NEW$ & VIEW$ (20 OCTOBER 2014)

This comes to you from Osaka, Japan. One more week…

Jobless claims lowest since 2000

(…) new jobless claims slumping from 287,000 to 264,000 in the week ended 11 October, the lowest seen since April 2000. The four-week average also fell, down to its lowest since June 2000.

Production leaps higher

Production rose 1.0% in September after a 0.2% decline in August, its biggest gain for almost two years, according to official data compiled by the Federal Reserve. Manufacturing output was up 0.5% after August’s 0.5% drop.

The rise leaves industrial production 0.8% higher in the third quarter compared to the second quarter, adding to signs that the US economy continues to grow at a solid pace.

The upturn in production also pushed capacity utilisation up to 79.3%, its highest since June 2008. The Fed is keeping a close eye on how fast spare capacity is being used up, as this is a key gauge of future inflation trends.

U.S. Housing Starts Up 6.3% in September U.S. home building rebounded in September on the strength of apartment construction, a category that provides less of an economic boost than single-family homes.

imageHousing starts rose 6.3% in September from a month earlier to a seasonally adjusted annual rate of 1.017 million units, the Commerce Department said Friday. Building permits, a bellwether of future construction, increased 1.5% last month to a 1.018 million rate. Economists surveyed by The Wall Street Journal had forecast housing starts to rise 4.6% last month and building permits to increase 2.3%.(…)

After a sharp fall early in the year, starts did rebound to match a postrecession high of a 1.1 million annual rate in July before slipping in August. Starts in August fell 12.8% from July, a slightly smaller decline than initially estimated.

Single-family starts remain down 9% from the postrecession peak established in November 2013. Starts of properties with five or more units, mainly apartment buildings, have increased 22.7% so far this year, compared with the first nine months of 2013.

Pointing up Newly started single-family units, roughly two-thirds of the market, rose just 1.1% in September. Permits for the category declined 0.5%. It has largely been a disappointing year for single-family construction, with starts up just 3.8% through the first nine months of the year, compared with the same period in 2013. (…)

In reality, stable single family starts since mid 2013 is not all that bad considering the sharp price increases builders have implemented and the rise in mortgage rates since May 2013 (see Facts & Trends: U.S. Housing A House Of Cards?)

Housing turnaround around the corner?

Fannie Mae , Freddie Mac and mortgage lenders are nearing an agreement that could lower barriers and restrictions on borrowers with weak credit, a move that would expand access to home loans amid the sluggish housing recovery.

The move by the mortgage-finance giants and their regulator, the Federal Housing Finance Agency, would help lenders protect themselves from claims of making bad loans, according to people familiar with the matter.

Fannie and Freddie are also considering programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers, the people said. That would be a reversal for the loan giants. The moves could be announced as soon as this coming week. (…)

Separately, Fannie Mae, Freddie Mac and the FHFA are considering new programs that would allow the companies to guarantee some mortgages with down payments of as little as 3%. The program might be limited to certain kinds of loans, such as mortgages to first-time home buyers.

Fannie Mae stopped accepting loans with 3% down payments last year, except in certain circumstances, while Freddie stopped guaranteeing such mortgages years ago.

The companies already guarantee loans with down payments of as little as 5%, though loans with down payments of less than 20% typically require mortgage insurance. (…)

This next image is just to give you an idea of the frugality efforts displayed by FNMA:Fannie Mae and Freddie Mac have recouped billions of dollars in penalties from lenders over charges of bad loans.

U.S. government bond yields, which influence mortgage rates, plunged on Wednesday as traders reassessed growth outlooks in Europe and fled to the safety of the U.S. The benchmark 10-year Treasury dipped as low as 1.873% on Wednesday before reclaiming some ground.

Freddie said that in the week ended Thursday, the average 30-year fixed-rate mortgage had a rate of 3.97%, down from 4.12% the week before. This week’s level was the lowest level tracked by Freddie since the week ended June 20, 2013, when rates averaged 3.93%. (Chart from ISI)

  • Gluskin Sheff estimates that the recent collapse in bond and mortgage rates makes refinancing available for 70% of current mortgages outstanding.

