NEW$ & VIEW$ (29 JANUARY 2014)

SOFT PATCH WATCH

U.S. Durable Orders Tumble 4.3%, Suggesting Business Caution

Demand for big-ticket manufactured goods tumbled last month, a sign of caution among businesses despite sturdier economic growth

New orders for durable goods fell 4.3% in December from a month earlier, the Commerce Department said Tuesday. Economists surveyed by Dow Jones Newswires had a median forecast that durable-goods orders would rise by 1.5% in December.

The decline, the biggest since July, was driven by a sharp drop in demand for civilian aircraft. Excluding the volatile transportation sector, durable-goods orders fell 1.6%—itself the biggest decline since March. (…)

The overall drop in orders was broad-based, with most major categories posting declines. Orders for autos fell by the most since August 2011, and demand for computers and electronic also declined sharply.

Orders for nondefense capital goods excluding aircraft—a proxy for business spending on equipment—declined 1.3% in December, reversing some of November’s 2.6% increase. (…)

Pointing up Nondefense capital goods ex-aircraft are up 0.7% in Q4, a 2.8% annualized rate. They rose 5.1% for all of 2013, but that was really because of a poor second half in 2012. As this chart from Doug Short reveals, core durables have displayed very little momentum in 2013.

Click to View

SPEAKING OF CARS

In reporting its results, Ford said that in the current quarter it would produce 14,000 fewer vehicles in North America than in the same period a year ago.

A Cooling of Americans’ Love Affair With Cars

An aging population and a shift away from car ownership will make it difficult for the U.S. auto industry to sell as many cars as it once did.

(…) The challenge, though, will be maintaining that level with a confluence of demographic headwinds hitting.

The population is significantly older, and growing much more slowly, than it did during the auto industry’s heyday. In 1970, the U.S. median age was 28 and the population aged 16 and over—broadly, those of driving age—had grown at 1.7% annually over the prior five years. Today, the median age is 38, with the driving-age population growing 1% annually.

At the same time, young people’s interest in cars seems to be waning. In 1995, 87% of the population aged 20 to 24 had a driver’s license, according to the Federal Highway Administration. By 2011 that had fallen to 80%.

A recent analysis by industry watcher IHS and French think tank Futuribles suggests a likely culprit: a trend toward more urban living. Cities offer alternatives to driving for getting around and owning a car there can be an outright, and expensive, nuisance. (…)

There has been a marked decline in the time Americans spend behind the wheel. And the further the recession slips into the past, the more this change looks driven by demographics rather than just economic distress.

In 2012, according to an analysis of census data by the University of Michigan’s Transportation Research Institute, 9.2% of U.S. households didn’t have a car, compared with 8.7% in 2007. In the 12-month period ended in November, vehicles logged 2.97 trillion miles on American roads, according to the Federal Highway Administration. That comes to 12,045 miles per person aged 16 and over—nearly a 20-year low. (…)

December Shipment Volumes

imageFreight volumes in North America plummeted 6.2 percent from November to December, making this the largest monthly drop in 2013 and the third straight monthly decline. December shipment levels were 3.2 percent lower than in December 2012 and 1.8 percent lower than 2011. Despite the fact that there were fewer shipments in 2013, other indicators, such as the American Trucking Association’s Truck Tonnage Index, have shown that loads have been getting heavier. This matches well with anecdotal evidence from LTL carriers that they are carrying fuller loads. And since the Cass Freight Index does not capture a representative picture of the small parcel sector of the industry, the steep downward freight movement in December was somewhat offset by the increase in small package shipping for the holidays.

TRUCKIN’ & TRAININ’: Interesting to see how trucking rates have gone up while rail container rates have been flat for 3 years.

Truckload pricing trend data

Intermodal price trends

CHINA: CEBM’s review of January industrial activity shows that economic activity remains weak, but that further MoM weakening was not observed.

U.S. Home Prices Rise U.S. home prices continued to rise solidly in November, according to according to the S&P/Case-Shiller home price report.

The home price index covering 10 major U.S. cities increased 13.8% in the year ended in November, according to the S&P/Case-Shiller home price report. The 20-city price index increased 13.7%, close to the 13.8% advance expected by economists.

The two indexes indicate home prices are back to levels seen in mid-2004. (Chart from Haver Analytics)

Turkey Gets Aggressive on Rates

Turkey’s central bank unveiled emergency interest-rate increases in a move that outstripped market expectations and sent the lira roaring back, in a test case for other emerging markets battling plunging currencies.

The central bank more than doubled its benchmark one-week lending rate for banks to 10% from 4.5%. At the same time, in an apparent effort to quell volatility and get banks to hold money longer, it shifted its primary lending to the weekly rate from its overnight rate of 7.75%, which it raised even higher.

The effective difference for most lending—2.25%—is a major move for any central bank, though not as large as it initially appeared. (…)

The Turkish rate hike, which pushed the overnight rate to 12%, followed a surprising increase in India on Tuesday, as Delhi moved to dampen rising prices even as the South Asian giant faces its slowest growth in a decade.

Argentina’s central bank has also pushed up rates in recent days, and in South Africa, which faces a similar mix of weakening growth and high inflation, rate setters were under pressure to follow suit at their meeting Wednesday.

On Monday, the Bank of Russia shifted the ruble’s trading band higher, in response to selling pressure on the Russian currency. (…)

High five “The reality is that Turkey needs capital flows every day. The rate hike makes more difficult for people to go short the lira, but this doesn’t mean necessarily people are coming in,” said Francesc Balcells, an emerging-market portfolio manager with Pacific Investment Management Co., which manages a total of $1.97 trillion.

Europe Banks Show Signs of Healing

Italy’s second-largest bank by assets, Intesa Sanpaolo ISP.MI +0.86% SpA, said that it has fully repaid a €36 billion ($49 billion) loan it took from the European Central Bank during the heat of the Continent’s financial crisis. The bank moved faster than expected to pay back loans that don’t come due until the end of the year.

Elsewhere, Europe’s banks have recently entered a stepped-up cleanup phase. (…)

In Italy, Banco Popolare BP.MI -1.21% SC on Friday joined several other banks there that plan to sell more shares this year. The lender said Friday that it would raise €1.5 billion by giving its investors the right to buy shares at a discount. (…)

European banks have raised about €25 billion of new capital in recent months in advance of the ECB exams, according to Morgan Stanley MS +0.53% analyst Huw van Steenis. (…)

Some bank executives privately said they are worried that the stress-test process itself could reignite the Continent’s financial crisis if unexpected problems are uncovered. The chairman of one of Europe’s largest banks said his company is refusing to make unsecured loans to other European banks because of concerns about the industry’s health. (…)

Big Oil’s Costs Soar

Chevron, Exxon and Shell spent more than $120 billion in 2013 to boost their oil and gas output. But the three oil giants have little to show for all their big spending.

Oil and gas production are down despite combined capital expenses of a half-trillion dollars in the past five years. (…)

Plans under way to pump oil using man-made islands in the Caspian Sea could cost a consortium that includes Exxon and Shell $40 billion, up from the original budget of $10 billion. The price tag for a natural-gas project in Australia, called Gorgon and jointly owned by the three companies, has ballooned 45% to $54 billion. Shell is spending at least $10 billion on untested technology to build a natural-gas plant on a large boat so the company can tap a remote field, according to people who have worked on the project.

(…) Chevron, Exxon and Shell are digging even deeper into their pockets, putting their usually reliable profit margins in jeopardy. Exxon is borrowing more, dipping into its cash pile and buying back fewer shares to help the Irving, Texas, company cover capital costs.

Exxon has said such costs would hit about $41 billion last year, up 51% from $27.1 billion in 2009. (…)

Costly Quest

Oil-industry experts say it will be difficult for the oil giants to spend less because they need to replenish the oil and gas they are pumping—and must keep up with rivals in the world-wide exploration race.

“If you don’t spend, you’re going to shrink,” says Dan Pickering, co-president of Tudor, Pickering Holt & Co., an investment bank in Houston that specializes in the energy industry. Unfortunately for the oil giants, though, “I don’t think there’s any way these projects are more profitable than their legacy production,” he adds. (…)

EARNINGS WATCH

 

Earnings Beat Rate Strong Early, But A Long Way To Go

With few companies reporting early, the beat rate jumped as high as 70% before falling back down to 58% on January 15th.  Since then we’ve seen it stabilize and solid beat rates late in the week of the 17th have taken us to a range around 65% since the Martin Luther King Day long weekend.

As of this morning, 66% of firms reporting have beaten their consensus EPS estimates, which is better than the last two fourth quarter reporting periods (61% in 2012 and 60% in 2011).  Since the start of the current bull market in early 2009, the average quarter has had a beat rate of 62%.  If the current quarter continues at this pace, we will log the highest EPS beat rate since this reporting period in 2010.  But keep in mind that less than 300 names have reported.  With over 80% of the market waiting in the wings, this earnings season is far from over.

Thumbs down Thumbs up DOW THEORY SELL SIGNAL? (From Jeffrey Saut, Chief Investment Strategist, Raymond James)

(…) All of those Bear Boos were reflected in this email from one of our financial advisors:

Hey Jeff, I know you have heard of the Dow Theory buy and sell signals. We are now in a Dow Theory sell signal, meaning the D-J Transport Average (TRAN/7258.72) made a new high unconfirmed by the D-J Industrials. We’ve been in a Dow Theory buy signal environment for the past two years and now that has reversed. These signals are not short term and only happen at major stock market turns. For instance, we had Dow Theory sell signals 4 times between October of 2007 and February of 2008, which was a precursor to the 2008 carnage. What happened on Thursday/Friday of this week also confirms the bearish Elliott wave pattern.

“Nonsense,” was my response. First, all we have seen is what’s termed an “upside non-confirmation” with the Trannies making a new high while the Industrials did not. That is NOT a Dow Theory “sell signal,” it is as stated an upside non-confirmation. To get a Dow Theory “sell signal” would require the INDU to close below its June 2012 low of 14659.56 with a close by the Trannies below their respective June 2012 low of 6173.86, at least by my method of interpreting Dow Theory.

