NEW$ & VIEW$ (24 FEBRUARY 2014)

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Home Sales Hit 18-Month Low Home sales fell in January to their lowest level in 18 months as higher prices and mortgage rates squeezed buyers who continue to face shortages of properties for sale.

Sales of previously owned homes fell by 5.1% to a seasonally adjusted annual rate of 4.62 million, the National Association of Realtors said Friday. The median sales price in January stood at $188,900, up 10.7% from a year earlier.

Sales volumes are being challenged by reduced affordability of homes and severe winter weather in many parts of the country—two factors putting a damper on demand. But real-estate agents say the market also is being constrained by a lack of supply. There were only 1.9 million homes on the market in January, according to the Realtors’ group. While that was a 2.2% increase from December, only three months during the past 12 years have seen inventories at even lower levels. (…)

Construction of new homes also remains near its lowest level in 50 years. Builders completed fewer than 570,000 new single-family homes last year, down from an average of 1.1 million from 1990 through 2003. (…)

Mortgage Troubles Near Prerecession Levels The number of Americans who are behind on their mortgages and the backlog of homes in the foreclosure process are approaching prerecession levels.

The U.S. mortgage delinquency rate—loans that are a payment or more behind but not yet in foreclosure—fell to 6.39% of loans in the fourth quarter of 2013, down from 7.09% a year ago and the lowest rate since the early months of recession in the first quarter of 2008, according to a report Thursday by the Mortgage Bankers Association.

The backlog of foreclosure inventory also fell to its lowest level since 2008, while the number of loans on which lenders initiated foreclosure was the lowest since 2006, which was when the housing bubble was starting to burst. (…)

Another encouraging sign: Three-quarters of the nation’s troubled loans were made in 2007 or earlier, and delinquency rates for loans made after that point are around historical norms, according to the Mortgage Bankers Association. “The legacy of very high foreclosure rates is a problem of older loans,” said Michael Fratantoni, the MBA’s chief economist.

(…) In October, 11.4% of loans were “underwater,” according to Black Knight, down from about 19% at the start of last year.(…)

Western markets like California and Arizona were among the hardest hit by the real-estate bust, but now have foreclosure inventories that rank among the bottom handful of states. (…) Some 1.25% of California mortgages were in foreclosure at the end of 2013, well below the national average, according to the MBA.

Some states are further along than others in reducing the backlog of foreclosures. Most of the nation’s highest foreclosure inventory rates are in the “judicial states,” where banks must get court approval to foreclose.

Florida, a judicial state, had the nation’s highest share of loans in foreclosure, 8.56%. Still, that was down to a bit more than half of its peak rate. New Jersey and New York—also judicial states—were next on the list and were the only other states with foreclosure inventory rates above 6%. The MBA said that 15 of the 17 states where the foreclosure inventory was higher than the national average were judicial states.

Judicial review has stretched out the foreclosure process, in part because banks have struggled to provide the proper paperwork to demonstrate ownership of mortgages. That has given homeowners more time to work out their debts. But some economists say it has hindered housing markets by slowing the repossession of abandoned or blighted properties.

Real Retail Sales

Doug Short does the math on real retail sales:

With yesterday’s release of the January Consumer Price Index [+0.1% MoM], we can now calculate Real Retail Sales for the underlying sales data released on February 13th. Nominal Retail Sales had fallen 0.4% month-over-month, the second month of contraction, and are up only 0.3% year-over-year (see my detailed overview here). When we adjust for inflation, January sales were down 0.6% MoM. The YoY change was a fractional 0.1% growth. Real sales are down 0.9% from their all-time high in November.

Doug’s numbers reveal that real retail sales have lost in the last 2 months all the gains recorded since June.

Drilling down, from HARD PATCH COMING?:

“Non-Auto Discretionary Sales” (core less food and gasoline) declined 0.3% in each of January and December and are down 0.4% over the last 3 months. During the 3 most important months of the year,nominal non-auto discretionary sales declined at a 1.1% annualized rate. We will get the January CPI later this week but we already know that Core CPI rose 0.3% during November and December. If January comes in at +0.1%, we could infer that real non-auto discretionary sales have dropped at a 2.3% annualized rate between November 2013 and January 2014.

Feds Withhold Water To California Farmers For First Time In 54 Years

The US Bureau of Reclamation released its first outlook of the year and finds insufficient stock is available in California to release irrigation water for farmers. This is the first time in the 54 year history of the State Water Project. “If it’s not there, it’s just not there,” notes a Water Authority director adding that it’s going to be tough to find enough water, but farmers are hit hardest as “they’re all on pins and needles trying to figure out how they’re going to get through this.” Fields will go unplanted (supply lower mean food prices higher), or farmers will pay top dollar for water that’s on the market (and those costs can only be passed on via higher food prices).

OECD warns of new era of slower growth Report pinpoints failure of emerging economies to launch reforms

The world risks slipping into an era of slower growth and high unemployment unless governments push ahead with sweeping structural reforms, the Organisation for Economic Co-operation and Development warned ahead of this weekend’s talks between G20 finance ministers and central bankers in Sydney. (…)

The OECD’s “Going for Growth” report found that the intensity of structural reform measures remained highest in Greece, Italy, Portugal and Spain, where action was being taken to reform the labour market.

But it pinpointed the failure of many emerging economies to launch comprehensive structural reform agenda. (…)


Small Investors Back in the Trading Game Individuals are ramping up trading at discount brokerages, and they are borrowing more against their portfolios to increase bets.

(…) Average daily client trades at E*Trade Financial totaled about 160,000 in the fourth quarter of 2013, up 25% from a year earlier. At TD Ameritrade, clients made 414,000 trades a day on average in the quarter ended Dec. 31, up 24% from a year earlier. Charles Schwab Corp. SCHW +0.50% customers made 488,000 trades a day on average, up 8%.

The trend continued in January, even as stocks fell. At E*Trade, daily trades were up 27% from a year earlier. At TD Ameritrade and Schwab, the increases were 28% and 17%, respectively. TD notched a record number of monthly trades in January, Charles Schwab hit a five-year high and E*Trade reached a level unseen since the “flash crash” of May 2010.

Not only are investors trading more, but they also are borrowing more against their portfolios to increase their bets. In December, margin debt hit an all-time high of $444.93 billion, not adjusted for inflation, up 35% from a year earlier, according to the New York Stock Exchange. (…)

At E*Trade, client trades from mobile accounted for 8.4% of total trades in 2013, up from 4.3% in 2011.

“Mobile remains a major focus for us,” said John Matos, a senior vice president at E*Trade who oversees the brokerage’s digital channels. “Our customers are increasingly engaging with their finances on tablets and smartphones, as evidenced by a record portion of trades being placed” through mobile technologies. (…)

“You see somebody make a lot of money in a day,” he said, “and that shows you it’s possible.”

Crying face Jesus said, “Father, forgive them, for they do not know what they are doing.” Luke 23:34

Investors Like the View in Europe Investors have been buying European stock funds, focusing on a brightening economic outlook and low interest rates.

Investors have sent $24.3 billion into European equity funds this year through Feb. 19, according to fund tracker EPFR Global. U.S. catstock funds have seen $5 billion in outflows.

In the exchange-traded-fund world, three of the top four stock-based funds in terms of investor inflows in 2014 are the Vanguard FTSE Europe, the iShares MSCI EMU and the Vanguard FTSE Developed Markets ETFs—all of which have heavy exposure to Europe. The three have seen a combined $4.23 billion in new money this year, while $19.1 billion has flowed out of the largest U.S. stock ETF, the SPDR S&P 500 fund.

The Stoxx Europe 600 index is up 2.4% this year, compared with a 0.7% decline in the S&P 500 index of U.S. companies and a 2.9% drop in the 30-stock Dow Jones Industrial Average.

Just kidding Just in case you missed what most people seem to have missed:

Total retail volume dropped 1.6% MoM in December in the EA17. Over the last 4 months, retail volume is down 1.8%, that is a 5.4% annualized rate! Core sales volume dropped 1.8% in December and is down 1.5% since September (-4.6% annualized). Real sales dropped 2.5% in Germany (-2.4% in last 4 months), 3.6% in Spain (-6.0%), 1.0% in France (-1.2%).


And this from Markit on January sales:

January eurozone retail PMI® data from Markit showed the first rise in sales for five months. And although only slight, the increase was the fastest since April 2011. Germany was the driver of growth, posting its most marked improvement in trade since August. France’s drag on the currency union’s overall performance meanwhile diminished as sales there fell at a much slower pace than in December, whereas Italy saw another solid decrease.

Don’t believe this is unrelated:

Euro-Zone Consumer Prices Fall at Steepest Rate on Record  Sharp Drop in Prices Is Sign of Weak Domestic Demand

Eurostat, the European Union’s official statistics agency, said Monday that consumer prices in the 18 nations that use the euro fell 1.1% in January from December, a record fall driven by sharpest decline in underlying inflation in a year. That “core” gauge of prices, which excludes the relatively volatile prices of energy, food, alcohol and tobacco, dropped 1.7% on the month.

Eurostat said the annual rate of inflation was unchanged in January at 0.8%, close to a four-year low and less than half the ECB’s target of a little under 2%.

BTW: Italy, the euro zone’s third largest economy, showed a 2.1% MoM decline, the biggest drop from among all euro zone members.

Daimler Truck Sales Rose in January The rise was boosted by demand in the U.S., Asia and Western Europe.

(…) While European demand was healthy in January, orders in Europe were more muted in February, Mr. Bernhard said.

Draghi Highlights Importance of March ECB Meeting

European Central Bank President Mario Draghi Sunday signaled the central bank’s March policy meeting could be critical in determining whether the ECB will provide additional stimulus to shore up the nascent euro-zone economic recovery.

“By then we’ll have the full set of information needed for us to decide whether to act or not,” the central bank chief said here at a meeting of global financial leaders. (…)

Both Mr. Praet and Mr. Draghi dismissed fears of deflation. Inflation expectations in the euro zone are well anchored, Mr. Draghi said.Confused smile

“We still see progress, but we still see downside risks to recovery,” Mr. Draghi said, noting the recovery in Europe is “modest, fragile, with uneven levels of activity.”

China property prices continue to rise Speed of growth cools but prices still up 9.6% year-on-year

New housing prices in China’s 70 biggest cities rose 9.6 per cent year on year in January, down from 9.9 per cent in December, according to a population-weighted average. Of the 70 cities monitored by the national bureau of statistics, six posted price declines from the previous month, up from just two in December.

New home prices in Shanghai and Beijing rose 20.9 and 18.8 per cent in January from a year earlier, respectively, slowing a touch from their 21.9 and 20.6 per cent increases in December.

