NEW$ & VIEW$ (15 NOVEMBER 2013)

Empire State Manufacturing Contracts: General Business Conditions Lowest Since January

The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3.



Shoppers Can’t Shake the Blues


Wal-Mart Stores Inc. offered little reason for holiday cheer, reporting its third straight quarter of poor sales in the U.S. and painting a gloomy picture for the economic recovery.

The downbeat outlook from the world’s largest retailer was a reminder that even as U.S. stock prices climb to record heights, many Americans remain caught between high joblessness and hits to their paychecks that are limiting their ability to spend, putting a further drag on an already sluggish economy.

Kohl’s Corp., a department-store chain that caters to middle-income customers, also reported weak results Thursday and said it scaled back its inventories ahead of the holidays, signaling a lack of confidence in its ability to boost sales. (…)

Wal-Mart lowered its full-year profit forecast on Thursday and warned sales would be flat through the end of January, after sales fell for a third straight quarter at U.S. stores open at least a year. (…)

Even higher-end retailers experienced softness in the third quarter. Nordstrom Inc. reported late Thursday that its profit fell to $137 million from $146 million a year earlier, as sales at stores open at least a year slipped 0.7%. The company attributed part of the decline to a shift in the timing of its big Anniversary Sale, but also saw some weakness.

“We’ve experienced softness in our full line store sales with third quarter results consistent with recent trends but lower than what we anticipated as we started the year,” Blake Nordstrom, the company’s president said on a conference call with analysts. (…)

On Wednesday, Macy’s Inc. delivered strong sales and an upbeat holiday outlook that sent its stock up more than 9%. But the department-store chain is boosting discounts to draw in shoppers even at the expense of profit margins.

Kohl’s said it plans to ratchet up holiday marketing and discounts to bring more people into its stores after it cut its full-year profit outlook Thursday. The department-store chain reported its third-quarter earnings fell 18% as comparable-store sales dropped 1.6%. (…)

The Bentonville, Ark., retailer could face additional pressure on sales from the expiration of a temporary boost in food-stamp benefits. The expiration on Nov. 1 is expected to leave nearly 48 million Americans with $5 billion less to spend this fiscal year, which ends in September, according to the Center on Budget and Policy Priorities. The hit follows the end of a payroll tax break that had saved 2% of consumers’ monthly paychecks.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps, or about $14 billion of the $80 billion the U.S. Department of Agriculture says was appropriated for food stamps in the year ended in September 2012. (…)

“A reduction in gas prices and grocery deflation will help customers stretch their budgets, but they’re still trying to absorb a 2% payroll tax cut, uncertainty over Washington, and a lack of clarity around personal health care costs that are all headwinds,” Mr. Simon said. (…)

U.S. Worker Productivity Climbs

More productive U.S. workers supported faster economic growth in the third quarter, but slower business investment might limit future gains.

Labor productivity, or output per hours worked, increased at a 1.9% annual rate from July through September, the Labor Department said Thursday.

Second-quarter productivity growth was revised down to a 1.8% pace from a previous reading of 2.3%. Productivity held flat from a year ago because the increase in output was matched by an increase in hours worked.

Meanwhile, unit labor costs, a key gauge of inflationary pressure, declined at a 0.6% annual pace last quarter. From a year earlier, unit labor costs are up 1.9%—running ahead of the increase in consumer prices.

Industrial Output Runs Hard to Stay in Place

Industrial production in September returned to where it was before the recession, based on a Fed index. But certain index components are way above or below that level, providing a telling set of statistics about today’s economy.

September’s industrial-production data, which cover the period just before the government shutdown, seemed encouraging at first glance. The index expanded 0.6% over the prior month, well ahead of predictions and the fastest pace in seven months. But the strength lay entirely in utilities output, which makes up a 10th of the index. The sixth-warmest September on record for the contiguous 48 states followed a summer that was milder than the year-ago period. Actual manufacturing production, which comprises three-quarters of the index, rose by just 0.1%.

U.S. Trade Gap Widens as Exports Slip

The U.S. trade deficit widened 8%, as a fall in U.S. exports in September suggests the global economy is struggling to gain traction quickly enough to offset tepid demand at home. (Chart from Haver Analytics)

Exports fell 0.2% while imports rose 1.2%, causing the trade gap to expand for the third-straight month.

The report suggests exports, after rising earlier in the year, slumped during the summer as demand weakened in Europe, Japan and developing economies. The three-month moving average of exports, a reading of the underlying trend, slipped for the first time since May. (…)

U.S. exports to the EU from January through September fell 2.7%, compared with the same period a year earlier. Exports to the U.K. were down 15.1%, and exports to Germany fell by 4.5%.

The European Union accounts for roughly 17% of the market for U.S. exports.

The U.S. is also seeing lower demand from Japan, whose export-driven economy is struggling amid weak overseas demand. U.S. exports to Japan this year through September were down 7.6% compared to a year earlier.

September’s drop in overall exports was broad-based, with falling demand for American industrial materials as well as consumer and capital goods.

U.S.: Downward revisions to Q3 GDP?

The US goods and services trade deficit widened unexpectedly in September to US$41.8 bn, the worst tally in four months. The deterioration was due to rising imports and declining exports, the latter falling for a third month in a row in real terms. The results are worse than what the BEA had anticipated when it estimated Q3 GDP last week.

As today’s Hot Charts show, the agency estimated a less brutal deterioration in net exports of goods than what actually transpired. And with real exports of goods growing in Q3 at about a third of the pace estimated by the BEA, and real imports of goods growing faster in the quarter than what the agency had anticipated, it seems that trade may
have been a drag on the economy in Q3 rather than a contributor as depicted in last week’s GDP report.


We now expect a three-tick downgrade to Q3 US GDP growth from 2.8% to 2.5% annualized. Unfortunately, the bad news doesn’t end there. September’s weak trade results are also bad for the current quarter. The higher imports probably mean that the Q3 stock build-up was larger than first thought, meaning that there’s perhaps a higher likelihood of
an inventory drawdown (and hence a moderation in production) in the current quarter. If that’s the case, Q4 US GDP growth could be running only at around 1% annualized. (NBF)

Consumer Borrowing Picks Up

Americans stepped up their borrowing in the third quarter, a trend that could boost the economy—but, in a worrying sign, the nation’s student-loan tab also rose.

Household debt outstanding, which includes mortgages, credit cards, auto loans and student loans, rose $127 billion between July and September to $11.28 trillion, the first increase since late last year and the biggest in more than five years, Federal Reserve Bank of New York figures showed Thursday.

Taking on Debt Again

Mortgage balances, the biggest part of household debt, increased by $56 billion amid fewer foreclosures, while Americans bumped up their auto-loan balances by $31 billion.

At the same time, the amount of education loans outstanding, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to surpass $1 trillion for the first time, according to this measure. The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as late payments on other debts dropped.

Yellen Defends Fed’s Role, Current Path

Federal Reserve Vice Chairwoman Janet Yellen signaled Thursday that no big changes would come to the central bank under her leadership if she becomes its next chief.

The nominee said at the hearing that the decision about winding down the program depended on how the economy performs. “We have seen meaningful progress in the labor market,” Ms. Yellen said. “What the [Fed] is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

She also repeated the Fed’s message that even after the bond program ends, it will keep short-term interest rates near zero for a long time because the bank doesn’t want to remove its support too fast.

The Fed’s next meeting is Dec. 17-18.

Surprised smile  Cisco CEO: ‘Never Seen’ Such a Falloff in Orders

imageThe Silicon Valley network-equipment giant on Wednesday said revenue rose just 1.8% in its first fiscal quarter, compared with its projection of 3% to 5% growth. Cisco followed up by projecting a decline of 8% to 10% in the current period, an unusually grim forecast for a company seen as a bellwether for corporate technology spending.

John Chambers, Cisco’s chief executive, said orders the company expected to land in October never materialized, particularly in Brazil, Russia, Mexico, India and China. Orders for all emerging markets declined 21%.

“I’ve never seen this before,” Mr. Chambers said.

First-quarter orders in China declined 18%, the company said, with Mexico and India off by the same percentage. Orders were off 30% in Russia and 25% in Brazil.