Second, there were not four Dow Theory “sell signals” between October 2007 and February 2008. There was, however, a Dow Theory “sell signal” occurring in November 2007 that I wrote about at the time. Third, there have been numerous Dow Theory “buy signals” since 2009, not just over the last two years. Fourth, Dow Theory also has a lot to do with valuations, and valuations are not expensive with the S&P 500 trading at 14.7x the S&P’s bottom up earnings estimate for 2014. And fifth, I studied Elliott wave theory decades ago and found it to be pretty worthless.

Canon to Return Some Production to Japan

Canon is stepping up efforts to take advantage of a weak yen by moving some of its production back home, in a move that could signal a shift in momentum of the Japanese manufacturing sector.

First, “Abenomics is working well … thus leading us to believe the foreign currency rate won’t fluctuate widely from the current levels at least for next several years,” Mr. Tanaka said.

Second, Mr. Tanaka said, a gap between labor costs in Japan and other Asian nations, where Canon has production bases, has narrowed. Rising wages outside Japan, as well as advanced factory automation technology the company has introduced at home, have contributed to the narrowing of those costs.

Canon said it expects to increase domestic output to 50% by 2015, from 43% in the latest business year ended December. About 60% of Canon’s production came from domestic factories between 2005 and 2009 but has fallen to below 50% since 2011.

 

NEW$ & VIEW$ (6 NOVEMBER 2013)

Freight Shipments Down in October

October was a depressed month for freight and the economy in general. The number of shipments and freight expenditures both declined from September, by 3.5 and 2.6 percent respectively. This marks only the second time this year that both indexes declined in the same month. (Shipment volume in April dropped 3.5 percent, but expenditures fell only 1.6 percent.) The 16-day federal government shutdown is partly to blame for the declines, but prior to the shutdown the economy was already exhibiting signs of a cool down.

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The 3.5 percent decline in freight volumes followed two months of strong growth, but is reflective of the weakening state of the overall economy. Shipment volume has already been below corresponding 2012 volumes in six months of this year, and October contributed the seventh month, coming in 2.0 percent below a year ago.

The sharp reduction in the shipment volume in October can be linked to the government shutdown. Although Customs and Homeland Security workers were exempt from the furlough, many freight shipments were delayed because other government agencies were not open to perform necessary inspections or processing.

Railroad carloadings declined again in October, dropping 0.7 percent, while intermodal loadings reversed September’s drop and rose 2.5 percent. Truck tonnage rose in September (the month for which the latest data is available from the American Trucking Association), but spot market load indicators have declined sharply in October.

U.S. manufacturing output was almost flat in September, with even the automotive sector showing definite signs of slowing. With inventories growing and retail sales and business spending flagging, there has been little reason to restock. In addition, export demand began to stall in August and has just begun to rebound.

U.S. planned layoffs rise in October: Challenger

The number of planned layoffs at U.S. firms rose 13.5 percent in October on cuts in the pharmaceutical and financial sectors, a report on Wednesday showed.

Employers announced 45,730 layoffs last month, up from 40,289 in September, according to the report from consultants Challenger, Gray & Christmas, Inc.

But for the first time in five months, the October figure was lower than the year-ago tally, which came in at 47,724. For 2013 so far, employers have announced 433,114 cuts, close to the 433,725 seen in the first ten months of last year.

MBA: Mortgage Applications decrease 7% in Latest Weekly Survey

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier and is at its lowest level since the end of December 2012. …

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Euro zone Sept retail sales fall more than expected

The volume of retail trade fell 0.6 percent on the month after a revised 0.5 percent rise in August, the EU’s statistics office Eurostat said. Analysts polled by Reuters expected only a 0.4 percent decline.

Sales of both food and non-food products fell and the volume of sales of automotive fuels was flat on the month.

Compared with the same period last year, September retail sales were up 0.3 percent, following three straight months of declines, the data showed.

The decline in retail sales was especially significant in the southern Europe, with Portugal recording an all-time low with a 6.2 percent slump on the month and Spain’s 2.5 percent decline was the biggest since April 2012.

Slovenia, now at risk of needing international financial assistance in case it fails to fix its banks and reform the economy, saw a 4.0 percent fall month-on-month in sales in September, the biggest decline since February 2009.

Core sales declined only 0.1% following two consecutive months of +0.4% growth. However, German retail sales are pretty weak, down 0.4% in September down 1.1% during the past four months (-3.4% annualized).

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High five  As a reminder, as posted here on October 31:

The Markit Eurozone Retail PMI remained below neutrality and declined to 47.7, from 48.6, indicating the fastest monthly rate of decline since May. In contrast, the average reading over the third quarter was the highest since Q2 2011 (49.5).

The faster decline in eurozone retail sales mainly reflected a steeper contraction in Italy, which had seen the slowest fall in sales in two years one month previously. Sales fell further in France, albeit at a slower rate, while the rate of growth in Germany was the weakest since May.

German Factory Orders Beat Estimate as Euro-Area Recovers

Orders, adjusted for seasonal swings and inflation, jumped 3.3 percent from August, when they fell 0.3 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 0.5 percent, according to the median of 37 estimates in a Bloomberg News survey. Orders advanced 7.9 percent from a year ago, when adjusted for the number of working days.

Overseas orders climbed 6.8 percent in September, while those from within the country dropped 1 percent, today’s report showed. Demand from the euro area surged 9.7 percent as investment goods jumped 23.6 percent. Over a two-month period, international demand contracted while domestic orders rose, led by investment goods.

“Foreign demand continues to remain rather weak despite the September increase,” the ministry said in the statement. “The data confirm the picture of an increasingly domestically driven economic recovery.”

This latest comment was aimed at the U.S. Treasury…In any case, this has been a very volatile series, with negative numbers in 4 of the last 6 months, although orders did rise 2.7% during the whole period, assuming the latest +3.3% jumped doesn’t get revised.

WEALTH EFFECT WANING?

Disappointing start to NY auction season
Quarter of paintings are unsold

One-quarter of the high-profile Impressionist and Modern paintings under the hammer at Christie’s went unsold on Tuesday night, signalling a bleak start for the autumn auction season in New York.

Another disappointment was “Mann und Frau (Umarmung)” by Schiele, which did not receive a single bid. The anonymous seller of this piece was widely rumoured to be beleaguered hedge fund billionaire Steve Cohen. Crying face

Earlier this week Mr Cohen’s fund, SAC Capital Advisors, said it would plead guilty to insider trading violations and pay a record $1.2bn fine. Observers at the evening said the combination of sky-high valuations and mixed quality had weighed more heavily on the purchasing decisions of dealers and collectors than in previous stellar years.

EARNINGS WATCH

 

China Drags on Western Profits

Once fuel for Western profits, China has emerged as a weak spot, offsetting optimism that European markets may be turning the corner and promising continued sluggish sales growth.

(…) But the latest set of quarterly earnings results reveal that for many companies, China has been a drag. While some industries did well, the combination of slower economic growth, plus government crackdowns that have put fresh scrutiny on the way companies win new business, hurt sectors from technology to luxury goods to pharmaceuticals. As a result, the sluggish global sales that persisted through much of the recovery aren’t likely to pick up soon. (…)

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Analysts estimate that third-quarter revenue at companies in the S&P 500 index increased just 3.2%, according to Thomson Reuters, following several periods of flat or no growth. Profits are expected to fare better, rising 5.3%, as companies cut costs and buy back stock, which boosts earnings per share.

The picture in Europe is bleaker. Earnings for companies in the Stoxx Europe 600 are expected to decline 14.6% as revenue falls 1.9%. While many European companies have reported improved performance at home, the euro-zone recovery remains shallow. Emerging markets are a particular weak spot, in part because many currencies have weakened against the euro.

 

NEW$ & VIEW$ (24 OCTOBER 2013)

Japan says exports almost flat as shipments to Asia slow down

Japan’s government downgraded its assessment of export performance for the second consecutive month in October on slowing shipments to Asia — suggesting external demand may now contribute less to Japan’s growth than initially anticipated.

The government left its overall assessment unchanged, saying the economy is set to recover at a moderate rate as high corporate profits fuel capital expenditure, which then spurs labor demand.

Domestic demand, boosted by increasing public works and consumer spending, has largely driven Japan’s recovery from recession last year, but signs of weakening exports may mean Japan having to rely even more on domestic demand to continue growing.

“Exports are almost flat,” the government said in its report for October. “Exports are expected to pick up in the future, because overseas economies are stable and because the yen has weakened, but we must be mindful of downside risks to overseas economies.”

That assessment marked a further downgrade from last month, when the government noted recent gains in exports had started to slow.

It was also the first time in three years that the government downgraded exports for two consecutive months.

A decline in export volumes due to lower shipments of cars to the United States, India and Southeast Asian countries prompted the downgrade in October.

The government left unchanged its view that industrial output is slowly increasing and that business investment is showing signs of picking up — mainly among non-manufacturers.

On deflation, the government’s view was unchanged from September, saying Japan is approaching an end to deflation as consumer prices, excluding fresh food and energy, were firming up.

LA area Port Traffic in September

On a rolling 12 month basis, inbound traffic was up 0.4% in September compared to the rolling 12 months ending in August.   Outbound traffic decreased slightly compared to August.

ARCHITECTURE BILLINGS RISE IN SEPTEMBER

Showing a steady increase in the demand for design services, the Architecture Billings Index (ABI) continues to accelerate, as it reached its second highest level of the year. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending.

The American Institute of Architects (AIA) reported the September ABI score was 54.3, up from a mark of 53.8 in August. This score reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 58.6, down from the reading of 63.0 the previous month.

Bank of Canada Drops Bias to Lift 1% Policy Rate

Bank of Canada Governor Stephen Poloz surprised investors by dropping language about the need for future interest rate increases, a move that’s leading to investor speculation about possible rate cuts.

