NEW$ & VIEW$ (29 JUNE 2015): Turmoil!

U.S. Consumer Spending Soared in May

Consumer spending rose 0.9% in May from a month earlier, the biggest jump since August 2009, the government said Thursday. The bulk of the increase came on goods, including everyday items such as groceries and big-ticket purchases like cars. Spending on services rose modestly.

Consumers’ incomes—including wages as well as government benefits—grew a healthy 0.5% last month, the same as April, marking the best two-month stretch of income growth since early 2014.

(…) the price index for personal consumption expenditures-picked up in May but were up just 0.2% from a year earlier. Core prices, excluding food and energy costs, were up 1.2% over the year.

Any doubt that wages are accelerating? (table from Haver Analytics)


From Ed Yardeni:

China Rate Cut Hacks a Perilous Path Central bank’s response to stock market’s nose-dive sets a dangerous precedent

The Shanghai Composite is off nearly 22% from its peak just over two weeks ago, including a 3.3% fall on Monday. (Chart from BI)

Shanghai Composite

After Chinese stocks cratered Friday—the culmination of a 10-trading-day run that erased nearly a fifth of the stock market’s value—China’s central bank sprang a surprise quarter-point interest rate cut along with a loosening of bank reserve requirements Saturday.

Responding so obviously to the stock market sets a dangerous precedent.

While most assumed the government found great virtue in the bull market to help companies raise capital and deleverage balance sheets, Saturday’s move removes whatever pretense some may have had that market forces were the main driver of Chinese stocks.

The PBOC cited persistently high borrowing costs in the real economy for the cut. That is true. Banks have been reluctant to cut rates and the effect of very low inflation means real, price-adjusted rates have fallen only slightly.

But if this was the rationale, then the central bank should have moved earlier in the month when May’s sluggish inflation data was released, notes Standard Chartered. But back then, the stock market was near its recent high point. (…)

But fear of a pause in stimulus became a factor behind the stock market selloff. Chinese investors know the good times will last only so long as the easing does. (…)

The real question becomes, how long is the PBOC willing to keep this up? Given how poorly supported stocks are by the fundamentals, and given how much margin leverage isembedded in investors’ positions, withdrawal of state support will give a shock that could prove calamitous.

It remains prudent for central banks to keep the stock market in mind when making policy moves. But making stocks the implicit target of central bank policy, as China now has, sets the economy on a perilous path.

This reporter was obviously not present in October 1987 when the Fed immediately reacted after the crash. Even though fewer than 10% of Chinese households own shares (U.S. = 50%) drops of this magnitude can hurt the economy and it is appropriate for the central bank to try to mitigate the impact.

(…) hectic activity at brokerages and trading firms has been a direct support to an otherwise sluggish economy. According to research firm Capital Economics, this alone boosted the economic growth rate by half a percentage point in the first quarter, when GDP was up 7% from a year earlier. Losing this support could cut a full percentage point off the annual growth rate, Capital Economics estimates.

Rising stock prices have also encouraged a wave of equity issuance, which has helped wean companies off dependence on debt finance. If this avenue closes, China will find it that much harder to cut debt levels.

The pain could spread further if stock losses cause a wave of defaults for those who borrowed money to invest. There is some 2.2 trillion yuan ($354 billion) of margin financing in the market currently, which Goldman Sachs estimates is equivalent to 12% of free float market cap of marginable stocks, or 3.5% of GDP. The investment bank’s strategists, in a note on Monday, called both these ratios “easily the highest in the history of global equity markets.” (…) (WSJ)

Capital outflows, then and now

(…) compared to 2012 everything is certainly much, much more ring-fenced.European bank exposures being an excellent case in point.


If Atlantic salmon fishing on the Québec North Shore is any indication, this will be a tough summer. I was lucky to land (and release) four salmons but many of my buddies, all good fishermen, were skunked. Lots of rain prior to our arrival muddied the Moisie River, quieting the fish which perhaps did not know its way upstream.

Investors must feel the same with Grexit looming, China crashing and the Fed beginning the rehab from financial heroin overdose. Given today’s opening (2080), U.S. equities remain overvalued at 18.7x trailing EPS and 20.4 on the Rule of 20 P/E.


The S&P 500 has broken its 100 day m.a. which is flattening. Next “support” is the still rising 200 day m.a. at 2054, last tested on February 2nd. European equities are off 6.2% from their April peak.