Global Economy Collapses Despite 4th “Warmest” January On Record

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that ‘weather’ is not to blame, US strategists, ‘economists’, and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

G-10 macro data is collapsing…

Venezuela Youth Drive Protests Against ‘Chavismo’ Students and recent graduates form the backbone of an increasingly raucous movement that has become the most formidable challenge President Nicolás Maduro has faced since taking office last April.
Oil at the heart of Venezuela’s turmoil Scrimping on PDVSA raises likelihood of more unrest

(…) While Venezuela boasts the world’s largest energy reserves, “chávismo” has spectacularly mismanaged the oil wealth, creating the country’s current problems.

“The main problem for PDVSA [the state-owned oil company] is the government’s fiscal voracity,” says David Voght, managing director of IPD Latin America, a consultancy. “Venezuela has focused more on politics than efficiency in its oil sector.”

Siphoning off PDVSA’S investment funds to pay for social programmes has so far helped maintain government support. Most protests have been in better-off neighbourhoods around the country.

“For the protests to be effective, they must include the poor,” says former presidential candidate Henrique Capriles, a member of the opposition’s more moderate wing who cautions it is wrong to create expectations that the government is about to fall.

But scrimping on investment throttles Venezuela’s golden goose, increasing the likelihood of unrest. Less oil production means less money to spend on imports and thus greater shortages, while money-printing to fund a gaping fiscal deficit has fuelled inflation of more than 56 per cent.

Furthermore, much of Venezuela’s output is mortgaged. Production has fallen to some 3m barrels a day, from 3.1m a decade ago, according to official figures, of which 310,000 bpd pays off loans to China, about 400,000 bpd is sold to allies, such as Cuba, for sub-market prices or in barter deals, and about 600,000 bpd is used to meet heavily subsidised domestic consumption.

As a result, there is even less money to spend on imports. By way of illustration, Venezuela’s remaining 1.7m bpd generates about $58bn of revenues a year. In contrast, imports totalled $77bn in 2012, according to UN statistics.(…)

But, in the past, Venezuela solved similar cash crunches by issuing international bonds. That trick is harder to repeat now, given that Venezuelan bonds have posted the biggest losses in emerging debt this year. The country’s benchmark bond due in 2022 yields 18 per cent, almost twice the rate of equivalent Ukrainian bonds.

With foreign reserves of only $20bn, versus principal payments of $4.5bn due this year plus another $13bn of interest, bondholders increasingly wonder where they lie in the pecking order should the government re-prioritise imports over debt. (…)


NEW$ & VIEW$ (21 FEBRUARY 2014)


The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in January to 99.5 (2004 = 100), following no change in December, and a 0.9 percent increase in November.
Philly Fed Misses Forecasts By a Wide Margin

Both the Empire and the Philly Fed declined “due to the harsh winter”. Yet, Markit’s flash PMI was very strong. Confused smile

Following on the heels of Tuesday’s weaker than expected Empire Manufacturing report, today’s Philly Fed also missed expectations by a wide margin.  While economists were forecasting a headline reading of 8.0, the actual reading was -6.3.  This is the lowest reading since February of 2013 and was the biggest miss relative to expectations since June 2012.

As shown in the table, just three (Delivery Time, Inventories, and Prices Received) of the nine components increased this month.  Of the six components that declined, Shipments and New Orders saw the largest drops, which doesn’t bode well in terms of economic strength. 

Once again, given the rough winter we have seen in the Philadelphia region, weather is being cited as the main culprit behind the weakness.  Whether or not you agree that the weather argument has any merit, the reality is that until it warms up, investors seem willing to give the economy the benefit of the doubt.  If you look at the forecast for the New York City area, it doesn’t look like it is going to consistently warm up any time soon.

Good news, though, lensing to small biz turned positive, barely (from BofAML)

(…) lending to small business is positive for the first time since the crisis — although nowhere near the level of the boom days of 2006 when credit expanded by more than a fifth.


imageThe U.S. CPI rose 0.1% in January, in line with the last six months, bringing the annualized rate of inflation to 1.2%. The total CPI’s 1.6% YoY increase should thus come down in coming months, unless monthly inflation picks up sharply.

Core CPI was also up 0.1%, also in line with the last six months (+1.4% a.r.), and is also up 1.6% YoY.

However, the Cleveland Fed median CPI rose by 0.2% for the third consecutive month, continuing to show YoY gains of 2.0%.

The inflation jury is still out, although there seems to be more and more inflation building in the pipeline. Consider that core PPI jumped 0.4% in January following a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Also, nonpetroleum import prices rose 0.4% in January.

Is Food Inflation Coming Back?


We highlighted the CRB/BLS Spot Foodstuffs Index last week. It’s continuing to rise but still remains lower year-on-year at this point. The question is whether this is the start of a broadly-based period of food price inflation?

Fingers crossed Grain prices forecast to fall to five-year lows Crop harvest expected to be close to record, says USDA

(…) We’re anticipating record crops in soyabeans and maybe even in corn with better production,” Joseph Glauber, US Department of Agriculture chief economist, said at the agency’s annual outlook forum. “All that will bring prices down.”

In the coming crop marketing year, corn will cost $3.90 per bushel, soyabeans $9.65 per bushel and wheat $5.30 per bushel, Mr Glauber said. These would be the lowest average prices since the year following a large 2009 US harvest.

Futures prices are currently far higher. CBOT December corn, a yardstick for this year’s harvest, was $4.6850 per bushel on Thursday, while CBOT November soyabeans were $11.4350 per bushel. (…)

High five  Richard Feltes, vice president of research at RJ O’Brien, a commodities broker, said the acreage forecasts did not appear to take into account the amount of land farmers were unable to plant last spring due to heavy rains.

“There is no allowance for the high ‘prevented plant’ that occurred last year. The trade is going to look on that with some degree of scepticism.” (…)


Even China’s Economists Are Singing the Blues China’s state media have long accused foreign analysts of being too bearish on the Chinese economy. Now domestic economist are chanting a pessimistic tune as well.

(…) “We are now in a painful stage,” economist Wang Luolin told a seminar this week.  “Let’s not try to dress things up,” said the consultant to the Chinese Academy of Social Sciences, a government think tank.

Yu Bin, a senior researcher at the influential Development Research Center under the State Council, took a similarly pessimistic view.

“The fact is, China’s economic growth is facing substantial downward pressure,” he said. “I don’t think we should get our hopes up for this year’s growth.” (…)

“We expect the economic growth rate to be just above 7% this year, and that’s about it,” Mr. Yu said. That would be well below the 7.7% expansion in all of 2013.

Mr. Yu added that all three big drivers of China’s growth — investment, consumption and exports— are looking weak.

Overall investment growth is expected to slip to around 18% this year from 19.6% last year, the researcher said. The manufacturing sector has been struggling with overcapacity and cut-throat competition, and oversupply of property in third- and fourth-tier cities will likely dampen overall investment. Meanwhile, mounting local government debt may weigh on infrastructure investment, he said.

Li Daokui, a former central bank adviser who normally has a more upbeat outlook, also sees slowing momentum – at least for now. “We should be prepared psychologically” for a shaky start to the year, he said, adding that growth could drop below 7.5% year-on-year in the first quarter.

Sad smile Slower growth adds to the increasing risk that borrowers won’t be able to repay their creditors.(…)

As a reminder, courtesy of Zerohedge which has a lot more to say about the China syndrome:



Brazil vows $18.5bn cuts to woo investors Move to restore fiscal credibility after downgrade threat

(…) The primary budget goal is predicated not only on problematic cuts to discretionary spending but is also based on an overly optimistic estimate of 2.5 per cent growth this year, says Tony Volpon, an economist at Nomura. “We’ve just changed our estimate to 1.3 per cent.”


Final Earnings and Revenue Beat Rates for Q4 2013

The Q4 2013 earnings season unofficially came to an end this morning with Wal-Mart’s (WMT) report before the open.  For the quarter, 61.9% of US companies beat consensus analyst earnings estimates.  As shown in the first chart below, 61.9% is at the top end of the range the earnings beat rate has now been in since 2011.

The top-line revenue beat rate for the just-completed reporting period finished at 63.8%.  Over the first three quarters of 2013, market bears often noted the weakness in top-line numbers, but they finished the year strong at least versus analyst estimates.  The 63.8% revenue beat rate was the best quarterly reading we’ve seen since Q2 2011.


The Thomson Reuters Same Store Sales Index is expected to struggle to a 1.0% gain in Q4 2013, which ends Jan. 31 at many store chains. That compares to a 1.7% actual gain in the index during Q4 2012 and would be below the 3% gain that indicates a healthy consumer sector. Excluding Walmart, the expected SSS growth rate for Q4 2013 increases to 1.6%, compared to 1.9% a year earlier.

(…) Of the 75 companies in the SSS index, 29 have reported Q4 results. Of these, 39% exceeded their SSS estimates, while 61% missed them.

In the Thomson Reuters U.S. retail universe, there have been 83 negative earnings per share pre-announcements for Q4, compared to only 18 positive EPS pre-announcements. By dividing 83 by 18, one arrives at a negative/positive ratio of 4.6 for the universe. Expect this to worsen for Q1 2014. To date, there have been 18 negative earnings per share pre-announcements vs. only 3 positive – which brings us to a negative/positive ratio of 6 for the universe.

As a result of the negative guidance, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter. At the beginning of the quarter (November 2013) the Same Store Sales growth estimate for the holiday season was 2.0%. Today, it is 1.0%, as seen in the chart below.



                                                                                                Source: Thomson Reuters I/B/E/S

Confidence in global recovery grows Survey reveals new fears over shortage of skilled labour

The latest FT/Economist Global Business Barometer survey, conducted at the end of January during the peak of concerns about emerging market fragility, shows an uptick in all measures of confidence.

Asked about global business conditions, 49 per cent said they expected them to get “better” or “much better”, a rise of 8 per cent on the previous quarter.

Respondents were more bullish about their individual businesses, with 59 per cent expecting conditions to improve (4 per cent higher than the previous survey) and 43 per cent saying conditions were the same in their respective industries (a 7 per cent rise).

While economic and market risk remained by some margin the biggest perceived threat, there was a notable easing of concern as the percentage citing it dropped to 52 per cent from 65 per cent the previous quarter.

As businesses become more confident, they are concerned about skilled labour. The survey showed that “talent and skills shortages” were slowly increasing, and were cited by 34 per cent of respondents as a risk, closing on “political risk” at 36 per cent. Respondents from North America were most concerned about skills shortages with 39 per cent citing it as one of the biggest worries for their business. (…)

The changing geopolitics of energy By David Petraeus and Ian Bremmer

In yesterday’s FT:

(…) The US energy revolution is far from the whole story. In Mexico, President Enrique Peña Nieto is moving forward with a historic energy-sector reform programme. Though much work still has to be done, it is clear the state-owned oil group Pemex will finally be forced to shed its monopoly and allow production-sharing contracts (and thereby reverse years of declining production). Long lead times for exploration and development of deepwater offshore acreage suggest that large production increases will take time, but the long-overdue Mexican reforms are welcome.