Poloz removed the language, which had been in place for more than a year, citing greater slack in the economy, while keeping his benchmark rate on overnight loans between commercial banks at 1 percent for the 25th consecutive meeting today. The country’s currency and government bond yields fell after the announcement.

The Canadian dollar fell 1 percent to C$1.0385 per U.S. dollar at 4:16 p.m. in Toronto. One dollar buys 96.29 U.S. cents. Government bond yields fell, with the five-year security declining to 1.73 percent from 1.79 percent. (Chart from BMO Capital)

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SENTIMENT WATCH

U.S. Equities: Lift-Off

The short-term resolution to Washington’s folly ignited stocks last week, kicking off what looks to be an equity overshoot phase. Even a soft earnings season is unlikely to derail the budding positive momentum in the broad market: investors may award a ‘free pass’ to the business sector, as uncertainty and modest order book softness is expected given the U.S. government shenanigans.US Equitites - Lift Off

More importantly, lost in the shuffle has been the simultaneous easing in three main reflationary variables.

  • First, the U.S. dollar is drifting lower, reflecting the official nomination of noted policy dove Janet Yellen as the new Fed Chairperson, and the expectation that liquidity settings will remain extremely generous.
  • Second, Treasury yields are moving sideways, digesting this year’s rapid advance. Prospects for another budget battle in the coming months suggest that the Fed may well delay tapering further. Thus, another sudden surge in yields is not imminent.
  • Third, oil prices are easing, reducing a drain on global consumer and business purchasing power, especially in the developing world where weak currencies have exacerbated the impact.

The reflationary push from these three natural economic stabilizers will add to the positive economic momentum that has been slowly but steadily building all year. Our profit model has hooked back up, and capital spending indicators are accelerating, implying that the transition to a self-reinforcing economic expansion remains intact. With reduced fiscal drag next year, growth could surprise on the strong side.

That said:

STRETCHED VALUATIONS

The Rule of 20 valuation barometer is approaching “fair value” which it has not exceeded during his bull market. The risk return ratio is getting unfavourable to investors based on trailing earnings and inflation. Equities do occasionally reach into overvalued territory and sometimes pretty high into it and for extended periods (click on charts to enlarge).

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The Rule of 20 is not a forecasting tool, it is a risk measurement tool enabling investors to objectively measure the potential reward vs the risk of owning equities at any point in time.

Other than the Rule of 20, I also look at some basic absolute valuation parameters on U.S equities. CPMS is a Morningstar software that I have profitably been using since 1985. The charts are not fancy but the data is reliable. The first chart plots Price/Sales for the median U.S. company in the CPMS database (2185 stocks) against net profit margins on the CPMS median.

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The median P/S is at its 20 year peak but so is the median profit margin. The gap between both lines is nearly as wide as it was in 2007, suggesting that expectations are for a continuation of record high margins. In fact, the red dot on the top right corner is the bottom up forecast for margins in 2014, a jump from 8.2% to 10%. Obvious irrational exuberance. Keep in mind that “sales” are barely growing, meaning that the denominator offers little upside to the P/S ratio.

The next chart looks at balance sheet values. It shows Price/Book Value against ROE for the median company in the CPMS universe.

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The median P/B is near its 20 year high but this is not supported by the median ROE, unless you want to buy analyst forecasts for 2014 which see ROEs jumping 200 bps to 12.8% (red dot), a rather heroic achievement in today’s environment. Note that the median ROE has been declining steadily since early 2012!

This is not my definition of “Buy low, sell high”. We are clearly defying gravity here. How lucky to you feel?

EARNINGS WATCH

We now have 181 companies representing 42% of the S&P 500 Index having reported so far. The earnings beat rate is now 61% (56% yesterday) while the revenue beat rate is 28% (unchanged from yesterday) as per RBC Capital’s calculations.

BANKING

Reset Switch: Is the Can Coming to the End of the Road?

From The Institutional Risk Analyst:

We invented an early warning operating bank stress indicator (BSI) in 2004 that was based on what were then the optimistic visions of Basel II and the global economy. (…)

We tracked the comings and goings the U.S. banking industry through the 2008 crisis and subsequent recovery. We started giving speaker presentations on the journey this systemic stress showing how as a whole, the banking industry population today has a stress profile similar to where it was just prior to the 2008 crisis. (…)

Since the beginning of 2013, we’ve seen a number of banks drop from what were steadily improving BSI scores in the A to A+ range back down to F’s. The subset of the population doing this is small but statistically significant enough to warrant us putting the pattern into exception analysis follow up. What reveals so far is that the time has come to recognize asset value degradations.

Some banks look to have carried loans at book value hoping that the economy would improve substantially before rules on revaluation triggered and the clock seems to have run out on the bet. Aggregate 1-4 residential lending on bank balance sheets is still around 14 percent below a beginning of 2008 baseline and current property valuations dictate that the write down process needs to begin recognition. Similar stresses also seem to be manifesting in some banks’ commercial real estate lending books.

(…)  From years of observation, we note that banks typically do their write downs as part of their 4th quarter end of year filings. At the moment we do expect most will survive the pain but do worry a little that the regulatory and counterparty burden on what will be materially weaker institutions could cause secondary effects to a still jittery market. (…)

 

NEW$ & VIEW$ (11 OCTOBER 2013)

September Retail Sales Disappoint Retailers posted disappointing sales gains in September, even as they stepped up promotions. The back-to-school period ended on a sour note, raising some concerns about the key holiday season.

The nine retailers tracked by Thomson Reuters posted 1.6% growth in September same-store sales, or sales at stores open at least a year, versus the 3.1% consensus estimate and the 5.5% increase posted a year earlier.

The above is from the WSJ. Here’s Thomson Reuters actual release which reflects an even weaker picture:

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 0.4% comp for September, missing its 3.1% final estimate. The 0.4% result is the weakest showing since the recession, when the Index registered a -2.4% SSS result in August 2009. Including the Drug Store sector, SSS growth rises to 2.4%, below its final estimate of 4.5%. Retailers were hurt by weak mall traffic, decrease in store transactions, and weak consumer spending in the face of the government shutdown.

Weak traffic, low transactions, while inventories are rising:

Freight Hint for Retail Boost

(…) Container cargo volume rose 6% in August from a year earlier at the ports of Los Angeles and Long Beach, Calif., the main gateway for Asian imports. Container traffic at Long Beach alone surged 16% in August to 630,292 standard container boxes, marking the busiest month for the port since October 2007.

Shipping operators reported strong growth in cargo shipments between Asia and North America in the third quarter, while demand on Asia-to-Europe routes continued to reel from a slow economic recovery in Europe.

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The Transpacific Stabilization Agreement, an industry group of 15 major container-shipping lines that carry cargo from Asia to North American ports, said its members handled 4.8% more cargo from the beginning of July through the third week of September than a year earlier. The growth accelerated in September, the group said. (…)

However, the Shanghai Container Freight Index (tks Fred), which rose 6% sequentially for the 3 months to 13-Sep-13 declined 9% MoM during the last month and 6% WoW during the last week. Shipments to Europe were particularly weak but U.S.bound traffic was also negative during the 4 weeks to 13-Sep-13.

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Normally, a weak back-to-school leads a weak holiday season in retailing. Surprised? Maybe the resilient U.S. is near the end of its resiliency. Read on:

Storm cloud  U.S.: Consumer revolving credit contracts in Q3

According to data released earlier this week, consumer credit rose an annualized 5.4% in August. That was the third reading above 5% in four months. (…)

Pointing up Revolving credit (credit cards for the most part) actually contracted for the third time in as many months. As today’s Hot Chart shows, Q3 2013 is on track to deliver the first quarterly contraction in over two years.

So what’s driving the growth consumer credit? Student debt backed by the federal government has accounted for 70% of the overall increase in consumer credit in the past year. As shown, students accounted for 23.3% of total consumer credit outstanding in August, a new record high. (NBF)

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And this important stuff from BMO Capital, understanding that young adults are the driving force in GDP growth:

The Changing Face of the U.S. Workforce

It is hard to exaggerate how rapidly the U.S. working population is changing. Just to pick on one stark example, there are now more employees who are 55 or older than there are those with a job in the 25-34 year grouping (prime home-buying age). This is the first time we have seen this in the 65 years of data, and most likely the first time it has ever happened. Note how the run-up in the 55+ category almost precisely maps the surge in 25-34 group 30 years earlier, as the baby boom ages. This also suggests that the tally of 55+ may also peak in 2020, or soon after.image

China Car Sales Drive Onward

China’s passenger-car sales rose 21% from a year earlier in September—the fastest growth in eight months—thanks to increased demand ahead of a weeklong public holiday and a rebound in sales of Japanese cars.

Sales of passenger cars including sedans, sport-utility-vehicles and minivans totaled 1.59 million units last month—up from 1.31 million a year earlier, the China Association of Automobile Manufacturers, a semiofficial industry group, said on Friday.

Sales of motor-vehicles including both passenger and commercial vehicles grew 20% to 1.94 million units, the association said.

September is a good month for car sales because consumers tend to increase spending ahead of the weeklong National Day holiday. The government suspended highway tolls for passenger cars and motorcycles during the past holiday, leading to a sharp increase in the number of self-driving travelers, according to the China National Tourism Administration.

The September year-over-year sales gains also reflect weakness in the year-earlier month when China’s territorial spat with Japan took a toll on the world’s No. 1 motor-vehicle market.

In September 2012 the nationwide sales of passenger vehicles fell 0.3%.

Opec oil output at lowest in two years
Disruptions in Nigeria, Libya and Iraq put pressure on Saudi Arabia

(…) Opec said output fell by 400,000 barrels a day from August levels to 30.05m barrels a day in September, its lowest estimate for production since 2011.

