NEW$ & VIEW$ (3 JULY 2013)

Portugal Rocks European Markets  Portuguese bonds and stocks led heavy declines in European markets after the foreign minister resigned, triggering the worst political crisis since the country’s bailout two years ago.

Portuguese bonds were already on a weaker footing before the resignation; they had dipped Tuesday after the surprise resignation of Finance Minister Vitor Gaspar. On Wednesday, the selloff accelerated sharply.

Midmorning in Europe, Portuguese 10-year bond yields were up 1.4 percentage points at 7.87% amid fears Mr. Portas’s party will withdraw its support for the government. Yields pushed higher in other financially stressed euro-zone countries as fears of contagion grew. Bond yields rise as prices drop.

“The political problems increase the uncertainty surrounding Portugal’s bailout commitments and potentially even the prospect for negotiations of a precautionary program succeeding the current program running out in May next year,” RBC said in a note to clients. “We see the risk of further spillover effects into Spanish bonds and Italian bonds hampering the recent recovery.”


Total sales volume rose 1.0% MoM after 3 consecutive monthly declines totalling –0.7%. Core sales volume rose for the second month: +0.9% in May after +0.8% in April, more than offsetting the –1.5% drop in Feb-March. (Eurostat)



Auto  Summer Auto Sales Surge  U.S. auto sales rose at the strongest rate in more than five years in June, lending new confidence to industry executives’ belief that the nation’s auto recovery has more room to run.

Overall, auto makers sold 1.4 million cars and light trucks in June, 9.2% more than a year ago, according to researcher Autodata Corp., and putting the industry on track to make 2013 its best sales year since 2007. Through the first six months of the year, Americans have purchased 7.8 million cars, 7.7% more than the same period a year ago.

image(Calculated Risk)

Imports’ share of the U.S. light vehicle market increased to 21.4% in June. (Haver Analytics)

Nissan deliveries increased 13 percent in June, the automaker said in an e-mailed statement, matching the average of eight estimates. The Yokohama, Japan-based company’s rise followed a 25 percent surge in May, which tripled the industrywide increase that month, after cutting the price of seven models. (Bloomberg)

Retail Vacancies Lowest in 4 Years

The average vacancy rate at U.S. retail property in the second quarter fell to its lowest level in more than three years to 10.5%, down from 10.6% in the first quarter, according to a report set to be released Wednesday by real-estate research firm Reis Inc. Asking rent increased to $19.19 a square foot from $19.13 in the first quarter.

The average vacancy rate at U.S. malls was at 8.3% at the end of the second quarter, the lowest rate in more than four years and down from 8.9% one year ago, according to the report. Strip-shopping centers, which include stores clustered around a common parking lot, ended the quarter with a 10.5% vacancy rate, down from 10.8% a year ago.

Still, nationwide vacancy remains well above the lows seen before the economic downturn. Overall vacancy was at 7.7% in the first quarter of 2008.



The market is generally improving for landlords partly because new development has been slow, putting a crimp on competition. About 31.5 million square feet of new space is expected to be delivered this year, compared with about 200 million in 2007 and 2008, according to the CoStar Group.

Development is picking up. CoStar projects that nearly 70 million square feet of new retail space will be delivered next year.

But Suzanne Mulvee, CoStar’s director of research-retail, doesn’t foresee a glut of space. “You’re still less than half of what we were doing,” she said. “This is nothing to be worried about.”

Cass Freight Index Report™ ‐ June 2013

The Cass Freight Index for June shows an increase in freight expenditures over May, while the number of shipments remained
virtually flat. The transportation sector continues to follow the up and down track it’s been on for the last two and half years.



June shipments rose less than 0.1 percent from May and were 1.5 percent lower than this time last year. In fact, the June 2013 value is the lowest of the last three June time periods. The shipment trend for 2013 remains
completely intertwined with those of 2011 and 2012. Cumulatively for 2013, the number of shipments is up 5.8 percent, but second quarter growth was much slower than first quarter growth. The high point year‐to‐date was hit in March, with June coming in 0.6 percent lower than the March high.

The railroad sector began and ended the last four weeks with drops in both carloadings and intermodal loadings, to end the period down 0.7 and 1.1 percent for carloadings and intermodal respectively. The trucking sector remains at high utilization rates with load size trending upward. Most truckers feel that shippers are still in control of pricing, but this could change quickly and soon. The American Trucking Association’s Truck Tonnage Index posted a 2.3 percent increase in May, which coincided with the strong 3.4 percent gain in number of shipments reported last month.

Oil Boom Gives U.S. More Policy Options

[image]The rise in North American petroleum production is a boon to government policy makers, who have less need to worry about the market impact of decisions they make.

(…) new U.S. shale-oil and Canadian oil-sands output provided an extra cushion amid a handful of production outages around the world.

Carlos Pascual, the State Department’s top energy official, said increased oil supplies, especially in the U.S., “have been absolutely essential at being able to undertake the kind of negotiations that we have had with countries around the world to reduce their imports of crude oil from Iran.”



NEW$ & VIEW$ (29 MAY 2013)


In May, the seasonally adjusted composite index of manufacturing activity gained four points settling at -2 from April’s reading of -6. Among the index’s components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at -10, and the jobs index subtracted six points to end at -3.

Most other indicators also suggested some easing in the pace of recent weakness. The index for capacity utilization picked up twelve points to settle at -6, and the index for backlogs of orders gained ten points to finish at -11. The delivery times index turned positive, moving up four points to end at 2, while gauges for our inventories were somewhat lower in May. The raw materials inventory index


Hiring activity at District plants was somewhat weaker in May. The manufacturing employment index moved down six points to -3, and the average workweek indicator lost three points to end at -6. Moreover, the wage index subtracted six points to finish at 6.


Smile  Home Sales Power Optimism

Home prices in March rose 10.2% from a year earlier, the largest annual gain since prices began to fall in 2006, according to the Standard & Poor’s/Case-Shiller national index released Tuesday. Prices increased 1.2% in the first quarter, the first increase for the typically slower winter period since 2006.

Completed foreclosures hold steady in April: CoreLogic

The number of foreclosed homes held steady in April, while there were fewer properties sitting in the pipeline, fresh signs the housing recovery is on track, data from CoreLogic showed on Wednesday.

There were 52,000 foreclosures completed last month, the same amount as in March, but down about 16 percent from 62,000 in April last year, CoreLogic said.

Before the housing crisis, foreclosures averaged 21,000 a month between 2000 and 2006. There have been about 4.4 million completed foreclosures since the financial crisis began in September 2008.

There were about 1.1 million homes in some stage of foreclosure in April, down 2 percent from the month before and a drop of 24 percent from a year ago.

Foreclosure inventory accounts for 2.8 percent of all mortgaged homes.

Smile  Port Volumes Lead Trucking on Spending Optimism: EcoPulse

The combined inbound-container volume at the Los Angeles and Long Beach ports has risen 3.5 percent in the first four months of 2013 from a year earlier, according to data compiled by Bloomberg. That comes after total imports through these locations grew 0.9 percent last year compared with 2011. (…)

An index of U.S. truck loadings rose 3.9 percent to 120.95 in April from a year earlier, following a 4.2 percent gain the prior month, based on data from FTR Associates, a Bloomington, Indiana-based transportation-forecasting company. While this proxy for volume has grown for 17 consecutive months, it has moderated since the early phases of the economic recovery, when it grew by as much as 13.5 percent in the fourth quarter of 2010, said Jonathan Starks, director of transportation analysis.

Air freight market stabilized in April after reversing in March

The global air freight market recovered slightly in April after a long-awaited recovery stalled in March, the International Air Transport Association (IATA) said on Wednesday.

International freight traffic grew 1.2 percent from April 2012 and was 0.8 percent up from March, but growth remained weak overall, IATA said.



Diverging trends in China and Japan

PMI data reveal strongly divergent trends within manufacturing in Asia. While China’s goods-producers suffer from falling export demand, Japan’s manufacturing sector is enjoying the strongest growth of exports for three years. Resulting changes in inventory levels suggest China’s manufacturers are likely to cut production in coming months while Japan is set to continue to see strong output growth.


