Pretty long post today, but interesting, and not very encouraging…
The latest data on U.S. workers’ willingness to change jobs adds to evidence the job market slowed this winter — and just not because of the weather.
The share of U.S. workers who voluntarily resigned from their jobs — the nation’s “quits rate” — dipped to 1.7% in January, from 1.8% in December, the Labor Department said Tuesday. That was the first drop in this rate since March 2013, though it remains just below its highest level during the economic recovery. (The Labor Department revised its data on quits, which began in December 2000; originally, the rate in December 2013 was 1.7%.)
All told, some 2.38 million workers quit their jobs in January, down slightly from 2.42 million in December and the second straight drop following months of gradual improvement.
Economists, including new Federal Reserve Chairwoman Janet Yellen, consider the willingness of workers to leave their jobs an important gauge of the health of the labor market. When workers are confident about jobs, they’re more likely to jump ship to find a new one or because they have already secured a position. When they’re not confident about the labor market, they stay put.
A healthy amount of quitting also makes the labor market more fluid and dynamic. If workers don’t quit, there are fewer openings for other job seekers. Most job openings come from people leaving jobs, not from things like tech firms staffing up. (…)
Other data in Tuesday’s report also pointed to weakness on jobs this winter. The “hires” rate, or the number of hires as a share of the employed, remained stuck at 3.3% for the fourth straight month, suggesting firms aren’t picking up their hiring. (This rate was 3.2% in January 2013—and in January 2012.) (…)
Here’s the best chart on JOLT, courtesy of CalculatedRisk:
Mortgage applications decreased 2.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 7, 2014. The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier.
U.S. WHOLESALE SALES CRATER IN JANUARY
I did not see this important release in any media this morning.
A 1.9% monthly drop is huge. It may be the weather, but it may also be that Christmas sales were so bad that inventories need to be rapidly and radically worked down. Inventories seem to be particularly high in Automotive (+6.9% YoY), Furniture (+6.2%)
Currently, many businesses aren’t required to pay overtime to certain salaried workers if they earn more than $455 a week, a level that was set in 2004 and comes to roughly $24,000 a year. The White House is expected to direct the Labor Department to raise that salary threshold, though it is unclear by how much.
Ross Eisenbrey, vice president of the liberal Economic Policy Institute, and Jared Bernstein, a former White House economist, recently proposed the limit be increased to $984 a week, or roughly $50,000 a year.
“That would mean between five- and 10-million people could be affected, but they might choose a lower number,” Mr. Eisenbrey said about the White House plans.
The rule change is expected to apply to salaried workers, as most of those paid by the hour already qualify for overtime. It would amend the implementation of the Fair Labor Standards Act and likely would require employers to pay time and a half for weekly work in excess of 40 hours by certain employees.
Euro-Zone Industrial Output Down Industrial production in the 18 countries that share the euro fell for a second month in January, underlining the fragile nature of the economic recovery.
The European Union’s statistics agency Eurostat Wednesday said output fell by 0.2% from December 2013, although it was up 2.1% from January 2013. The decline in output was a surprise, with the consensus forecast of 22 economists surveyed by The Wall Street Journal last week being for an expansion of 0.5%. (…)
The decline in output wasn’t widespread across the currency area, with increases recorded in Germany and Spain. However, there was a very sharp fall in the Netherlands, the euro zone’s fifth largest member, which saw output drop by 6.4% from December, while in Finland, output fell by 3.5%, and in France, it fell by 0.3%.
Figures for December were revised higher, and Eurostat now estimates that output fell 0.4% during the month, having previously calculated they fell 0.7%.
But it could also be due to this:
Power Companies Cut Dividends as Energy Subsidies Hit Earnings Renewable Energy Generation Erodes Wholesale Power Prices, Hits Profitability
European utilities E. ON SE EOAN.XE -0.71% and Enel ENEL.MI +0.16% SpA lowered their annual dividends Wednesday as the subsidy-led boom in renewable energy across the region undermined their fossil-fuel electricity business and hit earnings.
For decades utilities such as Germany’s E. ON and Italy’s Enel have generated vast profit with fleets of industrial-scale plants that powered Europe’s economies.
More recently, a surge in renewable energy generation, which Germany and other European Union governments have heavily subsidized in the hope of reducing carbon-dioxide emissions, has eroded wholesale power prices and diminished the profitability of conventional plants.
E. ON slashed its yearly dividend to shareholders by nearly half to €0.60 a share from €1.10 paid out last year. (…)
The utility said that underlying profit, an after-tax figure that strips out nonrecurring effects, was down 46% at €2.24 billion. Earnings before interest, taxes, depreciation and amortization fell 13.5% to €9.32 billion, on a 7.8% decline in revenue to €122.5 billion. E. ON adjusts Ebitda to exclude nonrecurring items.
The company expects 2014 Ebitda between €8 billion and €8.6 billion and underlying profit of between €1.5 billion and €1.9 billion.