Euro Zone’s Rebound Feels Like Recession

(…) Gross domestic product in the 17-country euro zone grew only 0.1% last quarter, or 0.4% at an annualized rate, data published on Thursday showed. The rate of growth was down sharply from the second quarter, when policy makers and economists began to hope that the clouds were clearing for the troubled currency bloc. (…)

Even Germany’s economy grew only 0.3% last quarter, or 1.3% annualized, as weak demand in Europe and patchy global growth hit its exports. (…) France and Italy, the bloc’s next-biggest economies after Germany, both suffered small contractions.



Industrial production down by 0.5% in euro area

IP in the Euro 17 area was down 0.5% MoM in September and for Q3 as a whole. IP of durable consumer goods were –2.6% MoM in September and –4.1% QoQ in Q3.


EU Inflation Slows to Four-Year Low

The EU’s official statistics agency said Friday consumer prices rose 0.9% in the 12 months to October, a lower annual rate of inflation than the 1.3% recorded in September, and the lowest since October 2009.

Eurostat also confirmed that the annual rate of inflation in the 17 countries that share the euro was 0.7% in October, the lowest level since November 2009.



Core inflation was +0.8% in October, down from 1.0% in September.


Brussels warns Spain and Italy on budgets

France’s ‘limited progress’ on reforms also under spotlight

Brussels has warned Spain and Italy that their budget plans for 2014 may not comply with the EU’s tough new debt and deficit rules, a move that could force both countries to revise their tax and spending programmes before resubmitting them to national parliaments.

The verdicts, the first time the European Commission has issued detailed evaluations of eurozone government budgets, also include a warning to France that its economic reform plan constitutes only “limited progress” towards reforming its slow-growing economy.

Earnings Season Ends

The third quarter earnings season came to an end today now that Wal-Mart (WMT) has released its numbers.  Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates.  Below is a chart comparing this quarter’s beat rate to past quarters since 2001.  Since the bull market began in March 2009, this is the second worst earnings beat rate we’ve seen.  Only Q1 of this year was worse. 

(…) the 8-quarter streak of more companies lowering guidance than raising guidance was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points.  When will companies finally offer up positive outlooks on the future?

China to Ease One-Child Policy

Xinhua said authorities will now allow couples to have two children if one of the parents is an only child. Currently, couples are restricted to one child except in some areas.

Morning MoneyBeat: Nasdaq Nears 4000

The Nasdaq Composite is poised to cross 4000 for the first time in 13 years, an event that is sure to prompt comparisons to the dot-com bubble. It shouldn’t.

(…) The Nasdaq is now dominated by mostly profitable companies. Names such as have come and gone, replaced by more mature companies, plenty of which sit on loads of cash and pay hefty dividends. Apple Inc,, Microsoft Corp. and Cisco Systems Inc. are bigger and return much more cash to shareholders now than they did during the go-go days. The index also trades at a far cheaper multiple than it did 14 years ago.

Light bulb  Berkshire Reports New Stake in Exxon Mobil

Warren Buffett’s Berkshire Hathaway disclosed it had picked up a $3.45 billion stake in Exxon Mobil, a sizable new addition to its roughly $107 billion portfolio of stocks.

The stock was likely picked by Mr. Buffett himself, given the size of the investment.


NEW$ & VIEW$ (10 OCTOBER 2013)

U.S. Mortgage Applications Show Little Bounce

The Mortgage Bankers Association reported that the total mortgage market index improved by 1.3% (-54.7% y/y) last week following their slight down-tick during the prior week. Applications to refinance an existing loan led the gain with a 2.5% increase, but remained down by two-thirds versus last year. Homepurchase mortgage applications slipped 0.7% (-5.6% y/y) and were 14.7% below the early-May peak.

large image

German industrial production growth adds to signs of third quarter economic expansion

Looking at the three months to August, which avoids some of the volatility in the monthly data, industrial production increased 1.4% on the previous three month period, with manufacturing up 0.9% and
construction posting a healthy gain of 3.8% over the same period. While the gains in total industrial production and manufacturing output fell slightly short of the 1.5% and 1.2% respective increases seen in the
second quarter, the upturn in construction in the three months to August was the largest since May 2011.

The industrial production data follow factory orders numbers, which showed a 0.3% drop in orders in August following a 1.9% decline in July. However, orders were nevertheless still 2.1% higher in the latest three months compared with the prior three months,which is the second- strongest quarterly rate of expansion since early 2011.


  • France’s IP rose 0.2% MoM in August (+0.6% consensus). Manufacturing production +0.3%.
  • Italian IP decreased 0.3% in August following a 1.0% drop.

Lightning Greek Deflationary Pressures Push Nation Further Into Insolvency, Increased Funding Needs

Deflation in Greece is pushing the country further into a state of insolvency.

The embattled nation has slid into deflation. The headline consumer price
index declined 1 percent year over year in September. The core reading fell 2.7 percent year over year in August. The gross domestic product deflator dropped 2.3 percent year over year during the first quarter of 2013. (BloombergBriefs)

Li Sees China Growth Topping 7.5% in First Nine Months

(…) China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent. (…)

IMF fears $2.3tn bond losses from taper
Fund issues warning in global financial situation assessment

(…) If the Federal Reserve’s likely move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt raise long-term interest rates by 1 percentage point, the IMF’s Global Financial Stability Report (GFSR) estimates that the market losses on bond portfolios could reach $2.3tn.

Brazil raises rate for fifth time since April
Central bank move brings Selic rate close to double digits

(…) Brazil’s central bank raised its benchmark interest rate for the fifth time in a row on Wednesday night, bringing it close to double digits and raising questions about how much longer the tightening cycle has left to run.

The bank increased the Selic rate by 50 basis points to 9.5 per cent amid debate about whether it plans to continue the cycle at the next meeting in six weeks’ time, which would bring the rates to the politically sensitive 10 per cent level.

The monetary policy committee “evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year”, it said, repeating the brief statement issued at its last meeting in August.

The bank has been keen to underline the credibility of its inflation-targeting regime after perceptions of political interference earlier in the year.

(…) analysts said use of the same language in the terse statement that accompanies the monetary policy committee meeting decisions indicated that the bank would be likely to tighten by another 50 basis points in November. (…)

Inflation in September of items whose prices are freely determined by the market has been moderating but remained high at 7.4 per cent year on year, while inflation on items controlled by the government was declining and running at an “unsustainably” low 1.1 per cent.

Supply of copper set to outstrip demand Miners and traders expect lower prices

(…) The expectation of a shift into surplus in the copper market was echoed by many of the traders, analysts and hedge fund managers assembled in London for LME Week, the largest annual gathering of the metals and mining industry. For the first time since 2008, investors polled by Macquarie did not pick copper as their favourite metal for next year.

However, few expect a collapse in prices, as a recovering global economy lifts copper demand. “The surplus we are forecasting is very modest,” Mr Keller of Codelco said, predicting a “really marginal” oversupply of 300,000-400,000 tonnes, compared to annual consumption of more than 20m tonnes. (…)


James Y., a reader, asked if I have ever applied the Rule of 20 to other major indices. I don’t have data for other markets. Here’s how Société Générale, which does good work on valuation, looks at many world markets based on the P/BV vs ROE relationships (via Advisor Analyst).

The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.

This is a snapshot which provides little historical info. SoGen also shows this interesting chart on U.S. non-financial ROE since 1980 which suggest a cyclical peak is nearby.

Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.


Chinese Think Tank Puts Shadow Banking at 40% of GDP As the fastest-growing part of China’s financial sector, shadow banking is no longer the sideshow it was five years ago.

(…) The government think tank report put the size of the sector—which covered all shadow-lending activities from most well-known wealth-management products and trusts to interbank business, finance leasing and private lending—at 20.5 trillion yuan ($3.35 trillion) as of the end of 2012.

But the calculation is conservative compared with those done by international research houses. Fitch Ratings estimated earlier this year that China’s total credit including various forms of shadow-banking lending may have reached 198% of the country’s GDP, while J.P. Morgan estimates have put it at as much as 69% of GDP, or 36 trillion yuan. (…)

Based on available data from regulators, the academy’s report said shadow-banking activities involving wealth-management products and trusts stood at 14.6 trillion yuan by the end of last year, equivalent to 29% of the country’s GDP. (…)

The growth of shadow financing could also make regulators’ credit-control measures less effective and may pose systematic risks to the economy, the think tank warned.