Markit’s flash PMI data showed China’s manufacturing sector contracted for the first time in seven months in May. Weaker foreign demand was a key factor behind an order book deterioration, with new export orders
dropping for a second consecutive month. The data raise concerns about the extent to which China’s exporters may be losing out to Japan, where the PMI survey has shown that a sharp depreciation of the yen has boosted export growth to its highest for three years in recent months. (…)

imageThe weakness of demand has caught many Chinese producers by surprise, meaning stocks have risen. In contrast, the stronger than expected demand for Japanese goods has led to a marked drop in
warehouse inventory levels of finished goods. The combination of falling orders and rising inventories in China has pushed the orders-to-inventory ratio to its lowest since last September. This lower ratio suggests that manufacturers will cut production in June to bring output more into line with demand and prevent any further build-up of inventories.

However, the combination of rising orders and falling inventories in Japan has pushed the orders-to-inventory ratio to its highest for three years. Such a high ratio suggests that producers will be stepping up
production to refill warehouses.

Sad smile  China Auto Sales Conditions Worsen During Past Two Months

(CEBM Research)

Auto sales growth in April was about 13% in terms of Y/Y growth. In a weak macroeconomic environment, this number is not bad compared to certain other sectors.
However, if viewed from previous SAAR auto sales data, sales conditions have been worsening over the past two months. Relatively high sales growth is due to some extent to the low base. Also due to the base effect, the sales growth of passenger cars in May is likely to drop. Passenger car sales growth is likely to peak in April.

Money  ECB: Cyprus Shock Caused Flight

The euro zone’s botched bailout of Cyprus caused a mini-run on banks in many of the currency union’s 17 members in April, exacerbating the decline in lending to the real economy, ECB data showed.

(…) The impact was also felt strongly in Greece, where private deposits fell €2.8 billion, or 1.6%, on the month. They are still nearly 10% up from their low point in June last year, however, reflecting a gradual return in confidence since the second restructuring of the country’s sovereign debt and the accompanying recapitalization of its largest banks.

In Spain, deposits fell by 1.5% to their lowest level since October and are down 6.6% from a year earlier, while in Slovenia, they fell by 1.9% and in the Netherlands, they fell by 0.8%.

Offsetting those developments, banks in France, Germany, Belgium, Austria, Estonia and Slovakia all registered inflows in deposits, in line with their recent trend.

The sudden loss of funding at many banks also appeared to have taken its toll on local lending, which fell in month-on-month terms in most of the countries where deposits had also fallen. The ECB reported that the volume of loans to businesses across the euro zone had fallen by €17 billion in April—the eighth decline in nine months and the biggest this year. Lending volumes to households crept up by €1 billion, their weakest rise this year.

Overall credit to the private sector was down 0.9% from a year ago, compared with a drop of 0.8% in February and March. That figure is a blend of modest increases in the largest and healthier economies of the euro zone, notably Germany, and sharp declines in stressed countries. Lending was down 12% on the year in Spain, and by 7.2% in Slovenia and by 6.3% in Greece and Portugal.

Sad smile  German Job Revival Goes Missing

German jobless claims jumped in May as the usual recovery in spring was much weaker than in previous years, the BA labor agency said.

German jobless claims in May rose by 21,000 from April in seasonally adjusted terms.

Neglecting seasonal effects, the total number of unemployed fell by 83,000 people to 2.973 million in May, pushing down the unadjusted jobless rate to 6.8% from 7.1% in April, BA said.

The adjusted jobless rate was unchanged for the seventh consecutive month at 6.9% in May.

OECD Sees Weaker Recovery

The combined gross domestic product of the OECD’s 34 members will grow by 1.2% this year, rather than the at 1.4% rate that was recorded in 2012, as the Paris-based organization had forecast in November. While Japan’s fiscal and monetary stimulus will fuel a stronger recovery than previously expected, the euro zone will contract 0.6% this year instead of the slight 0.1% contraction the OECD forecast in November.

IMF Cautions on China

The International Monetary Fund joined a host of private economists who have lowered expectations for growth in China, an outlook that has raised questions over whether Beijing will return to stimulus to support the economy.

The Fund also cautioned about China’s rising debt levels and a surge in credit, which it warned could be plowed into inefficient uses if it isn’t properly managed.

(…) the Fund lowered its growth forecast for the Chinese economy this year to around 7.75% from an earlier forecast of 8%. (…)

In a new estimate, the IMF said that China’s government debt totaled nearly 50% of gross domestic product. While much lower than the debt levels of the U.S., Japan and many other developed nations, that figure is considerably larger than an estimate of about 22% of GDP as of the end of 2012 based on Chinese government data. The difference comes from adding an estimate of China’s local government debt to the total.

The IMF also estimated that China’s fiscal deficit for last year totaled 10% of GDP, compared with a central government figure of about 1.5%. That suggests without substantial government support China’s growth would have fallen even more sharply. The U.S. fiscal deficit was 7% of GDP in 2012. (…)

China’s ratio of credit to GDP has risen to around 180% in 2012, from 123% in 2008, according to WSJ estimates based on central bank data. Sharp increases in credit, which have continued into 2013, raise fears of wasteful allocation of capital and a buildup of bad loans in the banking system. (…)

Latin America Disappoints After Squandering Commodity-Boom Era  Latin America is disappointing investors, economists and businesses with slower-than-forecast growth as waning commodity prices and strong currencies hit nations that failed to diversify and become more competitive.

The five biggest investment-grade markets in the region — magnets for foreign capital as rich countries stalled — expanded below projections or show signs of weakness. Mexico’s gross domestic product missed estimates in a Bloomberg survey, while economists polled by Brazil’s central bank cut the country’s 2013 outlook this week for the second time in seven days, anticipating the worst three-year period in a decade.

Thailand Cuts Rate First Time This Year as Growth Slows: Economy
South African growth at slowest since 2009
Weak data cause further weakening of rand

Gross domestic product grew by 0.9 per cent on a quarter-on-quarter basis, down from 2.1 per cent in the last quarter of 2012 and significantly below the consensus forecast of 1.6 per cent, data released by Statistics South Africa showed on Tuesday.

The slower-than-expected growth was led by a sharp contraction in manufacturing, with production in that sector falling by 7.9 per cent on a quarter-on-quarter basis.

Sweden Defies Europe’s Crisis as Rebound Trounces Forecast


Sweden’s economy grew twice as fast as predicted in the first quarter, sapping speculation that the central bank will need to cut interest rates at its July meeting.

Gross domestic product expanded a quarterly 0.6 percent in the three months through March, after growing a revised 0.1 percent the prior quarter, Stockholm-based Statistics Sweden said today. Annual growth was 1.7 percent, up from 1.4 percent.

Today’s data showed that consumer spending and inventories contributed to annual growth, while investments and exports declined.


Factset update:

Of the 487 S&P 500 companies overall that have reported earnings to date for the first quarter, 69% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 46% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. The first quarter of 2013 marked the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for Q1 2013 is 3.3% this week, slightly above last week’s growth rate of 3.2%. On March 31, the Q1 earnings growth rate for the index was -0.7%.

imageCorporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 86 companies have issued negative EPS guidance for Q2 2013, while 20 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.4% today from an expectation of 4.4% on March 31.



NEW$ & VIEW$ (3 MAY 2013)


Smile April Nonfarm Payrolls: +165K vs. consensus +145K, 138K previous (revised from +88K). Unemployment rate 7.5% vs. consensus 7.6%, 7.6% previous.

Storm cloud Freight Volumes Fall in April

imageNorth American shipment volume and overall freight expenditures both slumped in April, following strong showings in March. This month’s declines are significant because once again both the number of shipments and dollars spent have fallen below same month 2012 levels, and the
number of shipments is even lower than the April 2011 level.

Freight shipment volume dropped 3.5 percent from March to April, enough to reverse much of March’s gains. April shipments were 1.3 percent below 2012 figures, and 1.2 percent below 2011 levels.

Cass Information Systems processes more than $22 billion in annual freight payables on behalf of its clients. The Cass Freight Index is based upon the shipments of hundreds of Cass clients representing a broad spectrum of industries.

ECB Eases as Downturn in Europe Spreads

(…) Mr. Draghi repeated his long-standing view that the bloc’s economy, which has been mired in recession since the fall of 2011, will return to growth in the second half of this year. (…)

Mr. Draghi offered no reprieve to governments wanting to pause their fiscal belt tightening, which many analysts think is making their recessions worse. “Don’t unravel the progress that you have achieved,” he said.

