NEW$ & VIEW$ (29 APRIL 2013)

[image]Growth Stays Soft  The U.S. economy perked up in the first quarter, but federal budget cuts and caution by businesses highlighted mounting pressures that could weaken the recovery again in the coming months.

The nation’s gross domestic product, the broadest measure of goods and services produced across the economy, expanded at an annualized 2.5% pace in the first three months of the year after growing just 0.4% in the fourth quarter.

First Look at the First Quarter

The Sinister Season  Once again, the economy appears to be slowing in the spring, despite predictions to the contrary.

(…) The spring of 2013 appears to be following the script from 2012, and 2011, and 2010. Do you sense a pattern here? Keen-eyed Stephanie Pomboy, who runs the MacroMavens advisory, does, and it seems to be recurring right on schedule. “Everything from purchasing-manager surveys (both regional and national) to retail sales and employment to durable goods and consumer sentiment has taken a sudden and significant turn for the worse,” she writes. And, just in case it’s déjà vu all over again, she reminds her subscribers that stocks slid 10% in eight weeks last year. (…)

The Standard & Poor’s 500 is up some 16% from its November low, while the breadth of economic indicators (specifically Citigroup’s U.S. Economic Surprise Index, which tracks better-than-expected indicators versus downside surprises) peaked well short of the highs seen in the spring in 2012, 2011, and 2010. And it is rolling over yet again.

What’s more worrisome is that the “cornerstone of the bull case for the economy” — housing — shows signs of sputtering, Pomboy points out. (…) But recent housing indicators contrast with the stocks’ performance. “Existing home sales and single-family starts both disappointed, while new-home sales rose a modest 1.5% on the back of a 6.8% decline in price,” Pomboy writes in her latest note to clients. “At the same time, mortgage applications for home purchase, the best window into noninvestment buying activity, continue to hover just above their crisis lows. While the going story is that the problem is insufficient inventory, the folks in the business of creating said stock aren’t quite so sanguine. The NAHB Index of home-builder sentiment has declined three months in a row, a fact which would be troubling enough were these not three months that seasonally tend to see sentiment rise” (her emphasis).

Will Consumers’ First-Quarter Party Lead to Second-Quarter Hangover?

Markit offers little encouragement:

image(…) even this weaker-than-hoped growth rate exaggerates the true underlying momentum in the economy, as growth of final demand slowed compared with the fourth quarter. (…) just as the weakness of the headline number in the fourth quarter understated the true health of the economy, the upturn in the first quarter exaggerates the pace of recovery. Excluding inventories, growth was just 1.5% compared with 1.9% in the fourth quarter.

The concern is that growth could weaken again in the second quarter as the economy once again sees a ‘spring swoon’. Markit’s flash Manufacturing PMI fell sharply in April, signalling the weakest pace of expansion since last October. The disappointing PMI suggests that the boost to the economy received in the first quarter from the 1.3% increase in manufacturing output may not be repeated in the second quarter. Official data have already pointed to a weakening of the manufacturing sector in March.

The main problem facing the manufacturing sector in the second quarter is slower export sales, after flash PMI surveys indicated a general darkening of the global economic climate in April. This points to a waning of the growth impetus received from foreign demand: exports increased at a rate of 2.9% in the first three months of the year, reversing a 2.8% fall in the fourth quarter.

Things seem to be getting worse

  • Most U.S. PMIs declined recently, the ISM (51.3, down abruptly from 54.2) flirting with the 50 level where it was in November and December 2012. China’s PMI has been hovering just above 50 for 5 consecutive months while the  Eurozone PMI remains deeply negative.

  • Even the PMI Services are getting weaker.

  • Economic surprises have turned negative across the world.

  • Most industrial commodity prices have been weak lately.

  • imagePrice Drop Pinches Steelmakers 

    Steel prices have unexpectedly fallen 5% in the past month, setting off a scramble among steelmakers to maintain prices and market share despite a nationwide steel glut.

(…) In recent weeks, however, things got so bad—with some price offers slipping to as low as $570 a ton on benchmark hot-rolled coil, down from $640 a ton at the beginning of the year—that at least three large steelmakers announced they were suspending these discount programs.

  • ISI Company surveys show signs of peaking




Piaget Remains Upbeat on China

Executives at Compagnie Financiere Richemont’s Piaget watch-and-jewelry brand remain upbeat on China’s luxury demand despite a recent hurdle.

(…) “We talk a lot about slowdown and many people say that stores in China are empty, but if you look at stores all over the world, they are full of Chinese who are buying,” said Mr. Leopold-Metzger. (…)

But in recent months, Beijing’s crackdown on gift-giving and showy government displays of wealth has taken a toll on high-end timepiece demand. Swiss watch exports to China, the world’s No. 3 market for Swiss watches, fell nearly 26% in the first three months of the year, according to the Federation of the Swiss Watch Industry. (…)

French luxury company Hermès InternationalRMS.FR -1.78% SCA recently reported its slowest revenue growth in more than three years due in part due to a watch-sales decline from China, executives said.

