NEW$ & VIEW$ (12 DECEMBER 2013)

Budget Deal Picks Up Steam House Republican leaders threw their weight behind a two-year budget deal, planning to bring it to a vote Thursday as opposition in both parties failed to gain enough traction to threaten passage.


Homebuilders continue to digest Toll Brothers’ (TOL -1.8%) “leveling in demand”comments from yesterday’s earnings results – in the 19 weeks since August 1, business has been flat vs. last year, and in the first 5 weeks of FQ1 (beginning Nov. 1) business has also been flat from 2012 (though Hurricane Sandy makes a tricky comparison). (SA)

Pointing up Storm cloud  Container Exports at Lowest Point in Four Years; Imports Slow Against Growing Inventories

The month of November saw U.S. ocean container exports hit their lowest point since January 2010, when our Index begins. The November export index registered .934, compared to our baseline of 1.0 in January 2010. This is only the second time that the export index has fallen below 1.0. Imports were stronger than in two of the previous three years, but dropped 6.1 percent from October to November, a period where we have typically seen increases.


Interestingly, volumes declined almost across the board for the 25 destination countries included in the export index. Matching our data, many of the nation’s ports are reporting drops in the number of
containers handled. Production of automotive and related products
slowed in November because of falling domestic and foreign demand, which in turn reduced shipments of parts and finished goods.

Container imports fell for the third month in a row, dropping 6.1 percent in November. What amounted to a peak season “bump” in July and August has given way to a steady decline in imports since. This is not unusual for November, and is by far not the worst November showing
since 2010. Retail and wholesale inventories have reached levels above
their pre‐recession highs without the spending activity to support the



Euro-Zone Industrial Output Falls

The European Union’s statistics agency said industrial production was 1.1% lower than in September, the second straight month of decline and the sharpest drop since September 2012. The decline was spread across most of the currency area, with only Italy and Estonia recording increases in output.

Surprised smile  The decline in output came as a surprise, with 24 economists surveyed by The Wall Street Journal last week having estimated that output rose by 0.2% during the month. It raises the possibility that the euro zone’s return to growth may come to a halt in the final quarter of this year, having already weakened in the third quarter. (…)

The decline in industrial output was led by the energy sector, which recorded a 4% drop in production during October. That wasn’t a great surprise, given that temperatures across Europe were higher than usual during that month. However, output of capital goods fell by 1.3%, while output of consumer durables fell by 2.4% and of non-durables by 0.9%.

That suggests the drop in production was a response to weak demand from businesses and consumers. Figures released last week showed retail sales in the euro zone fell in October, while a November survey of consumers recorded the first decline in confidence this year.

Stock Surge Fuels Pensions

A roaring stock market and rising interest rates are fueling the strongest recovery in the $2.4 trillion U.S. corporate-pension sector in more than a quarter-century.

Investments in the average company’s pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate by J.P. Morgan Chase & Co. A separate analysis by Milliman Inc., which provides actuarial products and services, puts the figure above 94%, while pension specialist Mercer says the figure was 91% at the end of October. Funding levels are up from 77% at the end of last year, according to J.P. Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on bonds continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates on corporate bonds, which are used to value future retirement obligations. (…)

Pension-funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year.  (…)

About 25% of corporate pensions now are overfunded, or have more investments than future obligations, J.P. Morgan estimates. (…)


Gift with a bow Waiting for That Santa Claus Rally

Say what you will about the stock market’s recent skid, investors have a very favorable tailwind at their backs heading into the final few weeks of the year.

(…) For now, the selloff isn’t causing much concern among market watchers. “This is more of a lack of buyers than any type of real panic,” Mark Newton, chief technical analyst at Greywolf Execution Partners, wrote to clients Wednesday afternoon.

Looking beyond the day-to-day gyrations, here are five trends, courtesy of WSJ Markets Data Group, that point to the December effect on stocks and the rally reaccelerating by the end of the year:

December Is the Best Month for Stocks: The Dow has risen in December 72% of the time throughout its history. It averages a 1.4% monthly gain, the best increase of all 12 months.

Don’t Fret About the Early December Weakness: The bulk of the December rally typically occurs in the final 10 trading days of a year, a trend that bodes well considering the Dow is down 1.5% this month. Historically the Dow is flat, on average, in the first two weeks of December. It then averages a 1.5% gain in the final 10 trading days of the month.

Yearly Highs Happen Most Often in December: There have been 36 times the Dow has hit its high of the year in December, more than twice the amount of the next highest month — January – which has had 16 highs in a given year.

