NEW$ & VIEW$ (16 APRIL 2014)

U.S. Housing Starts Climb 2.8% Home builders stepped up construction for the second straight month in March, but broader trends suggest the market remains in a slump.

U.S. housing starts rose 2.8% in March to a seasonally adjusted annual pace of 946,000, fueled by growth in single-family homes, the Commerce Department said Wednesday. Starts for February were revised higher to a pace of 920,000 from an initially reported 907,000.

But other figures indicated the recovery remains choppy. Compared with a year earlier, housing starts were down 5.9%. And building permits, a bellwether of future construction, declined 2.4% in March from February to a pace of 990,000, marking the fourth drop in five months.

Both housing starts and permits were weaker in March than expected. Economists surveyed by The Wall Street Journal had projected home starts to rise to a pace of 965,000 in March and permits to hold steady at a pace of 1.01 million.

In an encouraging sign, the rise in home starts was driven entirely by a healthy 6% pickup in construction of single-family homes, which could indicate stronger demand among middle-class families. Construction of single-family homes has now risen for two consecutive months after falling sharply in December and January.

Construction of multifamily homes—including apartments and condos—fell 3.1% in March and was flat in February. That sector is particularly volatile and often doesn’t reflect underlying demand in the market. (…)

Other signs point to a struggling housing market. The National Association of Home Builders reported Tuesday that builder confidence in the market for single-family remained downbeat overall.

Sales of previously owned homes fell in February, marking the sixth decline in seven months, the National Association of Realtors reported last month. New-home sales also fell in February, according to the Commerce Department.

U.S. Consumer Prices Rise Slightly Higher housing and food costs helped lift overall consumer prices last month, a development that could reassure some Fed officials as they roll back their easy-money policies.

The consumer-price index, which measures how much Americans pay for everything from hospital visits to gasoline, advanced a seasonally adjusted 0.2% in March from the prior month, the Labor Department said Tuesday. That was slightly more than February’s 0.1% gain, which economists surveyed by The Wall Street Journal also forecast for March.

Compared with a year earlier, consumer-price inflation accelerated to 1.5% in March from February’s 1.1%. Stripping out volatile food and energy prices, the measure ticked up to 1.7% from 1.6%, putting it closer to the to the Fed’s 2% target and signaling healthier demand across the economy. (…)

March’s uptick in inflation was largely due to rising food and housing costs. Food prices rose 0.4% as droughts in parts of the U.S. and Brazil undermined agricultural output. Housing-cost inflation accelerated to 0.3% in March from 0.2%, indicating demand for housing is straining available supply in many parts of the country.

Gasoline prices fell 1.7% in March, likely the result of a surge in domestic oil production and subdued demand. Prices for new vehicles were flat, while apparel costs rose a meager 0.3%. (…)

Let’s dig a little deeper:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in March. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.4% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.5%, and the CPI less food and energy rose 1.7%


The median CPI has been rising 0.2% monthly in each of the past 5 months (2.4% annualized). Total CPI has been trending below the median CPI for close to 18 months. It should continue to close that gap and will likely move above the median CPI rate of change in the near future. If you missed the latest PPI report, it should be seen here.

Food, shelter costs accelerating:

The significant deceleration in food inflation between early 2012 and the end of 2013 has played an important role in limiting overall price pressures. Things are turning out to be quite different early in 2014. According to just-released data, the food component of the U.S. CPI surged 0.4% in March, the biggest increase since the autumn of 2011. As today’s Hot Charts shows, annual inflation is now running at just above 1.7%. We think that the ongoing drought in California will pressure food inflation to well over 2% as soon as May. This development is occurring at a time where shelter costs are rising at a post-recession high of 2.7% annually. With the two heavyweights of the CPI rising in unison (shelter is 32% of the CPI and food is 14%), the potential for some inflation pass-trough is greater now than at anytime since the end of the recession given the much improved labour markets. We still think that a stronger U.S. economy coupled with a pick-up in headline inflation will send the 10-year U.S.Treasury yields back above 3% in the coming months. (NBF)


Commodity prices turning back up. The sharp (27%), sustained decline in commodity prices since mid-2011 may have run its course.image

The best correlation with commodity prices is world industrial output growth, now recovering (chart from Ineichen Research):


Following a decade of very rapid economic growth, China is set to slow. This has raised concerns that a Chinese rebalancing could lead to lower commodity consumption. The most recent IMF World Economic Outlook looks at the relationship between commodity consumption and income for 41 countries over the period 1980-2013 to gauge prospects for future consumption in China. As today’s Hot Charts show, patterns in energy and metals consumption in China are broadly in line with the predicted values of the IMF regression.