American Execs Say China is Getting Expensive, and Profitable Of all the challenges facing U.S. companies in China, costs top the list of concerns, with the majority saying they expect to give out hefty pay rises in the coming year

A survey of U.S. executives in China finds that, of all the challenges facing U.S. companies on the mainland, costs are at the top of their list of concerns

The cost of labor particularly has been rocketing in China, by double digits for many businesses the last few years. That’s prompted some U.S. manufacturing to leave China for other shores – including the U.S. and Mexico.

US-China Business Council

More than 90% of respondents said their China business is profitable, the highest level since the survey was started.

Overall, though, sentiment hasn’t changed much from the “tempered optimism” of recent years. Companies say that a range of longstanding problems – such as delays in licensing and other market barriers – generally have not improved.

Mobile Ad Spending Rises Sharply

Marketers are finally convinced that there’s money to be made advertising to the legions of consumers glued to their smartphones and tablets: Spending on mobile ads more than doubled in the first half of the year.

(…) Mobile-ad spending in the U.S. totaled $3 billion in the first half, up from $1.2 billion a year earlier, the Interactive Advertising Bureau estimates.

Adults in the U.S. are expected to spend an average of two hours and 21 minutes a day on smartphones and tablets this year, excluding time spent talking on phones, according to a recent study by eMarketer. In 2010, adults spent only 24 minutes on mobile devices, not counting talk time. (…)

Google is expected to capture 46.8% share of the U.S. mobile ad market this year, estimates eMarketer, thanks largely to Web searches conducted on mobile devices.

Facebook, too, is benefiting. After initially lagging behind in mobile, the Menlo Park, Calif., company has worked to bolster its mobile-ad products, an effort that is now bearing fruit.

Mobile accounted for 41% of its advertising sales in the second quarter, Facebook said. Facebook will have about 14.9% of the mobile ad market this year, eMarketer estimates.

Unilever said that 50% of its spending on Facebook goes to the social-network’s mobile products. (…)

Mobile’s share of total online ad spending in the U.S. more than doubled to 15% during the half, the IAB said. Overall U.S. online ad spending rose 18% to $20.1 billion during the period.

Spending on search and display ads continue to account for the bulk of the overall sector but their share of the total declined in favor of mobile advertising.

Spending on TV ads in the U.S. will increase 2.8% to $66.35 billion this year, eMarketer predicts. (…)

[image]Sad smile  Canadian Mogul Paul Desmarais Dead at 86 One of Canada’s wealthiest and most powerful businessmen, Paul Desmarais built a corporate empire by engineering a reverse takeover of Power Corp. of Canada and refocusing the company on financial services.


NEW$ & VIEW$ (23 AUGUST 2013)


Flash PMIs hint at improving global manufacturing economy

Flash PMI data from Markit covering the eurozone, China and the US showed an across-the-board improvement in manufacturing business conditions in August. This was for the first time since June 2011 and suggested that the global manufacturing economy has picked up growth momentum.


The Markit-produced HSBC flash manufacturing PMI for China rose sharply in August, up from a near postcrisis low of 47.7 in July to a four-month high of 50.1. Although barely above the no-change level of 50.0, the improvement in the China PMI was significant in signalling an end of a three-month sequence of contraction. The data therefore add to hopes that the Chinese economy reached a low in the second quarter, when GDP growth slowed to 7.5%.

A flash Markit Eurozone PMI reading of 51.3 signalled an improvement in manufacturing business conditions for the second month running in August. An increase in the index from 50.3 in July also pointed to an
acceleration in the pace of growth to the fastest since June 2011. A concomitant improvement in the regions’ services PMI – which registered an upturn in business activity for the first time since January 2012 – left the composite Eurozone PMI at its highest for two years.

Manufacturing growth in the single currency area was led by Germany, where the PMI was the highest for over two years, while the French manufacturing sector more or less stagnated. Particularly encouraging news came from the rest of the region, where business conditions showed the largest monthly improvement since June 2011.

Moving further west, the Markit US manufacturing PMI came in at 53.9 according to the flash August reading, up from 53.7 in July and recording the fastest pace of expansion since March. With the US PMI up for a second successive month from June’s eight-month low, the survey data suggest that the economy has gained momentum again after a spring lull.

The upturns in the flash PMIs for three of the world’s largest manufacturing economies bode well for global growth. The JPMorgan Global Manufacturing PMI signalled that a near-stagnation of the world’s factories in the second quarter continued into July, but the flash data for August suggest that growth could lift higher.

Interestingly, new orders and new export orders were strong in the U.S. and rose marginally in Europe. In China, however, total new orders rose just above 50 but new export orders declined well below 50, meaning that domestic new orders rose strongly. Since exports are only a small part of China’s economy, we might be seeing the beginning of a strengthening in the Big Three economies.

[image]That would be a big surprise. How positive would that be for financial markets? Coming tug-of-war between taper fears, inflation fears and earnings expectations.

For clues as to what might really happen, Nouriel Roubini conveniently just wrote one of his long, rear-view-mirror article for Institutional Investor in which he forecasts that

  • world economic growth will remain anemic for many more years to come;
  • unemployment rates will stay high;
  • inflation will remain subdued for a long time;
  • aggressive monetary policy will continue for a little while longer;
  • long term interest rates in advanced economies will remain low and rise only slowly

If, like me, you have been following Dr. Doom’s crystal ball since 2009, your inclination would be to bet on the other side of Roubini’s trades. Winking smile

(…) The market appears to be accepting that though yields are moving up, they remain low by historical standards and can be better absorbed if seen in conjunction with an improving economic backdrop.

And further evidence of that more optimistic scenario was provided on Thursday, when manufacturing surveys from China to the eurozone and the US came in better than expected. US house prices were also shown to have risen 7.7 per cent in the year to June, while weekly initial jobless claims remain near multiyear lows. (…)

  • German GDP Growth Gains Steam 

    Germany’s economy rebounded sharply in the second quarter from a weak start to the year, gaining steam from a pickup in investment and robust consumption, official data showed.

Gross domestic product swelled 0.7%, corresponding to an annualized rate of 2.9%, the national statistics office said. The figures confirm official estimates issued last week.

That makes Germany the fastest growing of the world’s largest industrialized economies in the second quarter.

(…) some of the activity recorded in the three months to June had been postponed from the first quarter, when a severe cold spell depressed industrial activity and construction.

German GDP data for the second quarter showed a healthy pickup in investment: construction spending jumped 2.6% from the first quarter, “partly due to weather-related catch-up effects,” the office said.

Investment in machinery and equipment increased 0.9% after six consecutive quarters of declines, indicating companies have healthy cash positions or access to favorable financing conditions.

Private consumption in Germany increased 0.5% from the first quarter, supported by low unemployment and rising wages. Public consumption increased 0.6%.

Exports rose 2.2% on the quarter, while imports increased 2.0%. The data is adjusted for inflation and accounts for seasonal swings as well as the number of working days in each quarter.


There is a high level of hope that the housing market will keep lifting the economy. Existing home sales have been stronger lately and expectations are that they will keep rising, boosting prices and pulling along new construction. Charts like this one (CalculatedRisk) feed the hope:

But we forget that the early 2000’s were bubble years. BMO Capital puts things into their proper perspective. Warning: this may deflate some of your expectations.

U.S. Resale Market Feeling Normal Again

The 6.5% jump in existing home sales to more than three-year highs of 5.39 million annualized in July has taken the level above long-term averages, normalized for the growing number of households. This compares with the market for new homes, where sales and starts are both well below normal despite solid gains in the past year. The role of investors, who account for one-in-six resale transactions, likely explains the difference.


Note that first-time buyers were 29% of July sales, unchanged from June, and down from 34% a year ago and the historical norm of 40%. Not a healthy market just yet.

Raymond James adds:

Interestingly, there may be some evidence that the surge of demand from rental-home investors may have begun to wind down, as the NAR reported 16% of homes purchased in July were bought by investors down from 17% last month and 22% in February (the cyclical peak). That said, we note that 31% of all sales in June were still “all-cash” transactions (normally less than 10%), indicating that investors and other affluent households still remain a critical component of current housing demand. With rising home prices, distressed sales continued to dwindle to just 15% of sales (the lowest level on record since tracking began in October 2008).