Last-Day-of-the-Year Effect: The Dow has ended at a high on the final trading day of the year 11 times throughout its history. Ten of those 11 instances were record closes, with the most recent occurrence coming in 2003.

Santa Claus Is Good for Stocks: The Dow has risen in the five days before Christmas 65% of the time, including 10 of the past 12 years, averaging a 0.5% gain. The last five days of the year are typically even better for stocks: The Dow has risen 79% throughout this timeframe, averaging a 1.2% gain.

High five  World’s biggest investor BlackRock says US rally nearing exhaustion BlackRock has advised clients to be ready to pull out of global stock markets at any sign of serious trouble

(…) The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.

BlackRock, which manages funds worth $4.1 trillion, said the global system is still in the doldrums and far from achieving sustainable recovery. “The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody’s currency can fall at once,” it said.

The report said Wall Street is not in a bubble yet but BlackRock’s risk indicator – measuring “enterprise value” against earnings, adjusted for volatility – is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis,” it said. (…)



BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

“The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicentre of funding risk in 2014 due to big refinancings,” it said. BlackRock said the eurozone is “stuck in a monetary corset”, failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens. (…)

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013.

BlackRock said the profit share of GDP has soared to a modern-era high of 12pc of GDP, while the workers’ share has collapsed from 66pc to 57pc in one decade. “This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins.

Emerging markets are no longer accumulating foreign reserves at the same torrid pace. The annual growth rate of reserves has dropped to 7pc from 40pc five years ago, which implies far less money flooding into global bond markets. “This is bad news for struggling advanced economies and financial markets addicted to monetary stimulus,” it said.

There is a 25pc chance that the world navigates these reefs and achieves a “growth break-out”. Even if that happens it will not help stocks, and will be “bad for bonds”. The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles. What is good for investors is corrosive for societies, hardly tenable equilibrium.



Japan Sees Over $300 Billion in Damages The Japanese government said damage from the earthquake and tsunami that struck the northeast region would be more than $300 billion, raising the possibility that the economy may contract in the first half of fiscal year that starts April 1.

NRG Energy Casts Doubt on Reactor Plans NRG Energy’s CEO said the power company’s plans to build two big reactors at its South Texas nuclear plant could be delayed, or even canceled, in light of earthquake-related failures at a Japanese nuclear plant.

Canadian Government Likely to Fall The Conservative, minority government of Canadian Prime Minister Stephen Harper failed to win opposition-party approval for its budget, all but ensuring that his government will fall in coming days and be forced to seek new national elections.

Portugal Leader’s Fate Hinges on Budget Vote The future of Portuguese Prime Minister José Socrates hangs in the balance as the outcome of an austerity vote could lead to his resignation and push the government closer toward a financial bailout.

Housing Market’s Weakness Persists U.S. home prices fell for a third straight month in January, adding to evidence that the housing market is weakening even though the economy is improving


Dallas Fed President Richard Fisher: “I think it’s very important that a central bank keep its word. We’re only as good as our word because we have a faith-based currency. And people have to maintain faith that when the central bank says it’s going to do something it will get it done.”

Dallas Fed President Richard Fisher:

I speak to more business operators than most of my colleagues. We all have different compositions, but I’m the least academic. I’m the dullest knife in the drawer in that Committee. I survey some 50 businesses. What I’m hearing to a person, without exception, in every sector in every size whether they’re public or private is they’re all looking at ways to price more aggressively because their costs are going up. And that concerns me. And when you press them…you’re beginning to hear numbers in the 3%-plus level.

I spent last week in England, and in addition to meetings at the Bank of England I did what I like to do, which is I talked to quite a few business operators. I was hearing English business operators in my direct conversations talking about 4% not (being) so bad and that they might concede wages increase accordingly. That sends a shiver up the spine of any right-thinking central banker. So if it can happen in the U.K…it can certainly happen in the United States, and it can happen here in Europe.

Disruption in Japan Slows Rise in Oil Price  In addition to Japan’s nuclear power industry, the earthquake and tsunami also damaged nine oil refineries, disrupting nearly one-third of the country’s refining capacity. Many factories and businesses have ground to a halt, and vehicle traffic in Japan’s bustling cities has eased. Oil shipments have been curtailed by damage at seaports along the tsunami-ravaged coast that will take months to repair. All told, Japanese demand for oil has been reduced by an estimated 1 million barrels a day. That is nearly one-quarter of what Japan imports, and roughly the same amount of oil that has been withdrawn from world markets by the unrest in Libya.

