NEW$ & VIEW$ (23 JULY 2014)

U.S. Existing-Home Sales Hit Highest Level Since October

Sales of previously owned homes rose 2.6% to a seasonally adjusted annual rate of 5.04 million last month, the National Association of Realtors said Tuesday. Revisions showed May sales reached a 4.91 million rate, up from an initially reported 4.89 million pace.

Tuesday’s report showed home prices are growing more slowly than in prior months as more homes come on the market. The median sale price for a home last month was $223,300, up 4.3% from a year earlier.

The inventory of homes available for sale climbed 6.5% from a year earlier. At the current pace, it would take 5.5 months to exhaust the supply, a level close to what economists consider a sign of a balanced market.

One reason sales haven’t reached year-ago levels is that fewer investors are entering the market, Mr. Yun said. The share of June sales going to investors was flat at about 16%, down from 19% just two years ago. As a result, purchases of “distressed” properties—such as those in foreclosure—slipped as a share of overall sales.

First-time buyers are growing slightly, but at 28% of all buyers, they remain a historically small part of the market.

Compared with a year earlier, sales were down 2.3% last month. At the current pace, sales are roughly at the level they were in 2000, even though the U.S. population has grown, the economy has more jobs and interest rates remain historically low. Mr. Yun said the housing market is still “underperforming.”

Note that existing home sales rose M/M in every regions, including the South where housing starts sank 30% in June. Builders’ wet weather excuse gains credibility. July housing starts could thus be quite strong. Had starts in the South grown in line with the rest of the U.S., June starts would have been 20% higher.

This series of charts from the WSJ tell the whole story:

Gasoline Costs Lift Inflation Gauge

U.S. consumer inflation continued to stiffen last month but largely decelerated outside a jump in gasoline prices, and food costs in particular slowed after surging in recent months.

The index rose a seasonally adjusted 0.3% last month. Excluding the often-volatile categories of food and energy, prices rose 0.1% from May. Food prices ticked up just 0.1% in June from the prior month after rising 0.5% in May and 0.4% in each of the prior three months.

The Cleveland Fed table provides a more complete picture:

The median Consumer Price Index rose 0.2% (2.0% annualized rate) in June. The 16% trimmed-mean Consumer Price Index also increased 0.1% (1.8% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, the CPI rose 2.1%, and the CPI less food and energy rose 1.9%.


Total CPI has risen at a 3.6% annualized rate since March and at a 4.1% a.r since April. Core CPI: +2.4% annualized since March and April. Median CPI: +3.0% since March, +3.2% since April. Mrs. Yellen must be relieved with June’s core CPI at +0.1%. In effect, the whole market will be relieved, even though the “noise” is getting noisier. All indicators, core or not, are now at +2.0% Y/Y. Only 5 months ago, yearly total inflation was +1.1%. Nonetheless,

Critics have accused the Fed of “being behind the curve on inflation,” J.P. Morgan Chase chief U.S. economist Michael Feroli said. “One would think this would mollify that to some extent.”

Gavyn Davies Another false alarm on US inflation?

(…) In order to assess whether inflation is or is not a generalised economic process, several core measures have been developed inside the Fed. These are designed to remove spikes in commodity prices and other “flexible” prices, so that more persistent, underlying inflationary pressures can be laid bare. In the latest inflation scare, several of these core measures had shown a marked increase to their highest levels since 2008, which was worrying. But on today’s data, they have fallen back:

(…) It now seems probable that part of the recent jump in core inflation was just a random fluctuation in the data. There have been suggestions that seasonal adjustment may have been awry in the spring.

But the main reason for the lack of concern is that wage pressures in the economy have remained stable, on virtually all the relevant measures. The Fed published the following chart in last week’s Monetary Policy Report to Congress:

Wage inflation is apparently still fixed at around 2 per cent, exactly where it has been ever since the Great Financial Crash in 2008. Productivity growth is volatile from one quarter to the next but, according to Goldman Sachs’ productivity tracker, the underlying growth rate has been running at about 1 per cent per annum in recent years. That means that the underlying growth rate in unit labour costs (labour costs less productivity growth), which is a crucial indicator for the Fed, is running at only about 1 per cent. This is consistent with price inflation at only half the Fed’s 2 per cent objective.