As well as continued disruption in Nigeria and Libya – where the prime minister’s shortlived kidnapping on Thursday morning provided a reminder of insecurity in the country – Iraqi production fell below 3m b/d for the first time since June 2012. Maintenance work on southern ports has restricted exports from Opec’s second-largest producer.

Reduced supply from Africa’s Opec members, has been particularly hard felt in Europe, where many refineries rely on Libya’s high quality crude. European refineries have cut runs to their lowest levels in decades, according to estimates from JBC Energy and Energy Aspects, in the face of reduced crude supplies and competition from US refineries.

But refineries across the world are expected to return from seasonal maintenance periods by the end of the year, creating renewed demand for oil.

“In September and October high levels of refinery maintenance reduces pressure on the market, but as refineries return there is a question about where supply will come from,” said Richard Mallinson, an analyst at Energy Aspects in London.

Saudi Arabia, the de facto leader of Opec, has shown a willingness to meet any additional demand, however.

Saudi officials told the Vienna-based organisation the country had pumped crude at more than 10m b/d for a third consecutive month in September. Customers have turned to the world’s largest exporter to meet shortfalls elsewhere, and the country has a policy of raising production to meet its customers’ requests for more exports.

The fall in output from Libya, Nigeria and Iraq has brought Opec production in line with the cartel’s target of 30m b/d, which has been routinely exceeded in recent years.

But even at 30m b/d, the cartel is pumping more oil than the world needs, according to its own estimates. Surging supplies from North America will reduce the “call on Opec” to 29.7m b/d this year, a fall of 400,000 b/d from last year, it says.

As Credit Ratings Change, So Do Markets (Moody’s)

(…) For now, the latest trend of high yield credit rating revisions not only warns of a limited scope for any narrowing by credit spreads, it also menaces the outlook for equities. Ghost

Preliminary results show that US high yield companies were subject to 83 downgrades and 68 upgrades during 2013’s third quarter. During the six-months-ended September 2013, net high yield downgrades, or the numerical difference between downgrades less upgrades, averaged 2.1% of the number of US high yield issuers.

As derived from the relatively strong coincident correlation of 0.80 between the high yield bond spread and the moving two-quarter ratio of net high yield downgrades to the number of high yield issuers, the latest net high yield downgrade ratio favors a high yield bond spread that is closer to 500 bp, as opposed to 400 bp. (Figure 3.)

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Recently, the high yield spread approximated 449 bp. Setting aside a significant margin for forecasting errors, the high yield spread predicted by the net high yield downgrades exceeds the actual spread of 449 bp by 45 bp. Nevertheless, not only is the actual spread within the margin of error, but the current under-compensation for high yield credit risk is far less severe than the 239 bp average gap between the predicted and actual high yield bond spreads of 2007’s first half. (Figure 4)

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(…) Though net high yield downgrades do not yet alarm, they warn of a limited scope for a further narrowing by the high yield bond spread, unless profits accelerate convincingly. For the S&P 500’s non-financial company members, profits from continuing operations are expected to grow by 2.4% annually in Q3-2013 and then somehow accelerate to 7.9% by 2013’s final quarter. However, as recently as June 2013, Q3-2013’s operating profits were projected to grow by a much faster 7.4% annually compared to the latest call for 2.4% growth. (…)

The equity market is not immune to a prolonged deterioration of high yield credit rating revisions. In 2007, the market value of US common stock mistakenly set new highs as late as October despite what had become a long-lived and deepening shortfall of high yield upgrades relative to downgrades. (Figure 5.)

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The same phenomenon was even more evident when equities soared during 1999-2000 notwithstanding a high yield upgrade ratio that had sunk to a distressing 30% for yearlong 1999. Ultimately, share prices would plunge after cresting in March 2000. Prior to that, equities ignored 1989’s dreadfully low high yield upgrade ratio of 25% and climbed higher throughout much of 1989 before entering a slide that lasted until the final quarter of 1990. The longer share prices climb higher amid an especially weak distribution of high yield credit rating revisions, the more likely is a perilous overvaluation of equities.

Given the relationship between net high yield upgrades and the equity market, it’s not surprising that the high yield bond spread tends to bottom before the market value of common stock forms a major peak. For example, May 2007’s bottoming by the high yield spread was well before October 2007’s top for equities. And, though the high yield spread troughed in March 1998, equities did not crest until March 2000.(Figure 7.)

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SENTIMENT WATCH

The Yellen put
Markets dance to the tune of easy money

(…)  The markets have now accepted the circular logic of the Fed, which is that a whisper of the prospect of tapering leads to financial conditions tightening which the Fed then cites as the excuse not to taper. Indeed, this week Goldman Sachs put out a report reiterating its belief that the Fed won’t raise rates until 2016, suggesting well over two more years of liquidity and rising asset prices.

And of course, it isn’t just the Fed that is doing its bit for asset price rallies. There is talk of another round of easing in Europe, the BOJ continues on its aggressive easing and Australia has just cut rates.

(…) Who wants to fight the Fed under these circumstances?

“The Fed is always there,” says one Hong Kong-based hedge fund on the sidelines of the Goldman Sachs hedge fund conference in Singapore earlier this week. “It is clear that it will not tolerate a decline in asset values. If you sell in the face of QE, you look like an idiot.” (…)

Right on cue, not to be outdone:

Draghi Says ECB Guidance Allows Rate Cuts on Volatility

“The Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions, should the volatility in money market conditions return to the levels observed in early summer,” Draghi said at the Economic Club of New York yesterday. (…)

Draghi said at a press conference that the central bank is ready to use “all available” tools to contain market rates, a comment reiterated yesterday in its monthly bulletin.

So, with all this financial heroin:

In Latest IPOs, Profits Aren’t the Point

No profits? No problem. Investors are showing increasing hunger for initial public offerings of unprofitable technology companies and the potential for big gains that they bring.

Sixty-eight percent of U.S.-listed technology debuts this year, or 19 out of 28 deals, have been companies that lost money in the prior fiscal year or past 12 months, according to Jay Ritter , professor of finance at the University of Florida. That is the highest percentage since 2007, and 2001 before that. (…)

Unprofitable U.S.-listed technology companies that went public from 1990 to 2011 returned an average of 21.5% in their first three years, while profitable companies returned an average of 55.2% in that period, according to research by Mr. Ritter on companies with more than $50 million in revenues. (…)

In the dot-com boom years of 1999 and 2000, when many investors lost money after snapping up highflying shares, 86% of tech IPOs were of companies that lost money.

At the same time, when it comes to public offerings, some investors aren’t focused on averages. They are looking for home runs. Profitability even can be seen as a negative because it sometimes suggests maturity. (…)

 

NEW$ & VIEW$ (2 OCTOBER 2013)

Global PMI rises to 27-month high

The global manufacturing economy saw a modest pace of expansion in September, rounding off its best quarter for just over two years. The ongoing recovery again failed to filter through to the labour market, however, as employment levels were broadly unchanged over the month.

At 51.8 in September, up from 51.6 in August, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – edged higher for the third month running to a 27-month peak.

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Growth tended to be centred on the developed world, with the UK at the top of the global rankings and expansions also seen in the US, the eurozone, Japan and Canada. Among the emerging markets, China, Brazil and Indonesia stagnated in September. India, Russia and South Korea saw marginal contractions, whereas conditions improved
in Taiwan, Turkey and Vietnam.

Global manufacturing production rose for the eleventh consecutive month in September, with the rate of expansion the sharpest since May 2011. Higher output was supported by improved market conditions, as incoming new business increased for the ninth month running.

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There was also positive news for international trade volumes, as new export orders posted the most noteworthy increase since May 2011. The export growth rankings were led by the eurozone nations, with the largest increases reported by Spain, Ireland, Italy and the Netherlands.

September data pointed to a negligible gain in staffing levels, continuing a sequence of near-stagnation in the labour market that has been seen through the year-to-date. Among the largest industrial regions covered by the survey, job creation was seen in the US, the UK, Canada, Taiwan and Turkey.

Cost inflation accelerated slightly during September, hitting a near one-and-a-half year peak. Manufacturer’s pricing power continued its nascent improvement, as average output charges rose slightly for the second straight month.

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Global growth? Read on:

Maersk Four Rate Rises Fail to Spread as Demand Falls

The average global rate to ship an FEU fell 7.9 percent to $1,665 for the week ending Sept. 26, the third straight weekly decline, WCI data showed. The drop was led by the Asia-Europe route, with the fee from Shanghai, China’s busiest port, to Rotterdam, Europe’s biggest, falling 19 percent to $1,703. That rate has fallen 41 percent from $2,881 on Aug. 8, the highest in almost a year. (…)

The spot rate to ship a 20-foot equivalent unit, or TEU, to northern Europe from Far East Asia is currently $765 per box, down from $1,501 at the beginning of August, Alphaliner said, citing Shanghai Containerized Freight Index data. It could fall to $500 per TEU in the next few weeks, the Paris-based industry consultant said in an e-mailed note distributed yesterday. (…)

With no potential fundamental catalyst to drive charges higher before the end of the year and capacity growth set to exceed demand at least through 2014, there probably won’t be any sustainable uplift in rates before 2015, Cantor’s Byde said. (…)

Goldman’s Global Leading Indicator Plunges Back To “Slowdown”

Everything looked so good in August. Goldman’s global leading indicator (GLI) “swirlogram” had recovered quickly from a ‘growth scare’ in Q1 and was holding firmly in “expansion” territory. Then reality hit as new-orders-less-inventories worsened, various manufacturing surveys rolled over, industrial metals gave up gains, and Korean exports provided no help. Among the few factors holding up the index from already plunging levels was the Baltic Dry Index (which has collapsed now in the last few days) and Consumer Confidence (which appears to also be rolling over).September’s plunge into “slowdown” for the GLI is the biggest drop in 8 months.

 

And commodity prices show no upward momentum (chart from Ed Yardeni:

Meanwhile, U.S. PMIs remain positive in September and…

CANADA’S PMI POINTS TO SOLID GROWTH

Canada’s manufacturing expansion accelerated to a 15-month high in September, according to the RBC Canadian Manufacturing Purchasing Managers’ Index™ (RBC PMI™).