The energy boom also extends to Canada. There, America’s number one trading partner continues to increase production as it also seeks to diversify its market outlets for oil and gas exports, though it clearly will continue to export the vast majority of its oil resources to the US, where it supplies more than one-quarter of crude oil imports. Beyond that, after considerable delay, the Obama administration will probably approve the Keystone XL pipeline this year, providing a useful export route from Canadian oil sands to US refining markets. The cumulative effect of the developments in gas and oil production in the US, Canada and Mexico will be a continent that has much greater energy independence.

Meanwhile, discoveries in Brazil, Colombia, east Africa and elsewhere will come on line, adding to the supply surge.

Even in the turbulent Middle East, oil production capacity will rise this year. In Iraq, deteriorating security conditions in the Sunni Arab areas are hundreds of miles from oil facilities in the south, where the bulk of the country’s oil is produced. Oil production in the rest of Iraq represents less than 15 per cent of total volumes, and almost all of this year’s increases in export capacity will come from southern fields – though markets will watch developments in the Iraqi Kurdish region in the north.

In Libya, central governance is severely challenged, but the country’s competing factions have been careful not to kill the “golden goose” by damaging oil infrastructure. And assuming some deals between regional power brokers and the central authorities, export volumes should increase in the first half of 2014 from a few hundred thousand barrels a day to half or more of their pre-crisis volumes of 1.4m b/d.

Over the course of this year, the negotiation over the future of Iran’s nuclear programme will be the wild card to watch.(…) the more likely outcome will be a further extension of the interim agreement, pushing the issue into next year. If an agreement is reached, gradual oil sanctions relief will delay any resumption of full volumes into 2015, at the least, but supplies would then increase sharply thereafter.

All of these developments are bad news for governments that depend heavily on energy exports for their revenue. The Saudis, for example, who are anxious over the possibility of improved US relations with Iran, are watching this market shift closely, because market pressure to restrain output will leave them with less money to spend on projects meant to safeguard the kingdom’s stability at a time when those outlays are increasing substantially.

Russia has headaches too. When Vladimir Putin became president in 2000, oil and gas accounted for less than half of the country’s export revenue. Since then the percentage is now about two-thirds. Moreover, Russia’s European energy customers will have new options as US liquefied natural gas projects progress and as other potential exporters develop natural gas production. (…)

Venezuela’s troubles are the most immediate of all. That country, mired in its worst economic crisis in 30 years, is already plagued with spiralling inflation, consumer good shortages, power cuts and one of the world’s highest crime rates. And it sold much of its future production to China to generate funds to help win the recent national election. The challenges have accumulated so much that Caracas no longer publishes oil production or export statistics. (…) That is why lower oil prices are a potential disaster for Venezuela’s ruling party – and for Cuba’s Communists, who get by with cheap energy imports from their friends in Caracas. (…)

For decades, shifts in energy markets have reshuffled the deck of geopolitical winners and losers. That is now happening again. The latest trend looks here to stay, and the fallout has just begun.

Obama Budget Plan Reflects Partisan Lines President Obama’s 2015 budget proposal will abandon overtures to Republicans and call for a large expansion in spending on education and job training, in a push certain to ratchet up tensions in the already-fractured capital ahead of November’s elections.

NEW$ & VIEW$ (20 FEBRUARY 2014)

Note: Today, BEARNOBULL.COM also published:

Wal-Mart Offers Weak Forecast Wal-Mart offered a weaker-than-expected forecast for its recently started fiscal year and current quarter, further evidence of its struggles following the holiday-shopping season.

(…) the world’s biggest retailer confirmed its fiscal fourth-quarter earnings came in at the low end of its initial forecast.

Poor weather, an extremely competitive discounting environment and the continued growth of e-commerce weighed on traditional retailers over the holiday season and subsequent weeks. Wal-Mart previously said it experienced a rise in sales during the holiday season, but a weak January negated it.

For the recently started fiscal year, the company estimated adjusted per-share earnings of $5.10 to $5.45, compared with the $5.54 projected by analysts polled by Thomson Reuters.

Wal-Mart projected earnings of $1.10 to $1.20 a share for the current quarter, versus the consensus view of $1.23 a share.

For the fourth quarter, which ended Jan. 31, Wal-Mart posted an adjusted profit of $1.60 a share. Wal-Mart said comparable sales at its U.S. stores, its biggest unit, fell 0.4 percent in the fiscal fourth quarter. Overall revenue rose 1.4 percent to $129.7 billion.

The company in November had projected earnings of $1.60 to $1.70 a share, a range that fell mostly below consensus at the time. Last month, however, the retail giant warned that earnings could underwhelm due to rough winter weather and the consumer impact of food-stamp cuts in January.

Pointing up Considering Target’s own problems, WMT’s performance early in the year looks particularly weak. From the release:

We expect economic factors to continue to weigh on our outlook,” said Holley. “Some of the factors affecting our consumers include reductions in government benefits, higher taxes and tighter credit. Further, we have higher group health care costs in the U.S. These concerns, combined with investments in e-commerce, will make it difficult to achieve the goal we have of growing operating income at the same or faster rate than sales. In October, we forecasted a 3 to 5 percent net sales increase for fiscal 2015. Given these factors and the ongoing headwind from currency exchange, we expect to be toward the low end of the net sales guidance.

Here’s another economic factor affecting WMT’s customers (via ZeroHedge):

The “polar vortex” shock has arrived, only this time it is not in the form of another 12 inches of overnight snow accumulation but in the shape of household utility bills. A reader was kind enough to send us his just received ConEd bill for the month ended February 10. The result speaks for itself. It also speaks for where so much of US household disposable income will go in first quarter. Spoiler alert: not toward discretionary purchases.

And unfrotunately it will get worse before it gets better. On the back of a rapid decline in the “glut” of low cost natural gas (as stockpiles are drawn down to the lowest level since 2004) and the shift in forecast (that the freezing weather could last well into March), Natural gas futures are soaring (up over 10% today). This is the highest front-month futures contract price since December 2008 as “the possibility of periodic shortages now looms.”

And another one:image

And, eventually, that one:

U.S. Producer Price Index is Revamped; Shows a Pickup in Inflation Pressures

The Producer Price Index underwent major revision this month. It now includes prices for final demand of goods, services and construction as well as a reading of intermediate demand prices. The overall final demand PPI rose 0.2% in January (1.2% y/y) following a 0.1% uptick and no change in the prior two months. The 0.4% rise (0.9% y/y) in final demand for goods prices was the strongest gain in six months. A quickened 1.0% rise (-0.7% y/y) in food prices reflected a 1.1% gain (0.7% y/y) for consumers, a 1.4% increase (2.3% y/y) in the government sector and a 0.7% rise (-9.2% y/y) in export prices. Energy prices for final demand increased 0.3% (0.9% y/y). Prices for final demand excluding food and energy jumped 0.4% (1.3% y/y), the quickest monthly increase in two years. Finished core consumer goods prices were even stronger, however, and surged 0.7%. That pulled the y/y increase up to 2.1%.

Measured using the previous formula, which is being phased out as the headline series, producer prices increased 0.6% in January (1.5% y/y) after a 0.4% December rise. Expectations were for a 0.2% gain. Energy prices improved 0.4% (1.6% y/y) and food costs rose 1.1% (0.7% y/y). Prices excluding food & energy increased 0.5% (1.7% y/y) versus an expected 0.1%. Consumer goods prices provided the strength here and gained 0.7% (1.6% y/y) while capital equipment prices rose a moderate 0.2% (1.2% y/y).

FYI, the core PPI’s 0.4% jump in January was on the heels of a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Recall that nonpetroleum import prices also rose 0.4% in January.

We got the CPI this morning.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

Increases in the indexes for household energy accounted for most of the all items increase. The electricity index posted its largest increase since March 2010, and the indexes for natural gas and fuel oil also rose sharply. These increases more than offset a decline in the gasoline index, resulting in a 0.6 percent increase in the energy index.

The index for all items less food and energy also rose 0.1 percent in January (+1.6% YoY).

Interest-Rate Increase on Radar Conversation at the Federal Reserve’s most recent policy meeting turned to something that hasn’t been a serious topic for years: the possibility of interest-rate increases in the near future.

(…) a “few” Fed officials argued at a Jan. 28-29 policy meeting that increases might be needed soon to prevent the economy from overheating, according to minutes of the meeting released Wednesday. These officials were most likely from the Fed’s band of policy “hawks” who have largely failed in resisting the central bank’s easy-money policies. (…)

The officials argued that rules of thumb used by the Fed in the past, which prescribe an interest rate based on movements in the unemployment rate and inflation or economic output and inflation, point to the need for higher rates.

The argument was largely dismissed by other officials. Such prescriptions “were not appropriate in current circumstances,” others argued, because the economy is still emerging from an economic crisis. Moreover, low inflation, which by some measures is a percentage point below the Fed’s 2% target, has many officials oriented toward keeping interest rates down.


If you missed my Monday post (HARD PATCH COMING?), or doubted my analysis:

imageBloomberg’s Economic Surprise Index shows economic activity slowed before the harsh weather in December that is being blamed for recent weaker-than expected data. The slowdown probably reflects payback for over-accumulation of inventories during the second half of 2013 while revised data on retail sales suggest a much softer pace of household spending in the fourth quarter of last year. (…)

Downward revisions to retail sales data going back to November — to a 0.2 percent gain versus the initial estimate of a 0.5 percent increase — also point to a loss in momentum before the start of inclement seasonal factors.

Inventory accumulation was responsible for about 55 percent of nominal growth in the second half of 2013. Given the reduced pace of household spending, this has created an inventory overhang which has affected January industrial production and shown up in February regional manufacturing data. The overhang will probably be enough to restrain first-quarter growth.

In short, the initial estimates of growth made during the final six months of 2013 seem to have exaggerated the true underlying pace of economic activity. While the economy may not be headed for the “springtime swoon” it experienced the past few years, those expecting a burst of private sector activity sufficient to create a
sustained period of 3 percent growth will probably be disappointed.

‘J-curve’ recovery eludes Japan’s Abe Highest trade deficit hints at structural economic change

(…) Quarterly gross domestic product data released on Monday showed output failed to regain momentum at the end of 2013, as many economists had expected it would, largely as a result of weak net exports.

Exports actually declined by volume in January, for the first time in four months, a fall that was partly blamed on lower demand in China during the lunar new year.