Listed inventory in July rose by 120,000 units from June to 2.28 million for-sale homes. Total listings are still down 5.0% y/y and months’ supply still registers at a very low 5.1 months (down from 6.3 months last year). Nevertheless, the sequential inventory increase (+5.6%) was larger than typical June-July patterns, as listings are typically flat between June and July (dating back to 1990).

Inventory increases have now exceeded historical patterns in five of the last six months. Given the recent pace of double-digit y/y price increases
in many markets across the country, it’s not terribly surprising that more sellers would begin to emerge.

Consumers Skip Dining for Cars as Sales Slow

Restaurant sales contracted in June and July, even as spending on other discretionary categories such as automobiles and homes grew, a sign some Americans remain budget conscious.

Results at casual-dining establishments fell 3.5 percent last month, following a 2 percent drop in June, according to the Knapp-Track Index. This marked the first two consecutive declines in the monthly index of restaurant sales after the industry was rocked by its worst streak in almost three years between December and February.

Preliminary data suggest that August sales still are weak, though “better than July,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970.

“Consumers’ priorities change every month based on what they can afford,” Knapp said. Many Americans don’t eat out as often as they would like, and they’ve had to cut back “very begrudgingly” on meals away from home to help subsidize other purchases.

Pointing up Restaurants and retailers have been among the most active employers in recent months.

Leading Index Signals U.S. Growth to Pick Up Into 2014


The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent after no change in June.

Eight of the 10 indicators in the leading index strengthened in July, led by a widening gap between long- and short-term interest rates, higher stocks and more building permits. Fewer jobless claims and gains in factory orders also propelled the leading index last month.

Click to View

Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

Click to View(charts from Doug Short)

On the other hand:

This rise, however, was spearheaded by the three financial components (equities, credit spreads and yield curve). The steepening of the yield curve alone was responsible for half of the monthly increase in the LEI in July.

Excluding financial components, the gauge of future economic activity was only up 0.1% on the month. As today’s Hot Chart shows, the
behaviour of the LEI in this economic recovery has been very peculiar with little to no contribution from its non-financial components (there are seven of them). Four years into a recovery, it remains difficult to have strong convictions about the underlying strength of the U.S. economy. Under these circumstances, we believe that QE tapering by the Federal Reserve will proceed in slow increments. (NBF)



Hot smile  Central-Bank Moves Blur The View

The escalating role policy makers are playing in the foreign-exchange market is injecting new uncertainty into financial markets.

Central banks from Indonesia to Turkey to Brazil are stepping up efforts to fight steep declines in their currencies and protect vulnerable economies as investors pull cash from emerging markets.

These measures to support local markets are a sharp reversal from much of the past two years, when some of these same emerging-market central banks were trying to tame excessive currency appreciation.

On Thursday, Turkey’s central bank auctioned $350 million out of its reserves, making good on its promise to hold daily sales to support the lira.

Brazil’s central bank on Thursday said it would provide at least $60 billion more in dollar liquidity through the end of the year. Under the plan, the bank will offer $3 billion of dollar loans and swaps per week in regular auctions starting Friday.

Indonesian President Susilo Bambang Yudhoyono is expected on Friday to announce a “policy package” to stabilize the economy. (…)

The Fed released minutes Wednesday from its last policy meeting that did little to change investors’ expectations. The Philippines PSE Composite share index dropped 6% after markets reopened for the first time since Friday, while Indonesian stocks have shed 9% this week and Turkey’s are down 8%.

As money flows back to rich economies, developing countries face questions about how they will continue to fund economic growth and pay off their debts. A weaker currency can help on that front, spurring growth by boosting exports. But it also can trigger inflation, already viewed as too high in countries such as Brazil and India.

Some countries already have burned through foreign-exchange reserves with little to show for it. Turkey has spent about 15% of its reserves since May, while Nomura estimates Indonesia’s reserves are down 26% from their 2013 peak. Reserves in 21 emerging economies tracked by Nomura are down $153 billion from their peak this spring, a level of spending that hasn’t been seen since 2008, the bank said. (…)

Fed Burned Once Over Taper Now Twice Shy on QE3

U.S. central bankers have $3 trillion of losses reminding them they had better get their communications right should they decide to taper their bond purchases.

That’s how much global equity markets declined in the five days after Federal Reserve Chairman Ben S. Bernanke’s June 19 remarks that he may reduce his $85 billion in monthly securities buying this year and halt it altogether by mid-2014. His comments pushed the yield on the benchmark 10-year Treasury to a 22-month high.

Gillian Tett
Central bank chiefs must master art of storytelling

(…) Rather than operating the controls, moreover, central bankers also try to control economic outcomes by using words, not merely to influence price and interest rate expectations but to shape the mood. Thus the seemingly dry ritualistic texts that are issued each month – and supplemented by sober speeches – no longer merely describe policy; they are creating it too. Words are the weapon. (…)

At the European Central Bank, Mario Draghi has been masterful at delivering economic outcomes through words, as much as deeds. Indeed, what is most striking is that Mr Draghi has managed to reframe public discourse about the euro not so much by what he has said but what he implicitly persuaded us to assume. (…)

“[This] is about the creation of a monetary regime – a regime impelled by a series of communicative experiments … in which we are all participants, knowingly or not,” Prof Holmes argues. It is, he says, now defined “by the concept of a ‘public currency’, a term used in passing by Mervyn King, [former] governor of the Bank of England.” Central bankers now operate in an area where linguists, psychologists – and even anthropologists – know as much as economists. (…)

Narratives, narratives…(see EPSILON THEORY)

Clock  Coming soon at a theater near you: Lew warns Congress to strike debt deal US Treasury secretary fears risk of damage to economy

On a visit to Mountain View, California, in the heart of Silicon Valley, Mr Lew did not offer an exact deadline by when US lawmakers will need to strike a deal to raise America’s borrowing limit or face default. But analysts at the Bipartisan Policy Center, a think-tank, believe it will be somewhere between mid-October and mid-November, depending on the government’s cash flow.


Much has been written about current high profit margins and the risk of mean-reversion. BMO Capital takes another approach that I find interesting:

(…) regarding profit margins – it is extremely difficult for corporations to improve margins for long periods of time. Sooner or later organic growth is required to deliver results. Based on historical data the market
appears to be at an inflection point. For instance, using corporate profits as a percentage of nominal GDP as a broad proxy for US profit margins there have been only four other periods since 1950 where profit margins expanded for four or more consecutive years (Exhibit 1, left).

Interestingly, only two periods reached five years of profit margin expansion (market is currently in its fifth consecutive year of profit margin expansion). Following each of those periods, profit margins deteriorated quite significantly. In addition, current profit margins are at
all-time highs and well above one standard deviation from its average since 1950. As Exhibit 1 (right) shows, similar profit margin levels have proved to be short lived.


Given recent productivity and labor cost trends, we believe history is likely to repeat itself with profit margins having already peaked. This is important because following similar peak levels, market performance, EPS growth, and P/E levels tend to suffer in the period that follows. As
imageExhibit 2 illustrates, in the calendar year following an extreme peak in profit margins, market performance is slightly negative, price multiples contract while profits are roughly flat.

We believe this is explained by subdued productivity growth and increased labor costs during these periods (trends that are occurring now). What compounds matters is the fact that the current economic backdrop has been much weaker compared with those other periods where margins expanded significantly, yet market performance and valuation trends have been stronger. Whether or not the market is correctly anticipating stronger economic growth remains to be seen. Nonetheless, stronger economic growth is exactly what we believe will be required to keep EPS and market momentum intact.

Chart of the day: from Morgan Stanley’s Viktor Hjort via ZeroHedge


My good friend I. Bernobul wrote last week about a FT front page piece by James W. Paulsen, chief investment strategist at Wells Capital Management who was arguing that rising consumer confidence would more than offset slower earnings growth and rising bond yields as it apparently did in previous “remarkably similar cycles”.

Unfortunately, Paulsen provided no evidence of his assertions. However, it just happens that BMO Capital’s strategist published a chart correlating the equity risk premium with consumer confidence over the years. Nice of him to include the regression line to the scattergram; if this is what Paulsen means…how confident can you be?



The media are clearly in a positive mood these days.

U.S. Small-Business Owners Most Optimistic Since 2008

U.S. small-business owners are more optimistic now than at any time since late 2008. The Wells Fargo/Gallup Small Business Index improved to +25 in July, from +16 in the second quarter. The latest result, while not as high as pre-recession levels, is the highest index score since the third quarter of 2008.