The seasonally adjusted RBC PMI rose to 54.2 in September, up from 52.1 in August. This indicated further improvement in manufacturing business conditions, with the rate of growth above the series average and the fastest since June 2012.

The RBC PMI found that both output and new order growth accelerated in September. In particular, the latest rise in total new work intakes was strong and the fastest since June 2012. This partly reflected the greatest increase in new export orders for two-and-a-half years. Meanwhile, the rate of job creation also quickened to a 15-month high, as firms hired additional staff to handle increased business activity.

While in Mexico: Total new work intakes rose only slightly over the month, despite an increase in new export orders – the first in five months.

But:

September U.S. Auto Sales Fall 24%

(…) Industry executives said September sales were depressed because the Labor Day weekend occurred early in the month, and many cars sold during sales promotions tied to that weekend were counted in August rather than September.The selling rate for September was 15.28 million, down from an annualized selling pace of 16.09 million vehicles in August.

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image(Charts from CalculatedRisk)

Averaging August and September to smooth out the calendar perks, we get 15.68 million vehicles, down from 15.8 in July and in line with previous cyclical peaks if we exclude the bubbled 2000s.

 

Policy Makers Prepare For Siege

The federal government shutdown showed no signs of breaking, increasing the likelihood it will become entangled in an even larger battle over the Treasury’s ability to pay its bills.

Europe is not out of the wood just yet:

The rise of the currency has contributed to a tightening of monetary conditions. The IMF’s measure of the real effective exchange rate, which is deflated by the consumer price index, has risen to 98.72 from 98.24 over the last quarter and from 94.19 over the last year.

The strengthening of the currency has been accompanied by a rise in the cost of borrowing. Real three-month EUR LIBOR has risen to minus 0.94 percent from minus 2.45 percent over the last 12 months.

A monetary conditions index for the euro area has risen to 97.03 from 95.79 during the same period. The latest reading is 0.7 percent below the 10-year moving average. That compares with the figure having been 2.1 percent below that long-term mean one year ago.

The tightening of monetary conditions has occurred as a Taylor Rule model has called for the opposite to occur. A version of the monetary policy tool, based on coefficients estimated by the Federal Reserve Bank of San Francisco, suggests the main policy rate of the ECB should have been reduced to 0.25 percent from 1 percent during that period.

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Loans to non-financial corporations, adjusted for sales and securitization,
fell 2.9 percent year over year in August versus minus 2.8 percent in July. The equivalent figure for households stood at 0.4 percent year over year, unchanged from the previous month.

EARNINGS WATCH

Worrying About Profit Warnings Companies are cutting their profit forecasts at a record pace. Yet for investors, history shows the sour outlooks aren’t a reason to sell.

The number of companies projecting quarterly earnings results below analysts’ expectations climbed to 89 late last week, according to FactSet, which started tracking guidance data in 2006. The latest figure surpassed the previous records of 88 in the second quarter and 86 in the first quarter.

Earnings warnings have increased every quarter since the second-quarter of 2012, FactSet data show. Yet over that time frame, the S&P 500 has rallied 24%. (…)

“Third quarter earnings are expected to be the same as the second quarter – we will all be disappointed with low profit and sales growth, but in the end, the third quarter will set a new all-time record, beating out the current record set by the second quarter, by about 2%,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. (…)

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More Pain Looms for Banks  New troubles are piling up for U.S. banks as they prepare to release third-quarter earnings results amid warnings of weak trading revenue, a sharp decline in mortgage refinancings and rising legal costs.

(…) Analysts reduced revenue estimates for the six largest U.S. banks during the quarter and cut profit estimates for all but Wells Fargo.

Bank of America, which relies heavily on the trading and mortgage businesses, suffered the biggest drop. Analysts have reduced their third-quarter per-share earnings predictions for the Charlotte, N.C., lender by 27% since July 1. (…)

“For a while we thought a light was at the end of the tunnel,” said Gerard Cassidy, a banking analyst with RBC Capital Markets. “It seems to be a Mack truck.” (…)

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Weak third-quarter results are expected to accelerate plans for job cuts. Overall employment at the six largest U.S. banks declined by 26,254 jobs, or 2.2%, in the year ended June 30, company filings show. The largest was a 6.6% decline at Bank of America. Wells Fargo was the only gainer over the period, boosting its staff by 3.8%. (…)

Nowhere are banks hurting more than in mortgages. Banks long have braced for a slowdown, but the spike in interest rates this summer brought a yearlong boom to an abrupt end.

“It’s been brutal,” said Michael Menatian, a mortgage banker in West Hartford, Conn. “We were flat-out busy until May. Once rates went up, things went completely dead.” He said he closed around $4 million in loans every month through June, and about $1.5 million a month since then. (…)

J.P. Morgan, Bank of America, Wells Fargo and Citigroup already have cut more than 10,000 mortgage jobs this year, with plans for thousands more to come. J.P. Morgan is accelerating plans to cut as many as 15,000 jobs in its mortgage division by the end of 2014.

All told, the number of employees in the industry will likely shrink by 25% to 30% over the next year, estimates Christine Clifford, president of Access Mortgage Research & Consulting, Inc., a Columbia, Md., mortgage research and consulting firm. (…)

If you missed it, you may want to read the EARNINGS WATCH segment of Monday’s New$ & View$.

Merck to Cut Staff as Industry Trims R&D

Merck said it plans to slash its 81,000-strong workforce by 20% over the next two years, a stark show of the diminishing research-and-development capabilities of some of America’s biggest health companies.

The company also said it would close offices in New Jersey and discontinue some late-stage drug development, all in the service of saving about $2.5 billion annually by 2015. (…)

[image]After acquiring Schering-Plough Corp. for $41 billion in 2009, Merck’s workforce nearly doubled to reach a peak of 100,000. Assuming no new employees are added by 2015, the company’s total head count would fall to 64,800 after the layoffs, or just 17% more than before the merger.

Advancements in the understanding of genetics and biology have increasingly fuelled drug development in recent decades, and many of the most promising new drugs have been aimed at niche disease populations, developed in the labs of biotechnology competitors considered closer to the cutting edge of science. Merck has begun to catch up, most recently with an experimental cancer drug that harnesses the immune system to fight tumor cells. But some former executives worry that the company wasn’t quick enough to adapt and that its declining size mirrors the shrinking ambitions of other large drug makers. (…)

Merck lowered its earnings-per-share guidance to a range of $1.58 to $1.82, from a range of $1.84 to $2.05 previously; the company maintained its projected earnings per share, excluding restructuring items, at a range of $3.45 to $3.55.

Foreign Firms Tap U.S. Gas Boom

The U.S. boom in natural-gas production is luring investment from foreign manufacturers eager to tap a cheap, abundant supply of fuel and feedstocks.

Companies from the U.S. and abroad have invested or are planning to invest billions of dollars through the rest of the decade in plants that would churn out chemicals, fertilizers, plastics, metals and fuel from gas. Many foreign companies, alone or in joint ventures with U.S. partners, are taking advantage of gas that costs a fraction of what it does in Europe or Asia to expand production in the U.S.

Boston Consulting Group estimates that international companies will invest at least $50 billion through the end of the decade on projects that take advantage of low-price natural gas.

Linde AG, a German gas-and-engineering company, recently said it would spend $200 million to build a new air-separation unit in La Porte, Texas, that would provide synthetic gas for the petrochemical industry. The investment “is directly tied to the price and availability of natural gas,” said spokesman Uwe Wolfinger. “Five or seven years ago, this type of investment would have been far more likely elsewhere in the world.” (…)

Energy consulting firm IHS Cera said in a report last month that cheaper gas would kick-start the nation’s chemicals sector over the next dozen years, creating more than 300,000 jobs and driving half a trillion dollars in production through 2025. (…)

Chemicals accounted for one-quarter of the $160.5 billion in inbound foreign-direct investment in the U.S. last year, according to the U.S. Commerce Department. (…)

“If you think about the competitive advantages of an economy, having low-priced energy is about the most important,” Incitec Chief Executive James Fazzino said. Combined with a stable regulatory framework and a trained labor pool, the U.S. “is really the most attractive place in the world to invest,” he said. (…)

The Commerce Department, which for years has sought to help American companies boost exports, has put new emphasis on attracting foreign investment through a program called SelectUSA. (…)

Nomura Sees $690 Billion Flow Into Japan Stocks on Tax Break  (Tks Carl)

Japanese savers are poised to pump $690 billion into stocks to benefit from new tax breaks as the government tries to avert a retirement cash crunch in the nation with the world’s oldest population and lowest interest rates.

The Nippon Individual Savings Account program, which opens for applications tomorrow, will allow individuals to buy 1 million yen ($10,143) a year of risk assets that are exempt from taxes on dividends and capital gains for five years. The plan will draw as much as 68 trillion yen through 2018, with 65 percent of users pulling money out of bank deposits to purchase securities, estimates from Nomura Research Institute show. (…)

Equities made up just 7.9 percent of household assets as of March, compared with 34 percent in the U.S. and 15 percent in the euro zone, the most recent Bank of Japan data show. (…)

There have been other government policies that tried and failed to promote the shift of funds, and NISA is set to join them, said Yasuhiro Yonezawa, professor of finance at Waseda University in Tokyo.

“NISA will have limited impact on the investment attitude of Japanese people,” said Yonezawa. “I doubt they’ll behave rationally when it comes to asset management as they’ve been unresponsive to incentives offered by the government in the past.” (…)

The expiration of another incentive plan for investors at the end of this year will also limit NISA’s impact, according to Ichiro Takamatsu, a fund manager at Bayview Asset Management Co. Levies on dividends and capital gains will return to 20 percent after being cut by half for the past 10 years.