Although the study reveals that metals consumption tends to peak well before that of energy, the current level of per capita GDP in China (around $6,000 USD) remains well below the level that have in the past been associated with falling volume demand. According to the IMF, Chinese demand should continue to rise for the foreseeable future – implying positive spillovers for exporters of commodities. (NBF)image

And now this, coming to a city near you:

Pointing up Tight Job Market in U.S. Cities Prompts Higher Pay

To hire 10 to 15 project coordinators this year, Sabre Commercial Inc. has boosted pay 10 percent and added a 401(k) retirement plan.

“It is an employee’s market,” said John Cyrier, co-founder and president of the 48-employee Austin, Texas-based builder. “We are definitely seeing a labor shortage in Austin and central Texas. I see it only getting worse.”

Companies across the U.S. from Texas to Virginia and Nebraska are struggling to fill positions with metropolitan jobless rates below the 5.2 percent to 5.6 percent level the Federal Reserve regards as full employment nationally. Competition for workers is prompting businesses to raise wages, increase hours for current employees, add benefits and recruit from other regions. (…)

Unemployment in Austin-Round Rock-San Marcos was 4.8 percent in February, Labor Department figures show. Forty-nine, or 13 percent, of the 372 metro areas reported jobless rates below 5 percent that month, the most for February since 2008, two months after the start of the recession. The lowest was 2.8 percent in Houma-Bayou Cane-Thibodaux, Louisiana, because of offshore-oil exploration in the Gulf of Mexico.

Four years ago, during the worst of the labor-market slump, just two cities had rates below 5 percent. (…)

In New Orleans, where unemployment is 4.2 percent, “we are getting killed on overtime,” said Ti Martin, co-owner of Commander’s Palace, SoBou and Café Adelaide, which employ a total of more than 350 people. “We are doubling up and working extra hours,” and managers are filing in as cooks. The restaurants have a dozen or more openings, mainly for experienced chefs and servers, she said. (…)

In Omaha, with a 4.5 percent unemployment rate, the Greater Omaha Chamber is coordinating a program that will increase the number of internships to more than 300 this year from 135 in 2012 at employers including Mutual of Omaha Insurance Co., Union Pacific Corp. and ConAgra Foods Inc. Exposing young people to the city has been an “excellent recruitment tool,” said Sarah A. Johnson, director of talent and workforce initiatives for the chamber.

A tight market “is literally our reality,” said Omaha Steaks International Inc. spokeswoman Beth Weiss. The food seller hired more than 3,000 people for seasonal jobs during the holidays and uses cash bonuses and employee discounts to try to attract workers. (…)

The jobless rate in the Washington metro area, which includes the Virginia cities of Alexandria and Arlington, was 5.1 percent in February, near a five-year low, which means some professional jobs have gone begging.

“The competition for people is really fierce right now,” said Gar Muse, principal with Cooper Carry, an architectural firm that has increased staff to 50 in Alexandria from 40 in 2010 and plans to hire more. Cooper Carry boosted its advertising to seven print and online outlets this year from a single posting and uses social media to promote job openings.

The company also has had to work to keep existing staff. “We have lost a handful of people,” Muse said. “They are constantly being approached and we have had to make some counteroffers.” (…)

Even with hot labor markets in some cities, twenty-nine metro areas still have unemployment rates of at least the October 2009 post-recession peak of 10 percent, including Atlantic City, New Jersey, and Fresno, California.

The national picture is “generally consistent with a slowly improving” job market that is “still far from complete health,” said Rob Valletta, research adviser at the San Francisco Fed, whose work has been cited by Yellen. (…)

Meanwhile, in Europe,

Deflation Threat Becomes More Widespread in Europe

The European Union’s statistics agency Wednesday said consumer prices in the 18 nations that share the euro were 0.9% higher than in February, and 0.5% higher than in March 2013. That confirmed the preliminary estimate released late last month, and is the lowest annual rate of inflation since November 2009.

Eurostat said the core rate of inflation—which strips out volatile items such as energy and food—slipped to 0.7% from 1.0% in February, matching the record low reached in December 2013.

Eurostat also said the annual rate of inflation in the broader EU—which includes 10 countries that don’t use the euro—fell to 0.6% from 0.8% in February, its lowest level since October 2009.

Eurostat’s figures show that five eurozone members experienced declines in prices in the 12 months through March, while three members of the EU that don’t use the euro shared the same experience. But other members were on the cusp, with four eurozone members recording inflation rates below 0.5%, as did four EU members that don’t use the euro. Of the EU’s 28 members, only one had an inflation rate in excess of 1.5%: the U.K. where prices rose 1.6%, in the 12 months to March.