Pointing up  Prior to the recession and financial crisis of 2008-2009, Small Business Index scores were generally in the triple digits. The Wells Fargo/Gallup Small Business Index was initiated in August 2003, reached its peak at 114 in December 2006, and hit its low point of -28 in July 2010.

The latest results are based on a national random sample of 603 small-business owners having $20 million or less of sales or revenues, conducted July 22-26.

Small-business owners’ ratings of their current operating environment are mostly flat compared with April. The Present Situation Dimension of the index was +4 in July, essentially the same as the +2 in the previous quarter. But, this is only the second time the Present Situation Dimension has been in positive — if still broadly neutral — territory since December 2008.


I’d say they’re just barely out of misery. But they are good spirited…

Fingers crossed  The increase in the overall index score comes more from owners’ improving future outlook than from their views of present conditions.

The Future Expectations Dimension of the index, which measures owners’ expectations for their business’ operating environment over the next 12 months, increased to +21 in July, up from +14 in April. Small-business owners are modestly more optimistic about their future operating environment compared with one year ago, when this dimension stood at +18.


…although really not that much more.

But here’s the real thing:

Small-business owners’ increased overall optimism correlates with their more positive views toward the ease of obtaining credit. Fewer business owners say they have experienced difficulty in the last 12 months obtaining credit, at 25%, than did so last quarter, at 30%.


My reading of the above chart is that “% easy” is flat but “% difficult” is down a little. Simple math suggests that “% unchanged” must be up, and this is unchanged from poor. Nothing “more positive” here.

FYI: Disruptive technologies: Advances that will transform life, business, and the global economy

The McKinsey Global Institute set out to identify which of these technologies could have massive, economically disruptive impact between now and 2025.



NEW$ & VIEW$ (23 APRIL 2013)


Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.23 in March from +0.76 in February. Three of the four broad categories of indicators that make up the index decreased from February, and only one of the four categories made a positive contribution to the index in March.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.01 in March from +0.12 in February. March’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend.

The CFNAI Diffusion Index moved down to -0.02 in March from +0.13 in February. Twenty-eight of the 85 individual indicators made positive contributions to the CFNAI in March, while 57 made negative contributions. Fifteen indicators improved from February to March, while 70 indicators deteriorated. Of the indicators that improved, six made negative contributions.

Click to View


These three assets are “very sensitive” when it comes to the growth/inflation story. Each of them has been making a series of lower highs since May of 2011. Now they are breaking support lines of rising wedges and pennant patterns.


Sales of previously owned homes in March fell 0.6% from February after adjusting for seasonal factors, the National Association of Realtors said on Monday. Sales were still up by 10.3% from a year earlier, marking the 21st consecutive month in which sales have increased from their year-ago levels.

The number of homes for sale in March totaled 1.93 million, up by 1.6% from February but down by 16.8% from one year ago. It was the lowest level of inventory for the month of March since 2000, according to the Realtors’ group.


The median home price in March rose to $184,300, up 11.8% from one year ago, but still well off the peak of $230,000 in July 2006. Median prices rose by 26% in the West, reflecting an increase in sales of more expensive homes. Homes are also selling more quickly: Some 37% of homes sold in March were on the market for less than a month, and half of all homes sold within two months, down from three months one year ago, according to the NAR.

On Monday, regular averaged $3.54, according to the EIA’s weekly survey of gasoline stations, down 33 cents from $3.87 a year ago. And with the most recent downdraft in crude-oil prices, gasoline may go lower still.

Since Americans use roughly 135 billion gallons of gasoline a year, the 33-cent decline would, if it persisted, save them about $45 billion a year. That comes to about 40% of the estimated $115 billion that will come out of paychecks this year due to the reversal of the 2011 payroll-tax cut.

Wealth effects also are providing a boost. Economists at Credit Suisse calculate that over the past two decades, every 10% increase in housing wealth led to a 0.33% increase in consumer spending, while every 10% increase in stock-market wealth led to a 0.11% increase in spending.

Economists polled by The Wall Street Journal estimate home prices will rise 5.3% this year, which would translate into a spending increase of about $20 billion. The stock market is up about 9% so far this year, which would translate to a further spending increase of about $10 billion. 

(Chart from Bespoke Investment)

  • Weekly sales bottoming out?


On Sunday, the Federal Aviation Administration, which is part of the Department of Transportation, started implementing the furlough, or leave of absence, of 47,000 workers, many of them air traffic controllers.

They will be required to take unpaid leave for one day out of each 11 until the end of the fiscal year, in September, as the FAA tries to cut $637m out of its budget, which is mainly personnel costs.



Germany Joins Low-Speed Europe

When even Germany stops motoring, you know you’ve got a problem.

The woes of Europe’s auto industry show no sign of abating: European Union auto sales were down 9.8% year on year in the first quarter. But within the data, there is an anomaly. In Germany, Europe’s supposed economic strongman, car sales fell 12.9% over the first quarter compared with 2012(…).

The latest 17% year-on-year drop in sales in March was partially attributed to there being two fewer working days this year. But German car manufacturers are generally at a loss to explain the sales slump, other than to cite weak consumer confidence amid continuing uncertainty around the European economy.

The concern is that Germany’s car market is simply now catching up with other depressed European markets. Germany’s car sales last year were still only 11% short of their 2006 peak, whereas Spain and Italy’s markets have shrunk about in half since precrisis highs. (…)

German Economic Indexes Show Unexpected Decline

A gauge of manufacturing from a survey by Markit Economics fell to 47.9 from 49 the previous month. For services, the index fell to 49.2 from 50.9.

Italy: a senior moment
Turn on the liquidity taps and look the other way

Since the inconclusive election in late February, the 10-year yield has fallen 80 basis points to a whisker above 4 per cent. Italy’s political and economic plight is arguably worse now than 18 months ago. Projections show that public sector debt will be 130 per cent of gross domestic product this year – 4 percentage points higher than its last forecast in September. The head of the Confindustria business lobby says the gridlock has cost the economy 1 per cent of output.

The other beneficiary of liquidity is Spain. Despite its banking and financial crisis, a party funding scandal and the bailing-in of bank depositors in the rescue of Cyprus, Spanish 10-year bond yields are 300 basis points lower than last July.

The fundamentals are deteriorating in both Spain and Italy, political events are discouraging and policy makers are dithering. But the fact is that they can afford to. Italy without a government? Why worry? Thanks to central bank liquidity investors can look the other way.


Spain’s Recession Eases as Rajoy Prepares Growth Plan

Gross domestic product fell 0.5 percent from the fourth quarter, when it dropped 0.8 percent, the most since 2009, the Bank of Spain said in its monthly bulletin today. That’s the seventh quarterly contraction. (…)

The International Monetary Fund last week cut its outlook for Spain, predicting the economy to shrink 1.6 percent this year before growing 0.7 percent in 2014.


First, the official S&P numbers as of last week: Of the 104 companies having reported on Apr. 18, 67% beat and 22% missed.

Q1 estimates are now $25.40, down from the Match 28 estimate of $25.49. Full year estimates are dropping markedly from $111.14 at the end of March to $109.52 as of Apr. 18, a 2.3% decline in lest than 3 weeks.

Factset calculates that of the 102 companies that have reported earnings to date for the quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 45% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters.

Remember that aggregators use different methods to compile earnings. I stick with S&P`s, especially since they consider pension amortization as operating costs, unlike most others.

Pointing up  Bespoke Investment looks at the broad market:

Bottom-Line Average, Top-Line Bad

A little over 200 companies have reported earnings so far this season, and as shown below, 58% of them have beaten consensus earnings estimates.  This is the exact same “beat rate” we saw last earnings season.

Unfortunately, top-line revenue numbers haven’t been pretty.  As shown below, 43.9% of the companies that have reported have beaten revenue estimates, which would be the weakest reading seen since the financial crisis.  Last earnings season, we saw a big bounce in revenue beats after two very weak quarters, but it looks now like we’re reverting back to what we saw in the middle of 2012.