“Individual investors will sell shares toward the end of the year before the tax rate is raised back,” said Takamatsu. “Many are holding unrealized gains due to the Abenomics rally and that will spur profit-taking.” (…)

 

NEW$ & VIEW$ (27 SEPTEMBER 2013)

U.S. GDP growth confirmed at 2.5% in Q2

The US economy grew at an annualised pace of 2.5% in the second quarter, in line with the previous estimate but defying analysts’ expectations of a pick up to 2.6%.

There was better news on final sales, which strip out inventories, which grew faster than previously thought, increasing at an annualised rate of 2.1% instead of 1.9%.

Pointing up  Worryingly, it looks like even this relatively modest growth is only being achieved by firms cutting prices. Prices charged for goods and services fell at an annualised rate of 0.1%. That was the first time these prices have fallen since the dark days of early-2009 and points to a general lack of demand growth.

The data therefore look likely to further dissuade policy makers that the economy is ready to withstand any tapering of the Fed asset purchases programme, especially as more up to date indicators such as retail sales, manufacturing output, the flash PMI and durable goods orders all suggest the economy has lost momentum again as we move towards the fourth quarter.

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Pending Sales of Existing Homes in U.S. Decreased 1.6% in August

The index of pending home sales fell 1.6 percent, after a revised 1.4 percent decrease in July that was bigger than initially reported, figures from the National Association of Realtors showed today in Washington. Economists forecast a 1 percent decline in the gauge from the month before, according to a median estimate in a Bloomberg survey.

(Haver Analytics)

Sad smile This is the fourth straight month of declining pending sales and prior months were revised down. Inventory remains low but it has increased in six of the past seven months at rates exceeding historical averages.

Confidence Gap” Widens to Record Levels

For more than a year now, we have been highlighting the growing “confidence gap” among Americans based on income.  While it is common for wealthier people to be more confident than poorer people, the discrepancy in confidence levels continues to be at record levels.  More recently, there has been growing commentary regarding this disparity’s impact on the economy in the form of weak sales from low income retailers like Wal-Mart (WMT), while retailers to the higher end and luxury markets have been holding up much better.

Goldman’s Analyst Index Plunges Most In A Year

Goldman Sachs Analyst Index (GSAI) tracks manufacturing and service sectors based on bottom-up analyst input on a firm by firm basis to generate a real-time indicator of US economic strength akin to the ISM data. After spiking to multi-year highs in August, it has collapsed by the most in a year in September as the New Orders sub-index retraced its outsized gains from August. The sales/shipments index fell, while the employment index stayed flat and below the 50 mark. The underlying composition of the GSAI weakened in September with a few sectors noting lower sales and/or a downgrade in expectations, and on balance sentiment with respect to business conditions seemed a touch weaker since August and employment remained below 50 for the sixth month.

The September GSAI joins other business surveys (stronger Philly Fed, mixed Empire State, and weaker Richmond Fed) in sending a mixed signal about recent business activities.

 
Fingers crossed  Maersk calls bottom of trade cycle

Container shipping line says demand to rise 4-6% over two years

Maersk Line said on Thursday it believed the downturn in trade had bottomed out and predicted demand for global containers would grow by 4-6 per cent in 2014 and 2015, up from recent forecasts of 2-3 per cent for this year.

Maersk is one of the best corporate indicators of global trade as it carries 15 per cent of all seaborne containers. (…)

Each of the last three quarters has seen a small increase in annual growth of container demand as trade between emerging markets has increased. But Mr Stausholm conceded: “Because of more regionalisation and nearshoring, it means there are much lower growth rates for Asia-Europe trade.”

Container shipping is not the only part of the industry to see an increase in trade looming. The Baltic Dry index (…) has climbed over 200 per cent this year as trade has gingerly picked up. (…)

Europe Tops U.S. as Global Growth Locomotive

(…) A 1 percent increase in aggregate demand in Europe’s developed nations gives 33 of 39 international economies a bigger lift in their gross value added, a proxy for gross domestic product, than if the higher demand had occurred in the U.S., Barclays strategists including London-based Jim McCormick said in a Sept. 25 report.

The impact of the European demand rise on the entire world is more than 0.25 percent, three times the U.S. effect. The explanation is that that Europe has a bigger economy with greater trade links and its banks are more exposed globally, McCormick, Barclays’ global head of asset allocation research, told reporters in London yesterday.

Europe’s positive spillovers were calculated using historical relationships between economies. The ripples extend as far as emerging Asian economies and to some in Latin America.

“While it is often believed that the U.S. cycle is a bigger source of global growth shocks, statistics suggest otherwise,” the Barclays report said.

The observation was contained in a study suggesting “the evolution of the European recovery could well be the most important factor for financial markets in the months ahead.”

Among other reasons for that analysis: The euro region’s eight-quarter recession may have hurt asset markets abroad too. Barclays noted that assets typically linked to growth have underperformed the Standard & Poor’s 500 Index by almost 20 percent since Europe’s slump began in the middle of 2011. Since the rebound started this year, growth assets have started to gain against the S&P.

Japan Prices Jump, But it Could be the Peak Market watchers who conclude from Friday’s consumer price data that Japan is speeding out of deflation could be setting themselves up for disappointment in the months ahead.

Economists say the 0.8% jump in core prices, which exclude fresh food, is likely the peak in a three-month rally that politicians have hailed as the beginning of the end to 15 years of falling prices. It was the biggest monthly jump since 2008. (…)

When energy and food are excluded from core CPI – giving “core core CPI” – prices fell for the 56th straight month in August. Economists say that getting prices of everyday expenses like rent and karaoke to rise requires stimulating demand from consumers through higher wages – an unlikely prospect with Japanese companies trying to cut costs instead.

Crying face  Obama and Republicans poles apart on US budget Stand-off over debt ceiling appears intractable

 

NEW$ & VIEW$ (16 AUGUST 2013)

Storm cloud  US industrial production stalls

US industry suffered a disappointing start to the third quarter, but there are signs that growth may pick up again as we move through the quarter.

Industrial production stalled in July, showing no change against expectations of a 0.3% increase. Manufacturing output fell unexpectedly, down 0.1% against June. Even when looking at the three-month trend, the picture is one of a stalling industrial sector. Production was flat in the three months to July, the weakest performance since last October and indicating that the economy has slowed sharply from the 1.3% three-month growth rate seen at the beginning of the year and the 1.0% rise seen in the first quarter.

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This clearly represents a weaker than anticipated start to the third quarter, and will raise question marks over the solidity of the US economic recovery.

Fingers crossed  However, July may represent a low for the sector. The easing in the rate of growth over the course of the year to date has been signaled in imageadvance by Markit’s PMI survey and, reassuringly, having slumped to an eight month low in June, the PMI picked up in July, hitting a four-month high. The improvement in the survey data – which have provided a very reliable guide to the official numbers – suggests that the official data will pick up again in coming months.

Importantly, new order inflows gained further momentum during the
month, which should drive ongoing production growth. Manufactures are reporting that domestic demand is providing the main impetus to renewed growth, but perhaps the most important driver of new orders in July was the export market. With growth picking up in Europe, US firms are able to offset some of the weakness evident in emerging markets. July’s rise in export orders was the largest so far this year.

PHILLY FED MANUFACTURING SURVEY SO-SO

The survey’s broadest indicators for general activity and new orders were
positive for the third consecutive month, although they fell back from higher readings last month. Responses indicated flat shipments and only slight increases in overall employment this month. The surveyʹs indicators of future activity, although not as high as in July, continue to suggest that firms expect continued growth over the next six months.

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These four charts illustrate how weak things are in the Philly Fed district. New orders did spike in the last 2 months but unfilled orders remain pretty low. Yet, employment rose in the last 2 months, even though the workweek is still not expanding.

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Open-mouthed smile  Jobless Claims in U.S. Decline to Lowest Level Since 2007

The number of claims for jobless benefits dropped by 15,000 to 320,000 in the week ended Aug. 10, the least since October 2007, according to Labor Department data. The Labor Department revised the previous week’s figure to 335,000 from an initially reported 333,000.

U.S. INFLATION STUCK AROUND 2.0%

Inflation, up 0.2%, Moves Closer to Fed Target

Rising prices for a broad range of consumer items in July pushed overall inflation up from historically low levels, a development that could reassure Federal Reserve officials as they consider dialing back their bond-buying program in coming months.

The seasonally adjusted CPI for all urban consumers rose 0.2% (1.9% annualized rate) in July. The CPI less food and energy increased 0.2% (1.9% annualized rate).

According to the Federal Reserve Bank of Cleveland, the  median Consumer Price Index rose 0.2% (2.0% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.8%, the CPI rose 2.0%, and the CPI less food and energy rose 1.7%

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The weakness in the U.S. economy is having little effect on inflation which stubbornly remains in the 2.0% range, however you measure it. Core CPI has advanced 0.2% in each of the last 3 months (+2.4% a.r.). The median CPI has also gained 0.2% in each of the last 4 months and 5 of the last 6 months. Only the 16% trimmed-mean CPI remains below 2.0%, rising at a 1.6% annualized rate in the past 3 and 6 months.

The Rule of 20 uses total CPI for its inflation component. Now +2.0%, it is up measurably from the +1.1% recorded last April but back to its February reading.

U.S. HOUSING

Homebuilder Confidence in U.S. Jumps to Highest Level Since 2005

The National Association of Home Builders/Wells Fargo index of builder confidence climbed to 59 from a revised 56 in July, which was lower than previously reported, the Washington-based group reported today.

High five  Prospective buyer traffic was unchanged at 45.

U.S. housing starts, permits rise in July but below forecasts

U.S. housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market’s momentum.

The Commerce Department said that housing starts increased 5.9 percent to a seasonally adjusted annual rate of 896,000 units. June’s starts were revised up to show a 846,000-unit pace instead of the previously reported 836,000 units.

Permits to build homes rose 2.7 percent in July to a 943,000-unit pace.