The Q2 earnings season begins in 2 weeks (even though 13 companies have already reported: 10 beats, 3 misses). Estimates continue to edge lower but only marginally. It is also reassuring that earnings preannouncements are not getting worse. Fingers crossed

The U.S. consumer is back which will alleviate any fear of a significant economic slowdown.

Not to say that U.S. equities are not vulnerable; extreme valuation levels are always dangerous. Just to say that the U.S. economic background should not be a negative factor.

Iran nuclear talks delayed by disagreements Nuclear negotiations held up by arguments over draft accord

(…) there have since been continued disagreements over core elements of the potential agreement, including the pace at which sanctions will be lifted and the access that international inspectors will have to Iran’s nuclear facilities, especially military sites.

Mr Zarif’s departure from Vienna on Sunday comes after Iran’s supreme leader Ayatollah Khamenei laid out a series of red lines last week that appeared to be unacceptable to the world powers Iran is negotiating with.

In his speech, Mr Khamenei said sanctions relief under any deal would need to be immediate and there would be considerable limits on where international inspectors would be allowed to visit in Iran.

NEW$ & VIEW$ (24 JUNE 2015): Housing! Wages Pressuring Margins? After Greece…

U.S. New-Home Sales Rise to 7-Year High

New-home sales increased 2.2% over the month to an annual rate of 546,000, the Commerce Department said Tuesday. That marked the best month of sales since February 2008, and it followed an 8.1% surge in sales in April. (…)

The months’ supply of new homes—reflecting how long it would take to exhaust all homes on the market at May’s sales pace—fell to 4.5 last month from 4.6 in April and 5 in March.

Sales varied by region. New-home purchases surged in the Northeast and climbed in the West, but fell in the Midwest and South.

 large image large image

Total new home sales are up 18.6% YoY in May. Sales are up 27.3% YoY in both the South and the West but are unchanged in the Northeast and down 14.3% in the Midwest. These two regions only account for 20% of new home sales (2012-14 average).

By contrast, existing home sales have been the strongest in the Northeast and the Midwest through May.

The stronger tailwind behind housing is this:

The total number of new households increased by 1.4 million y/y through March. This growth rate has exceeded the 1.0 million mark since October 2014. That’s the good news. The bad news is that all the new households are renting rather than buying their homes. The total number of homeowners peaked at 76.5 million during Q4-2006. It was down to 74.0 million during Q1-2015. The number of households who are renters rose 9.3 million since Q2-2004 from 32.9 million to 42.2 million. (Ed Yardeni)

The fact remains that first-time buyers seem to be a lot more active. They accounted for 32% of sales in May from 30% in March-April and 27% last year. Employment growth in the 25-34 age group is now +3.5% YoY, more than double the U.S total.

U.S. Durable Goods Down, Businesses Remain Cautious

New orders for durable goods—products such as computers and trucks designed to last at least three years—decreased a seasonally adjusted 1.8% in May from a month earlier, theCommerce Department said Tuesday. April durable goods orders fell a revised 1.5%, compared with the previously reported 1% decrease. (…)

Through the first five months of the year, overall orders are down 2.2% compared to the same period in 2014. (…)

Excluding the transportation sector, orders rose 0.5%.

Another volatile sector, defense, helped push the headline figure higher. Excluding defense, durable orders fell 2.1%.

But a key measure of business investment rose for the second time in three months. Orders for nondefense capital goods excluding aircraft—a proxy for company spending on equipment and software—increased 0.4% in May. The figure was down 0.3% in April.

But up 1.6% in March. Last 3 months: +1.7% or 7.0% annualized.

Ikea Will Raise U.S. Minimum Wage to $11.87 to Retain Workforce

Ikea Group, the world’s largest furniture retailer, will raise the hourly minimum wage it pays workers in the U.S. by 10 percent to $11.87, seeking to keep employees from moving to other merchants that have boosted pay recently.

The increase, which takes effect Jan. 1, follows a 17 percent boost to $10.76 an hour this year. The 2016 raise will affect 32 percent of Ikea’s hourly retail staff, along with some workers in distribution, the company said Wednesday. (…)

After the increase, the average hourly pay rate at its 43 U.S. stores will be $15.45.

The living wage in New York’s Kings County, where Ikea’s Brooklyn store is located, is $14.30 an hour for a single childless adult, according to the MIT calculator. It’s $13.71 for the New York metro area.