Here`s a good analysis from Zacks: Evaluating Q1 Results – Focus on Technology

As of Monday evening (4/22/13), we have Q1 results from 15 of the 69 Tech sector companies in the S&P 500. This is barely 1/5th of all Tech companies in the index, but keep in mind that these 15 companies include many of the industry heavyweights, like Google, Microsoft, Intel, Oracle, Texas Instruments and others. These 15 companies combined account for 47.8% of total Tech sector market capitalization and account for 43.8% of all Q1 earnings expected from the sector.

Total earnings for these companies are up +3.9% from the same period last year, with 66.7% of companies beating earnings estimates. Total revenues are up +4.8%, but only 33.5% of the companies have come out with positive revenue surprises. The growth rates look decent enough, but they will disappear following Apple’s report, which is expected to show a -16.8% year over year decline. The composite earnings growth rate for the sector, where we combine the results that have come out with those still to come, is for a decline of -5.9% from the same period last year. Excluding Apple, Tech earnings would be down only -2.3%.

But irrespective of the growth rates, the ‘beat ratios’ (the percentage of companies coming ahead of expectations) are weak, and are notably so on the revenue side. The earnings ‘beat ratio’ of 66.7% is weaker than the aggregate for the S&P 500 as a whole and relative to how these same group of companies performed in 2012 Q4, but the revenue ‘beat ratio’ of 33.5% is outright mediocre.

So, what’s going on with Tech earnings?

Investors have soured on Apple big time and hardly anyone is expecting fireworks from the company in tomorrow’s release, particularly following last week’s negative pre-announcement from Cirrus Logic. But Apple still matters – to the sector as well as the market. After all, even if it’s results came in-line with expectations (a decline of -16.8%) tomorrow, its earnings will account for more than 22% of the entire sector’s Q1 earnings. (…)

Apple’s problems may be company specific, but plenty of its Technology peers are faced with similar earnings challenges. In Intel’s earnings report last week, we saw how the weak PC demand picture is weighing on its outlook. The situation isn’t much different for other PC centric players like Hewlett-Packard, Dell, Microsoft and Advanced Micro Devices, to name just a few. Ironically, Apple played a leading role in bringing the PC market to its knees.

Others are faced with different headwinds that lead to the same earnings challenges. Companies with advertising-based business models like Google, Facebook, Yahoo and others are struggling with monetizing the secular shift from PC to mobile devices. This platform shift has material consequences for these companies’ margins, as do the headwinds facing Apple and the PC players.

A key driver of the Q1 earnings weakness for the sector is from margin pressures. Net margins in the quarter are expected to be down 177 basis points from the same period last year, which more than offsets the stronger-looking +3.3% gain in revenues, resulting in -5.9% decline in total earnings.

The first and third quarters are typically the seasonally weakest periods for the sector. As such, the market may be willing to cut the Tech companies some slack for a weak showing this reporting season. But a lot will depend on how they guide towards the coming quarters, as expectations, particularly in the second half of the year, are for a resumption of strong growth.

Current consensus expectations are for total Tech sector earnings to increase by +8.3% in the second half of the year after declining by -5.2% in the first half. The second half recovery is then expected to carry into 2014, resulting in total earnings growth for the sector of +13.2%. A big part of these earnings recovery hopes rest on margin expansion.

On a quarterly basis, net margins for the sector peaked in 2012 Q3 and have yet to get back to those levels. On an annual basis, the sector’s net margins have been essentially flat since 2011, but are expected to make strong gains later this year and next year after contracting in the first half of 2013. Hard to envision such margin gains given the multiple headwinds facing them.

What all this boils down to is that earnings expectations for the broader S&P 500 in general and the dominant Technology sector in particularly remain elevated. I am not talking about estimates for the currently underway first quarter of 2013, but the coming quarters, particularly the second half of the year and next year. Those estimates need to come down and they most likely will come down after we hear from management teams.


NEW$ & VIEW$ (20 SEPTEMBER 2012)

Central Banks Flex Muscles

Massive injections of stimulus into financial markets by the world’s largest central banks are creating a domino effect around the globe.

(…) As with past episodes of aggressive easing by the world’s major, developed-market central banks, many investors are homing in on emerging markets offering higher yields and generally healthier economies. The Brazilian real initially jumped 0.7% after the Fed’s move, but finished Wednesday’s session up 0.3% from a week earlier. The Mexican peso, meanwhile, has gained 2.7% over the past week, the Polish zloty is up 4.3% and the Korean won is up 1.6%. (…)

Brazil took steps Monday to prevent potential waves from the Fed’s easing from lifting the value of its currency, conducting so-called “reverse dollar swaps” to prevent its currency, the real, from appreciating. Also Monday, Peru adjusted its intervention strategy toward weakening the Peruvian sol, and on Tuesday Turkey cut interest rates by more than expected. (…)

Officials in South Korea, Thailand, Singapore and the Philippines took a cautious view of the uptick in their currencies following the Fed’s announcement, though they all asserted a readiness to smooth out market movement if capital inflows become excessive. (…)

In the previous round of Fed quantitative easing, the dollar weakened significantly against most currencies. The Wall Street Journal Dollar Index, a measure of the dollar’s value against a basket of major currencies, fell 18% in the 13 months from June 2010, when expectations of more Fed stimulus first began to rise, until the $600 billion bond-buying program ended the following summer. The index dropped 20% against the Brazilian real over the same period and 18% versus the Korean won. (…)

Yuan Hits Fresh High Against Dollar

Since late last year, the yuan has weakened modestly against the dollar, falling as much as 1.6% against the U.S. currency in late July. But the Chinese currency has reversed course recently and hit a seven-month intraday high during Thursday’s trading, at 6.2945 against the dollar. The yuan is now down just 0.2% against the dollar this year.

China’s central bank, which has been guiding the currency on a stronger path in recent weeks, Thursday guided the yuan a bit stronger. Traders said the recent yuan guidance reflected the broad weakness in the dollar against other currencies following massive stimulus plans by the European Central Bank and the U.S. Federal Reserve.

Japan suffers steep fall in exports
Surprised smile  August shipments to western Europe drop 28%

Thursday’s government data showed that shipments slipped almost 6 per cent from a year earlier to Y5tn ($64bn), the third monthly fall in a row, while imports were 5.4 per cent lower at Y5.8tn. (…)

The provisional data from the ministry of finance showed that August shipments to western Europe fell by 28 per cent from a year earlier, thanks to big falls in exports to Germany (18 per cent) and the UK (42 per cent). Exports to China posted their third successive decline. August’s 10 per cent fall was only slightly better than a 12 per cent slump in July.

Swedish budget emphasises stimulus
Government downgrades growth forecast for next year

Anders Borg, the centre-right finance minister, on Thursday unveiled SKr23bn of initiatives to boost the economy, including a big cut in corporate tax, investment in infrastructure and measures to tackle youth unemployment. (…)

Among the measures unveiled, many of which have been trailed by the government in recent weeks, was a cut in corporate tax from 26.3 to 22 per cent, putting Sweden just under the EU average. It also unveiled plans to spend SKr100bn on infrastructure from 2014 to 2025 including a new underground line in Stockholm.



Smile  Housing Recovery Gains Traction

Home sales and construction jumped to their highest levels in more than two years, offering the strongest signal to date that the U.S. housing sector has turned the corner after a six-year rout.

imageSingle-family housing starts in August rose by 5.5% from July to their highest level in 28 months, the Commerce Department said Wednesday. In August, builders started construction on 535,000 homes at a seasonally adjusted annual rate, up 26.8% from one year ago. Overall housing starts were up by 2.3%, amid a small drop in the more volatile multifamily sector.

Meanwhile, sales of previously owned homes in August rose by 7.8% from July to their highest level in 27 months, the National Association of Realtors said. Sales climbed 9.3% from a year ago, marking the 14th straight year-over-year sales increase, even as the number of homes listed for sale was down sharply.

As I have been saying since January:

The lack of attractive inventory is having “the single biggest impact on new-home sales right now,” Mr. Wehrli said.

Existing house prices are +10% in the last 7 months. Now that prices are rising YoY in most cities, the recovery could accelerate if it motivates fence-sitters. Even more so if QE3 lowers mortgage rates even further.


Storm cloud  Bank of America Ramps Up Job Cuts

Bank of America is planning to cut 16,000 jobs by the end of the year. If the cuts are made, the lender will likely lose its title as the U.S banking industry’s largest employer.