China’s Growth Slows China’s gross domestic product growth slipped in the first quarter to its slowest level in 18 months as the world’s second-largest economy continued to downshift.

The 7.4% growth over the year-earlier period was below the 7.7% level seen in the fourth quarter of 2013, and slightly below the target of “about 7.5%” set by China’s leadership for all of 2014. But it came in slightly above economists’ expectations, according to a Wall Street Journal survey of analysts. (…)

Officials at the statistics bureau attributed then slower first-quarter growth data to weak external demand—affected in part by the severe U.S. winter—a struggling real-estate market and structural changes. (…)

Industrial production grew 8.8% in March, slightly below analyst expectations of 9%. This compares with 8.6% year-over-year growth in January and February, which were combined to limit distortions from the Lunar New Year holiday, according to the bureau. (…)

Fixed-asset investment—covering areas such as machinery, land and buildings—edged up to 17.6% in the first quarter, slightly below expectations, compared with 17.9% year-over-year in January-February. Analysts attributed the result in part to problems in the housing sector. (…)

Retail sales, meanwhile, posted 12.2% year-over-year growth for March, in line with the consensus and a modest increase over the 11.8% year-over-year rise seen in January and February.(…)

Electricity, Steel Hint at Economic Uptick in China Though China’s economy grew in the first quarter its slowest pace in 18 months, two proxies-production of steel and electricity-point to some resilience.

Electricity output in March was up 6.2% from a year earlier to 453 billion kilowatt-hours, faster than the combined 5.5% pace of January and February (the two months were counted together to limit distortions from the Lunar New Year holidays). Steel production was up 2.2% to a record 70.3 million tons. That compares with a 0.6% expansion in February and a contraction of 3.2% in January. (…)

The electricity- and steel-growth numbers for March were weaker than last year’s, when the economy expanded 7.7%. Growth in electricity output in March was still well below last year’s average 7.6%. Its 5.8% expansion in the first quarter was slower than broader economic growth. Crude steel production in the month lagged behind last year’s average 7.5% growth rate.

US Treasury slams China over currency  Comes as China’s FX reserves hit nearly $4trn

In mid January, I began TAPERING…EQUITIES with this chart from The Short Side Of Long. We have since added 14 weeks to the current bull market, making it the second longest in the last 80 years. I must sadly reckon that I have lived through the 5 longest and worked through the four longest bull markets…

Punch To save you time, I calculated that to make it the longest, this bull would have to keep running until April Fool’s day next year. Here’s something to really look forward to!

And while the Roubinis of this world were getting famous rehashing about the lost decade, equities were compounding at a 25% annual rate. The 5-year gain of 153% is the fifth best in nearly 150 years.

May I point out that the four previous extraordinary market performances have all ended pretty badly for the unprepared. Remember the song Spinning Wheel?

Note What goes up must come down
Spinnin’ wheel got to go ’round (…)

Did you find the directing sign on the
Straight and narrow highway
Would you mind a reflecting sign
Just let it shine within your mind
And show you the colors that are real Note

Believe it or not, these guys also sang More and More, I Can’t Quit Her, Go Down Gamblin’, Back Up Against the Wall, My Days Are Numbered, And When I Die. Their name? Blood, Sweat & Tears (really!)…

…which is what will eventually happen to people populating this next chart (courtesy of Ian McAvity):


NEW$ & VIEW$ (15 APRIL 2014)

U.S. Retail Sales Surge as Consumers Rev Up Growth

Retail sales advanced 1.1% in March from the prior month, the best gain in a year and a half, the Commerce Department said Monday. The improvement, along with an upward revision of February’s sales to a 0.7% gain, served as confirmation of shoppers shaking off the winter blues that led sales to plunge in December and January.

Still, the March gain pushed first-quarter retail sales only barely above the fourth-quarter level. (…)

Monday’s report showed broad-based improvement in retail sales. Consumers spent more at big-box stores, in restaurants and on the Internet. Outlays at building and gardening suppliers rose 1.8% from February. Furniture-store sales were up 1%. (…)

Auto sales rose 3.4% from the previous month to lead the overall gain. (…)

Forecasters at Macroeconomic Advisers project growth in U.S. gross domestic product will slow sharply in the first quarter to a 0.5% pace. But the firm anticipates second-quarter growth to blast ahead to a 3.8% rate. Still, that averages to 2.2% pace of growth in the year’s first half.

Doug Short tracks core retail sales:

Click to View

BloombergBriefs is not impressed:

imageWhile the March rebound in spending is impressive, household consumption in the first quarter should expand at a subdued 2 percent rate. Moreover, the underlying detail of the data does little to suggest a breakout above the three-year trend in personal consumption of 2.4 percent. Outside of the rebound in auto sales, growth revolved around weather sensitive categories such as building materials, which increased 1.8 percent. Demand for general merchandise expanded at a 1.9 percent rate and apparel increased 1 percent.