  • And this important change:image

Natural-Gas Prices Fall Even With Chill Nearing When cold weather looms across the U.S., natural-gas prices usually rise. This year they are falling, after a record production boom nearly replenished stockpiles left at their lowest since 2003 by last winter’s freeze.

LowReadingPrices for the fuel used to heat half of American homes fell to their lowest point of 2014 on Friday in intraday trading and are down 9.3% since Sept. 29 on speculation that further supply additions could lead to a glut.

On Friday, the November contract settled down 3 cents, or 0.8%, to $3.766 a million British thermal units on the New York Mercantile Exchange. It was the lowest close since July 28. (…)

For consumers, prices will be about 6.8% higher than last winter, as gas utilities sell more expensive fuel they bought in the spring and summer, according to the U.S. Energy Information Administration. But it could have been a lot worse. The EIA’s latest forecast for six months of residential prices dropped from what it had predicted in June. (…)

Even with higher prices, the EIA expects consumers to spend less because they will use less. The National Oceanic and Atmospheric Administration is predicting that heating degree days, a measure of weather-related heating demand, will be 12% lower than a year ago. That should reduce natural-gas consumption by 4% to 13% in different regions around the country, according to the EIA, with Midwestern states seeing the biggest savings on their heating bills. (…)

ECB Officials Call for Bold Measures on Growth

European Central Bank officials fanned across Europe Friday to deliver a common message to governments that bold measures are needed to reform their economies, raise productivity and improve the eurozone’s anemic growth outlook.

The remarks from several members of the ECB’s 24-member governing council underscored the bank’s recent campaign to accelerate the debate in Europe on how to get the struggling eurozone economy on the right track without relying on the ECB’s easy-money policies.

Rolling on the floor laughing “Accelerate the debate in Europe”! LOL!!!

“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,” Bundesbank President Jens Weidmann said at a conference in Riga, Latvia, one of several ECB officials to speak Friday.

His comments were echoed by ECB executive board member Benoît Coeuré, who warned at the same conference that “talking vaguely about structural reforms, but not doing them, is the worst of all worlds.”

“While in ’normal’ times it might be acceptable to reform one sector at a time, in crisis times it is not. Fairness must be a priority. And the best way to align vested interests is to reform them all at once,” Mr. Coeuré said. (…)

The ECB responded in June and September with rate cuts, cheap bank loans and planned purchases of asset backed securities and covered bonds. The aim of the measures is to raise Europe’s money supply and spur new lending and spending. Mr. Coeuré said Friday that the ECB would begin these purchases “within the next days.”

But while these purchases have yet to even begin, financial markets are clamoring for the ECB to do more, primarily by purchasing large amounts of government bonds to reduce interest rates and cheapen the euro.

But the comments Friday suggest some on the ECB’s governing council remain skeptical of this policy, which was used extensively in the U.S., U.K. and Japan.

Mr. Weidmann noted that much of the weakening in eurozone inflation has been due to falling energy prices and the effects of reform efforts in parts of the region, forces that are largely outside the realm of monetary policy.

Nerd smile “much of the weakening in eurozone inflation has been due to falling energy prices”. Hmmm, maybe in the last month or so, not over the several years.


He reiterated his criticism of the ECB’s asset-backed securities program, saying it transfers risks from financial institutions to the central banks and, ultimately, taxpayers. (…)

The top central banker in neighboring Austria, Ewald Nowotny, signaled the situation in Europe isn’t dire enough to require a more beefed-up response by the ECB. “It is not as if the ECB needs to open up the emergency toolbox,” he told journalists on the sidelines of an investor trade show in Vienna. (…)

“the situation in Europe isn’t dire enough” … so far…and depending on how one defines Europe…


Equity markets rally on low rate hints BoE adds voice to concern over acting too quickly

(…) The ferocity of market moves appears to have alarmed policy makers, with Andy Haldane, the Bank of England’s chief economist, saying on Friday that he favoured delayed interest rate rises. He said evidence of a weaker global economy, lower inflation pressures and low wage growth had forced him to reassess the UK economic outlook.