Fingers crossed  Architecture Billings Index Inches Back into Positive Territory

    On the heels of a nearly three-point increase, the Architecture Billings Index (ABI) climbed into positive terrain for the first time in five months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI score was 50.2, up from the mark of 48.7 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.2, up from mark of 56.3 the previous month.

    “Until the economy is on firmer ground, there aren’t likely to be strong increases in demand for design services,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “In the meantime, we can expect to see design activity alternate between modest growth and modest decline.” (Chart from CalculatedRisk)


Fingers crossed  Oil tumbles as Saudis offer more supply  Higher-than-expected US inventories also weigh on prices

Higher-than-expected weekly US inventories data released on Wednesday also weighed on crude. ICE November Brent fell $3.84 a barrel to $108.19. Nymex October West Texas Intermediate, the US benchmark, which briefly rose above $100 late last week, settled down $3.31 at $91.98 a barrel.

The prospect of extra Saudi supplies comes as the market has grown cautious about a possible release of strategic petroleum stocks by the US and other developed nations.


88 companies have already said that results will come in below expectations; 21 that have signaled a positive outlook, said Greg Harrison, corporate earnings research analyst at Thomson Reuters.

“That’s much more pessimistic than normal,” said Mr. Harrison, who added that the third quarter of 2001 was the last time that earnings guidance leaned so heavily to the downside. (NYT)

Pointing up  Since September 4, eight additional companies have issued Q3 guidance, all of them negative.

I remind you that for Q2 2012, 107 companies issued EPS guidance. Of these 107 companies, 72 issued negative EPS guidance and 35 issued positive EPS guidance.

Last night:

Norfolk Southern Profit Drop Echoes FedEx Slowdown Signal  Norfolk Southern Corp.’s quarterly profit will trail analysts’ estimates as dwindling volumes at the second-biggest eastern U.S. railroad add to signs of a slowing domestic economy.

Surprised smile  Third-quarter profit at Norfolk Southern will be $1.18 to $1.25 a share, according to a railroad statement, short of the $1.63-a-share average estimate of 27 analysts surveyed by Bloomberg. The Norfolk, Virginia-based carrier will report earnings Oct. 23.

GOOD QUOTE from George Jonas in Why George Soros is wrong about the European Union:

You can’t have socialism without a printing press.


On Jan. 27, 2012, I posted on 3D printing technology, urging you to take 15 minutes of your time to watch a TED video on 3D printing which will truly revolutionize manufacturing and shipping and …etc., etc., etc. The link to the video is at the end of the post NEW$ & VIEW$ (27 Jan. 2012).

John Mauldin’s Outside the Box letter prints the transcript of a presentation by Alex Daley, editor of Casey Extraordinary Technology which discusses 3D printing, among other topics. You can watch the presentation here:  or, if you prefer, read the full transcript. Some excerpts:

The idea is simple. Take a powder, like  the ink in an inkjet printer. Spray down a thin layer, then use heat or chemicals to bond the powder together into a solid object. Then layer on some more and repeat until you slowly, one layer at a time, build up a 3-dimensional object. Hence the term additive manufacturing. Control the entire process by computer, and you can fuse layers together to build almost anything.

The premise may be simple, but the implications are far-reaching. Unlike traditional subtractive manufacturing, there is little to no waste in the process. And, thanks to the generic nature of the machines, able to control the layers one at a time from a computerized model of the object to be built, one object can be created at a time with customization, much like with a router or lathe – but far more flexible than mold-based processes.

A single copy of a thousand different objects, or a thousand copies of a single one, can be created with no change in the economies of doing so, just as a home printer can print a letter one moment and a photo the next.

(…)systems have now been created to work with a wide variety of practical materials like flexible plastics, or steel and aluminum, all the way  to the emerging ideas of biological materials or even… chocolate. (…)

User cases like BMW’s underscore the importance of the technology. During the design phase of a new or improved vehicle, BMW will go through many iterations of a part to get it exactly right. Previously, they used CNC routers to create prototype fixtures for the car. However, when they moved to using a printer from Stratasys – one of the largest 3D printer manufacturers in the world – BMW was able to reduce the cost of each test part by 58%. Better than that, their wait time for a newly designed part fell 92%. That’s an astounding change to the financials of the process, and a huge leap forward in terms of their ability to bring a design to life quickly. (…)

While this type of work still requires highly precise machines with steep price tags, the prices are dropping rapidly. (…)

3D printing is a remarkable emerging industry, and at approximately $500 million dollars annual revenue in size today, has a great future ahead of it, for both consumers and investors. The technology is just now making the turn up that hockey stick-like growth curve, and over the long run may have as much effect on manufacturing as the PC had on knowledge work – an economic revolution of immense proportions.

Really immense!


NEW$ & VIEW$ (18 July 2012)


Lightning  Dire Signs for Spanish Economy

Spain’s housing and banking sectors continue to deteriorate, grim new government data showed, providing the latest indication that the country’s economy remains caught in a protracted recession.

House prices declined at the fastest pace since the start of the crisis in the second quarter, the public ministry said, while bank deposits saw a record decline in May from a year earlier, and bad loans increased for a 14th month in a row, the Bank of Spain reported.

Total private-sector deposits held in the country’s banks shrank 5.75% from a year earlier in May to €1.327 trillion. Some €7.4 billion were withdrawn compared with April, the data showed. The pool of bad loans jumped to €155.84 billion, or 8.95% of total loans, up from 8.72% in April.

Credit volume in Spain—which during the boom grew at annual rates of almost 30%—has been falling every month since February 2011, and in May was down 3.82% on an annual basis.

(…) The country’s house price index dropped 8.3% from a year earlier in the second quarter, indicating that the free-falling real-estate market has yet to find a floor. (…)

Hollande scraps tax breaks on overtime
Latest measure upsets French business and opposition

The move follows a number of other actions taken by the new government that have unsettled business leaders. The budget measures include scrapping a move by Mr Sarkozy to reduce employers’ heavy labour costs by shifting some of the financing of social welfare from employment charges to value added tax.

BCA Research warns that French recession could get worse:

France is currently headed toward mild recession and according to our Global Investment Strategy service, there is a non-trivial risk that if the French recession turns out worse than ’mild’, then its debt problem will be in the spotlight, creating intense pressures in the French bond market.

Lightning  Italy’s PM warns of Sicily default

Italian Prime Minister Mario Monti expressed serious concern on Tuesday over a possible default by Sicily, an autonomous region long criticized for its wasteful public administration and bloated government payroll.

Mr. Monti said in a statement that there were “grave concerns” that the southern island could default and he said he had written to Governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.

The highly unusual intervention from the Prime Minister underscored the gravity of the situation in Sicily, which accounts for around 5.5 per cent of Italy’s gross domestic product and has an unemployment rate of 19.5 per cent, almost twice the national level.

Despite the worry over its finances, Sicily is not expected to pose a major threat to Italy’s overall public finances and credit agency Fitch said it saw no immediate risk it would fail to meet its commitments.

“As far as we know, the region of Sicily is not in the best of financial conditions. But it’s not on the verge of an imminent default on its loans and bonds,” said Raffaele Carnevale, senior director for international public finance.

Fitch rates Sicily triple-B-plus with a negative outlook, one notch below Italy’s sovereign debt rating. The debt of Sicily and other local authorities amount to around €115-billion, contributing to Italy’s huge €2-trillion public debt.



Storm cloud  Intel warns on outlook for new orders
PC makers demand on hold amid uncertainty and Windows 8 launch

Paul Otellini, chief executive, told an analyst conference call that a recovery expected in the US and western European markets, where there had been “softness” for several quarters, had failed to materialise.

In the emerging economies of Brazil, Russia, India and China, PC prices had been rising with the value of the dollar, while China’s economic growth had been slowing.

“While we still see growth [in China], we don’t see quite as much as we first thought,” he said.

Smile  Homebuilder Sentiment Beats by Wide Margin



China’s Communist Party seems to have successfully restarted the FAI machine that it over-cooled in 2011. Spending on infrastructure slowed to only 2% YoY in December 2011. The pace of infrastructure spending has accelerated to 6% in the first half of 2012 but notice the monthly trend since April: +9% YoY in April, +9.7% in May and a huge +17.5% in June.

Not convinced that Beijing is behind the recovery? State-Owned-Enterprises infrastructure spending growth dropped spectacularly from a 20-25% pace in early 2010 to +15% in early 2012 and to 5-10% in the last 12 months. SOE’s infrastructure spending growth jumped to +11.1% in May and +24.7% in June.