China’s April flash MNI was stable at 58.5 (58.2 in March) but ISI’s seasonal adjustment shows that it declined to 52.8 in April.


But China’s data also point to a weaker rather than a stronger spring. HSBC’s flash PMI fell to 50.5 in April. ISI says freight traffic rose 7.8% YoY in March, down from +9.6% in Jan-Feb combined.

Japan Signals More Stimulus Before Vote

Japan’s chief cabinet secretary says the economy is about to get a new dose of fiscal spending as the Abe administration looks to maintain its momentum heading into elections.


Eurozone economics are also getting worse, if that’s possible. Zerohedge:

(…) As European macro data in the last month has plunged at its fastest rate in 6 years, equity markets have, of course soared back to near multi-year highs (EuroStoxx 600 up 5% in the last week alone). We only hope that the equity markets really do know something different this time – as opposed to the last two times we saw this kind of disconnect. The answer –Draghi’s ‘whatever it takes’ promise is maintaining a 30% illusion of wealth in European equities over their macro reality.

It’s different this time – the disconnect that we have seen twice before in the last 5 years is ‘transitory’


ECB data on bank lending confirm that no change in trend is imminent. Loan demand keeps falling and credit conditions remain tight.


(Capital Economics)

France needs a scapegoat:

French socialists attack ‘selfish’ Merkel
Leaked document reveals tensions between two countries

(…) “The [European] project is today battered by a marriage of convenience between the Thatcherite leanings of the current British prime minister – who only conceives of a Europe à la carte and of rebates – and the selfish intransigence of Chancellor Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future.” (…)

“French socialists want Europe. What they fight is a Europe of the right and its triptyque: deregulation, deindustrialisation and disintegration,” the document said.

Italy found a saviour:


Italy’s Progress Fuels Recovery

Markets applauded political progress in Italy, extending a rally in stocks and allowing Rome to secure the lowest funding cost at a debt auction in over two years.

Italy auctioned €3 billion ($3.91 billion) of five-year bonds and €3 billion of 10-year bonds. The yield on the five-year debt was 2.84%, down from 3.65% at the last debt auction March 27, while the ten-year yield was 3.94%, down from 4.66%. The yields mark the lowest funding costs Italy has achieved at a debt auction since October 2010. Demand was also up strongly compared with the country’s last auction.

The yield on traded 10-year Italian bonds fell 0.08 percentage point to 3.975%, within a whisker of the 3.895% low yield seen last week, according to data from Tradeweb. (…)

Lightning  The weakness in the economy was highlighted Monday by a survey from the national statistics institute Istat showing that Italian manufacturing confidence dropped in April, reversing the positive trend seen in the previous three months, on a worsened outlook for production. The drop reflects a deterioration from an already low level of expectations for new orders and a decline in the general outlook for production, Istat said.

[image]Euro-Zone Firms Lose Confidence

The European Commission, the executive arm of the European Union, said Monday that confidence fell among businesses across the industrial, services, retail and construction sectors. Its business climate indicator fell to minus 0.93 in April from minus 0.75 in March, marking the lowest level since November. (…)

The commission’s survey showed the mood worsening among businesses and consumers as a whole in several countries considered to be among the euro zone’s strongest, such as Germany, France, Austria and Finland, as well as some that have suffered most during its fiscal crisis. Confidence fell in Italy, and plunged in Cyprus.


Companies Feel Pinch on Europe Sales

Hiding behind the profit gains of America’s biggest companies is a worrying slowdown in sales growth, reflecting the combined effects of Europe’s malaise, a stronger dollar and sluggish consumer spending.

(…) imageWith earnings reports in from more than half the companies in the Standard & Poor’s 500-stock index, first-quarter revenue for the group is expected to shrink 0.3% from a year earlier, according to Thomson Reuters. That would cut short the sales improvement reported at the end of last year and mark the third quarter out of the past four in which revenues have failed to grow by 1% or more. (…)

One big problem for U.S. companies is Europe. Executives weren’t expecting much from the region last quarter. But many found conditions tougher than anticipated. And some of them are increasingly worried that while Southern Europe’s hardest-hit countries may be bottoming out, there is room left for the bigger economies like France and Germany to deteriorate. (…)

The European Union accounts for about a fifth of the global economy, and Deutsche Bank estimates about 17% of the profit and revenue for companies in the S&P 500 comes from Europe. (…)

General Electric Co. watched conditions in Europe fall through its forecasts early this year. Orders had risen at the end of last year. But by the middle of the first quarter, they were down 8% from what GE had expected, finance chief Keith Sherin said.