Wal-Mart to impose charges on suppliers as its costs mount

Wal-Mart Stores will begin charging fees to almost all vendors for stocking their items in new stores and for warehousing inventory, raising pressure on suppliers as the world’s largest retailer battles higher costs from wage hikes.

The company said it started informing suppliers about the fees and other changes to supplier agreements last week. The changes, which also include amended payment terms, will affect 10,000 suppliers to its U.S. stores. (…)

The move marks a shift of sorts by Wal-Mart, which unlike other retailers has sought to limit such fees in return for demanding suppliers give it the lowest price, said Kurt Jetta, head of consumer and retail analytics firm Tabs Group Inc.

    “It is not the way Walmart has done business in the past,” Jetta said. “This approach suggests that they are seeking areas to offset their increased investment in wages, as well as offset their lack of organic revenue growth.” (…)

Auto U.S. Subprime Auto Loans Stretched to Seven Years Stoke Concern

Of the subprime vehicle loans bundled into securities, 73 percent now exceed five years, up from 64 percent during the first three months of 2014, according to data from Citigroup Inc. Loans as long as seven years are increasingly being put into more bonds as auto-finance companies and Wall Street banks sell the securities at the fastest pace since 2007. (…)

A debt offering recently marketed by American Credit Acceptance LLC demonstrates some of the risks. About one-third of the 14,628 loans in the deal are tied to borrowers with credit ratings under 500 according to the Fair Issac Corp. grading system known as FICO — or with no score at all, according to a prospectus obtained by Bloomberg. The company is charging interest rates of between 27 and 28 percent for almost one-third of the borrowers, and more than half of its loans exceed five years. (…)

Loans have been getting longer for prime borrowers as well. The percentage of loans exceeding five years in those securitization pools has grown to 47 percent from 38 percent in 2006, according to Citigroup data. (…)

Pointing up CHINA: From the PBoC 2Q15 Survey of bankers: ratings for both the industry climate and loan demand fell to the weakest over the last 10 years.

Surprised smile This from Deutsche Bank:image

Foreign Reserves Slip in Emerging Markets, Raising Risks Central banks in emerging markets are running down foreign-currency reserves at the fastest pace since the financial crisis, reducing some countries’ capacity to weather potential shocks.

imageTotal foreign-exchange reserves in emerging countries are estimated to have dropped $222 billion to $7.5 trillion during the first quarter, according to a Wall Street Journal analysis of International Monetary Fund data. The 3% decline in reserves would be the biggest percentage loss for a quarter since the first quarter of 2009.

Despite the drop, total foreign reserves still are hovering around record highs for emerging countries, giving observers confidence that they are, overall, in a relatively strong position to withstand external shocks in periods of stress. Some countries, such as Russia, have been rebuilding their reserves after significant declines. Total foreign reserves are able to cover about 11 months of import needs for these countries, according to IMF data, while a rule of thumb for adequacy is six months.

(…) the drop has been limited to a handful of countries that hold the largest amounts of reserves. (…)

Turkey, South Africa, Malaysia and Indonesia are among vulnerable countries whose reserves have fallen below their short-term external financing needs, according to the Institute of International Finance. (…)

Part of the recent reserve decline was due to a broad-based dollar rally. (…)

Nearly half of the decline—$113 billion—was in China, which faces shrinking trade surpluses and growing capital outflows. Its central bank was also seen to have propped up the value of its currency by selling dollars, driving its foreign reserves down to $3.7 trillion.

Russia’s reserves also fell last quarter, as the central bank attempted to bolster its currency amid lower oil prices and sanctions. But Moscow managed to arrest the reserve’s decline, and it resumed purchasing dollars recently. Saudi Arabia, Nigeria and Malaysia also suffered steep reserve losses due to reduced revenues from commodity exports. (…)

Greek problems mask the rising risks in Italy and France

Italy and France face mounting problems of high debt, slow growth, unemployment, poor public finances, lack of competitiveness and an inability to undertake necessary adjustments. Reductions in energy prices combined with low borrowing costs and a weaker euro, engineered by the European Central Bank, cannot hide deep-seated and unresolved problems forever.

Italian total real economy debt (government, household and business) is about 259 per cent of GDP, up 55 per cent since 2007. France’s equivalent debt is about 280 per cent of GDP, up 66 per cent since 2007. This ignores unfunded pension and healthcare obligations as well as contingent commitments to eurozone bailouts.