In a major change from their attitude in recent decades, central bankers (even the Bundesbank) have been suggesting that wage inflation is too low, not too high. In the US, wage inflation needs to accelerate to over 3 per cent before the Fed’s leadership would worry that it indicates above-target price inflation for a significant period of time. Although labour market slack is clearly declining as unemployment falls, Fed research published yesterday argued that there remains a large pool of long term unemployed and discouraged workers that can be drawn back into the labour force as the economy expands.

Can price inflation accelerate meaningfully without this being accompanied by a rise in labour cost inflation? It could do so if import prices, or profit margins, provide an inflationary impetus, but neither seems very likely at present. Profit margins are already at very high levels by the standards of past cycles, and global goods prices, excluding commodities, still seem very subdued.

Atlanta Fed President Lockhart said last week that the Fed should wait until it sees “the whites of their eyes” (meaning higher inflation) before raising rates, and Chair Yellen warned about previous “false dawns” in the economy. There is nothing in today’s inflation data to make the doves change their minds. On today’s evidence, there has been yet another false alarm on US inflation.

Isn’t wage inflation always lagging inflation? Anyway, so far, so good…

Australian Inflation Muddies Rate Cut Scenario

Consumer prices rose 0.5% in the second quarter from the first and were up 3.0% from a year earlier, the Australian Bureau of Statistics said Wednesday.

Core inflation, which strips out extraordinary events such as the price effects of extreme weather or new taxes, rose by an average of 0.7% on quarter, up from an expect rise of 0.6%. This measure rose 2.8% from a year earlier, putting it close to the top of the 2% to 3% band that RBA policymakers target.

Spanish Growth Quickens

In its monthly economic performance review, the Bank of Spain said gross domestic product likely grew 0.5% in the second quarter from the first, compared with 0.4% growth recorded in the first quarter.

On an annual basis, the economy is likely to have grown 1.1% in the second quarter compared with the year-earlier period, it said.

The central bank said it now anticipates that Spain’s economy will grow 1.3% in 2014 and 2% in 2015, slightly above earlier projections of 1.2% and 1.7%, respectively.


RBC Capital’s tally shows that of the 130 companies (39%) having reported so far, 68% beat and 23% missed.

Pointing up Excluding C and BAC legal expenses, companies that have reported boast a 7.7% Y/Y EPS growth rate (+4.4% revenue growth), +9.8% ex-Financials on 5.9% revenue growth.


Of the members of the gauge that have reported results so far, 77 percent have exceeded analysts’ estimates for profit and 67 percent have beaten revenue projections, according to data compiled by Bloomberg.

European stocks rose for a second day as earnings from Daimler AG to Akzo Nobel NV beat estimates. Emerging market shares advanced to an 18-month high as Indonesia’s rupiah led gains among higher-yielding currencies.

Strong earnings, inflation behaving, low interest rates and a cool Fed…Will we finally decisively break 1980 on the S&P 500?

NEW$ & VIEW$ (22 JULY 2014)


Equity markets are at valuation levels skewed towards higher risk vs potential reward. Beta management must be on at this time. Beware of poor economic and market momentum. Beware of Europe.

  • The EU economy is slow and slowing (charts from Pictet). German manufacturing output has slumped lately. German retail sales are very weak.



  • The EU is most vulnerable to a Russian recession and/or worsening in geopolitics.
  • EU companies earnings are not as strong and resilient as US companies earnings (Table below from Ineichen Research and Management AG)


  • EU equity valuation offer no compensation for these poorer fundamentals:


  • The ECB’s QE program is more words than substance, so far. In fact, the ECB’s balance sheet has shrunk 14% in the last 12 months.

China’s excavator sales in June were 6.3 th units and the Y/Y growth was -24%, better than the previous month. 1H sales decreased by 11% on a Y/Y basis, well
below the single-digit growth expectations at the beginning of the year. (CEBM Research)


ISI’s truckers survey, which has the highest correlation with GDP, increased to a very strong 63.7, up +11.0 points y/y, a nine-year high.