His comments followed those by James Bullard of the St Louis Fed on Thursday, who said the US Federal Reserve should carry on with its asset purchases in October, instead of halting them as scheduled. (…)

Bundesbank hits back at calls for stimulus

Germany’s top central banker has rejected calls for the eurozone’s largest economy to raid its fiscal coffers to fund an investment spree that critics say would stave off the risk of economic stagnation in the currency area. (…)

Jens Weidmann, president of the Bundesbank, on Friday acknowledged the recent economic data had been “disappointing”. But he hit back at the calls for Germany to shift its policy stance, saying maintaining its budget balanced made “perfect sense” for a country with debts of more than €2trn set to face a “huge” burden from its aging society in the coming decades.

Why would anyone invest in any meaningful way in Europe-centric companies just keeps escaping me.

China to Inject More Funds Into Banks The central bank plans to inject as much as 200 billion yuan ($32.6 billion) into about 20 large national and regional banks to push the economy back to stronger growth rates amid deepening worries about a global slowdown.

(…) The latest effort by the People’s Bank of China, which will offer funds to about 20 large national and regional banks, follows last month’s move to pump 500 billion yuan into the country’s five major state-owned banks. It comes as concerns mount in Beijing that the nation will miss its growth target—set at 7.5% this year—for the first time since the 1998 Asian financial crisis. (…)

The economic slowdown has led Chinese leaders including Premier Li Keqiang to call on the central bank and other financial regulators to help make credit more accessible to businesses and consumers. The latest action by the central bank comes just as senior officials of the Communist Party prepare to gather for an important policy meeting in Beijing, which opens on Monday. At the top of their agenda is the rule of law, but the leadership is also likely to discuss ways to make local officials more accountable for their failure to galvanize economic activity, according to Chinese officials.

(…) Banks are reluctant to lend to small businesses as the slowdown in growth has raised the prospect of soured loans.

Another challenge is the lack of strong demand among larger firms for loans. Many Chinese companies appear less eager to spend. In a survey of more than 2,000 industrial firms in July and August, economist Gan Jie found that most said they didn’t need bank loans. Nearly half the firms (44%) reported overcapacity in their industries, with supply exceeding demand in China and abroad. (…)

U.S. Stocks: Tenacious or Teetering? Stocks ended a tumultuous week with a burst of strength, but some money managers are warning that the underlying problems that drove prices down in the first place still loom large.

Nothing really worth quoting from this article except this, which reveals that much of the recent problem lies with energy stocks:

Of the 118 energy stocks in the Russell 2000 small-stock index, three-quarters have fallen 30% or more, Mr. Sluymer said. Of the 81 large and midsize energy stocks in the Russell 1000 index, 40% have fallen that much.


I read a lot of stuff, even while on vacations on the other side of the planet. I am always surprised at how little emphasis is placed on earnings by the media and most popular strategists or market pundits. The fact is that the current turmoil is happening right in the middle of Q3’s earnings season and earnings are coming in pretty solid.

Of the 80 companies that reported so far, 57 (71.3%) beat estimates and earnings are beating by 5%. EPS were expected to rise 4-6% YoY in Q3 but, so far, they are showing +11.2%!

Trailing 12-m EPS are now seen near $115, up 12.5% YoY. On that basis, the Rule of 20 P/E is 18.1x, providing an 11% upside to the “20” fair value. If downside is 1700 (Rule of 20 P/E of 16.5 as in last correction), upside = +11% vs downside of 10%. Even odds but:

  • Interest rates have declined a lot;
  • Inflation is not rising;
  • Earnings are rising and beating again (look at the chart showing how equities are falling while the Rule of 20 Fair Index Value (yellow line) is rising strongly);
  • Oil is declining;
  • Mortgage rates are breaking below 4%;
  • Employment is strong, especially among potential first-time home buyers;
  • Europe remains a basket case and more and more investors are coming back to this sad reality;
  • China is a big unknown;
  • The U.S. dollar is strong;

So, what else is there to buy other than U.S. equities and some Canadian non-resource stocks? I would rather wait to see markets settle down but buying the dips is now pretty tempting.image

Ghost Loans to buy US shares at record levels Previous peaks have come ahead of stock market downturns

(…) Recent wild swings in asset prices have been blamed already in part on brokers cutting margins for those investors whose investments were approaching losses. Forced sales by those investors helped fuel the market rout.