Last month, groundbreaking for single-family homes, the largest segment of the market, fell 2.2 percent to a 591,000-unit pace, the lowest level since November last year. Starts for multi-family homes jumped 26 percent to a 305,000-unit rate, reversing the prior month’s decline.

Permits for multi-family homes rose 12.6 percent to a 330,000-unit rate. Permits for single-family homes fell 1.9 percent to a 613,000-unit pace.

This chart from CalculatedRisk shows the impact that rising prices and rates are having on the singles market. Even the multi-family, mainly rental, seems to have peaked out.

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Turtle  Wal-Mart Deepens Gloom Around Retailers

The WSJ today is writing about the apparent disconnect between official retail data and the actual trends reported by retailers. Yesterday’s New$ & View$ commented on that with this chart from Pictet illustrating the problem:image

Today’s WSJ article adds more details:

Wal-Mart Stores Inc., Macy’s Inc. and Kohl’s Corp. this week all reported weak results for their most recent quarters, raising concerns over whether shoppers will keep their pocketbooks open through the back-to-school and holiday seasons.

The disappointing results have left executives at retailers, restaurants and consumer-goods companies puzzling over the disconnect between the poor showing for sales and recent economic indicators that should point to a stronger consumer. (…)

But so far in this retail reporting period, those positive indicators aren’t showing up at the cash register.

Wal-Mart delivered the latest dose of bad news, reporting weak sales that it expects to persist into the fall.

The retailing giant said its fiscal second-quarter earnings rose 1.3%, but sales grew more slowly than expected, as consumers in both mature and emerging markets curbed their spending and traded down to lower-priced products. Wal-Mart, the world’s largest retailer, cut its forecast for sales and profit for the year as its low-income customer base remains cautious.

Sales at U.S. stores open at least a year fell 0.3% after Wal-Mart had said they would be no worse than flat. It was the second consecutive decline for the key retail metric. Wal-Mart expects flat comparable-store sales in the U.S. in the current quarter as well.

Wal-Mart’s release followed a disappointing report Wednesday from department-store chain Macy’s, which cut its profit forecast for the year and warned that its shoppers remain stretched.

Both retailers reported declining traffic, a worrying sign, and Macy’s said it would boost its marketing efforts to bring consumers back in. On Thursday, Kohl’s added to concerns about a weak back-to-school season when it said its fiscal second-quarter profit fell 3.5% and lowered its earnings forecast for the full year.

The downbeat trend has been widespread. Teen retailers American Eagle Outfitters Inc.  and Aéropostale Inc. warned this month their results will be worse than they had expected, and Thursday afternoon, high-end retailer Nordstrom Inc. lowered its profit and sales outlook for the year.

Bloomberg adds:

Li & Fung Ltd.— the world’s largest supplier of clothes and toys — also reported first-half profit that missed analyst estimates amid sluggish demand from U.S. customers.

Li & Fung’s U.S. customers — which include Wal-Mart, Target Corp. and Kohl’s — “have all adopted a more cautious view toward their winter sales this year” as the “retail environment is tracking with the slow pace of economic recovery,” the company said in a statement.

Part of the problem seems to come from the high pent-up demand for cars and other housing-related goods that stretched consumers can no longer postpone, forcing them to cut into other expenditures.

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Car sales plateaued in recent months and the housing market may be feeling the effects of rising prices and interest rates, raising the danger of a pretty weak second half.

But don’t you worry, the higher-end consumers, in large part bankers, strategists and economists, are there to save us all!

Still, economists caution against reading too much into Wal-Mart’s results.

“Wal-Mart caters to people who shop from paycheck to paycheck, as opposed to people who go out and buy cars,” said Miller Tabak economist Andrew Wilkinson. “The tailwind from rising housing and stock values that is hitting the higher-end consumers doesn’t apply here.”

Consumer spending will continue its steady increase, he said, which is already around $50 billion above its prerecession peak of $375 billion a month.

Hmmm…

On Thursday, even high-end department store Nordstrom said that its sales trends were softer than anticipated and reduced full-year guidance. (FT)

Here’s the reality of most Americans:

In a separate Labor report Thursday, Americans’ real average weekly earnings declined by 0.5%. The drop was due to a decline in average hourly wages, adjusted for inflation, and a decline in the average work week.

As of May, 47.6 million Americans, or one in seven, received food aid – highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010.

Ladies and gentlemen, fasten your seat belts, we have entered the twilight zone.

Incidentally, today’s FT publishes

99 percent badgeWhy inequality matters
Tim Harford on why rising unfairness hurts us all

(…) Between 1993 and 2011, in the US, average incomes grew a modest 13.1 per cent in total. But the average income of the poorest 99 per cent – that is everyone up to families making about $370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much the top 1 per cent are making. The stakes are high.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them. (…)

And at some point, the poor react…

This comes on the heels of Bill Moyers’ chronicles of “Two American Families”, well worth the 83 minutes of your time. Moyers’ interview by Charlie Rose is also interesting.

Something to watch because this is unsustainable.

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Rail-Truck Shipments Reveal Holiday Sales Clues

Total U.S. intermodal volume — goods shipped by more than one means of transportation — rose 4 percent for the four weeks ended Aug. 10 compared with a year ago, according to figures from the Washington-based Association of American Railroads. That’s the biggest increase since March.

The data will reflect a change in pace “before it becomes a broad phenomenon” and supplement commentary from trucking and railroad companies, Gayle said.

It seems that intermodal traffic has been pretty volatile lately. It fell sharply in the first half of July and bounced back thereafter but ended down 2.5% YoY in July. Trucking volume has been weaker lately as well. Here’s the Cass Freight Index which combines all freight, at the end of July:

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EUROPE’S TURNAROUND?

Eurozone shows unconvincing rise from recession as GDP expands in Q2

Markit sets the record straight on Europe’s q2 GDP (my emphasis):

(…) However, the GDP increase looks likely to overstate the true health of the Eurozone economy in the second quarter. In particular, the increase looks to be based on unsustainable factors, notably a weather-related upturn and a record jump in car output. The upturn also sits in contrast to weaker business survey data (notably in France, where the largest question marks hang over the GDP data). This combination of
temporary-looking growth drivers and the contrast with the survey data suggests that the impressive performance may not be repeated in the third quarter. (…)

The variations in national performance underline the fragility of the upturn, especially when deeper looks at the data suggest that the strength of growth in both France and Germany looks somewhat unsustainable.

imageThe volatile industrial production was driven by a surprisingly strong jump in production of durable goods, led in turn by a 15.7% surge in car production – the largest ever increase seen since data were first
available in 1991. This increase not only looks unsustainable but is also at odds with the PMI data, which tend to give a better picture of the underlying health of the manufacturing sector as a whole.

imageReassuringly, however, although the manufacturing PMI data remained weak in the second quarter, a return to growth is clearly evident in July, suggesting the goods producing sector is on course to expand in the third quarter.

Perhaps most striking, however, are the jumps in GDP in austerity-encumbered Portugal and France, both of which leave question marks over what the underlying growth drivers were of such robust rates of expansion in these countries. (In fact, besides the volatility in the German numbers, almost all of the divergence between the weaker PMI signal for the second quarter and the contrasting GDP expansion can be explained by the variance in the French PMI and GDP numbers.)

Pointing up The robust French data in particular contrast markedly with PMI data which, although having bottomed-out earlier in the year, pointed to imagean ongoing deterioration of output in the second quarter. The government’s statistics body, INSEE, assigned the 0.5% GDP increase primarily to rising domestic demand and an upturn in inventories. Both of these could fade in the third quarter: INSEE themselves note that consumer confidence remains close to its all time low, and inventories will be cut unless demand moves higher.

Finally, there is also some evidence that the upturns in Germany and France reflected a rebound in domestic spending after adverse weather deterred shoppers at the start of the year; something which would not be
especially noticeable in the manufacturing and services PMIs and is again a growth driver that would be only temporary.

Euro-Area Exports Increase 3% as Inflation Holds Below 2%

Exports from the 17-nation bloc rose a seasonally adjusted 3 percent in June from May, when they dropped 2.6 percent, the European Union’s statistics office in Luxembourg said today. Shipments from Germany, Europe’s biggest economy, gained 6.3 percent, after a 9 percent decline the prior month. The euro-area inflation rate remained at 1.6 percent in July, a separate report showed.

Euro-zone imports increased 2.5 percent in June after a 2.1 percent decrease the prior month, and the trade surplus increased to 14.9 billion euros ($19.9 billion) from 13.8 billion euros.

Exports from France, the second-biggest euro-area economy, fell 1.7 percent, while Italian shipments rose 1.4 percent, today’s data showed. Spanish exports dropped 2.4 percent.

THIS ACCIDENT WAS JUST WAITING TO HAPPEN:

Dutch gloom as housing bubble deflates
Bankruptcies rose to highest level in last three months

(…) Household spending has been falling for three straight years, and it dropped again 2.4 per cent year on year in the second quarter, dragging the entire economy down with it. (…)

At the heart of the Netherlands’ persistent case of the blues, economists agree, is a slowly deflating housing bubble. Property values in the Netherlands rose as much in the boom years before 2008 as in peripheral European countries like Spain, leaving the country with a mortgage debt load larger than any other in the eurozone.

The bubble was fuelled by the fact that Dutch mortgage interest was fully tax deductible, a strong incentive in a country of high income taxes. Dutch banks developed a series of unique, complex mortgage products to help borrowers maximise the tax benefits.

Prices have fallen 21 per cent since their 2008 peak, leaving 30 per cent of all Dutch mortgage holders underwater, owing more than their houses are worth. Few experts think the bottom has been reached, and with their net worth falling, homeowners are spending less. (…)

EARNINGS WATCH
 

Final Q2 ’13 Earnings and Revenue Beat Rates

(…) overall it was a relatively good season.  As shown below, the final earnings beat rate came in at 62.2%, which was the highest reading since Q3 2011.  The final revenue beat rate came in at 56.6%.  While top line numbers weren’t as strong as bottom line numbers, the revenue beat rate this quarter was still stronger than 3 of the past 4 earnings seasons.