The Harpex Index is a shipping index calculated and published by ship brokers Harper Petersen & Co. It tracks the weekly shipping rate changes for eight classes of container
ships. Importantly, the HARPEX measures the changes in fleet demand for the transport of finished goods, and is considered a good current activity indicator. It thus gives a broader picture of commercial goods versus a narrow glimpse of only raw input commodities.

Harpex chart

But container exports have been falling steadily for 28 months:


Ocean container exports fell 1.2 percent in June ‐ the fourth month‐to‐month drop this year. Containerized exports have performed poorly throughout all of 2014 and have declined 8.4 percent year to date. The global economy is still struggling to recover and all but one of our top ten trading partners had a decline in container
imports from the United States. Compared to the same month in 2013, container exports were down 8.9 percent. Container exports in each of the last 28 months have been down on a year‐over‐year basis. They hit a high in March 2011 and are currently 44 percent below that high.

The import container index dropped 3.7 percent from May, following the slight 0.8 percent decline in April. Orders for imports by U.S. companies were weak in the first half of the year, which decreased the quantity of containers shipped to the United States. Imports from China fell for the third month in a row, but China’s new
export orders rose in June, signaling a rise in U.S. imports in the coming months. China excluded, there was a 2.0 percent rise in imports from other Southeast Asian countries. Despite the June drop, container imports are 4.7 percent higher than last June. Year‐to‐date, however, container imports are down 5.7 percent, due mainly to the large drop in February. (Cass)

Top US banks see loan losses tumble Lending strengthened and credit quality improved

Big US banks reported the lowest loan losses in eight years in the second quarter, reflecting tighter lending standards since the financial crisis. (…)

Six of the biggest commercial and consumer lenders in the US – Wells Fargo; Bank of America; JPMorgan Chase; Citigroup; US Bancorp; and PNC Financial Services – collectively reported credit losses equal to 0.6 per cent of total loans, down from a credit crisis high of 3.3 per cent, according to Keefe, Bruyette & Woods, an investment bank.

Lower-than-expected loan losses and the sale of non-performing assets have enabled the big banks to release reserves, helping to flatter earnings. (…)

On a year-over-year basis, the improvement in net charge-offs at the six big US commercial banks was across the board, including residential mortgages, home equity, credit cards and commercial real estate, according to data compiled by SNL Financial and Credit Suisse.

In commercial real estate lending, the banks recorded a negative loss rate, meaning they actually saw higher recoveries on delinquent debt than losses in the quarter.

In broad-based lending to companies, the losses have already shrunk significantly and the second quarter saw a flattening of net charge-off rates at lows of 0.1 per cent. (…)

High Times for High Yield

Both in the US and globally, the high yield bond issuance of April-June 2014 proceeded at a record pace for a second-quarter. High yield bond offerings from US-domiciled companies totaled $88.5 billion in Q2-2014, which rose by 4.0% from Q2-2013’s old second-quarter high of $85.1 billion. Better yet, worldwide offerings of high yield bonds soared higher by 52.5% annually in Q2-2014 to a new second-quarter record of $214.0 billion that was also unrivalled in terms of a moving three-month sum.


Second quarter 2014’s record three-month sum for the worldwide issuance of high yield bonds was mostly the consequence of a blistering pace of high yield bond offerings from West European companies. Not only did Q2-2014’s $101.8 billion of high yield issuance from Western Europe handily surpass the $85.1 billion from US entities, but West European supply also skyrocketed by 211.9% year-over-year, where the latter included year-to-year advances by high yield bond offerings of 235.7% for European financial companies, to $45.8 billion, and of 194.8% for European nonfinancial companies, to $56.0 billion.

In a stark break from the past, the $162 billion of newly issued high yield bonds from Western Europe eclipsed the accompanying $155 billion from US-based companies. By contrast, 2013’s $153 billion of high yield bond issuance from Western Europe approximated 44% of the US’s $348 billion of such offerings, where that share falls to a much smaller 27% for the 10-years-ended 2013.


Small Caps Run Into Big Doubts The swoon in shares of small companies’ shares deepened Monday, underscoring investor concern about valuations.

This is big and will get much, much bigger. Here’s an interesting infographic from Valuewalk.