“There has been no J-curve,” says one economist close to the government. “It’s been very surprising. We may need to consider whether there’s been a deeper change in the economy, one that means the old assumptions about the costs and benefits of a weak yen don’t apply any more.” (…)

The high proportion of energy in Japan’s imports may be one factor preventing the J-curve from taking shape, experts say. Rising electricity prices have been painful for many, but have not prompted a widespread shift to Amish-style living. Even finding alternatives to the grid can require importing, at least at first: sales of Chinese-made solar cells rose enough in January to add to the trade deficit, according to government data.

An increase in consumer demand ahead of the sales-tax rise is also supporting imports and widening the trade deficit, economists say. That is likely to subside after April, though at a cost to overall economic activity, since the tax rise will hit consumption of domestically produced goods as much as foreign ones.


NEW$ & VIEW$ (19 FEBRUARY 2014)

Empire State Factory Index Backpedals

Click to viewThe Federal Reserve Bank of New York indicated that its Empire State Factory Index of General Business Conditions for February fell to 4.48 from its two year high of 12.51 during January.The latest figure fell short of expectations for a level of 9.5, according to the Action Economics Forecast Survey.

Based on these figures, Haver Analytics calculates a seasonally adjusted index that is compatible to the ISM series. The adjusted figure declined to 50.9, but a rising level of activity is indicated by a figure above 50. Since inception in 2001, the business conditions index has a 67% correlation with the quarterly change in real GDP.

Deterioration in the overall index this month reflected sharp declines in the new orders, shipments and inventories indexes. The number of employees series also slipped marginally. During the last ten years there has been a 75% correlation between the jobs index and the m/m change in factory sector payrolls. Improved readings for unfilled orders and delivery times dampened some of the downward pressure on the overall index. The length of the average workweek reading also gained slightly to its highest level in six months. (Chart from Doug Short)

Pointing up Bespoke Investment has the best juice from the NY Fed report:

The lower chart below shows Technology and Capital Expenditure plans for manufacturers over the next six months.  As shown, both indices declined this month to multi-month lows.  While plans for Technology spending dropped to their lowest levels since last June, plans for Capital Expenditures are down to their lowest levels since July 2009.


U.S. Housing Starts Fall 16% Construction of new homes tumbled in January, the latest sign of cooling in the U.S. housing market as much of the country shivered through a cold and snowy winter.

U.S. housing starts in January fell 16% to a seasonally adjusted annual rate of 880,000, the Commerce Department said Wednesday. That was down from an upwardly revised December rate of 1,048,000 new homes built. Single-family starts for January were down 15.9% to a 573,000 annual pace.

Building permits, a sign of future construction, fell 5.4% to a seasonally adjusted annual rate of 937,000 last month from December’s upwardly revised rate of 991,000.

Home Builders Sour on Market Home builders are losing confidence in the housing market amid severe weather, worker shortages and limited availability of land, according to an industry index.

Builder confidence in the market for single-family homes dropped to 46 in February, down sharply from a reading of 56 a month earlier, the National Association of Home Builders said Tuesday. That was the biggest one-month decline on record and the lowest level since May.

More weather blaming. Look at the NAHB’s headline: Poor Weather Puts a Damper on Builder Confidence in February re-printed just about everywhere. It apparently snowed everywhere (chart from Bespoke Investment):

Activity fell sharply around the country. Activity in the West took the largest hit and the 14 point decline reversed the gains of the prior two months. The index for the Midwest followed with a 9 point drop to the lowest level in 9 months. The 8 point decline in the index for the Northeast lowered it to the lowest point since October. Finally, the 7 point decline in the South repeated its January downdraft.

There are other reasons, however:

“Clearly, constraints on the supply chain for building materials, developed lots and skilled workers are making builders worry,” said NAHB Chief Economist David Crowe.

The HMI breakdown reveals that builders don’t expect the weather to improve much before September at the earliest.

All three of the major HMI components declined in February. The component gauging current sales conditions fell 11 points to 51, the component gauging sales expectations in the next six months declined six points to 54 and the component measuring buyer traffic dropped nine points to 31.


The 4-week m.a. bounced back to +1.7%. Fingers crossed


Will this helps?

Americans Ramp Up Their Borrowing

U.S. consumers late last year drove the largest quarterly increase in credit outstanding since the third quarter of 2007, just before the recession started, according to figures released Tuesday by the Federal Reserve Bank of New York. Household debt, which includes mortgages, credit cards, auto loans and student loans, jumped $241 billion between October and December to $11.52 trillion.

One major factor behind the increase has been the stabilization of the nation’s mortgage debts, the biggest piece of household borrowing. Mortgage debt increased $16 billion in the fourth quarter of 2013 from a year earlier, ending a four-year streak of year-over-year declines. Fewer Americans are filing for bankruptcy or going into foreclosure, moves that bring down mortgage debt.

Meanwhile, more people are borrowing to pay for educations, cars and new homes. All told, overall debt is up $180 billion from the fourth quarter of 2012, the first increase from year-earlier levels since late 2008. Household debt remains 9% below its peak of $12.7 trillion in the third quarter of 2008.

(…) much of the recent rise in borrowing is being driven by student loans. Nearly two-thirds of last year’s overall gain in debt—about $114 billion—was from student loans.

Consumers are showing signs of being more cautious about debt this time around. Tuesday’s report showed new originations of mortgages fell for a second quarter in a row, to $452 billion, likely due to higher interest rates. Auto-loan originations also fell in the fourth quarter, to $88 billion.

imageU.S.: Re-leveraging in the works

Is U.S. deleveraging finally over? Aggregate consumer debt rose by US$241 bn in 2013Q4, the biggest quarterly increase since 2007. Student debt rose again and accounted for roughly a fifth of the increase. But as today’s Hot Charts show, even excluding student loans, household debt rose for the second consecutive quarter in Q4, the first back-to-back increase for that measure since 2008. That’s due to a second straight increase in mortgage loans and a further ramp up in auto loans, the latter hitting a new record in Q4.

The potential for re-leveraging is now starting to be fulfilled thanks to the combination of low interest rates, rising consumer confidence and improving credit ratings, particularly among those with the lowest scores (i.e. those that had been previously shut out of the formal loan market). So, looking beyond near-term weather-related disruptions to economic activity, the outlook for the U.S. economy looks good. (NBF)


(…) In attempting to escape from the consequences of the credit bubbles, and the resulting Great Recession in the developed world, many emerging economies may have ended up creating similar problems of their own. The external financing aspects of the EM problem may well be less than in the 1990s, but the internal aspects could take longer to handle. Credit standards in the EM banking sectors are now tightening markedly, in contrast to the easing now underway in the DMs [2]. This needs to change before growth in the EM economies can recover.

In summary, while the emerging markets may escape the sudden stops of the 1990s, they may be facing a domestic credit crunch instead. (Gavyn Davis)

Winking smile The 1% Don’t Feel The Weather: Ferrari Posts Record Sales In US; Doubled In Jan

First Mercedes, then Porsche, and now Ferrari and Maserati post record US sales in January…



NEW$ & VIEW$ (18 FEBRUARY 2014)

U.S. Ocean Container Exports Decline 18% in January

Reflecting a global economic slowdown, U.S. container export volumes sank 18% in January compared to the same time last year. Container imports, on the other hand, increased 5.1% year over year. Ocean container activity – both imports and exports – increased month to month (exports at 2.9% and imports at 5.8%), but not at the magnitude of the increases we saw in December. The U.S. economy had a fairly strong second half in 2013, but turned sharply downward in December. The slowdown has continued into January and February.

January 2014 container import volumes were 5.1 percent higher than a year ago and at the highest January mark in our index data (since 2010). Import container shipments rose 5.8 percent from December, a significant slowing from the 17.7 percent increase we saw from November to December. The slower growth in import ocean container activity coincides with the start of the drop-off in new orders placed with our trading partners. Imports from China were responsible for most of the growth in December and January, which has been the trend for the last several years.

image image

Auto Europe Auto Recovery Gains Pace

New car registrations, which mirror sales, rose to 935,640 vehicles in January, up 5.5% from the same month a year earlier, according to the Association of European Automobile Manufacturers, known as ACEA.

The rise in January marks the fifth-consecutive monthly increase in demand after six years of declining sales, but ACEA said it was the second-lowest number of cars sold in the month of January since the group began collecting EU-wide data in 2003.

“Most EU markets posted growth, as did all the major ones, from 7.6% in the U.K. and Spain, to 7.2% in Germany, 3.2% in Italy and 0.5% in France,” ACEA said in its monthly release. Car sales rose 33% in Ireland, 32% in Portugal, 15% in Greece, and 7.6% in Spain, some of the countries worst affected by the euro crisis. (…)

Industry analysts remain guarded too about the strength of the upturn.

“Whilst clearly a positive month it was perhaps not as strong as might have been expected and at this point we don’t want to get too carried away,” auto analysts at ISI Group said, citing a 2.8% decline in registrations on a comparable basis month on month. Fewer discounts and incentives in some markets may have contributed to that decline, ISI said.

Rebates and cheap financing stimulated sales in Germany in January, while a scrapping premium in Spain underpinned sales there, said Ernst & Young analyst Peter Fuss.

In contrast, car sales continued to decline in Austria, Belgium, Cyprus, Estonia and the Netherlands. (…)

Bloomberg has the same story but with somewhat different numbers than the WSJ from the same source:

Registrations increased 5.2 percent from a year earlier to 967,800 vehicles, the Brussels-based European Automobile Manufacturers Association, or ACEA, said today. That compares to a 13 percent jump in December sales. The stretch of gains is the longest since a 10-month period ended in March 2010. (…)

Spanish demand for cars has been boosted in recent months by a cash-for-clunkers sales incentive program renewed by the government in October. Dealer discounts in Germany averaged 11 percent in January, the lowest level of price cutting in the past two years, according to trade publicationAutohaus PulsSchlag. Peugeot and Renault together were the second-biggest car discounters in Germany last month, with price cuts averaging 12.1 percent, according to Autohaus PulsSchlag. Dearborn, Michigan-based Ford lowered its prices more than other competitors in Germany with a 12.3 percent reduction, the magazine said.

Bundesbank warns on German house prices Central bank’s move stokes fears of property bubble

House prices in Germany’s biggest cities are overvalued as much as 25 per cent, the Bundesbank warned on Monday, adding to fears that international investment has helped to fuel a property bubble in the eurozone’s largest economy.

The German central bank said that residential real estate prices in 125 cities rose by 6.25 per cent on average last year. In October, it reported that property prices in the biggest German cities were 20 per cent overvalued, suggesting the problem is getting worse. (…)

A report earlier this month from property specialists Engel & Völkers predicted that international investors from Italy, Israel, Russia, the US and China would continue to push residential prices in Berlin up this year, where property remains cheap by international standards. (…)

Taiwan Sees Growth at 3-Year High

The government now expects Taiwan’s gross domestic product to expand 2.82% in 2014, it said Tuesday. This would be higher than the government’s previous estimate of 2.59% and above the 2.11% growth recorded in 2013. The government also revised annual fourth-quarter GDP growth to 2.95% from 2.92%.