He opened the door to more dramatic measures if needed to spur private-sector lending, such as facilitating purchases of pools of small business loans and a possible reduction in the bank’s deposit rate to negative territory.

The ECB held the rate it pays on deposits parked at the central bank at zero. But Mr. Draghi said he had an “open mind” on whether to make this rate negative, meaning banks would have to pay the ECB to deposit money.

The comment was a marked shift from two months ago, when Mr. Draghi warned of “unintended consequences” of moving into such “unchartered waters.”

A negative deposit rate would encourage strong banks to lend excess funds to other banks rather than simply park them at the ECB. But the move may also weaken bank profits and lead them to pass along the cost to depositors.

EU Paints Gloomier Picture for Economy

The 27-nation European Union economy will shrink by 0.1% in 2013, the EU’s executive said. Its winter forecast published in February had projected a 0.1% growth rate. The 17-member euro area will suffer a 0.4% economic contraction this year, while the earlier forecast was a 0.3% contraction.

EU economies to breach deficit limits  France, Spain and the Netherlands to all miss EU-mandated target

China Service Industries Expand at Slower Pace

The non-manufacturing Purchasing Managers’ Index fell to 54.5 from 55.6 in March, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement today in Beijing.

Dr Copper, ‘telling us the party’s over…’

India cuts rates to boost growth
Decision driven by slowdown in the economy

The Reserve Bank of India on Friday cut the repo lending rate by 25 basis points to 7.25 per cent, the third rate reduction since January, against a backdrop of disappointing economic growth and a gradual slowdown in inflation.


Moody’s update after 76% of S&P 500 companies reported. It’s tally reveals that earnings are up 3.6% YoY (+1.7% ex-financials). Significantly,

Corporate revenues have been stagnant. As derived from the 76% of the S&P 500 companies that have released first quarter 2013 results, their sales rose by an imperceptible 0.2% year-to-year. Worse yet, after excluding the S&P 500’s financial company members, sales dipped by -0.1%.


Profit margins have risen spectacularly in recent years, in large part because revenue growth far outpaced inflation. During the last 12 months, however, revenue growth has literally stalled, causing margins to edge down. The challenge to even maintain margins is getting huge. Moody’s goes on:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by us merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.



BTW: U.S. Trade Slumps in March

U.S. trade slumped in March, with imports falling faster than exports on lower shipments of Chinese goods and foreign oil.

U.S. exports fell by nearly 1% in March after growing 4.3% in 2012. Nearly all of the major export categories saw a decline. (Chart from Haver Analytics)

U.S. exports declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.


NEW$ & VIEW$ (26 APRIL 2013)

Jobless Claims Near Five-Year Low

Initial jobless claims, a proxy for layoffs, declined by 16,000 to a seasonally adjusted 339,000 in the week ended April 20, the Labor Department said. The four-week average of claims, which smooths weekly volatility in the figures, fell by 4,500 to 357,500.

Click to View(Chart from Doug Short)


As derived from the Conference Board’s consumer confidence surveys of the 12-months-ended March 2013, the 15.2% of surveyed Americans expecting a higher income six-months hence was less than the 16.7% anticipating a reduction income. (Moody’s)


ATA Trucking Index increases in March

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index gained 0.9% in March after decreasing 0.7% in February. (The 0.7% loss in February was revised down from a 0.6% increase ATA reported on March 19, 2013.) Tonnage has now increased in four of the last five months. Specifically, since November 2012, the index is up 7.6%. (…)

“Expect freight tonnage will slow in the months ahead as the federal government sequester continues and households finish spending their tax returns,” he said. “The good news for tonnage is housing starts are growing and energy production is good – both of which generates heavy freight. However, these two sectors alone won’t be enough to keep the overall index growing at a 3.9% clip in the second quarter.”

Drop in Borrowing Squeezes U.S. Banks U.S. companies are pulling back on borrowing, which could put a drag on the limping U.S. economy and make it even harder for banks to break out of their long slump.

[image]Outstanding loans by the biggest banks to U.S. companies declined 9% in the first two weeks of April compared with the end of March, according to Federal Reserve data. The slip followed a 2.7% rise in the first quarter, the smallest quarterly gain in two years. (…)

Business owners “feel very, very hesitant to invest,” and the economy is “struggling to get solid footing,” but “we didn’t expect the wall we hit,” BB&T Corp. Chairman and Chief Executive Kelly King said last week. Outstanding business loans by the Winston-Salem, N.C., bank, the nation’s 12th-largest by assets, were flat in the first quarter. “I think all of us are trying to figure out what happened.” (…)

The recent slowdown is especially disconcerting because demand for other types of loans is cooling, too. Consumer lending dipped in the first quarter as the recent surge in mortgage borrowing ebbed. As a result, total loans fell 0.6% in the first quarter at the biggest U.S. banks and 0.2% at the smaller banks, according to Federal Reserve data compiled by Barclays PLC analysts.image


imageWorryingly, the key credit and lending aggregates show continued deterioration. Lending to the private sector contracted for an eleventh straight month, with the rate of annual decline (-0.8% y/y) similar to February’s reading. Overall, the data underscore the ECB’s concerns that its loose monetary policy stance is not fanning out to the more vulnerable sectors of the euro area economy, and will increase pressure on them to respond, particularly in support of SMEs as they have been hinting at in recent weeks. The data also follows Wednesday’s Bank Lending Survey from the ECB, which revealed that weak underlying credit growth continued to reflect both constraints in supply, as well as limited demand for credit among businesses and households. (RBC capital)

BoJ raises economic forecasts
Data show deflation remains a major problem

On Friday, as the BoJ released its semi-annual report on prices and economic activity, it said that its policy board members expected inflation to average 1.4 per cent in the next fiscal year, rising to 1.9 per cent the year after. The current fiscal year began this month.

(…) it represents a dramatic shift from the BoJ’s expectations in January, when board members said they expected prices to rise at an annual rate of 0.9 per cent in the 2014 fiscal year.

In its report, the BoJ said the economy would start picking up by the middle of this year and lifted its forecast for real GDP growth to 2.9 per cent from 2.3 per cent. Thereafter, prices would be pushed up by a combination of increasing demand, a weaker yen and rising expectations of inflation, the BoJ said.


Moody’s update:

The revenues and operating income of S&P 500 member companies have been growing at a very slow rate, according to data supplied by Bloomberg News. For the 34% of the S&P 500’s constituents that have released Q1-2013 results, a meager 1.5% annual rise by sales yielded a mediocre 3.5% yearly increase by operating income. For the subset of nonfinancial company members that have released first-quarter results, the annual growth rates were 1.9% for revenues and 1.1% for operating profits.


Fingers crossed  Slovenia struggles to quell bailout talk
Conflicts of interest dog efforts to overhaul economy

(…) But Andrej Šircelj, president of the board of BAMC, the bad bank, and an opposition SDS parliamentarian, says action is needed soon.

“Slovenia does not have much time,” he says. “The government has no programme, no strategy, no policy . . . Most financial investors would like to see what is going on with the banking system and privatisation.”


NEW$ & VIEW$ (20 MARCH 2013)

Cyprus. Tax on deposits. Eurozone construction drops. Strong U.S. employment, housing, trucking. Restaurants take the brunt. China weakness continues in March. Sentiment watch.


Cyprus Rejects Rescue Plan

Cyprus’s parliament rejected its government’s bailout deal with the euro zone without a single vote in its favor, a move that could hasten the potential collapse of its banks and send the tiny island nation hurtling out of the euro zone. (…)

What happens next isn’t clear. A senior European official said after the vote that the euro zone would continue to wait for a counterproposal from Nicosia, outlining how it would raise the €5.8 billion it needs in order to secure the €10 billion bailout it had agreed upon with the euro zone and the International Monetary Fund.

Apart from negotiating the rescue deal, the government has been working on a Plan B that would involve support for its banks from Russia, a longtime friend of the country and the largest source of foreign deposits in Cyprus’s banks. Cypriot officials were planning to offer Russia stakes in energy projects and banks, two officials familiar with the situation said. The Cypriot finance minister is due to meet with his Russian counterpart in Moscow on Wednesday.