Obviously, this might be a problem for a while…

NEW$ & VIEW$ (16 OCTOBER 2014)

I am writing this in Kyoto, Japan where the more than 1600 temples and 200+ shrines render life much more serene than in financial markets. Not as complete as usual, but I hope this helps.

Deflation Risk Feeds Global Fears Behind the spate of market turmoil lurks a worry that top policy makers thought they had beaten back a few years ago: the specter of deflation.

(…) The deflation concern is particularly pronounced in Europe and Japan, two economies where policy makers are struggling to come up with solutions to counter especially slow economic growth.

However, recent declines in commodities prices suggest that downward pressure on inflation—if not all-out deflation—could become a wider-ranging phenomenon, and one with some mixed implications for economies like the U.S. and emerging markets. (…)

The deflation concerns are particularly acute in Europe, where annual inflation in the 18 nations that use the euro was 0.3% last month, a five-year low that is far below the European Central Bank’s target of just under 2%. (…)

“Market valuations, especially for rich countries, have been well above what was warranted by fundamentals. What kept them up there was a belief that central banks were markets’ best friends,” said Mohamed El-Erian, chief economic adviser at Allianz Group. “Most people now recognize that the ability of central banks to address what ails the global economy is weaker than they believed.” (…)

The U.S. confronts much different circumstances than Europe and Japan. U.S. inflation had been rising toward the Fed’s 2% objective earlier this year but now faces a downward tug amid the weakening global growth and a strengthening U.S. dollar. The Labor Department reported Wednesday that producer prices in the U.S. fell in September. Sharp drops in commodities prices this month could add to downward pressure.

Yet falling commodities prices have silver linings. For one, the decline is being driven in part by a U.S. energy production boom—not just sagging global demand for goods. Moreover, falling gasoline prices are a boon to U.S. consumers: One rule of thumb is that every one-cent drop in the price of gasoline amounts to a $1 billion boost to U.S. household incomes, and gasoline prices have dropped by 13 to 17 cents from a year ago, according to the automobile group AAA. (…)

The U.S. Goods PPI ex-food, ex-energy was actually up 0.2% in September and is up 0.4% in the last 3 months (1.6% annualized). Services PPI declined 0.1% after rising 0.4% in the previous 2 months. Declining food and energy prices will free much money for discretionary spending in coming months. Let’s see how consumers behave. In the past, the U.S. consumer has tended to spend up.

Europe does not benefit as much from falling oil prices since taxes are a much large piece of the retail price than in the U.S..

Consumer Caution Dents Retailers’ Holiday Hopes Spending at U.S. retailers declined in September, raising concerns about the strength of American consumers heading into the holiday-shopping season.

Retail sales fell 0.3% in September, the Commerce Department said Wednesday. The broad-based decline came alongside weakening consumer confidence and minimal wage growth that has weighed on the recovery in recent years.

While spending at retailers is up 4.3% from a year earlier, double the pace of inflation, the September stumble continues a choppy pattern that shows many Americans are cautious heading into the holiday shopping season. (…)

Pointing up A slowdown from strong summer auto sales, falling gasoline prices and the timing of Apple Inc.’s iPhone 6 release all played a role in the latest data. Earlier concerns of a consumer slowdown in July were eased when sales for that month were revised up to a respectable 0.3% gain from an initial flat reading. (…)

Wal-Mart Stores Inc., WMT -3.57% citing what it called a tougher sales environment than it had anticipated, cut its forecast for sales this year and doesn’t see much improvement in 2015. Wal-Mart said it expects sales to grow by 2% to 3% for the current fiscal year, down from the 3% to 5% sales growth it initially expected. (…)

Seasonally adjusted retail sales declined in most categories in September, though sales did jump 3.4% at electronics and appliance stores. Purchases of Apple’s new iPhone, which went on sale Sept. 20, likely contributed. Sales at nonstore retailers, a category including online shopping, fell 1.1% on the month. That could reflect back-ordered phones that were purchased, but not delivered, before Oct. 1.