Italy is running a budget deficit of 2.9 per cent. Government debt is around €2.6tn, approaching 140 per cent of GDP. French public debt is above €2.4tn, or 95 per cent of GDP. The current budget deficit is 4.2 per cent of GDP. France’s budget has not been balanced in any single year since 1974.

Italy’s economy has shrunk about 10 per cent since 2007, as the country endured a triple-dip recession. Italy’s unemployment is more than 12 per cent, with youth unemployment about 44 per cent. French GDP growth is anaemic, with unemployment above 10 per cent and youth unemployment of more than 25 per cent.

Trade performance is lacklustre. Italy’s current account surplus of 1.9 per cent reflects deterioration of the domestic economy rather than export prowess. France’s current account deficit is about 0.9 per cent of GDP, reflecting a declining share of the global export market.

Italy and France’s problems are structural, rather than attributable to the eurozone debt crisis. High wages, inflexible labour markets, generous welfare benefits, large public sectors and restrictive trade practices are major issues.

In the World Economic Forum’s competitiveness rankings, Italy and France ranked 49th and 23rd respectively, well behind Germany (fourth) and Britain (10th). In World Bank studies, Italy and France rank 56th and 31st in terms of ease of doing business. Transparency International ranks Italy 69 out of 175 countries in perceived levels of public corruption, comparable to Romania, Greece and Bulgaria.

The lack of competitiveness is exacerbated by the single currency. Italy and France faced a 15-25 per cent overvalued currency until the recent decline in the euro. Denied the historically preferred option of devaluation of the lira or franc to improve international competitiveness, both countries have relied increasingly in recent times on debt-funded public spending to maintain economic activity and living standards. (…)

France and Italy may not be able to avoid a financial crisis. Real GDP would need to increase at more than twice projected rates to stabilise and then reduce government debt-to-GDP ratios.

Alternatively, deep reductions in fiscal deficits would be required to start deleveraging. The necessary fiscal adjustment of about 2 per cent of GDP would be self-defeating, creating a familiar cycle of lower growth, rising budget deficits and higher borrowings.

A weak economy and low inflation will ultimately cause debt to increase beyond critical levels, triggering a climactic moment. (…)

Gavekal agrees. Things are only getting worse…


…because of a lack of competitiveness…image

…currently masked by Draghi’s weakening of the euro which cannot erase the fundamental debt problem…


…which will only get worse as the population ages…image

Nerd smile The Rise of the Triple-Digit Stock



Adjusted for seasonal influences, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.4 in June, down from 54.0 in May and the lowest reading since October 2013. The PMI was still above the neutral 50.0 threshold, but slightly below its average since the recovery began in late-2009 (54.3).
Softer output growth was a principal factor behind the decline in the headline index during June. In contrast, new business growth picked up slightly from May’s 16-month low and job creation accelerated to its strongest since November 2014.


The latest expansion of production volumes was the weakest recorded by the survey since January 2014. Some manufacturers cited greater efforts to fulfil orders from inventories in June, as highlighted by the first reduction in stocks of finished goods since December 2014. Moreover, there were reports that softer output growth reflected a degree of caution about the business outlook, as well as concerns about the impact of the strong dollar on competitiveness. Although new orders from abroad stabilized in June, this followed declines in export sales during each of the previous two months.

Meanwhile, overall volumes of new work expanded at a solid pace in June, but the latest upturn was still the second-slowest since January 2014. Improving U.S. economic conditions were cited as a factor supporting new business gains in June. However, some manufacturers noted that sharp declines in investment spending within the energy sector had weighed on new order volumes.

imageHigher overall levels of new work contributed to rising volumes of unfinished business in June, but the rate of backlog accumulation remained only marginal. A number of firms suggested that additional staff hiring had helped reduce pressure on operating capacity at their plants. Job creation has now accelerated in three of the past four months, with the latest upturn in manufacturing payroll numbers the fastest since November 2014.

Despite a moderation in production growth, input buying increased at a robust and accelerated pace during June. Meanwhile, the latest survey indicated that suppliers’ delivery times improved for the first time in two years. This was widely linked to an alleviation of transportation bottlenecks related to the west coast port strikes earlier in 2015.

Average cost burdens increased for the second month running in June, which contrasted with falling input prices earlier in the year. However, the rate of cost inflation was only modest and well below the long-run survey average. Meanwhile, factory gate price inflation remained marginal and eased slightly since May. Survey respondents suggested that higher input costs had only contributed to gradual rises in their average prices charged in recent months, in part reflecting strong competition for new work.