JPMORGAN: Cyprus Could Still Default, And The Market Is Underestimating The Risks

(…) As White explains, this leaves Cyprus with no good options at this point. They still have three less-than-good options, but all are wrought with serious problems.

The first option is to remove the levy on insured depositors and shift the entire burden of it to uninsured depositors – those with over 100,000 euros in their accounts. However, in order to get to the total 5.8 billion euros, the levy on uninsured depositors would have to be hiked to 15.4 percent.

This is a problem, because a significant portion of those uninsured deposits come from moneyed Russian interests looking to use the Cypriot banking system as a tax haven.

“There is some possibility that Russia would respond to a larger haircut by refusing to roll its existing €2.5bn loan to Cyprus; meaning that this option would still leave a significant shortfall,” says White. “In such a scenario, either the haircut on uninsured deposits would need to be around 21.8%, or further Troika funding would need to be found.”

The second option, then, is to go straight back to the EU for additional support. However, given the ostensible reason that the EU asked Cyprus to chip in to the bailout so much to begin with – a looming German federal election in September – White says it’s unlikely that German politicians will be interested in any sort of “U-turn.” In fact, going back to the EU could make things worse if EU leaders manage to further complicate the situation.

The third option is to go with a more progressive levy. One proposal is to subject depositors with less than 100,000 euros in their accounts to a smaller levy – 3 percent from 6.75 percent – while making those with between 100,000 and 500,000 euros pay 10 percent, and those with more than 500,000 euros pay 15 percent.

This probably won’t do much to appease those offended by this idea of deposit expropriation, meaning a plan like this might not make it through parliament either. (…)

White writes there are also longer-term implications for the whole euro zone, though (emphasis added):

We do not expect short-term bank runs or direct contagion, Near-term impacts on bank equity have been relatively limited so far (mostly in the 4% range). However depositors will now be aware that they are effectively taking a significant credit risk when they leave funds in weak banks backed by weak sovereigns – and there is a good chance that rates may need to rise in the periphery to reflect this increased perceived risk (indeed, we believe this action hints at broad risks for anyone with capital in a fiscally stressed country). The long-term implication for bank funding in the periphery is not a positive one, in our opinion, and by implication, there could be impacts on the supply of credit. Effectively, this would appear to work directly against the objectives of Banking Union, which is designed to ensure that a Euro in a Cypriot bank can ultimately be treated in the same way as a Euro in a German bank.

NBF Financial has this other angle:

According to the most recent data, the country is home to the second largest shadow economy in the Euro zone. As today’s Hot Chart shows,
the equivalent of 26% of GDP is accounted by  “economic activities and the income derived thereof that circumvent or avoid government
regulation or taxation”. That compares to an OECD average of 16% (and 11.5% in Canada). Under these circumstances, there is nothing automatic in committing other countries’ taxpayer money for bailouts within the
monetary union.


Ninja  The idea of taxing deposits is spreading:

Hacienda confirma que pondrá un tipo “moderado” a los depósitos bancarios (El Pais)

The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type “moderate” tax on bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate. This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits.

“The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits,” said the minister, adding that this kind “will not be much higher than 0%” .

Lightning  Euro-Zone Construction Output Falls Sharply

Output in the euro zone’s construction industry fell sharply in January, wiping out a modest improvement in December and adding to signs that the bloc is heading for another quarter of economic decline.

(…) construction output in the 17 nations that use the euro fell 1.4% in January from December, and 7.3% from the corresponding month a year earlier.

Tuesday’s figures showed construction output rising 3.0% from the previous month in Germany, but falling 4.0% in France.



Smile  Companies Open Up to Outsiders

A survey of large companies show that firms plan to increase hiring this year.

When asked about their hiring plans for the coming year, respondents said they plan to increase hiring in the U.S. by 17.5%, compared with 2012. In 2012, they said, they hired 8.6% fewer employees than in 2011. “This is the biggest upswing I’ve seen in ten years,” Crispin said.

Sun  Single-Family Homes Drive Housing Starts

Construction of single-family homes in the U.S. rose 0.5% in February to a rate of 618,000 units, a nearly five-year high. Overall housing starts increased 0.8%.

Overall housing starts rose 0.8% in February to a seasonally adjusted annual rate of 917,000, the Commerce Department said Tuesday. January’s figures were revised upward to a rate of 910,000.

Meanwhile, the number of new building permits, an indication of future construction, rose 4.6% to an annualized level of 946,000 in February, also the highest level since June 2008.

Raymond James housing analyst adds:

The annualized pace of single-family permit activity has shown consistent improvement since last March, and, based on our recent research, we believe order momentum and pricing power this spring are likely to exceed expectations. At this point of the up-cycle, land and labor availability remain key constraints on the pace of volume recovery; however, the major public builders are seeing a surprising level of pricing power as demand emerges.

ISI’s own homebuilders survey has kept rising in March, in contrast to NAHB which declined.

Smile  ATA Truck Tonnage Index Edged Higher In February


The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.6% in February after increasing 1% in January. (The 1% gain in January was revised down from a 2.4% increase ATA reported on February 19, 2013.) Tonnage has now increased for four straight months, which hasn’t happened since late 2011. Over the last four months, tonnage gained a total of 7.7%.

Compared with February 2012, the SA index was up a solid 4.2%, just below January’s 4.6% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 4.4%. In 2012, tonnage increased 2.3% from 2011.

Surprised smile  Americans Cut Restaurant Spending as Taxes Bite

Sales at casual-dining establishments fell 5.4 percent last month, after declining 0.6 percent in January and 1.6 percent in December, according to the Knapp-Track Index of monthly restaurant sales. This was the first three months of consecutive declines in almost three years, with consumers caught in a “very emotional moment,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970. (…)

Although casual-dining sales took the biggest hit in February — down 4.9 percent — the weakness was broader, according to “channel checks” conducted by RBC. Fast-food fell 0.1 percent, the worst in two years; revenue growth at so-called fast-casual eateries, up 0.6 percent, was the lowest in three years, the data show.

U.K. Data Delivers Blow Ahead of Budget  Just hours ahead of the U.K. budget, Chancellor of the Exchequer George Osborne was dealt a blow as data showed unemployment rose for the first time in a year and average earnings growth fell to the lowest in over three years.

The Office for National Statistics Wednesday said the official, international measure of unemployment rose 7,000 in the three months to the end of January to total 2.52 million. That meant the unemployment rate held steady at 7.8% from the three months to December.

The last time unemployment increased was in the three months to January 2012. The ONS figures showed the increase was entirely due to a rise in unemployment among 18- to 24-year-olds, which reached a 17-month high.

imageAdding to the bad news, earnings growth fell, which means the squeeze on consumers’ pay packets tightened.

Average weekly earnings excluding bonuses—the measure which includes bonuses can cause steep fluctuations in monthly changes payments—rose 1.2% in the three months to January. That was the lowest increase since the three months to December 2009 and is down from a 1.3% rise between October and December last year.

Consumer price inflation stood at 2.7% in January and rose to a 10-month high of 2.8% in February. (Chart from Markit)


CEBM Research’s mid month survey points to weakness

  • More than 64% of (steel industry) respondents thought actual sales were lower than their expectations, worse than the previous survey. Moreover, almost 30% of respondents were pessimistic toward the recovery of the steel market in the future and only 8% thought an improvement would come soon.
  • Most construction machinery dealers surveyed mentioned that sales in the first half of March declined significantly on Y/Y basis, while about 1/3 of respondents expect flat or growing sales in March. Overall, we believe that sales of excavators in March will decline about 15% to 20%, lower than our expectations.

That goes against the not very reliable Conference Board LEI for China which rose 1.3% in February with 5 of the 6 index components contributing positively.

The PBoC Banking Climate Index rose 0.7%  in Q1’13 with a 6.3% gain in the loan demand index.


Larry Fink: Cyprus Not an Issue, Sees 20% U.S. Stock Gain

Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said Cyprus is not a major problem and U.S. equities will rise 20 percent this year as the economy rebounds. (…)

“Depending on the economic information that we receive, we can be in the beginning of a 5 percent correction or we’re going to be in a probably prolonged one- or two-month pause, which I don’t mind. But I would say by year-end equity markets are going to be much higher.”