Motor vehicle and parts sales fell 0.8% in September, the first decrease in the category since January. Still, auto sales, which rose 9.5% from a year earlier, have been a bright spot for the economy as Americans replace aging vehicles.

Sales at gasoline stations were down 0.8% from August. Average gasoline prices fell 40 cents per gallon by the end of September from their spring peak, according to the U.S. Energy Information Administration.

This last line is not to be overlooked as lower gasoline prices are impacting total sales. Gas station nominal sales are falling rapidly and will continue to drop in coming months. While this negatively impacts the overall stats, it frees much money for discretionary spending.

From Haver’s table below, here are the facts: total retail sales are are up 0.6% Q3, 0.3% ex-autos but 0.8% ex gaz and building supplies (+3.3% annualized)


Amazon to Hire 80,000 Holiday Workers Amazon plans to hire 80,000 seasonal workers for its warehouse network in the U.S., representing a 14% increase from last year as the company brings its massive distribution facilities closer to urban centers.

U.S. Producer Prices Unexpectedly Slip; Core Index Unchanged

U.S. Small Business Optimism Retreats; Pricing Power Deteriorates Further

U.S. Gasoline and Crude Oil Prices Reach New Lows

Saudis prepared for $80 oil in bid to retain market share: sources

(…) Saudi officials have given a different message in meetings with investors and analysts: the kingdom, OPEC’s largest producer, will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The discussions, some in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto aim of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.

The Saudis appear to be betting lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions. (…)

On Sunday, Ali al-Omair, oil minister of Saudi Arabia’s core Gulf ally Kuwait, appeared to be the first to articulate the emerging view of OPEC’s most influential member, saying output cuts would do little to prop up prices in the face of rising production from Russia and the United States.

“I don’t think today there is a chance that (OPEC) countries would reduce their production,” state news agency KUNA quoted him as saying.

Omair said that prices should stop falling at around $76 to $77 a barrel, citing production costs in places such as the United States, where a shale oil boom has unexpectedly reversed dwindling output and pushed production to its highest level since the 1980s. (…)

Oil prices: Saudi slick measures

In April 1986, US jets bombed Libya, George Michael’s “A Different Corner” topped British pop music charts, and Chernobyl’s fourth reactor exploded. Oil prices also fell below $10 a barrel for the first time in a decade. Years before, Saudi Arabia had tried to cut output to counter the rise of North Sea crude and energy efficiency in the west. By 1985, this had failed. (…)

52-Week Lows in the Energy Sector Exceed 40%

No sector of the market has been harder hit in the last several days than the Energy sector, and with its decline, the list of new 52-week lows has been steadily expanding.  In Wednesday’s trading, 42% of the stocks in the S&P 500 Energy sector hit 52-week lows.  As shown in the chart below, the net reading of 52-week highs (percentage of 52-week highs minus percentage of 52-week lows) for the sector is now at its most negative levels in over three years since the aftermath of the US debt downgrade.  We still have a ways to go before getting below those levels, and let’s just hope the days when every stock in the sector trades at a 52-week low simultaneously aren’t seen again for a very long time.

Stocks Swoon in Frenzied Trading Frenzied trading swept global financial markets, with the Dow industrials tumbling as much as 460 points before partially recovering and investors scrambling to buy safe-haven government bonds.

Wednesday’s session briefly saw U.S. Treasury yields plunge to their lowest level in 16 months, in what traders said was the sharpest move in years, and the S&P 500 stock index wipe out its gains for 2014. Then both markets made U-turns. Oil prices continued this month’s deep slide, with Nymex crude falling six cents to $81.78 a barrel, off 24% since June.