“The solid improvement of demand from developed economies will likely continue to boost domestic household consumption,” the government’s Directorate General of Budget, Accounting and Statistics said Tuesday.

“But price competition on electronic components from China is becoming fierce,” clouding the outlook for Taiwan’s exports, the statistics agency added.


BOJ Surprises Markets The Bank of Japan surprised the market by doubling incentives designed to spur bank lending, weakening the yen and lifting Tokyo stocks at a time when the nation’s economy is showing signs of trouble.

In the hope that it will open the spigot for lending to the broader economy, the central bank said it will expand two programs where it offers fixed-rate loans at rock-bottom interest rates to commercial banks. It will also lengthen the duration of the loans, making it easier for financial institutions to profit even in an environment where interest rates are close to zero. (…)

Since the current lending programs don’t expire until the end of March, the policy board could have waited for another month to see whether the recent downturn subsides. Analysts say the sudden action suggests that it wanted to bring calm to the stock market.

The central bank will offer funds at a fixed 0.1% rate for four years through the redesigned lending schemes, instead of the previous terms of one to three years.

While Japan’s bank lending has been increasing recently, cash and deposits held by corporations remain at record levels, their total standing at ¥224 trillion in the July to September period of 2013, the latest data released in December showed.

PBoC drains $7.9bn from money markets China’s central bank uses repos to drain liquidity for first time in eight months

China’s central bank has drained Rmb48bn ($7.9bn) from money markets, an unexpected move that signals its concern with the boom in lending at the start of the year.

The People’s Bank of China withdrew the cash by issuing 14-day bond repurchase agreements. It was its first time using repos to drain liquidity from the money market in eight months.

The central bank typically gauges demand from banks the day before conducting open-market operations, but on this occasion it issued the repos without advance warning, traders said.

The drain follows a jump in bank and shadow bank lending in January. New local-currency loans reached Rmb1.32tn ($218bn) last month – nearly triple December’s total, Rmb200bn more than market expectations and the highest monthly total since January 2010.

It is customary for banks in China to lend most heavily at the start of the year, but the numbers this January were unusually strong even accounting for seasonal patterns.

Analysts said Tuesday’s cash withdrawal indicated that the central bank did indeed have a tightening bias, albeit a mild one.

China Is the No. 1 Gold Buyer Chinese demand for gold soared by 32% to record levels last year, even as the price of gold slumped 28%.

Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013, even as the price of gold slumped 28%.

The surge in buying saw China overtake India as the world’s top consumer of physical gold, importing 1,066 metric tons of the metal to India’s 975 metric tons in 2013, according to new data from the World Gold Council. (A metric ton is equal to about 2,240 pounds.)

In India, consumption increased by 13% but further growth was curbed by import restrictions aimed at narrowing the country’s current-account deficit. The council estimates around 200 metric tons was smuggled into the country. (…)

The sharp rise in Chinese consumption partially offset a steep fall in gold demand elsewhere. While global sales of gold bars, coins and jewelry grew by 21%, gold-backed exchange-traded funds liquidated 51% of their gold holdings, putting 800 metric tons of the metal back on the market. The result was a net year-over-year decline in global gold demand of 15%, according to the gold council report.

Last year’s price slump contributed to a 2% fall in global gold supply, according to the report from the council, which is funded by mining companies. The supply of gold from mining companies increased 5% last year, but gold recyclers held back bringing their metal to market at depressed prices.

Worsening U.S. Divorce Rate Points to Improving Economy

(…) The number of Americans getting divorced rose for the third year in a row to about 2.4 million in 2012, after plunging in the 18-month recession ended June 2009, according to U.S. Census Bureau data. Whatever the social and emotional impact, the broad economic effects of the increase are clear: It is contributing to the formation of new households, boosting demand for housing, appliances and furnishings and spurring the economy. Divorces are also prompting more women to enter the labor force. (…)

Divorces were at a 40-year low in 2009, according to Jessamyn Schaller, an economics professor at the University of Arizona in Tucson, citing data from the federal government’s National Center for Health Statistics. The divorce rate more than doubled between 1940 and 1981 before falling a third by 2009, according to figures from NCHS, based in Hyattsville, Maryland.

The rise in divorces has coincided with an increase in household formation. Almost 5.3 millionhouseholds have been formed in the past four years after the figure slumped to fewer than 400,000 in 2009, according to the Census Bureau. That is bolstering the need for apartments, condos and furnishings.

“Separations and divorce often create additional housing demand by creating two households when there was one,” said David Crowe, chief economist at the National Association of Home Builders in Washington.

About 150,000 divorces were postponed or avoided between 2009 and 2011, said Philip Cohen, a sociology professor at the University of Maryland in College Park who linked breakups to the economic cycle in a January 2014 paper. (…)


NEW$ & VIEW$ (17 FEBRUARY 2014)

Note: Today, BEARNOBULL.COM also published: HARD PATCH COMING?



You have to admit that Disney’s marketing department is amazingly powerful.


Voir l'image sur Twitter


Many will also need to change some of their usual expressions…Including many economists who, like the U.S. economy, find themselves frozen in their tracks.

And tonight I realized
I really have no sense of myself
No way to take it back
I am frozen in my tracks
I’m frozen in my tracks, frozen in my tracks (Tragically Hip)

Worried about softer economic data? Don’t. This is all you need to know: Severe winter masks US economic recovery

Industrial Output Slid in Cold January

Unusually cold weather in January chilled factories’ output and froze up some mining operations but boosted utility consumption as Americans huddled for warmth. Total industrial production fell a seasonally adjusted 0.3% in January, the Federal Reserve said Friday. It was the first decline for the reading since July.

The unexpected drop was “partly because of the severe weather that curtailed production in some regions of the country,” the central bank said. Manufacturing output, the largest component of industrial production, fell 0.8% in January. (…)

Mining production, which tends to be volatile from month to month, fell 0.9% in January. But the category that includes oil and gas extraction was still up 6.7% from a year ago. Again, weather may have contributed to the January drop.

Read that last paragraph again. Feel like I do? Confused smile

But here’s the nugget that explains it all: “Fracking is quite hard when the ground is frozen,” said Mr. Dales of Capital Economics.

Obviously, economics courses don’t dig deep below ground level! ‘Cause a little digging reveals that even though the Fed’s release also blamed the “severe weather” for the weak U.S. January manufacturing numbers, the facts are that:

  • Manufacturing output has been revised downward for each of October through December. The revisions are not insignificant and result in an annualized gain between October and January of only 0.6%. From an other angle, manufacturing output grew by 0.47% monthly on average between August and October 2013, 0.3% in each of November and December, before the 0.8% drop in January. Part of January’s decline is weather-related but the basic trend is clearly not good.
  • Production of Business Equipment fell for the third consecutive month (-4.9% a.r.)
  • Production of construction supplies dropped 1.0% after a 0.6% drop in December. These require lead time and must be related to the housing slowdown.
  • The production of automotive products fell 5.1% in January. Weather-related or due to excess inventories?
Wells Fargo to Ease Mortgage Standards

Franklin Codel, a top mortgage executive at the bank, announced at a real-estate industry conference last week that the bank would begin originating purchase loans backed by the Federal Housing Administration with credit scores as low as 600, down from its previous limit of 640, through its retail channel. (…)

The policy change could lead other lenders to gradually relax standards that were sharply tightened after the housing bust in 2008, said industry executives. Wells Fargo is the nation’s largest mortgage lender and funded more than $356 billion in originations last year, or around 19% of all mortgages, according to Inside Mortgage Finance, an industry newsletter. (…)

Average credit scores on FHA loans for home purchases stood at around 690 in December, down from 700 in 2012, according to Ellie Mae, a mortgage-software firm.


Import Prices Inched Up in January

Overall import prices were up 0.1% last month from an upwardly revised increase of 0.2% in December, the Labor Department said Friday. Despite their recent uptick, import prices in January were down 1.5% from a year earlier.

High five Under the tame headline numbers, here’s the rub: A 1.2% decline in petroleum prices last month offset a 0.4% rise in nonpetroleum prices, the largest increase since May 2011. Last month’s strength in nonpetroleum prices reflected a 0.8% rise (4.9% y/y) in foods, feeds & beverages costs as well as a 0.7% gain in nonauto consumer goods prices.

Pointing up Maverick Sees Inflation After Calling Housing Bust in Recession

Prices in the U.S. may increase more than many expect this year, says David Rosenberg. That’s a 180-degree turn for the economist who not long ago correctly predicted a declining inflation rate, a view now prevalent among his peers.

“This deflation, disinflation, benign inflation story which seems to be everybody’s mindset is really yesterday’s story,” said Rosenberg, 53, chief economist and strategist at Gluskin Sheff & Associates in Toronto. The Federal Reserve, through efforts to spur growth, “is carrying out the mother of all reflationary policies,” he said in an interview. “My bet is the Fed will ultimately get what it wants, and then some.” (…)

Complacency over prices is reminiscent of 2003, when few economists and policy makers foresaw the bout of inflation that caused the Fed to begin raising interest rates in June 2004 and continue for two years, Rosenberg said. He predicts a spurt in prices this year will prompt investors, who now expect interest rates to hold close to zero until the second half of 2015, to change tack. (…)

“You have to expect that as the economy does better inflationary pressures follow suit,” Rosenberg said. “The Fed will purposely lag the cycle, which is why the yield curve has been steepening and will continue to steepen. But at some point the bond market will call the Fed’s bluff and the Fed will have to start raising interest rates.” (…)

“I see all the signs ahead of cost-push inflation — which will become more readily apparent once commodity prices find a bottom,” he wrote. “The next decade is going to look more like the 70s than many think.” (…)

Allan Meltzer, a professor of political economy at Carnegie Mellon University’s Tepper School of Business in Pittsburgh and the author of a history of the Fed, said it’s possible inflation could heat up, but not for the reasons Rosenberg offers.

“Cost-push inflation is bad economics,” Meltzer said, arguing inflation is mainly a monetary phenomenon driven by money and credit growth, not by rising labor and raw materials expenses. Still, he said, “inflation seems likely to rise” because the Fed has in the past been slow to respond.