Stress Tests Loom For Ireland’s Banks Looming stress tests on four troubled Irish lenders will attempt to reach a definite count of the losses lurking in their loan books but could still fail to restore confidence in Ireland’s banking system.

IMF Lowers New Zealand Growth Forecast The IMF lowered its growth forecast for New Zealand, in a further blow to the nation’s economy that is being squeezed by the cost of two earthquakes and continuing weakness in the housing and retail industries.


Martin Wolf charts

A chart of global vehicle sales



Japan in desperate bid to cool reactors Government warns time running out to avert a nuclear accident.
Hit to economy ‘limited’, says Yosano  Spending on rebuilding effort to shore up output

Bahrain Arrests Opposition Leaders Bahrain arrested several opposition leaders and activists in dawn raids on their homes, as the government continued its attempt to stifle the recent uprising on the strategic Gulf island.

Libyans Scramble in Face of Onslaught Col. Moammar Gadhafi’s forces attacked the last rebel-held major city in western Libya and expanded territory near the eastern rebel capital of Benghazi, as the government gained momentum in its bid to reassert control. The Libyan leader’s son, Saif al-Islam Gadhafi, said military operations against the rebels would be over within 48 hours.


Approvals halted for new nuclear plants China will suspend approval of new nuclear power stations and assess all nuclear projects, including those under construction, in the wake of the Japan crisis, the State Council said on Wednesday.

Nuclear’s loss not a worry; the new world power is gas With Japan’s catastrophe causing a new distaste for atomic energy, the cheapness of natural gas should allay concerns for the future.

Swiss Raise 2011 Forecast The Swiss government agency Seco said it expects the country’s gross domestic product will expand by around 2.1% this year, up from a previous estimate of 1.5%. It maintained its GDP growth forecast for next year at 1.9%. Consumer price inflation is expected at 1.0% in 2011 and at 0.9% next year, compared with 0.7% and 0.8% respectively in the previous forecast.

Indian inflation

Holdings of US debt cut by $5.4 billion China trimmed its holdings of US debt in January, it’s the third straight month of net selling after China’s holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.

Few Britons Plan to Seek Pay Rise The U.K. public’s inflation expectations rose to their highest in more than two years in February but fewer than one in 10 people would push for higher wages to compensate, according to a Bank of England survey.

Tax Plan Aims for 25% Cap The chairman of the House Ways and Means Committee wants to cut the top U.S. tax rate to 25% for individuals and corporations, and cut or eliminate many popular deductions.

Retailers Push Amazon on Taxes Wal-Mart, Target and other large retailers are ratcheting up a political campaign to force Amazon to collect sales taxes, sensing opportunity in the budget crises gripping statehouses nationwide.

On average, US public pension funds expect to generate an 8% average annual return. This despite the fact stock markets have essentially flat-lined over the past decade, bond yields are at historic lows, and prior gains were in many cases because of the Internet, housing and credit bubbles.

OECD calls for rapid rise in retirement age Action urged to ensure pensions are sustainable


The headwind from pension funds keeps blowing hard, even in a rising market (see Pension Funds Flee Stocks in Search of Less-Risky Bets).  Pension funds equity exposure is a good long term contrarian indicator. Their equity exposure troughed in 1990 and peaked in 2006-07, a perfect buy-high sell-low pattern, not unlike Joe Public mind you.

(…) the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher is risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.


Globally, Investor Confidence fell 1.9 points from September’s revised reading of 88.1 to 86.2. In North America, confidence fell by 3.2 points to 84.9 from September’s level of 88.1. Investor confidence in Europe remained largely static, ticking down 0.6 points to 96.4 from 97.0 in the prior month. Across the regions, confidence among Asian investors remained positive at 103.3, though this level was down 4.4 points from the September reading.

“This month saw institutional investor confidence continue to ease further,” commented Froot. “Looking at the underlying data, institutions have been allocating away from developed markets and towards emerging markets, but the net of the two flows has been negative. This continues a pattern established at the beginning of August and would suggest that institutional investors are content to play the role of liquidity provider rather than liquidity taker in the current market environment.”

“Similar to last month, we see continued reticence on the part of investors to invest in the major economies,” added O’Connell. “The euro region did receive some flows during the month, but flows to the US, UK, Japan and Australia were generally anemic. The most attractive destinations for institutional flows over the month were China and India, reflecting that growth appears more compelling to investors in these regions than in the core developed markets.”

Full State Street release