By the end of the quarter, GE’s revenue from Europe was down 17% from a year earlier. European orders were off 17%, with gas turbines and jet engines about a third, and those for health-care equipment about 5% below. (…)

Companies operating in Europe also are reporting signs of spreading gloom. Advertising giant Omnicom Group Inc.’s  business slowed in Europe’s healthier core in the first quarter, a sign that European companies may be tightening their purse strings.

“Our business is stabilized, I would say, in the south,” John Wren, Omnicom’s CEO, said on an April 18 earnings conference call. “What we saw in the first quarter were setbacks in France and in Germany.”

Return of risky lending practices
Situation is similar to pre-2007 housing market mania


(…) A bigger source of worry at the moment is the commercial mortgage-backed securities market, where CMBS vehicles are stuffing themselves with riskier mortgages on buildings such as office blocks, shopping centres and apartment complexes.

Moody’s, the ratings agency, has been raising the alarm. On its calculations, the loan-to-value ratio of commercial mortgages has hit a “tipping point” of 100 per cent. It took 10 years to reach that point after the widespread adoption of CMBS in the 1990s, Moody’s says; it has taken just two years since the resumption of CMBS buying after the crisis to get back there.

The higher leverage in commercial property looks safe, given improving rents and occupancy rates, but interest-only mortgages are back, and Moody’s worries that if interest rates are higher in a few years’ time it simply will not be possible to refinance these mortgages when they come due. That could plunge lots of properties into default – and the investors who clamoured for that little extra yield from CMBS will rue their choice.

Whether it is leveraging up ailing shopping centres or declining PC manufacturers, the risks ought to be clear. But the demand for yield may be too powerful a siren song.


On the Rise  A lost generation? No way! The Millennials are finally poised to start spending, which is good news for the economy and stocks.

(…) Yet the Millennials are far from the slackers the media and popular culture portray — a generation of adult children living at home with Mom and Dad, texting away and refusing to grow up. The evidence suggests that their march up the career ladder hasn’t been aborted so much as a delayed by economic circumstances and personal choice. Once they get going, however, and marrying, starting families, and moving into their high-earning years, their influence could approach that of their baby-boom parents. (…)

FOR ONE THING, THE MILLENNIALS — sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 — make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7% larger than the baby-boom generation, which came of age in the 1970s and ’80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.

This echo-boom generation totals 27% of the U.S. population, less than the 35% the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4% a year. As the Millennials hit their stride, they could help lift GDP growth to 3% or more, at least a percentage point higher than current levels.

The Millennials already account for an annual $1.3 trillion of consumer spending, or 21% of the total, says Christine Barton, a partner at the Boston Consulting Group, which defines this cohort as ages 18 to 34. As the economy pulls out of an extended period of sluggish growth, helped in part by this rising generation, annual growth in consumer spending is likely to revert to its long-term average of 3.5% to 4% from about 2% now. Likewise, consumer spending on durable goods could rise sharply.

The Millennial generation has already made a big mark on one industry: education. The number of students enrolled in college in the U.S. climbed by 30% from 2000 to 2011, helping to fuel a building boom on campuses across the country. But that’s something many schools could regret in coming years, given the past decade’s sharply declining birth rate.

Owing in part to the Millennials’ surge, apartment demand is strong around the country. Housing could be the next major industry to benefit from their size and maturation, but Wall Street could reap the biggest rewards. The MY ratio, which compares the size of the middle-aged population of 35-to-49-year-olds with that of the young-adult population, ages 20 to 34, explains why.

Middle-aged folks have higher incomes than younger people, and a greater urgency to save for retirement. They invest their savings, which drives up stock prices. When the MY ratio is rising, meaning the older cohort outnumbers the younger, the stock market typically does well. The ratio has been falling since 2000, which has exerted a drag on stock prices.

Alejandra Grindal, a senior international economist at Ned Davis Research, notes the MY ratio will bottom in 2015 and then rise through 2029. It is one of several reasons the firm is bullish on stocks. (…)

Above all, the Millennials are connected — to the Internet and each other. They brought us Facebook and popularized YouTube, Twitter, and phrases like 24/7, which describes how much time they spend on the ‘Net and personal electronic devices. Nielsen estimates that 74% of young adults between the ages of 24 and 34 own smartphones, up from 59% in mid-2011. According to Advertising Age, consumers in their 20s switch between communications platforms and devices 27 times per nonworking hour. (…)

As for those ages 25 to 34, the unemployment rate was 7.4% in March, below the national average of 7.6%, and well below 8.9% in January 2012. Dick Hokenson, an economist who heads ISI Group’s Global Demographics Research team, says 25-to-34-year-olds have recovered almost 75% of the jobs they lost to the recession. “They’re finding jobs; they’re moving out and doing normal things,” he says.