Rising wage pressures and a drop in the rental vacancy rate signal core inflation is about to turn the corner, said Torsten Slok, the New York-based chief international economist for Deutsche Bank AG. Average hourly earnings for private workers show that once wage inflation takes hold, it continues for several years, he said, citing a four-year surge that began in March 2004 and a five-year spurt from early 1994. (…)

Chinese Capital Markets Frozen As Bad Loans Soar To Highest Since Crisis

Chinese capital markets are quietly turmoiling as debt issues are delayed and demand for “Trust” products – the shadow-banking-system’s wealth management ‘investments’ – is tumbling. As Nikkei reports, since January, 9 companies have postponed or canceled issuance plans (around $1 billion) and is most pronounced in privately-owned companies (who lack an implicit government guarantee). This, of course, is exactly what the PBOC wanted (to instill some fear into these high-yield investors – demand – and thus slow the supply of credit to the riskiest over-capacity compenies) but as non-performing loans in China surge to post-crisis highs, fear remains prescient that they will be unable to “contain” the problem once real defaults begin (as opposed to ‘delays of payment’ that we have seen so far).

Via Bloomberg,

Chinese banks’ bad loans increased for the ninth straight quarter to the highest level since the 2008 financial crisis, highlighting pressures on asset quality and profit growth as the world’s second-largest economy slows.

Non-performing loans rose by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013 to 592.1 billion yuan, the highest since September 2008, the China Banking Regulatory Commission said in a statement on its website yesterday.

Chinese banks are struggling to keep soured loans in check and extend earnings growth as the slowing economy and government efforts to curb shadow financing make it harder for borrowers to repay debt.

“China’s economic growth turned downward with the new leadership switching policy focus to reform and risk management from emphasizing stable expansion,” said Wang Yichuan, a Wuhan-based analyst at Changjiang Securities Co. “Naturally the bad loans will increase along with the change. We expect the deterioration to continue for two more years.”

Chinese banks added 89 trillion yuan of assets, mostly through loans, in the past five years, equivalent to the entire U.S. banking industry’s, CBRC data show. By comparison, U.S. commercial banks held $14.6 trillion of assets at the end of September, according to the Federal Deposit Insurance Corp.

Investors are increasingly concerned that China’s investment through borrowing since 2008 may trigger a financial crisis

Via Nikkei,

Concerns over potential defaults on high-yield financial products are making Chinese companies put some debt issues on hold due to wary investors, as well as posing a potential new risk to the global economy.

Since January, nine companies have postponed or canceled issuance plans for a total of 5.75 billion yuan ($948.24 million) in bonds and commercial paper, equivalent to about 2% of the debt issued over the period.

This is most pronounced among privately operated companies, whose lack of government backing has meant less interest from potential investors than hoped.

Demand has been dulled by worries over defaults on so-called wealth management products, a feature of China’s shadow banking system.

Broader credit risks have driven interest rates up, and the gap between corporate debt and more-creditworthy government bonds is widening. Average yields on AA-rated seven-year corporate bonds reached 8.44% in mid-January.

So even if companies offer bonds, they will be unable to raise money if they cannot pay these higher rates.

“There’s a possibility that the Chinese government will step in to keep the negative impact from spreading,” says Hiromichi Tamura, chief strategist at Nomura Securities, “but if these types of repayment delays continue, they could trigger a global stock market downturn.”

Japan Growth Figures Disappoint

The country’s gross domestic product expanded at an annualized pace of 1% in the October to December period. Economists surveyed by The Wall Street Journal predicted a 2.8% rise.

The figures will likely strengthen concern among Japan watchers already worried about how the country’s domestic-driven recovery will fare once the nation’s sales tax is raised to 8% from 5% in April. They expect at least a temporary chill in demand when the new rate goes into effect.

Though consumers and firms spent less in the quarter than forecast, economists say the number was weighed down mostly by weak demand for Japanese goods abroad. (…) The central bank has forecast firm exports and business investment will propel the economy in 2014 despite the sales tax increase. (…)

Exports grew just 1.7% in the fourth quarter of 2013 after a 2.7% annualized fall in the third quarter, gross domestic product data released Monday showed. (…) A 7% fall in auto exports to the U.S. in December is likely to be a harbinger for what’s to come, industry officials say.


U.S. Margins Call:

Goldman’s research found a range of companies in different sectors making the same points, that cost increases and competition would put a squeeze on profit margins. Companies such as McDonald’s and Nike complained of cost increases – names from Ford Motor through Johnson & Johnson to Schlumberger alerted on competitive pricing. (FT)

Eurozone Profits:

Europe’s earnings season is revealing a continent that is still sickly and at risk of deflation. Revenues of the 122 Stoxx 600 companies to have reported so far were slightly lower – by 0.8 per cent – in the fourth quarter of 2013 than they were a year earlier, according to Thomson Reuters.

From these weak revenues, Corporate Europe extracted far lower profit margins, which for non-financial companies have now dropped back almost to their low levels of 2009. Put poor revenues together with poor margins, and Société Générale’s Andrew Lapthorne shows that Europe’s share of the earnings generated by the MSCI World index (which covers the developed world) has dropped to its lowest level since 1985. (FT)

Brazil’s Economy Seen in a Major Downturn

The central bank’s economic activity index fell 1.35% in December from November, dented by a drop in industrial production and weak retail sales. Economists say the data mean the government is likely to declare that economic growth declined in the year’s last quarter after contracting 0.5% in the third period, suggesting the country had entered a technical recession. (…)

Economists now expect Brazil’s economy to grow as little as 1.5% this year, less than the 2.3% estimated growth for 2013. (…)

But persistently high inflation continues to squeeze Brazilian consumers. Last week, Brazil said annual inflation in January was 5.59%, above the central bank’s target of 4.5. As a result, the central bank has gradually raise interest rates, a move that could slow growth even more. The central bank has raised its base interest rate to 10.5% from 7.25% in the past year. (…)


The Case for 4% Growth Demand for new homes — and the outlook for economic growth — are understated, say these economists. How to play the new boom.

(…) Applied Global Macro Research, an unusually rigorous and prescient group that expects 4% growth in economic output this year and next. The firm’s three economists — Jason Benderly of Vail, Colo., and Carsten Valgreen and Niels-Henrik Bjørn of Copenhagen — cite the ongoing housing recovery for their bullish outlook, arguing that future demand for housing is understated. (…)

Pent-up demand for housing should therefore boost this sector’s contribution to economic growth. The contribution will come directly, via the increase in residential investment, and indirectly, through channels that include the greater purchase of consumer items for the home and a general increase in consumer spending from rising housing wealth. (…)

To these powerful ingredients, add a few others: the feedback effect on consumer spending from rising labor income; the diminished “fiscal drag” from higher taxes and spending cuts; and the likelihood that investment in equipment, another key component of gross domestic product, will heat up in response to strength in these other sectors.


UAW Suffers Big Loss at VW Plant The United Auto Workers union suffered a crushing defeat Friday, falling short in an election in which it seemed to have a clear path to organizing workers at Volkswagen’s plant in Chattanooga, Tenn.

The setback is a bitter defeat because the union had the cooperation of Volkswagen management and the aid of Germany’s powerful IG Metall union, yet it failed to win a majority among the plants 1,550 hourly workers.

Volkswagen workers rejected the union by a vote of 712 to 626. The defeat raises questions about the future of a union that for years has suffered from declining membership and influence, and almost certainly leaves its president, Bob King, who had vowed to organize at least one foreign auto maker by the time he retires in June, with a tarnished legacy.

“If the union can’t win [in Chattanooga], it can’t win anywhere,” said Steve Silvia, a economics and trade professor at American University who has studied labor unions. (…)

The election was also extraordinary because Volkswagen choose to cooperate closely with the UAW. Volkswagen allowed UAW organizers to campaign inside the factory—a step rarely seen in this or other industries. (…)

In addition to letting union representatives into the plant, Volkswagen kept members of management from expressing any views on the vote, and agreed to coordinate its public statements with the union during the election campaign. (…)

The union’s loss adds to a long list of defeats for organized labor in recent years. States like Wisconsin enacted laws that cut the power of public-employee unions, and other states, including Michigan, home of the UAW, adopted right-to-work laws that allow workers to opt out of union membership if they choose. (…)

workers were persuaded to vote against the union by the UAW’s past of bitter battles with management, costly labor contracts and complex work rules. “If the union comes in, we’ll have a divided work force,” said Cheryl Hawkins, 44, an assembly line worker with three sons. “It will ruin what we have.”

Other UAW opponents said they dislike the union’s support of politicians who back causes like abortion rights and gun control that rub against the conservative bent of Southern states like Tennessee. Still others objected to paying dues to a union from Detroit that is aligned with Volkswagen competitors like GM and Ford. (…)

The UAW’s loss in Chattanooga also seems likely to complicate contract talks it will have with the Detroit auto makers in 2015. Right now, GM, Ford and Chrysler pay veteran workers about $28 an hour, and new hires about $15 an hour, and the UAW wants to narrow that gap.

But without the ability to push wages higher at foreign-owned car plants, the UAW is likely to have little leverage in Detroit, said Kristin Dziczek, director of the Labor & Industry Group at the Center for Automotive Research in Ann Arbor, Mich.

“They have to organize at least one of the international auto makers in order to attempt to regain bargaining power with the Detroit Three,” she added.


NEW$ & VIEW$ (14 FEBRUARY 2014)

Storm cloud  Retail Sales Fall, Point to Slowing Growth Retail sales fell sharply in January, marking the second straight monthly decline and the latest sign the U.S. economy stumbled into 2014.

An economic recovery that looked poised to lift off is reverting to its characteristic sluggishness as gauges of shopping activity, job creation, wage growth and factory output flash yellow.

And it’s more than just the weather that’s behind the malaise.

The latest warning sign came Thursday in a Commerce Department report showing a 0.4% drop in retail sales in January from a month earlier, the sharpest decline in a year and a half. Americans cut back on a broad swath of goods including cars, furniture and clothing.

Another Sales Slip

Punch I will come back to this next Monday as it looks like more than a soft patch…

Euro-Zone Recovery Picks Up Slightly GDP growth in the final quarter of 2013 remained below the pace needed to make a dent in high unemployment or alleviate debt burdens in southern Europe.

Gross domestic product increased 1.1% at an annualized rate during the fourth quarter, the European Union’s statistics office said, the third-straight quarter of growth. GDP was up 0.3% from the third quarter on a nonannualized basis. For 2013 as a whole, GDP fell 0.4%.

German GDP, which accounts for 30% of the euro-zone total, expanded 1.5% at an annualized rate. The region’s second-biggest economy, France, expanded at a 1.2% annualized rate after stagnating the previous quarter. Italy’s GDP expanded for the first time since 2011, though just barely—0.5% at an annualized rate.

Wells Fargo edges back into subprime as U.S. mortgage market thaws

The bank is looking for opportunities to stem its revenue decline as overall mortgage lending volume plunges. It believes it has worked through enough of its crisis-era mortgage problems, particularly with U.S. home loan agencies, to be comfortable extending credit to some borrowers with higher credit risks.