Obviously, Beijing is re-stimulating in a non-traditional but quick-fire way.


China total electricity consumption came in at +4.3% YoY in June, from +5.2% in May. YTD electricity consumption rose 5.5%. The Chinese economy has yet to show any substantial sign of stabilization as these charts from ISI and Standard Chartered Research show.

image image


  • According to our recent survey of steelmakers, almost all respondents told us sales in July were getting worse and actual demand was below their expectations. (…) As for the demand outlook for next month, most steelmakers revised their expectations downward, with no one expecting improvement in the coming month, while about 20% of respondents thought demand may shrink further.
  • Construction machinery dealers surveyed mentioned that they did not see any recovery signs of improved demand in the first half of July.
  • Overall cement sales growth for the first two weeks in July remained sluggish. New project starts stayed at a low level in the property and infrastructure sectors. The majority of infrastructure projects are resumptions, whereas new starts were limited. (…) most of cement makers that we surveyed were pessimistic and generally believe that it will be difficult to see a recovery in cement demand for the next two months.
  • The July heavy truck dealer survey shows heavy truck sales this month may follow seasonal patterns, with M/M growth becoming negative and Y/Y growth coming in at around -20%. (CEBM Research)

If the dragon has landed, still a big if, it has yet to show signs of a new take-off. Chinese companies have been surprised by the rapid and significant slowdown. What will they do now to bring cost more in line with revenues? Fire people? That may be why Wen said yesterday that the employment outlook “will become more complex and severe.” Pointing up

“There are insufficient signs that China’s economy has hit bottom,” said Zheng Xinli, deputy head of the China Center for International Economic Exchanges and a guest economist of China Daily.

“Whether the economy has reached a turning point or will continue to decline in the third quarter remains unclear,” he told China Daily.

“Though the labor market remains stable, businesses have already had problems. If the economy remains in a downward spiral, more social conflicts will emerge following business closedowns and a decrease of local fiscal income,” Zheng warned.

Storm cloud  Chinese companies warn profits plunging as slowdown spreads

On Wednesday, Air China Ltd., one of three main government-owned airlines, warned first-half profit will fall by at least half from a year earlier. State-owned ZTE Corp., one of the world’s biggest producers of telecommunications equipment, is projecting a decline of up to 80 per cent.(…)

ZTE’s statement Friday said some Chinese phone companies were postponing new equipment orders – a downbeat sign for Beijing, which is pinning its hopes on higher investment to drive growth.

Air China blamed its lower profits on weak travel demand at home and abroad. China’s two other major state-owned airlines, China Eastern and China Southern, issued similar warnings earlier.

The country’s shipbuilding industry association, slammed by weak trade, says May orders for new vessels were half the level of a year earlier.

TCL Corp., one of the world’s biggest producers of televisions and other consumer electronics, said Sunday its first-half profit will be “significantly lower.” A major appliance retailer, Suning Appliance Co. Ltd., warned its own profit might fall by 30 per cent.

Li Ning Co., a maker of athletic shoes and sportswear, issued a profit warning in early July and announced the departure of its CEO and the launch of an overhaul to improve efficiency and profitability.

In the auto industry, Dongfeng Motor Co. Ltd., the local partner of Nissan Motor Corp., warned last week its first-half profit will be down 60 to 70 per cent. (Chart below from China Daily)

To summarize:

As of Tuesday, 449 listed companies said they expect their first-half profits to decline from a year earlier, while 233 others expect losses, accounting for 46.74 percent of listed companies that have issued their first-half performance forecasts thus far.

Due to economic complexity in the second quarter, 103 companies trimmed their profit forecasts for the first half, accounting for 64.78 percent of those that revised their first-half forecasts.


Make or Break Time for China

Storm cloud  Dell CEO warns of slowdown in China

Dell Inc. is experiencing a business slowdown in China, its largest market outside of the United States, chief executive officer Michael Dell told a business forum on Tuesday.

China June Property Prices Flat

Average housing prices in 70 Chinese cities were flat in June from May, ending eight straight months of declines and offering yet another sign that the country’s real-estate market may have bottomed out.

[image]Encouraged by cheaper mortgages after China’s central bank cut interest rates twice since June, home buyers have returned to the market in droves, and “pent-up demand from genuine home buyers and upgraders—as well as worries [by prospective buyers] that the market will rebound–sent prices in some cities higher in June over May,” said Ma Xiaoming, a statistician from the statistics bureau.

Some property developers have also canceled discounts as transactions increased, he added.

Based on Dow Jones Newswires calculations, prices in the 70 cities increased by a marginal 0.02% on average in June from a month earlier, compared with a 0.1% fall in May and a 0.25% decrease in April.



Last December, I posted excerpts of an IRA interview with Michael Whalen, an award winning composer and new media observer. In this week’s issue of The Institutional Risk Analyst, Michael reviews his predictions of last year and discusses how he sees the future of media. Long excerpts but very interesting and thought provoking. Full IRA interview is here.

  • It seems that about 100% of what we discussed has come to pass or is in process, and then some. We were talking about the eventual end of television networks, film companies and the continued radical upheaval of the music business. It is certainly the case that network television is ending as we know it. While we have not seen any of these media companies fall over and die – the erosion in all of television and broadcast media in general in just 10 months is alarming.
  • I think the biggest single factor that has changed since we spoke last year is that major media companies and especially the television and cable franchises are no longer pretending that things are “OK”. (…) the total number of people watching programmed broadcast television is less than half of what is was just 10 years ago. The level of desperation out there is amazing.
  • In the face of these actions, income streams everywhere are drying up. Look at how new ventures like Oprah’s OWN network (launched just a year ago) has been a financial disaster since day one. News Corp’s (“NWS”) failure in launching their digital magazine “The Daily” and the continued trouble for media institutions like the New York Times (“NYT”) are but single examples of an ocean of trouble for media. (…)

Continue reading



Fresh Plan for Europe Crisis Germany and France presented a broad plan to better coordinate economic policy in the euro zone amid news that economic growth had stalled across much of Europe in the second quarter. The proposals outlined Tuesday from French President Nicolas Sarkozy and German Chancellor Angela Merkel were immediately criticized by investors as falling short of what was needed. U.S. stocks initially rose as investors saw signs of broader cooperation in the euro zone, but fell after Mr. Sarkozy said increasing the size of the euro-zone fund to bail out weaker countries wasn’t in the cards. Demand for U.S. Treasurys surged and the price of gold also rose, as did the cost of insuring euro-zone sovereign debt against default.

image (Chart from NBF Financial)


Growth in Emerging Parts of Europe Slows Growth in Central Europe’s emerging markets is slowing significantly as the recovery in the neighboring euro zone loses steam. Hungary, the Czech Republic and Romania on Tuesday all reported preliminary figures showing that the pace of economic expansion in the second quarter was weaker than in the first three months of the year.

Vital Signs: Manufacturing Picks Up The Federal Reserve’s manufacturing production index rose 0.6% from June, boosted by a jump in motor-vehicle output as supply-chain disruptions from Japan eased. The Fed’s overall index of industrial production rose a sharper 0.9% as oil and gas companies stepped up drilling and utility output soared as hot weather spurred demand for air conditioning.


Wal-Mart Frets Over Uncertainty  Wal-Mart Stores Inc. joined the chorus of retailers saying that uncertain economic conditions in the U.S. are making shoppers reluctant to spend.


Dell Lowers Sales Forecast Dell Inc. said its second-quarter profit jumped 63% on strong demand from corporate customers, but slowing sales to consumers and the U.S. government prompted the company to lower its full-year revenue target. It expects revenue to rise between 1% and 5% for the year, lower than its previous range of between 5% and 9%, as it faces a challenging sales environment.

Euro-Zone Inflation Eases Consumer prices fell by 0.6% from June, but were up 2.5% from July 2010. Core inflation fell by 1% from June, to leave the annual rate of increase at 1.2%, down from 1.6% in the previous month.

U.K. Unemployment Rate Jumps The U.K.’s unemployment rate jumped to 7.9% in June from 7.7% and the number of people claiming the jobless benefit posted its largest rise in more than 18 months in July as the labor market increasingly reflects the stagnating economy.