NEW$ & VIEW$ (8 MARCH 2013)

U.S. employment explodes. Consumer deleveraging done. Government deleveraging, none. Unit labor cost rises. Transport biz ok. China economy remains slow. Cash flows. U.S. bank unstressed. Eurozone economy stressful, leading to instability. Sentiment watch.


Surprised smile  February Nonfarm Payrolls: +236K vs. consensus +160K, 119K previous (revised from +157K). Unemployment rate 7.7% vs. consensus 7.9%, 7.9% previous.


Weekly Unemployment Claims: 4-Week Moving Average at a Five Year Low

Click to View

Money  Freshly Flush, the Consumer Is Back  Fresh data suggest a growing number of Americans are becoming more comfortable borrowing—a development that could fuel more spending and give the sluggish recovery a lift.

imageU.S. households ramped up their borrowing at an annualized rate of 2.4% in the final three months of 2012, the biggest jump since the beginning of 2008, according to a Federal Reserve report released Thursday. Mortgage borrowings outstanding dropped only 0.8%—the lowest percentage drop since early 2009. Meantime, other kinds of consumer borrowing expanded at the fastest pace since the third quarter of 2007. (…)

The net worth of U.S. households—the value of homes, stocks and other investments minus debts and other liabilities—rose 1.8% in the fourth quarter of 2012 to $66.07 trillion, the highest level since the final quarter of 2007, when the recession began, the Fed said. Americans continued to borrow in January, mostly for education and cars, another Fed report Thursday showed. And a separate report by the Federal Reserve Bank of New York last week showed Americans late last year took on more debt for the first time since the throes of the recession as households took out more mortgages and far fewer fell into foreclosure. (…)

The nascent recovery of the housing market is playing a key role in making Americans more confident about the economy by raising the value of their homes, often their most valuable asset. The value of real estate owned by households climbed nearly $450 billion in the fourth quarter of 2012, the Fed said. Americans also have much more equity in their homes: a measure of owners’ equity as a percentage of household real estate hit 46.6%, the highest since the first quarter of 2008.

Meanwhile, the stock-market recovery is also making some Americans feel more flush. The value of stocks owned by households rose over $150 billion in the fourth quarter, even as the Dow Jones Industrial Average dropped 2.5% during the period—reflecting rising prices of foreign stocks and more investors moving into stocks in general after shying away. The stock market has seen substantial gains since then—the Dow is up over 9% this year, at a record high—suggesting household balance sheets have improved further.


High five   U.S. Deleveraging? Not So Fast

In the private sector (nonfinancial businesses and households) deleveraging has been substantial. In the financial sector, it has been even more substantial and continues.

In the public sector, most notably federal, there has been a substantial buildup in debt. Taken altogether, total U.S. debt today is higher as a percentage of gross domestic product than ever before, due to federal borrowing.

Pointing up  Slower Productivity Creates Risk for Stock Bulls

(…) After depending on productivity to fuel growth, however, companies have nearing the end of doing more with less.

Businesses are recognizing their existing staff are hitting their limits. According to a survey of manufacturers done by the New York Fed, 40% of respondents who plan in hire this year said the first or second most important reason was that their current employees are overworked. (…)


Charts from Haver Analytics


imageAn increase in shipment volumes in February reversed a four‐month downward slide, putting levels back on pace with 2012. (…)  All modes have been experiencing up and down shifts in volume for the last eight months, with no signs of change in the coming months. Although there are some strong indicators of improvements in the economy, many of them do not translate to improvements in the freight logistics market. Others signal weak demand for freight.

The 5.6% increase in shipments in February reversed last month’s 4.8 percent sequential drop. (…) The turn‐around followed four consecutive months of declines, and still puts 2013 only 0.6 percent of December 2012. February’s sharp increase is partially due to the strong showing for rail over the last four weeks – carloadings are up 3.7 percent and intermodal units are up 6.9 percent over the preceding four weeks.

Breaking it down week by week, however, demonstrates the uneven performance of the transportation sector; both carloadings and intermodal loadings were up two weeks and down two weeks. The most significant drop was 5.2 percent in intermodal loadings for the week ending February 28th.

The ATA’s truck tonnage index has shown growth during the last two periods (December and January), which would seem contrary to the trend in this index. The Cass shipments index is not a reflection of tonnage carried, so the two could vary for a variety of reasons. The most likely reason for the difference in the last few months is that the average weight of a shipment rose during the period. In addition, the trucking industry remains at near capacity and there was no indication of capacity pressure or truck shortages, suggesting that the same number of trucks were handling more tonnage per shipment. Anecdotal evidence also supports fuller loads for LTL carriers.

Rail Traffic Continues to Point to Economic Strength

“Rail intermodal traffic continues to grow.  In February, year-over-year intermodal volume on U.S. railroads rose for the 39th straight week, and February saw the first double-digit year-over-year increase in two years,” said AAR Senior Vice President John T. Gray.  “Shippers find intermodal appealing for a lot of reasons, including fuel savings, higher trucking costs, and service that has become much better in recent years.” (Via PragCap)

rails Rail Traffic Continues to Point to Economic Strength



China Exports Beat Expectations

China posted a surprise trade surplus in February thanks to stronger-than-expected exports as the global economy recovered, and a drop in imports.

Exports were up 21.8% from a year earlier—slower than January’s 25% pace but well above economists’ expectations of 5%, and a positive sign for the world’s second-largest economy. (…)

Exports to the U.S. were up 15.7% from a year earlier, and exports to the European Union were up 16.5%. But exports to Japan were down 6.5% and imports from Japan were down 36%, reflecting heightened political tensions between the two countries as a territorial dispute lingers.

High five  The FT has this important info:

Because the Chinese New Year holiday fell in January last year and in February this year, analysts said it was better to look at aggregate trade data for the two months to make sensible year-on-year comparisons.

On that basis, Chinese export and import growth both held up reasonably well. Exports were up 23.6 per cent in the first two months of 2013 from a year earlier, while imports were up 5 per cent.

But even this two-month comparison might be misleading since the slowdown in factory activity has carried through into March because the New Year celebration fell later than usual in February.

“This can mean even the January and February combined data are distorted on the upside and the unwinding of the Chinese New Year distortions would happen in March,” said Song Yu, an economist with Goldman Sachs.

So, read on:


Our (CEBM Group) survey basically reflects the weakness of both spot and futures markets for steel after Spring Festival. Over 45% of respondents stated that actual sales were lower than their expectations, much worse than the previous survey.

Construction projects and cement production restarted after the Lantern Festival (Feb. 24) (…) However, actual demand had not been confirmed in the short term; only 23% producers were optimistic about sales in March.

The survey suggests that around 90% of copper merchants surveyed indicated that orders have declined slightly M/M due to the holiday break. Copper merchants did not see a strong recovery after the Chinese New Year due to soft downstream demand.

In the March survey, real estate developer respondents reported strong sales before Chinese New Year (CNY), in-line with developers’ expectations. Sales decreased slightly after CNY, but developers can still sell 70%-80% (75%-85% in January) of their supply in Tier-1 cities and 60%-70% (60%-80% in January) in Tier-2 cities. None of surveyed developers have introduced new supply in February, but they observed strong low-end demand and high-end property sales.

Surprised smile  As March is the beginning of the peak season in property sales, respondents showed strong motivation to raise prices in March even when they knew a rapid rise in property prices would have a negative impact on their own sales. According to the survey, average prices in March for new properties will increase by 5%-10% M/M in Tier-1 cities, and by 3%-5% M/M in Tier-2 cities.

Few surveyed developers said they would launch new sales campaigns in March due to low inventory. As most developers stopped purchasing land in 1H12, respondents agreed that a shortage of new supply is a real problem for them until late April.

The CEBM machinery manufacturer survey shows that the demand recovery after the holiday has not been observed. (…)  New orders of machinery tools in January and February were still weak.

The result from the survey shows that uncertainty of auto sales conditions has increased.

Exports recovered weakly after the festival; total exports in January and February remained flat Y/Y, barely changed from 4Q12. (…) Export volume surged in March 2012 due to the significant increase in shipping fees. A high Y/Y base will likely weigh on March exports Y/Y.