The small steps from Wells Fargo could amount to a big change for the mortgage market. After the subprime mortgage bust brought the banking system to the brink of collapse in the financial crisis, banks have shied away from making home loans to anyone but the safest of consumers. (…)

So far few other big banks seem poised to follow Wells Fargo’s lead, but some smaller companies outside the banking system, such as Citadel Servicing Corp, are already ramping up their subprime lending. To avoid the taint associated with the word “subprime,” lenders are calling their loans “another chance mortgages” or “alternative mortgage programs.” (…)

It is looking at customers with credit scores as low as 600. Its prior limit was 640, which is often seen as the cutoff point between prime and subprime borrowers. U.S. credit scores range from 300 to 850. (…)


Central bankers and many economists are beginning to think that the decline in the labour participation rate may be a secular phenomenon. If so, the actual supply of labour is much less than generally believed. Inflation is not exclusively demand-pull, it can also be the result of diminished supply. Here’s a real world example, happening right now:

imageTruckload linehaul rates paid in January increased 2.9% year over year, resulting in the largest year-over-year increase in linehaul rates since last February. Recent spot market data, combined with increasing demand and high number of trucking companies exiting the market, all seem to indicate that rates – both contracted and in the spot market – will continue to rise.

In his January analyst report, Donald Broughton stated: “We believe that persistent cost pressures, relatively tepid demand, soft pricing, increasing regulatory pressure, and a less robust used truck market have taken their toll on smaller carriers over the last two years.” As a result, the number of trucking companies that went out of business in 2013 exceeded that of the prior two years combined.

The Association of American Railroads reported that intermodal volumes rose 6.8%, 7.8%, and 8.0% in Oct, Nov, and Dec respectively. Truckload costs are increasing. Inevitably, then, intermodal costs will also rise. In January, total imageintermodal cost per mile was 1.7% higher than in January 2013.

“Although we expect the pricing dynamic in intermodal to remain competitive and see linehaul rates remaining relatively flat in the near term, we do believe that intermodal pricing could increase modestly in 2014 if truckload capacity continues to be squeezed,” stated the most recent Cass Intermodal Price Index report from Avondale Partners.

It added that there is a high degree of correlation between truckload and intermodal pricing.

To be monitored because transportation costs tend to filter through retail pricing.

China Inflation Holds Steady

China’s consumer-price index rose 2.5% year-over-year, data released by the National Bureau of Statistics on Friday showed, matching December’s pace.

Meanwhile the producer-price index, which represents prices paid for finished goods at the factory gate, registered deflation for the 23rd consecutive month. The index fell 1.6% year-over-year after a 1.4% drop in December.

Mixed Signals From Central Bankers on Long-Term Jobless

Central bankers aren’t telling a consistent story about the relationship between long-term unemployment, slack in the economy and inflation.

In her testimony to Congress Tuesday, Federal Reserve Chairwoman Janet Yellen said high levels of long-term U.S. unemployment signaled high levels of slack in the economy which will keep inflation low. “The fact that we have very long spells of unemployment — almost 36 percent of those unemployed who are in very long spells of 26 weeks or more — really suggests that the job market is not strong enough to be able to provide people with jobs who want to work,” she said. “It’s a mark that there’s a great deal of slack in the labor market still that we need to work to eliminate.”

In presenting the Bank of England’s quarterly inflation report on Wednesday, Gov. Mark Carney said falling levels of long-term unemployment in the U.K. was a sign there was more slack in the economy than previously thought.
“A substantial share of the fall in unemployment has been driven by a fall in the number of long-term unemployed,” he said. “That means a lower level of unemployment is consistent with stable inflation.” In its report, the BOE reasoned that people who have been out of jobs for a long-time tend to become disconnected and disappear from the labor force altogether. The fact that they’re now coming back in the U.K. suggests there is a greater supply of labor than previously thought and that the economy can tolerate a lower unemployment rate than thought without causing inflation.

Confused smile Let’s get this straight. On one side of the Atlantic a central banker says high levels of long-term unemployment points to slack. On the other side of the Atlantic a central banker says falling levels of long-term unemployment points to slack. It’s a complicated story they’re telling, and suggests economists don’t well understand the relationship between long-term unemployment, labor supply and its connection to inflation. (By Jon Hilsenrath)

Norway’s Central Banker Urges Shift in Sovereign Wealth Fund Investments.

Norway’s central bank governor said Thursday the nation’s huge sovereign-wealth fund should be allowed to increase exposure to assets such as equities and infrastructure and trim back on bonds to find a better balance between improving returns and hedging against risk. Øystein Olsen said in an interview that cutting the bond exposure of the fund, also known as the oil fund, to between 20% and 25% of its holdings from the current 35% could be appropriate.

Big Turnaround in Market Sentiment as Week Closes

The week seems to be ending with an almost complete turnaround in sentiment. After the gloom of January and the first week of February, markets have rallied around the world. Going into Friday, the mood continues to be lifted, this time with positive GDP data in Europe and news that Italy has gotten itself a new government the driving forces.

Bears Go Back Into Hibernation

Did you notice that bears are down near the lows while the bulls are midway? Here’s another way to look at it: “Dunno”!”

For the four weeks ended last week, survey respondents expecting little change in stock prices amounted to 59 percent of those calling for gains or losses. The figure, based on the market outlook for the next six months, was the highest since March 2003. (ZeroHedge)


Airplane  And these guys fly us all over! Airbus Buys Bank The European aircraft maker said it has bought a small German lender, part of its plan to create an in-house bank to improve its access to credit. Confused smile


NEW$ & VIEW$ (13 FEBRUARY 2014)

Note: BEARNOBULL.COM also published: LADIES’ TURN (II)

USDA Projects U.S. Net Farm Income to Decline 27% in 2014 Federal forecasters expect U.S. farm income to decline 26.6% to $95.8 billion this year due to a sharp drop in corn and soybean prices.
Falling Property Values Hint at Trouble on the Farm Plummeting prices for corn and soybeans are weighing on land values and threatening a yearslong boom for U.S. growers.

(…) From 2009 to mid-2013, average prices for agricultural land in the U.S. rose by half, while in Iowa, Nebraska and some other Midwest farm states, prices more than doubled, according to U.S. Department of Agriculture data from last August. That helped fuel economic prosperity across the Farm Belt while stoking fears about a possible bubble.

Now there is mounting evidence the boom is fizzling out. Farmland prices in Iowa fell 3% over the second half of last year, and those in Nebraska fell 1%, according to estimates from the Farm Credit Services of America, an Omaha, Neb., lender that calculates weighted averages based on land quality. Reports from U.S. Federal Reserve Banks across the Midwest late last year showed prices flattening or slipping from the previous quarter. A monthly survey of Midwestern lenders by Omaha-based Creighton University in January found the outlook for farmland and ranchland prices was the weakest in more than four years.

Despite the falling property values, agricultural analysts say a repeat of past farm-belt collapses is unlikely. Farmer income is expected to remain strong and debt levels are low, according to USDA figures.

But prices have plunged for corn, a key U.S. crop. After rising to all-time highs in 2012—driven by growing demand and tight supply because of a historic drought—prices for the biggest U.S. crop dropped 40% last year, thanks to a record harvest of 14 billion bushels. The Federal Reserve warned in January that corn prices, then around $4.28 a bushel, won’t cover farmers’ anticipated cost of raising the crop this year. Prices have since climbed to about $4.40 a bushel, compared with about $8.31 in August 2012.

Soybeans, the nation’s No. 2 crop, have also lost value. Meanwhile, with the Fed scaling back its stimulus efforts, buyers of U.S. farmland face the prospect of higher interest rates after years of cheap borrowing.

The shifts have forced farmers to recalculate the value of productive land. (…) Falling land prices could cause economic ripples, curbing farmers’ ability to borrow money to buy new acreage, crop supplies or machinery. (…) A pullback in farmers’ spending could curtail construction of grain bins and livestock facilities as well as purchases of new machinery. Tractor company Deere & Co. predicted Wednesday that sales of farm equipment in the U.S. and Canada this year would decline 5% to 10% from 2013.(…)

The economic picture in the Farm Belt is expected to worsen. The USDA forecast Tuesday that U.S. farm incomes will dive 27% this year from 2013, to $95.8 billion, which would be the lowest level since 2010. Last year’s total was the highest since 1973 on an inflation-adjusted basis, but the continued slump in grain prices is expected to this year outweigh the benefits of having more corn and soybeans to sell. Still, even with the expected decline, the USDA reckons incomes will remain $8 billion above the previous 10-year average.

Michael Duffy, professor of economics at Iowa State University in Ames, Iowa, projects lower income for farmers could drive the price of farmland down 20% to 25% over the next several years. (…)

Southland Home Sales Drop in January; Price Picture Mixed

Southern California logged its lowest January home sales in three years as buyers continued to wrestle with a tight inventory of homes for sale, a fussy mortgage market and the highest prices in years. The median price paid for a home dipped from December – a normal seasonal decline – but remained 18 percent higher than January last year, a real estate information service reported.

A total of 14,471 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 21.4 percent from 18,415 in December, and down 9.9 percent from 16,058 sales in January 2013, according to San Diego-based DataQuick. (…)

Last month’s Southland sales were 17.3 percent below the average number of sales – 17,493 – in the month of January since 1988. Sales haven’t been above average for any particular month in more than seven years. January sales have ranged from a low of 9,983 in January 2008 to a high of 26,083 in January 2004.

“The economy is growing, but Southland home sales have fallen on a year-over-year basis for four consecutive months now and remain well below average. Why? We’re still putting a lot of the blame on the low inventory. But mortgage availability, the rise in interest rates and higher home prices matter, too,” said John Walsh, DataQuick president.

“Two of the bigger questions hanging over the housing market right now are,‘How much pent-up demand is left out there?’ and, ‘Will inventory skyrocket this year as more owners take advantage of the price run-up?’” Walsh continued. “Unfortunately, we’ll probably have to wait until spring for the answers. When it comes to statistical trends, January and February are atypical months that haven’t proven to be predictive over the years.” (…)

China auto market growth slows sharply in January

Growth in China’s auto market slowed to 6 percent in January, a third of the rate seen in December, partly weighed down by sluggish sales of commercial vehicles likes trucks and buses.

The relatively slow growth in the world’s biggest auto market was also due to the week-long Chinese New Year holiday, or Spring Festival, starting at the end of January that resulted in fewer working days compared with 2013, analysts said. Most dealers close during the holiday, which fell in February last year.