While disappointing economic news in Europe and the U.S. provided the backdrop for Wall Street’s most turbulent day since 2011, traders said the outsize moves were magnified by hedge funds and other short-term players bailing out of money-losing investments. Traders expressed amazement at the wild ride, which came on enormous trading volume for both stocks and bonds. (…)

Feeding the gloom Wednesday morning was weaker-than-expected news on U.S. consumer spending, as retail sales fell 0.3% for September from the prior month. In addition, German data showed consumer prices holding at low levels last month, stoking fears of deflation, a damaging cycle of falling prices and spending. (…)

Since hitting an all-time high Sept. 18, the S&P 500 is down 7.4%, thanks in part to its 0.8% slide Wednesday, making for the sharpest pullback for the benchmark since late 2012. Over the past year, however, the S&P 500 remains up 8.2%. (…)


From RBC Capital Markets:

    • 14.9% of the S&P 500’s market cap (49 companies) has reported. So far, earnings are beating by 5.6% while revenues have surprised by 1.3%.
    • Expectations are for revenue, earnings and EPS growth of 4.1%, 5.7% and 7.6%, respectively. Assuming an historical beat rate, EPS will likely come in closer to 10%.
Where Do Stocks Go From Here?

(…) “I think we may have seen the worst of the selloff, but I think the market is going to continue to be volatile here,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, which oversees about $190 billion in New York. (…)

Leo really said: “I have no clue where stocks go from here”.

The only way to answer the question is to look at the risk/reward equation. The Rule of 20 P/E is now 18.06, down from 20.0 last June. If it retreats between 16 and 17x like in the last correction, we have another 10% to lose. On current estimates for Q3, we would lose 7%. On the other hand, the current upside to “fair value” is 15% (2106). The last time we had such upside potential was in February 2013.


Market Tumult Squeezes Big Banks

(…) Bank stocks were hammered Wednesday harder than the overall stock market, as investors, surprised by the sudden plunge in yields, questioned rosy scenarios that had forecast that bank earnings would rise along with interest rates next year.

The KBW Bank Index fell 3.34%, its worst drop since November 2012, compared with a 1.1% drop in the Dow Jones Industrial Average. (…)  For the year, the Dow is off 2.6%, while the bank index has fallen 4.2%. (…)

Banks had been eager for higher interest rates because the rates they charge borrowers for loans would rise faster than the rates they pay out to depositors. (…)

Wells Fargo WFC -2.01% & Co. said Tuesday that its net interest margin had slid to 3.06% in the third quarter from 3.39% in the third quarter of last year and 4.27% in the first quarter of 2010. It was the bank’s lowest net interest margin in at least the past three years.

If the rates continue to stay low, Wells Fargo will take a variety of steps, including being “much more vigilant on expenses,” said the bank’s chief financial officer, John Shrewsberry, on a call with analysts to discuss the company’s third-quarter earnings. (…)

On Wednesday, Bank of America’s Mr. Thompson, said: “We continue to remain positioned to benefit as interest rates move higher, particularly from the short end of the curve,” meaning increases in short-term interest rates.

But in response to an analyst’s question, he said that the bank’s net interest income could fall $100 million below the third quarter under a more cautious rate scenario. Bank of America’s stock fell 4.6% on Wednesday. (…)

Mike Mayo, an analyst at CLSA, said that the fear in the markets now is that the U.S. may be sliding into a deflationary environment, similar to what Japan has experienced. This would slow growth even further and cut bank earnings prospects. (…)

Keefe, Bruyette & Woods said in a recent report that it still expects a two-percentage point increase in the Fed’s short-term rates by 2016.

But Keefe Bruyette added that while bank earnings could rise from 3.2% to 5.4% if rates do still rise, they could drop anywhere from 4% to 9.4% in 2016 if they stay low.

Surprised smile BAC bank funded $11.7 billion in mortgages during the third quarter, down from $22.6 billion a year ago. Results were higher than the second quarter, which had $11.1 billion in mortgages.

Netflix Shares Plunge 25% as User Growth Disappoints

With Stock Prices Tumbling, Investors See Fed Pushing Back Rate Hikes

Stock Market Blowout Isn’t Keeping Dallas Fed Leader Fisher Up At Night

“A market correction doesn’t mean the economy is in trouble,” Mr. Fisher said in an interview on Fox Business Network Wednesday. “Without mentioning any companies in particular, prices are getting more rational and some very good companies are even being mispriced to the down side,” he said.