Again, the numbers tell a cautiously hopeful story. Nineteen percent of U.S. men ages 25 to 34 live with their parents, says Mark Mather, a demographer with the nonprofit Population Reference Bureau. But that is up only five percentage points from 2007. The percentage of 25-to-34-year-old women still living at home is 9.7, up from 9% in 2007.

There is almost $1 trillion of student debt outstanding in the U.S. today, which could limit the purchasing power of Millennials. “These people have a mortgage and no house,” Francese says.

But here, too, total figures are misleading. The average student loan among Gen Y-ers is $25,000, and the median loan is nearly $14,000, according to the Federal Reserve Bank of Kansas City. Less than 1% of student loans are larger than $100,000. (…)

AS THE MILLENNIALS’ EMPLOYMENT situation improves, more young adults living at home will pack their bags and move out. That could spur an increase in U.S. household formation, which turned negative in 2007-08. Since then, the number of newly created households has recovered to about a million a year, still well below an annual average of 1.5 million since the 1970s, according to Census Bureau data.

Greater financial security could mean an increase in the birth rate, which typically slumps during economic downturns. Francese sees the average birth rate for U.S. women rising to 2.1-2.2 in coming years from a depressed 1.9 recently. (…)

That suggests they will also start buying homes. Pat Tschosik, a consumer strategist at Ned Davis Research, figures there will be more home buyers than sellers in the 12 years ending with 2019, giving the housing market a boost.(…)

THE MILLENNIALS ALSO could have a big impact on Detroit, which saw annual vehicle sales plummet to 10.4 million in 2009 from an average of 17 million a year in the early to mid-2000s. This year sales are likely to recover to 15.3 million, before rising gradually to 17 million in 2017, says Jeff Schuster, senior vice president of forecasting at LMC Automotive, formerly a division of J.D. Power & Associates. (…)

THE GOOD NEWS FOR Wall Street is that Millennials know they need to save, and they’re not afraid of stocks, which account for more than 70% of their portfolios, according to Vanguard. They are also poised, along with their Gen X predecessors, to come into some serious money as the boomers age and die. The two younger generations combined could see their wealth grow to $28 trillion in the next five years from $2 trillion now, as they earn more and claim their inheritance, says Christopher Tsai, head of Tsai Capital in New York. (…)

Demographics Behind Smaller Workforce  Americans are leaving the labor force in unprecedented numbers. But the trend has more to do with retiring baby boomers than frustrated job seekers abandoning their searches.

(…) For one thing, the participation rate was falling long before the recession, and that drop would almost certainly have continued even if the downturn had never happened. The main reason is demographics: Americans are much more likely to work between the ages of 25 and 54 than when they are older or younger. But with the baby boomers aging, and many of their children now at least 16 years old but not yet into the prime of their working lives, it is the older and younger ends of the working-age population that are growing most quickly. Adjust for the changing population, and the “missing” workforce shrinks to about 4.3 million.

Moreover, even as young people make up more of the working-age population, they are becoming less likely to work. That is partly the result of rising rates of college attendance and partly of declining rates of employment among high schoolers. Both are long-term trends that were likely accelerated by the recession, as young people went to college in part to avoid the brutal job market, and as employers spurned teenagers for more experienced employees. No doubt many of those teens and 20-somethings would rather be working, but they aren’t sitting idle waiting for the job market to rebound. All but about 350,000 of the missing young people are full-time students.

Lastly, the financial crisis and recession—along with longer-run trends such as improved life expectancy—have led many older Americans to postpone retirement, although a far smaller share of them work than people who are in their prime working ages. That adds about 1.2 million additional older workers to the labor force, offsetting some of the decline among other age groups.

Put it all together, and the labor force is missing about three million workers who aren’t in school or retired. That is still significant: Add those workers to the unemployment rolls and the jobless rate would jump to 9.3%. But it suggests the decline in participation is about more than a weak economy. (…)

BYD to Sell ‘Made in U.S.’ Buses  Chinese car maker BYD is setting up shop in the U.S., with small ambitions but a clear goal: Get the government to subsidize the sales of its American-made electric buses.

BYD spokesman Micheal Austin said the company’s U.S. production facility meets “Buy America” procurement guidelines, enabling its customers to tap federal subsidies that cover up to 80% of the cost of the electric buses they buy. The availability of government aid was one of the main motivations behind BYD’s move to the U.S., he said. (…)

Buy America provisions are designed to ensure that government-sponsored transportation infrastructure projects in the U.S. use products made in the country. When it comes to buses, the rules stipulate that U.S.-made parts should account for more than 60% of the cost of all components. Final assembly must take place in the U.S. (…)

BYD’s Mr. Austin said assembling a bus in the U.S. would cost $100,000 more than doing so in China. He said an electric bus could sell for up to $800,000. “But the economic value of having a plant there far outweighs the costs,” he said, since the buses would qualify for government funding.