The February upward revisions to the top line estimates, to 0.7 percent from the initial 0.3 percent, indicate that the release of pent-up demand in the wake of weather-related weakness in spending has probably run its course.

If one adjusts the data for inflation and population growth, the trend in retail sales remains well below pre-recession levels. On a three-month annualized pace, sales excluding gasoline are down 0.1 percent, which is more indicative of the true financial shape of the average U.S. household. Whether one looks at a deflated trend in personal consumption or retail sales, it is evident that U.S. households are still in the process of adjusting to the new realities of the economy.

The causes of this are straightforward. Household deleveraging, although late in the process, has not yet run its course. Meanwhile, income growth is insufficient to support a sustainable move in consumption back toward the pre-crisis trend and the thawing in credit markets has not spread beyond large firms and the two upper quintiles of income earners. The bottom three quintiles of income earners, which comprise 60 percent of the population and are responsible for 40 percent of total consumption, are still in the process of adjusting to the reduction in food stamps and emergency unemployment benefits that occurred at the end of 2013. While the increase in the labor force participation rate in the March jobs report was encouraging – it means some of those who lost unemployment benefits are probably rejoining the workforce – this process of adjustment will probably continue to act as a net drag on spending.

Consumer Price Index rises by 0.1%

Nothing too scary, yet. Still in the 1.5-2.0% range but ISI’s Ed Hyman is joining my camp of watchers. After noting Friday’s strong PPI, Ed now says that inflation has bottomed. He is worried by trends in average hourly earnings and is pondering the actual amount of labor slack.

Lightning Cass/INTTRA Ocean Freight Indexes Report

Export container volumes were 18.6 percent lower than last March, and were at the lowest level for March since our index series began in 2010. Exports increased to 19 of our top 25 trading partners, but the rise was tempered by yet another decline in exports to China.

March imports were higher than in March of 2013 (by 3.3%), but lower than 2011 and 2012 levels. (Cass)

 image image

Lightning Housing Trouble Grows in China Overbuilding by Chinese real-estate developers has left many of the country’s smaller cities with a glut of apartments for sale, driving down prices and posing an economic threat.

(…) Data in some of these smaller cities is scarce. But in 100 cities tracked by Nomura HoldingsInc., 42% of those classified as Tier 3 and Tier 4 saw housing prices decline in March from February. Home construction in such cities is racing well ahead of population growth, says Beijing research firm Gavekal Dragonomics, as developers continue to build new projects without buyers. (…)

Yet even with market strength holding up in the most prominent cities, the overall value of Chinese housing sold in the first two months of 2014 declined 5% from a year earlier, government statistics show. Private-sector data indicate the decline continued in March. (…)

The construction, sale and outfitting of apartments accounted for 23% of China’s gross domestic product in 2013, Moody’s MCO +1.79% Analytics calculates. That is up steeply from 10% in 2006 and is higher than American housing’s share of GDP reached during the height of the U.S. housing boom in 2006, Moody’s says. (…)

The finances of some cities and developers are being affected. China’s local governments depend on land sales to developers for about 40% of their revenue. Now those sales are bringing in less cash. (…)

As developers grow short of money, some are using apartments instead of cash to pay their bills to construction companies. Anne Stevenson-Yang, research director at J Capital Research in Beijing, who crisscrosses China checking out property developments, sums up the real-estate market in China’s smaller cities “an incredible house of cards.” (…)

Take a drive through China’s third- and fourth-tier cities and these issues are all too visible. Many cities are ringed by row after row of empty apartment buildings that reach 20 stories into the sky. At night, they are dark save for blinking red lights on top to warn airplanes.

(…) over the past few years, building has proceeded at such a blistering pace that Nicole Wong, a real-estate analyst in Hong Kong for CLSA, figures the pace of construction in third- and fourth-tier cities needs to fall by half between 2013 and 2020 to get supply and demand somewhat back in balance. (…)

European Companies Hit by Exchange Rates A handful of big European companies warned that exchange rates will continue to weigh on performance, another challenge for companies still dealing with weak global growth
Light bulb Robert Arnott: A Better Mousetrap?

Good Consuelo Mack interview on an important topic. Arnott is totally right.

Is there such a thing as a better mouse trap? This week’s Financial Thought Leader guest has created an alternative to traditional index funds. Instead of being based on market capitalization or stock price, his Fundamental Index® approach measures fundamentals such as sales, profits, and dividends to determine the weight securities have in his indexes. Research Affiliates Chairman and CEO Robert Arnott explains why fundamentals can make a big difference.