China warns over fresh currency tensions
Competitive devaluations will hurt emerging nations, says Beijing

Beijing has issued a new warning against competitive devaluations by rich countries, saying that emerging markets will pay the price for so-called currency wars.

“For the global economy this year, I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,” commerce minister Chen Deming said on Friday.

Martini glass  Chinese parliament holds 83 billionaires
Report identifies 17% rise in super-wealthy delegates

Not quite what Lincoln thought of a “government of the people, by the people, for the people…”

Brazil’s central bank adopts hawkish tone
Benchmark Selic rate left unchanged at low of 7.25 per cent

(…) But in the accompanying statement, for the first time since August 2011, it left open the possibility of an increase to tackle rising inflation.

This represented a sharp turnround from previous statements that rates would remain low for a “prolonged period”, leading economists to predict central bank president Alexandre Tombini could increase them as early as next month. (…)

Profit squeeze hammering emerging equities

(…) Godet’s calculations show a steep decline in return-on-equity (ROE) in emerging markets to around 12 percent, a fall of 3 percentage points in the last 18 months and well below pre-crisis levels of 16-17 percent.

That lags developed markets’ 13.5 percent. But U.S. firms – “the ultimate quality and growth markets” in Godet’s words – have usurped EMs’ ROE supremacy with a 15 percent average. ROE shows how well a company is using shareholders’ equity investment to generate profits. (…)

Money  [image]Firms Return Record Cash To Investors

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.

(…)American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market [image]research firm. (…)

The Federal Reserve on Thursday paved the way for more activity. In its “stress tests” of banks’ financial health, the Fed said 17 of the largest U.S. financial groups have enough capital to keep lending even if the economy were to take a sharp downturn. Several banks are now expected to boost dividends and share buybacks.

(See on that NORTH AMERICAN BANKS RANKING (March 2013))

‘Stress Tests’ Show Banks on the Mend

The Fed in its latest “stress tests” said the largest U.S. banks have enough capital to keep lending in a hypothetical sharp economic downturn, potentially clearing the way for the return of billions of dollars to investors.



Storm cloud  German Industrial Production Unexpectedly Stagnates  German industrial production unexpectedly stagnated in January as Europe’s debt crisis weighed on company spending and investment.

Production was unchanged from December, when it rose 0.6 percent, the Economy Ministry in Berlin said today. December output was revised up from an initially reported 0.3 percent increase. From a year earlier, production fell 1.3 percent when adjusted for working days. (…)

Spanish industrial output shrank 5 percent in January from a year earlier. In Finland, production slumped 3.6 percent in January from December, while in Turkey output rose 2.3 percent. (…)

ECB should cut rates, allow higher inflation: Lagarde

The European Central Bank should cut interest rates further and strong economies such as Germany should allow higher inflation and wage growth, the head of the International Monetary Fund said on Friday.

ECB Chief Plays Down Italy Fears

European Central Bank President Mario Draghi played down fears that Italy’s indecisive election could reignite Europe’s debt crisis, saying that financial markets have taken the election results in stride and that Italy’s current political mess doesn’t threaten its budget discipline. (…)

A majority of Italian voters supported political parties, especially those led by comedian Beppe Grillo and former Premier Silvio Berlusconi, that have pledged to soften or reverse fiscal austerity measures that Italy has already enacted.

Italian Banks’ Bad Loans Seen Rising as Gridlock Hampers Growth

(…) Italian corporate and household non-performing loans rose to a record in December, reaching 125 billion euros, according to data from the Italian Banking Association. Banks’ gross non- performing loans as a proportion of total lending increased to 6.3 percent from 5.4 percent a year earlier. (…)

Italian banks tied their fortunes more closely to the financial strength of the state in 2012, increasing holdings of the country’s sovereign debt by 58 percent to 331 billion euros. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. (…)

Hollande faces pressure over jobs pledge
Unemployment hits highest level since 1999 as police and protesters clash

Figures published on Thursday by Insee, the statistics office, put the country’s jobless rate at 10.6 per cent in the final three months of 2012, up from 10.2 per cent in the previous quarter. Excluding France’s overseas territories the rate was 10.2 per cent, which compared with 5.7 per cent in Germany and an 11.7 per cent eurozone average.

Stratfor: Europe, Unemployment and Instability 

Excerpts from a good Statfor piece via Economic Intersection.

(…) Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.

Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.

This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.

History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.

It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.

It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.

The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has not encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.


World shares hit highest since June 2008

World shares hit their highest level since June 2008 and the dollar touched a fresh 3-1/2-year high against the yen on Friday, ahead of U.S. jobs data expected to point to a continuing pick up in the world’s biggest economy.

AAII Bullish Sentiment Posts Small Increase


NEW$ & VIEW$ (25 FEBRUARY 2013)

The sequester and the fragile U.S. economy. Truck tonnage. Car sales. Rising inventories? ObamaCare. House prices. Canadian economy struggling. Social unrest. China’s PMIs. China housing. Earnings watch. Sentiment watch.


Long Impasse Looms on Budget Cuts

Lawmakers anticipate that looming spending cuts will take effect next week and won’t be quickly reversed, likely leading to protracted uncertainty that presents risks both to Congress and the president.

Never mind the political risks. How about the real world?


GDP could shrink in the first and second quarters — two consecutive declines is the popular definition of a recession — and stretch into the third quarter, according to Charles Dumas of Lombard Street Research in London — a prospect he says Wall Street is “blithely ignoring.” Federal spending could be reduced by 0.5% under sequestration, which would come atop the 1% fiscal tightening under the 2011 debt-ceiling agreement and 0.8% impact of the end of the payroll-tax cut on Jan. 1, he points out.

LEI – Is There A Disconnect? (Lance Roberts)


(…) the negative trend of the LEI since the turn of the century has not only been a reliable indicator of the maturity of the economic cycle but a cross below the ZERO bound has been closely associated with a market peak. However, with the Fed artificially suppressing the yield spread and boosting asset prices (both of which are major components of the index) through repeated QE programs the artificial inflation of the index is likely masking the weakness in the economy.

Speaking of underlying weakness in the economy – the next chart is the annual change in the LEI versus the annualized growth rate of GDP.


(…) Historically, when the annual rate of change in the LEI drops below zero the economy either has been, or was close to, a recession.  At a current reading of 2.06% there is not a tremendous margin for error with regards to missteps with either fiscal or monetary policy.  Furthermore, as discussed recently, with the global recession already providing a drag on the domestic economy – any drastic moves toward austerity could easily push the economy over the ledge. (…)

ATA Truck Tonnage Index Posts Best Ever January (via CalculatedRisk)

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.9% in January after jumping 2.4% in December. … Tonnage has surged at least 2.4% every month since November, gaining a total of 9.1% over that period. As a result, the SA index equaled 125.2 (2000=100) in January versus 121.7 in December. January’s index was the highest on record. Compared with January 2012, the SA index was up a robust 6.5%, the best year-over-year result since December 2011.

“The trucking industry started 2013 with a bang, reflected in the best January tonnage report in five years,” ATA Chief Economist Bob Costello said. “While I believe that the overall economy will be sluggish in the first quarter, trucking likely benefited in January from an inventory destocking that transpired late last year, thus boosting volumes more than normal early this year as businesses replenish those lean inventories.” (emphasis added)


Inventory restocking seems to be confirmed by rail traffic. Intermodal volume has been very strong in the past several weeks.

The problem with the above is that the consumer is 70% of the U.S. economy and indications are that consumer spending has stalled. Restocking could rapidly lead to destocking.

ISI company surveys revealed softness from truckers and retailers and restaurants last week while manufacturers and homebuilders improved.

Pent-Up Demand Drives Auto Sales

More than 1.2 million new vehicles were estimated to have been sold in the month, a 4.3% increase over a year earlier and a 15% increase over January, according to If accurate, that would put the seasonally adjusted annual rate at 15.5 million vehicles. (…)

Analysts, however, will be searching Friday’s reports for signs that auto makers may be too far ahead of the sales curve (…)

ObamaCare’s Tax Net Snares Middle Class, Economy

When the subsidized exchanges open in 2014, ObamaCare will become a redistribution program. This year, it’s primarily a tax collection program.

The health law will shrink the fiscal 2013 deficit by $34 billion due to $36 billion in revenue, the Congressional Budget Office predicts.