The China Association of Automobile Manufacturers (CAAM) said on Thursday passenger vehicle sales rose 7 percent from a year earlier while commercial vehicle sales, which make up around 15 percent of the entire auto market, were virtually flat.(…)

The overall market grew 17.9 percent in December last year and ended the 2013 year with a growth rate of 13.9 percent. (…)


IEA Cuts Emerging-Market Demand Forecast

In its closely watched monthly oil market report, the International Energy Agency, which represents some of the world’s largest oil consumers, said it trimmed its oil-demand forecast for developing countries by 80,000 barrels a day in the first quarter. (…)

Still, the IEA Thursday slightly increased its overall demand forecast for the year by 125,000 barrels a day to 92.6 million barrels a day, citing improving prospects for the U.S. economy. (…)

Oil prices: well managed, behaving well:

 image image

Report warns of excess supply of rental units in Toronto and Vancouver

(…) The large number of condos that are still being built in both of those cities will lead to an excess supply of rental units in the coming years, and will likely cause their condo vacancy rates to rise by 0.3 to 0.4 percentage points, Mr. Tal adds. The shift is significant considering that Toronto and Vancouver boast the lowest overall vacancy rates outside of Alberta. But it will not be enough to derail the housing markets in those cities or cause a sharp drop in rents, Mr. Tal predicts. (…)

Mr. Tal says vacancy rates will probably rise in the coming few years and rent inflation will ease. “But a careful analysis of the magnitude of the projected supply/demand mismatch suggests a much gentler adjustment than feared by many,” he writes.

The Calgary area has a vacancy rate of 1 per cent, and Toronto and Vancouver are each at 1.7 per cent. The majority of Canadian cities, accounting for about 45 per cent of the population, have higher vacancy rates, stretching from 2.5 per cent in Winnipeg to 11.4 per cent in Saint John.

Mr. Tal estimates that the average number of people per rental unit in big cities last year was 2.1, down from 2.4 10 years earlier. The trend toward smaller families and one-person households has raised the demand for rental units by close to 10 per cent during the past decade.

When you add it all up, the picture that emerges is of a market that reached its peak at a national level in 2012, and is now beginning a moderate decline, Mr. Tal says.

Veritas Investment Research analyst Ohad Lederer published a report in November arguing that Toronto’s rental market might be at an inflection point. “We believe recent claims of robust rental market increases should be taken with a grain of salt,” he wrote.

“In one possible scenario, the Toronto rental market may no longer absorb supply as it comes on stream, resulting in lower rents and increasing cash outflows for landlords, who then decide to sell, at first in a trickle and then in a thunderous herd,” he added. “In this scenario, condo prices could drop dramatically, given relatively small unit sizes that do not attract a wide segment of potential buyers and the already weak underlying fundamentals.”

Mr. Tal says the “real challenge for investors down the road won’t be falling rents, but rather higher financing or opportunity costs when mortgage rates eventually rise.”


S&P updated its earnings score sheet as of Feb. 10 with 358 (79%) S&P 500 companies having reported Q4 results. The beat rate is 66% and the miss rate 23.5%, in line with Q3’13 results. Beat rates are particularly high in IT (76%) and Financials (72%). Excluding these two sectors, the beat rate drops to 61.8%, down from 64.4% in Q3.

Q4’13 operating EPS are now seen reaching $28.70, down $0.53 in the last 10 days. Trailing 12 months EPS would thus total $107.75, up 5.4% from their level after Q3’13 and up 11.3% YoY. Revenues are up 5.7% YoY in Q4, bringing operating margins to a new record of 9.85%.

We have had 18 additional reports in the last 3 days. With 84% of the S&P 500 market-cap in, the picture is almost complete. RBC Capital does an excellent job monitoring and analysing earnings. Total revenues are up 2.2% (+2.4% ex-Financials) and EPS are up 7.8% (4.6%). Where it gets interesting is in the breakdown between domestically and globally oriented companies (ex-Fin) which are roughly 50-50 in the Index. RBC calculates that domestic companies revenues grew 4.4% in Q4’13 vs 2.1% for global companies. Domestic profits grew 10.3% vs 4.3% for global companies.

Back to S&P numbers: estimates for Q1’14 are fairly stable at $28.01, up 8.7% YoY and only $0.12 lower than 10 days ago.

With trailing 12m EPS reasonably solidly set at $107.75 (only about 100 companies to be tallied), the Rule of 20 sets fair value at 1972 (20 minus core CPI of 1.7% = Rule of 20 P/E of 18.3 x 107.75, January CPI will be released Feb. 20). Fair value is thus 8.3% above current level.

Equity markets had a brief 5.8% setback in recent weeks (U.S. growth scare and EM rout) but are now realizing that earnings are still rising, inflation remains subdued, interest rates are kept excessively low and the financial heroin keeps flowing albeit at a somewhat reduced rate. Note how the Rule of 20 Fair Value (yellow line on chart) has spiked thanks to rising trailing earnings.


Downside? 1715 on the rising 200 day m.a., which is also 17.5x on the Rule of 20 P/E (half way between 15-20), some 6% below current levels. Trailing 12m EPS could rise another 2% to $110 after Q1’14.

So 8-10% upside to fair value, 6% downside to fundamental and technical resistance. Not bad. Yet, there is this soft patch risk. How soft a patch? How soft Europe? How bad China? Dunno, but watching carefully. Today’s earnings headlines are nothing to reassure:

    Europe MSCI Revenues Remain Downbeat

    The forward revenues of the EMU MSCI is also falling, and has been doing so at a faster pace recently, suggesting that the region may be especially hard hit by weaker growth among emerging economies. The only good news is that the forward profit margin seems to have bottomed early last year and is recovering slowly.

    Punch FT’S GAVYN DAVIES (A dose of humility from the central banks)

    (…)  past week, we have had major statements of intent from Janet Yellen, the new US Federal Reserve chairwoman; from the European Central Bank; and from the Bank of England. After multiple hours of fuzzy guidance about forward guidance, the clarity of previous years about the global policy stance has become much more murky. Central banks are no longer as obviously friendly to risk assets as they once were – but they have not become outright enemies, and they are unlikely to do so while they are concerned that price and wage inflation will remain too low for a protracted period.

    It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week.

    The first point to make about Ms Yellen is that she has declared herself to be the agent of continuity not the harbinger of a significant regime shift at the Fed. (…)Economists at the Fed, like the Congressional Budget Office, have been moving towards supply-side pessimism, implying that more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.

    There are also signs of supply-side pessimism at other central banks.

    The BoE’s latest Inflation Report has reduced productivity growth projections, and says that the amount of spare capacity in the economy is only 1-1.5 per cent of GDP, despite the fact that the level of GDP is still below the 2008 peak. To the extent that its latest phase of forward guidance is decipherable, the BoE seems to be eager to reassure markets that the bank rate will rise very gradually, and to a low end point, but it does not fully eliminate the possibility that the first UK interest rate rise will come this year.

    The ECB also has a pessimistic view of the supply side, which explains why it does not see any urgent need for a big monetary policy change as inflation drops towards zero. That does not mean it will refuse to cut interest rates into negative territory next month. My interpretation of the supposedly “neutral” steer from Mario Draghi’s press conference on Thursday last week is that the ECB president said only that more information would be needed before action would be taken. That information would come in the form of the ECBs inflation forecast for 2016, which would be published earlier than usual.

    A sensible guess at that forecast can be made, given that it will depend on market forward rates for oil prices, which are falling. JPMorgan reckons the likely forecast for eurozone inflation in 2016 will be 1.5 per cent, compared with 1.2 per cent in 2015. That seems to offer Mr Draghi enough evidence of a prolonged period of exceptionally low inflation, which is what he needs to get the German Bundesbank to support action. But it does not point to a threat of outright deflation, without which ECB balance sheet expansion looks improbable. Mr Draghi went out of his way to differentiate between these two different states of the economy last week.

    Pointing up If the central banks are becoming more pessimistic about the supply side, this could spell danger for markets that have perhaps already priced in a strong medium-term recovery in GDP towards previous trends. Without the prospect of this GDP recovery, the high share of profits in current GDP could start to pose problems, especially if the central banks are expected to raise short rates within a year or two. Regardless of the path for short rates, asset purchases are petering out everywhere except in Japan, and Chinese liquidity withdrawal is adversely affecting Asian monetary conditions.

    Yet the prospect of genuinely hostile central banks for markets still seems some way off. Above all else, policy committees seem highly uncertain about the right path for interest rates now that asset purchases are ending. But there is an emerging degree of consensus that global inflation, notably wage inflation, remains inconsistent with their mandates.

    The Romers wrote: “Central bankers should have a balance of humility and hubris.” At present, they seem to be leaning towards humility about what they know and can achieve. In an environment of unavoidable doubts about the labour market constraints that they are facing, it seems that they will let wage inflation increasingly act as the judge and jury for the stance of policy. Their latest refrain is that inflation will return to target, but only over a prolonged period, and that wage inflation will be the crucial signal.

    Only when wage inflation starts to rise should markets really start to worry.

    So, our central bankers are quietly acknowledging that labour supply may be lower than previously thought. That has been my point in recent months. In the same FT today:

    German companies court older workers Labour shortages force employers to offer incentives

    (…) “German companies are facing a labour shortage. It is difficult for them to get competent, highly skilled employees,” said Nils Stieglitz, professor of strategic management at Frankfurt School of Finance and Management. “One way to compensate is to extend the lifetime of their employees.”

    As a consequence, Prof Stieglitz said, pressure was mounting on German employers to offer a better work-life balance to retain older employees. (…)

    As governments across Europe have pushed through plans to raise retirement ages, Germany, the continent’s strongest economy, has taken a step in the opposite direction.

    The country recently unveiled draft legislation to lower the retirement age to 63 for workers such as Mr Brockmann who have contributed to the system for 45 years.

    The government estimates that, each year, about 200,000 workers will be able to retire early under this legislation – a proposal that will cost €60bn between its planned introduction in July and 2020.

    The remainder of the workforce will be required to keep to the current retirement age, which is being raised from 65 to 67. (…)

    The plan has also been criticised by German business leaders, who have had to work hard in recent years to hang on to older employees.(…)

    Germany’s working-age population is expected to fall 7 per cent by 2025, according to projections from the United Nations Population Division, in part because German women have been having too few babies for more than 40 years.(…)

    Finally, my suspicions on January’s U.S. employment report are shared by David Rosenberg:

    It’s ‘as if 100,000 service-sector jobs went missing,’ Rosenberg says

    David Rosenberg, chief economist and strategist of Gluskin Sheff, says the weakness in the data came on the services side of the ledger — which doesn’t make sense to him when looking at both the ISM and ADP surveys. The employment component of the ISM services index was a strong 56.4% in January, and ADP said 160,000 private-sector services jobs were created during the month. “It’s as if 100K service sector jobs went missing in the payroll report,” he said.

    (In the chart, the blue bar represents what the Labor Department says of private-sector services employment, and the red bar is ADP’s tally.)

    He said the headline number “did not pass the proverbial sniff test,” and that the strong showing of the household survey is closer to the mark and more consistent with what actually is going on in the economy.