FYI
 
Buffett targets cars, oil and satellite TV
Berkshire Hathaway invests the most money in stocks since 2011

Warren Buffett put money to work in cars, oil and satellite television in the second quarter as the chief executive of Berkshire Hathaway and his deputies invested the most money in stocks since 2011, according to regulatory filings.

Berkshire increased its holdings in General Motors, the carmaker recovering from bankruptcy and a government bailout, and made two new investments: in Dish Network, the broadcaster controlled by Charles Ergen, and Suncor Energy, a Canadian oil company. (…)

Mr Buffett now controls 40m GM shares worth $1.4bn, up from 25m at the end of the first quarter. Berkshire also disclosed that at the end of June it owned more than 17.8m Suncor shares worth more than $500m.

The new stake in Dish adds to Berkshire’s media holdings, as it already owns 6.8 per cent of DirecTV, worth $2.3bn, in addition to holdings in the Washington Post Company, and Liberty Media. However, the small size of the Dish investment, at $23m, suggests it is the responsibility of one of Mr Buffett’s two investment deputies, Todd Combs and Ted Weschler.

Mr Buffett also added slightly to his largest holding, in Wells Fargo, taking Berkshire’s stake to 8.7 per cent of the consumer bank, worth $20bn.

Berkshire reduced some holdings, exiting a stake in newspaper publisher Gannett, while reducing investments in Kraft and Mondelez, the snack group it spun out last year.

Berkshire’s biggest holdings are mostly consumer-facing groups with strong brands, including Coca-Cola, American Express and Procter & Gamble. The exception is Berkshire’s one technology holding, a $13bn stake in IBM.

 

NEW$ & VIEW$ (31 JULY 2013)

Home Prices Jump, but Headwinds Build

Home prices during the first half of 2013 posted their largest gain since the housing boom peaked seven years ago, but rising mortgage rates and the potential for more supply could eventually slow the run-up.

(…) home prices in 20 major U.S. cities rose by 12.2% in May from one year earlier. The Standard & Poor’s/Case-Shiller index shows that home prices are now down from their 2006 peak by 24.4%, compared with a peak-to-trough decline of 35.1% in March 2012. Prices in two cities, Dallas and Denver, reached an all-time high, surpassing peaks set in 2007 and 2006, respectively.

Some economists say the Case-Shiller index could overstate the magnitude of recent price increases because of how it counts foreclosures. Because foreclosures may be in greater disrepair than traditional homes, they tend to sell at a discount. As the share of distressed-property sales rises, as it did beginning in 2007, price falls can be magnified in markets with lots of foreclosures; later, when the share of distressed sales falls, as it has over the past year, prices appear to rebound faster. The Zillow index, by contrast, doesn’t include foreclosed properties, minimizing potential volatility from this shift in the sales mix.

Nationally, home values rose by 5.8% in June from one year ago, according to Zillow Inc., the real-estate website, the largest gain since 2006. So far this year, prices are up 2.7%, the strongest year-to-date gain in June since 2005.

For now, inventories remain tight in a majority of the nation’s major housing markets. The Wall Street Journal’s survey of quarterly housing-market conditions in 28 metro areas found that Phoenix, Seattle, Denver, and Sacramento, Calif., had less than a 2.5-month supply of homes for sale at the current sales pace. Dallas, Los Angeles, San Diego, Washington, D.C., and Orlando, Fla., had less than three months of supply, according to data compiled by John Burns Real Estate Consulting in Irvine, Calif.

Typically, real-estate agents consider a balanced market to have a six-month supply. Nationally, the supply of existing homes for sale stood at five months at the end of June, according to the National Association Realtors.

EU Jobless Rate Falls

Eurostat, the EU’s official statistics agency, said Wednesday that 10.9% of the workforce in the 27 nations that then formed the EU were unemployed in June, down from 11.0% in May. That is the first fall in the jobless rate since January 2011.

The number of unemployed in the 17 euro-zone countries edged down to 19.27 million from 19.29 million, the first decline since April 2011. The fall wasn’t sufficient enough to move the jobless rate overall, which held firm at 12.1%—its highest on record—for the fourth successive month.

The unemployment rate fell in Portugal, Spain and Ireland—three of the countries given forms of financial assistance since the bloc’s debt crisis began—but rose in Cyprus and Greece, as well as in the Netherlands and France.

Pointing up Eurozone Retail PMI improves to 21-month high in July

The eurozone retail sector neared stabilisation in July, Markit’s retail PMI® data showed. The value of retail sales fell for the twenty-first month running, but at the slowest rate over that period. Moreover, both Germany and France posted higher sales during the month, with the latter recording the first expansion since March 2012. The main negative finding from the latest survey was a sharper decline in Italian retail sales.

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Germany’s retail sector registered a third successive month of rising sales in July, the longest sequence of growth for a year. Moreover, the rate of expansion accelerated further, to the fastest since January 2011. The French retail PMI rose for the fourth month in a row in July, and registered above the no-change mark for the first time since March 2012. Moreover, the rate of growth signalled was the fastest since October 2011.

imageItalian retailers continued to weigh on the overall eurozone performance. Sales fell for the twenty-ninth month running, and at the strongest rate since April. Moreover, the gap between the Italian and German retail PMIs was the largest since February 2012.

Eurozone retail sales were lower on an annual basis in July, as has been the case since June 2011. That said, the rate of decline was the slowest
since March 2012, and sales in Germany and France posted year-on-year growth. Italy continued to register a severe annual drop in sales, however.

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Retail employment in the eurozone declined for the sixteenth consecutive month in July, albeit at the weakest rate in that sequence. German retailers hired extra staff for the thirty-eighth month running, while the rate of retail job shedding in France slowed to a marginal pace. Italian retail employment fell at the weakest pace in five months.

Retailers’ purchasing of new stock fell at a sharper rate in July. This partly reflected a build-up of unsold stock during the month, the first such increase since August 2012. Meanwhile, the rate of purchase price inflation eased on the month, and remained weaker than the historic survey average.

Euro-Area Inflation Holds at 1.6%, Providing ECB Some Leeway

Euro-area inflation held steady in July after accelerating for two months, adding leeway for the European Central Bank to loosen monetary policy as the 17-nation currency bloc struggles to pull out of a record-long recession.

CHINA STIMULUS WATCH
 
Pointing up  Beijing offers growth assurance in its economic balancing act

China’s authorities, mindful of the risk of a sharp economic slowdown that could derail their reform efforts, sent their clearest signal yet that they will safeguard growth and tweak policy when necessary.

The message from a meeting of China’s top decision-making body, the Politburo, sought on Tuesday to dispel market concerns about China’s near-term economic outlook by stressing stability of growth.

The main economic planning agency followed on Wednesday with assurances that this year’s growth goal was safe and that the authorities would supply markets with relatively ample funding. (…)

In particular, the politburo’s mention of “stable and healthy development” of the real estate sector caught markets’ attention, interpreted as a sign that Beijing would not risk any radical action to cool that market, concerned about the impact on overall economic growth.

Such a view was reinforced on Wednesday by comments from a senior central bank official, who dismissed any link between the property boom and easy credit. (…)

“Fiscal policy will play a bigger role in supporting the economy as we need to maintain prudent monetary policy,” said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank in Beijing.

“There will be more tax cuts and the fiscal deficit may exceed 2 percent of GDP (target),” he said, adding that this should allow growth to stabilize in the second half of the year. (…)

“The central authorities will continue to coordinate the multiple tasks of stabilizing growth, restructuring the economy and promoting reforms,” the official Xinhua news agency said, citing a statement released after the politburo meeting.

Both the party leadership and the planning agency highlighted plans to boost China’s urban population by 400 million over the next decade, with the planning agency’s chief, Xu Shaoshi, saying the government would unveil its urbanization plan in the second half of the year. (…)

Taiwan economic growth beats forecasts Rise in consumer spending drives 2.3% second-quarter growth

The economy grew 2.3 per cent between April and June from the same period of last year, the government said on Wednesday. That surpassed the consensus forecast of 2.1 per cent in a Bloomberg survey of economists, and followed first-quarter growth of 1.7 per cent.

The announcement came a week after South Korea also outperformed forecasts by reporting year-on-year growth of 2.3 per cent for the same period.

Taiwan’s struggling labour market means it is unclear whether that consumption growth is sustainable, economists say. While unemployment is low, real wages have been falling gradually for years. Data for May showed average earnings fell 0.3 per cent from a year earlier.

Nonetheless, consumption grew 5.3 per cent quarter on quarter, rebounding from a 0.4 per cent fall in the first three months of the year, according to seasonally adjusted estimates by JPMorgan.

Exports rose 5 per cent year on year in the second quarter, after growth of 4.8 per cent in the previous quarter.

But export orders fell 3.4% YoY in June…

Ford Truck to Use Natural Gas

Ford Motor Co. will begin selling an F-150 pickup truck later this year that is modified to run on compressed natural gas, as demand continues to grow among commercial fleet buyers.

Ford sold 11,000 trucks last year that run on natural gas, and that was double what the company sold in the years of 2009, 2010 and 2011 combined. Until now, Ford hadn’t made it an option available on the base F-150, reserving it for heavier-duty models and its Transit Connect delivery van.

With the addition of the F-150, Ford expects to sell about 15,000 CNG vehicles this year, the company said in a statement. (…)

Neither GM nor Chrysler would disclose how many CNG vehicles they have sold this year. The Natural Gas Vehicles for America—a trade group—estimates that there are about 130,000 natural gas vehicles on U.S. roads, primarily in commercial trucks and buses.

Companies, including Pioneer Energy Services and AT&T Inc., have been among Ford’s biggest clients for the compressed natural gas. The extra cost to build the trucks can quickly be covered because the companies use so much fuel at a higher cost and refueling isn’t difficult because they can install their own natural gas pumps. (…)