Thus, ObamaCare’s ramp-up will be an economic drag, made steeper by employers’ shifts to avoid fines that kick in next year.

While much of the new taxes will come from high earners, ObamaCare’s tax net will be impossible to avoid for the middle class. Pretty much anyone who uses medical care will pay up, since fees on insurance policies, prescription drugs and medical devices are sure to be passed along to consumers.

Likewise, tax penalties for employers who fail to offer affordable and comprehensive coverage would come at least partly out of wages for moderate earners.

In all, ObamaCare is expected to raise about $800 billion in revenue over 10 years, including penalties on individuals and firms for not complying with new mandates.

January Annual Home Value Increase Is Largest Since Summer 2006

Zillow’s January Real Estate Market Reports, released today, show that national home values rose 0.7% from December to January to $158,100. January 2013 marks the 15th consecutive month of home value appreciation. On a year-over-year basis, home values were up 6.2% from January 2012 – a rate of annual appreciation we haven’t seen since July 2006 (when the rate was 7.5%), before the peak of the housing bubble.


The rental market remains strong, even as the housing market regains strength. (…) Investors are still playing a big role in the housing recovery, as they purchase homes (many times lower priced homes or distressed inventory) and convert these into rental units to satisfy the increase in demand for rental housing. Their involvement in the marketplace has often squeezed out first-time buyers and has contributed to high home value appreciation. (…)

Pointing up  Fig4The rate of homes foreclosed continued to decline in January with 5.54 out of every 10,000 homes in the country being liquidated. Nationally, foreclosure re-sales continued to fall, making up 13.05% of all sales in January. This is down 3.6 percentage points from January 2012 and down 6.9 percentage points from its peak level of 19.9% in March 2009.

See also: 2 Million Homeowners Freed From Negative Equity in 2012; 1 Million More to Come in 2013


Canada’s Economy Struggles as Inflation and Sales Slow

Canada’s inflation rate fell in January to its lowest since 2009 and retail sales plunged in December, adding to evidence the country’s economy is struggling to accelerate from its slowest pace since the 2009 recession.

Consumer prices rose 0.5 percent in January from a year earlier, the least since October 2009, Statistics Canada said today from Ottawa. Retailers in December recorded a 2.1 percent drop in sales, the biggest decline in almost three years, the agency said separately.

France asks Brussels for budget pass
Finance minister seeks extra year to hit deficit targets Surprised smile
Risk of instability hangs over Italy poll
Result that yields strong government ‘would be a miracle’
Social Unrest In Europe? (BCA Research)

Three crucial stabilizing factors have de-fused the risk of an imminent social explosion in Europe.

  • First, in the powder keg that ignites major social unrest one vital ingredient is missing: inflation. An INSEAD study of social upheaval shows that the young can tolerate unemployment so long as prices are stable, and they expect a brighter future when they eventually find jobs. The good news is that inflation in Europe’s troubled economies is well contained, and coming down.
  • The second stabilizing factor is the role of the family as a vital shock absorber. For example, note that the countries with the highest youth unemployment rates are also the ones with the highest proportion of young adults living with their parents. Effective transfers at the family level are providing the young jobless with essential economic and social support.

Social Unrest In Europe

  • Third and probably most important the official unemployment numbers in some European countries are a fiction. It is an open secret that many of the officially jobless in countries like Greece and Spain are actually working in the shadow economy which encapsulates activity that is unrecorded, unregulated, and untaxed.

Bottom Line: The social, political and economic stability of Europe is much greater than widely believed. Hence, any sell-off on renewed social or political tensions in the coming weeks or months is a possible opportunity to shift into euro area assets.

I don’t subscribe to that view. Today’s youth has little patience. I expect a hot spring in Europe.

UK loses triple A credit rating  Moody’s action cites deteriorating outlook

Sterling hits two-year low on downgrade Moody’s action rattles currency in final minutes of trading


China’s farm produce prices down  Farm produce prices in China have seen a marked decline since mid-February, according to a survey conducted by Xinhua News Agency.

The average price of 21 monitored vegetables declined 11.2 percent from February 10-22, while the price of eggs was down 0.4 percent, said the survey released Friday.

The price of pork, a staple meat in China, dipped mildly, but the price for chicken held steady. Prices of beef and mutton also nudged down.

Food prices account for about one-third of the prices used to calculate the consumer price index (CPI), a main gauge of inflation, in China.


The overall index rose sharply to 61.8 in February. The New Orders index rose again.


High five  Note: this MNI index goes totally against this morning’s Markit flash PMI.

Is China’s Property Market Topping Out?

Investing in property is very important to Chinese people, who are unable to easily move their money overseas and distrustful of the stock market. According to Jing Ulrich, a property cycle in China only lasts about 14 months from beginning to end.

(…) Chinese home buyers in tend to put down a lot more cash and borrow less than their Western counterparts, so interest-rate hikes have less impact on the market. Instead, the government has used requirements for minimum down payments and restrictions on buying multiple homes to cool things down.

Though they never formally relaxed the rules, Ms. Ulrich said authorities judiciously started taking a more laid back attitude to enforcement when it became clear the market was stuttering in the second half of 2012.

Now she is on the lookout for renewed signs of zeal in enforcing the curbs, which would be the easiest way to suppress demand. Buying restrictions could also be extended beyond the 40 or so cities where they are now in force. (…)

Vietnam Inflation Rate Eases as Economy Struggles to Revive  Vietnam’s inflation eased in February as domestic consumption struggled to rebound after a credit crunch that slowed economic growth to a 13-year low.

Consumer prices climbed 7.02 percent from a year earlier after rising 7.07 percent in January, the General Statistics Office in Hanoi said today.

The World Bank in December forecast that Vietnam’s economy will expand 5.5 percent this year, which would mark a third straight year of below-6-percent growth. The increase in gross domestic product averaged 7.3 percent annually in the first decade of this century.


Q4 earnings season ends this week. Factset on S&P 500 companies:

Of the 429 S&P 500 companies that have reported earnings to date for the fourth quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 69% recorded over the past four quarters. (…)  In terms of revenues, 66% of companies have reported sales above estimates. This percentage is well above the average of 50% recorded over the past four quarters.

Bespoke on NYSE companies: Earnings Season Ends with a Thud

Not only did the season end on a down note regarding the market, but the underlying earnings numbers fell hard this week as well.  As shown below, the final reading for the percentage of US companies that beat Q4 earnings estimates was 61.4%.  This is still a solid number compared to recent quarters, but it actually fell 2.2 percentage points this week.  Of the 252 companies that reported this week, only 48% beat earnings estimates, causing the overall beat rate to drop from 63.6% down to 61.4%. While it hasn’t been mentioned, maybe weak earnings has been a key reason for the market’s drop this week.


The revenue beat rate ended at 62.7% for the fourth quarter reporting period.  As shown below, this is much better than what was seen in the prior two quarters, and it’s the exact same beat rate that was seen during the Q1 2012 reporting period.  Just like the earnings beat rate, the revenue beat rate also fell this week, dropping 1.3 percentage points from a reading of 64% last Friday.


The official S&P tally as of Feb. 21:

Of the 445 companies having reported, 65.8% beat and 24% missed earnings estimates. Ex-IT companies which beat by 83%, the beat rate drops to 62.8%.

Pointing up Q4 EPS are now seen at $23.28, down $0.04 from last week and $0.55 (-2.3%) from Jan. 31. This is the lowest earnings level since Q1’11. It also marks the second consecutive Y/Y decline (-5.1% in Q3).

Trailing 12-month EPS now total $96.95, down 0.5% from Q3’12 and 1.8% from Q2’12. Valuation based on trailing earnings is now facing a mild headwind after enjoying a strong tailwind since mid 2009 (EPS +149%).

Q1’13 estimates remain upbeat at $25.57, +5.5% Y/Y, even though they keep declining albeit at a slower rate lately. If met, trailing earnings would resume growth and reach $98.28 after Q1’13.

Note this, however:

Corporations and analysts are lowering earnings expectations for Q1 2013. In terms of preannouncements, 72 companies have issued negative EPS guidance for Q1 2013, while 23 companies have issued positive EPS guidance.


As of last week, nearly 20% of the S&P 500 companies have pre-announced and 76% were negative. The last few weeks seem to have been particularly difficult for consumer-centric companies. This could begin to hit producers potentially facing excess inventories. Then there is the looming sequester which will hit a host of companies which may have been hoping for a solution that now seems elusive. The risk is clearly tilted toward negative earnings surprises. Read on:

Darden Cuts Guidance, Citing Payroll Tax, Gas Prices

Darden Restaurants Inc., which owns Olive Garden and Red Lobster, cut its fiscal-year profit and revenue outlook, citing “headwinds” from consumers pinched by higher payroll taxes and gasoline prices.

Its less-rosy view comes amid similar warnings from U.S. food and retail chains that have blamed the economy for slowing sales. (…)

“While results midway through the third quarter, [which will end Sunday], were encouraging, there were difficult macroeconomic headwinds during the last month,” Chief Executive Clarence Otis said. Two of the most prominent culprits were increased payroll taxes and rising gasoline prices. (…)

Restaurant analyst Bonnie Riggs, from market research firm NPD Group Inc., said that three weeks ago, which is about when consumers likely saw the impact of the higher payroll tax in their paychecks, restaurants reported a 4% decline in same-store sales, marking the first industrywide, weekly decline that NPD has seen in more than a year and a half. (…)

For the year, Darden now expects earnings from continuing operations of $3.06 to $3.22 a share on sales growth of 6% to 7%, down from its previous view of $3.29 to $3.49 a share in earnings on 7.5% to 8.5% sales growth.

Darden said it expects fiscal third-quarter earnings from continuing operations between $1 and $1.02 a share, below estimates of $1.13 from analysts surveyed by Thomson Reuters.

Q3 will miss by 11% while full FY mid-point EPS are shaved 8%. Big impact.


RBC Capital Markets’ latest sentiment indicator:

Bullishness recently hit its highest level since July 2005 according to our
sentiment indicator. Of the six components that comprise the composite, only the CBOE Put/Call Ratio and the AAII Bull Ratio stand at relatively depressed readings. Unbalanced optimism sets the stage for a pullback in share prices, one in which investors will need to decide whether to lean into or against.



(…) The Standard & Poor’s 500-stock index has gone 505 days without a correction, deemed a 10% drop from a recent high. Since 1962, the index has rallied for at least 500 days without a correction during five separate instances, according to data provided by stock-market research firm Birinyi Associates.

In all five rallies, stocks averaged another 9.2% gain over the next six months and a 13% increase over the ensuing one-year time frames. (…)

“This market’s rally without a 10% pullback is not out of the ordinary,” Kevin Pleines, research analyst at Birinyi, told MarketBeat. He said there is little historical merit to the notion that the market is overdue for a sizable drop. (…)

In a note to clients on Friday, Thomas Lee, chief equity strategist at J.P. Morgan, advocated some near-term caution. He said the S&P 500 would look more compelling if it fell to the 1400-to-1450 range.

Such a drop would be consistent with patterns that have played out since the market bottomed in March 2009. On average, rallies have lasted 55 days and risen 18% in between 5% pullbacks over the last four years, according to research firm Stone & McCarthy Research Associates.

Lately, the S&P 500 has risen 12% throughout the last 66 trading days since its most recent pullback that concluded in mid-November. There have only been four other instances throughout the last four years in which the market has rallied for a longer period of time without at least a 5% pullback, the research firm said.

“We think there could finally be a minor pullback at any time,” said Mark Arbeter, chief technical strategist at S&P Capital IQ. “While we continue to think that the market will grind higher in the weeks to come, risk appears to be rising and the call from here may get a little trickier.”

But on a longer-term time horizon, the rally may have more momentum behind it.

“We are still positive on stocks and believe the bull market will continue,” said Birinyi’s Mr. Pleines. (WSJ)


NEW$ & VIEW$ (16 JANUARY 2013)

Note: I am still travelling on the U.S. West coast, hence the limited posting this week.


Consumer Prices Hold Steady

The index of consumer prices was unchanged in December after falling 0.3% the prior month, the Labor Department said Wednesday. The so-called core prices, which don’t take into account the volatile food and energy sectors, rose 0.1%.

(…) Gasoline prices dropped 2.3% in December, the third consecutive decline. Overall energy costs fell 1.2% for the month. (…)

Year over year, consumer prices were up 1.7% and core prices were 1.9% higher.

A separate Labor report Wednesday showed Americans’ real average weekly earnings rose 0.6% because both hourly pay and the average workweek increased. Still, since reaching a peak in June 2012, weekly earnings have edged down by 0.1%. The figure is before taxes.

U.S. industrial production rose to its highest level since mid-2008 in December as manufacturing and mining output climbed. Industrial output increased 0.3% last month, the Federal Reserve said, while capacity utilization inched ahead to 78.8% from a revised 78.7% the prior month. Mining output rose 0.6%, while utilities dropped 4.8% “as unseasonably warm weather held down the demand for heating,” the Fed said.

Auto  EU Car Sales Slump

New registrations, a proxy for sales, shrank 8.2% in 2012 to a little over 12 million units and are set to drop further in 2013—perhaps by as much as 5% even after five years of steady contraction, according to the European automobile manufacturers’ association ACEA. (…)

As well as a declining population in many of Europe’s richer countries, car markets are close to saturation because of the relatively young age of Europe’s passenger-car fleet, a long-running tendency for European drivers to drive less, and the increasing durability of modern cars, which is squeezing demand for new vehicles. Add Europe’s economic malaise, where rising unemployment and increased taxes have hit demand for consumer goods in the region, and EU car demand may be on the same course as in Japan, where car demand has fallen since 1992. (…)

Europe’s car fleet is an average 8.4 years old compared with around 11 years in the U.S., where the average age of cars on the roads is rising, said Mr. Pearson. Every additional half-year that customers keep old cars on the road takes away 700,000 cars from potential demand, he estimates. (…)

Meanwhile, Europe’s economic woes are dragging not just on car ownership but how much people are prepared to drive, evidenced by traffic on Europe’s toll roads.

Analysts at Moody’s Investor Services, which tracks the credit worthiness of Europe’s listed toll-road operators, estimate traffic could fall by up to 5% in parts of Europe this year after declines of 8% in Italy, 10% in Spain and 15% in Portugal in the first nine months of 2012.

For Europe’s auto industry, the gloomy outlook is underscored by the problem of overcapacity, with analysts reckoning the EU has between 15 and 20 factories operating at less than 50% of full capacity.

So, oil demand is falling just about everywhere but in China, and supply is rising. Why aren’t oil prices falling? Ask the Saudis.

‘Tight oil’ boom to fuel supply, says BP
North America set to dominate unconventional resources for decades

(…) In its latest energy outlook, BP said the shale revolution that had transformed the US energy market would spread to other parts of the world, with global output of shale gas trebling and tight oil growing more than sixfold by 2030. (…)

BP said the US would be 99 per cent self-sufficient in net energy by 2030 at the same time as large emerging economies such as China and India see their dependence on energy imports rise – a shift that “will have major impacts on trade balances”. (…)

Portugal’s Central Bank Forecasts Deeper Downturn

Portugal’s central bank forecast a deeper slump this year than it predicted two months ago but said the economy will likely return to growth in 2014.

The Bank of Portugal now expects the economy to contract 1.9% this year, more than the 1.6% it forecast in November. It revised export growth downward to 2% from 5%. (…)

With its gloomier outlook, the central bank has distanced itself further from the Portuguese government’s own forecast of a 1% contraction this year.


Scotia Capital likes equities…

With the recent pick-up in the global LEI, we would expect S&P 500 top line to continue to expand in coming quarters. 2013 EPS expectations are somewhat elevated, but as long as earnings
are trending higher, equities should remain well supported.


…but of the larger kind:

According to Standard and Poor’s, S&P 600 Q4 EPS forecasts currently stand at US$6.20. This suggests an 11% sequential improvement and an 18.5% YOY increase. Although U.S. macro data improved in Q4, we doubt U.S. small caps will be able to deliver.

The NFIB Small Business Optimism index is deteriorating since last April, with the Earnings Trend and Sales Expectations components going down. Moreover, the ISM trend (rolling 12-
month) is still pointing toward softer earnings growth in the small cap space. Until the ISM trend reverse, we would expect earnings growth to moderate.