Enel reduced its dividend by 13% to €0.13 but pledged to lift its payout ratio to at least 50% of ordinary net profit, which excludes special items, from its current payout policy of at least 40%. (…)
The poor results chime with the mood among most of Europe’s other established electricity providers in recent weeks. In response to the worsening business environment, utilities across Europe are cutting costs and thousands of jobs. Some have responded to the poor power price level by shutting down or mothballing unprofitable power plants. E. ON plans to shut down a total of 13-gigawatts of generation capacity, which equates to the output of at least 13 large nuclear reactors or more than a quarter of E. ON’s fleet of conventional power plants in Europe.
E. ON’s German rival RWE AG RWE.XE -0.94% last week reported its first net loss in more than 60 years, after booking billions in write downs as renewables continue to squeeze its plants and curb wholesale electricity prices. RWE lowered its 2013 dividend payment to €1 a share, half of what it paid the year before. The crippling impact of renewable energies on the European power generation industry was evident last month when France’s GDF Suez SA GSZ.FR -1.27% announced write-downs worth €14.9 billion. (…)
Emerging markets have substantially underperformed U.S. equities in the past year as investors realized there is no such thing as a one way ticket. The underperformance occurred in spite of promising outlooks early in 2013 as per the global PMIs. Things changed radically in May after Ben Bernanke murmured “taper” for the first time and speculative funds got the jitters.
Nearly 12 months later, EM PMIs remain in contraction territory while the economic momentum has seemingly shifted to developed countries which now boast generally expansionary PMI readings, nearly opposite to their January 2013 levels (the RBC Capital table dates before the release of the U.S. February ISM at 53.2).
But EMs are primarily exporters to the DMs making the current situation rather awkward if not unstable. It may also be that the combination of a Chinese slowdown with the huge devaluation of the yen has shifted market shares in South East Asia. We will know shortly since losing countries will need to address their new found inability to compete.
The Made in China label is losing traction with its two biggest customers. After three decades of gains, China’s share of U.S. imports has plateaued and in Europe it’s in decline.
The steepest losses are in the European Union, where China’s share of imports slumped to 16.5 percent in the first 11 months of last year, from a 2010 high of 18.5 percent, according to data compiled by Bloomberg News. In the U.S. the needle has barely moved in the past five years, holding around 19 percent.
China’s low-cost vantage has been blunted by rising wages and an appreciating currency, with cheaper nations including Vietnam and Bangladesh competing to sell products from T-shirts to shoes. (…) The yuan has appreciated about 35 percent against the dollar since July 2005, wages have tripled in the past decade and China’s labor force has begun to shrink. (…)
The nation’s working-age population began declining in 2012, Chinese government data show. The pool of 15- to 39-year-olds — the backbone of factories making clothes and toys — has contracted by 35 million in the past five years, a U.S. estimate indicates.
The changes have led global manufacturers to begin shifting production to countries such as Bangladesh and Vietnam, which surpassed China in 2010 as the largest supplier of Nike Inc. footwear.
Higher costs and wages in China are prompting some Asian companies to set up manufacturing plans in neighboring countries. Samsung Electronics Co. is building a $2 billion plant in Vietnam that may make 120 million handsets by 2015.
U.S. and European clothing makers are also looking elsewhere. Some 72 percent of chief purchasing officers who oversee a collective $39 billion in annual purchases for apparel firms expected to shift to lower-cost nations — with Bangladesh, Vietnam and India as the top three destinations for the coming five years, a survey conducted by advisory firm McKinsey & Co. in 2013 shows. (…)
(…) Stephen Green, head of Greater China research at Standard Chartered, said that a sharp easing in interbank interest rates in recent days may be an early indication that Beijing is preparing a more supportive economic policy. Further actions could include a cut in bank required reserve ratios – which would release more liquidity into the economy – and an invigoration of investment projects under the current five year plan, Green added.
Jianguang Shen, Greater China chief economist at Mizuho Securities, said that the recent depreciation of the renminbi against the US dollar and the decline in interbank rates signified that “monetary policy has started to ease already”. (…)
Several inter-related constraints conspire to make any stimulus initiative by Beijing delicate to execute. Any credit-centric stimulus would risk setting back the progress that China has made in slimming down its sprawling shadow finance system. An investment-centric programme, for its part, could end up compounding the issue of chronic overcapacity in heavy industrial sectors such as steel and cement.
However, analysts said, allowing the slowdown to continue unchecked in an environment of tightening credit could trigger a domino effect of corporate bond and trust product defaults. (…)
Judgments on whether or not Beijing will be able to pull off this balancing act, Botham said, defines the line between China optimists and China pessimists. (…)
Consider that this is a huge,complex ship to manoeuver and that its captains have little experience stirring in such heavy cross-currents…China clearly has decided to depreciate its currency. Others will likely follow.
The Bank of Thailand on Wednesday chose to cut its policy rate by 25 bps to 2 per cent – the lowest level since 2011 when the country was battling widespread flooding. The monetary policy committee said in a statement that it was acting to “lend more support to the economy”.
Thai household debt has jumped sharply, from 55 per cent of GDP in 2007 to about 80 per cent now, while the country is also losing market share in exports. (…)
Indonesia and India have already carried out a number of increases since last summer, partly to stem rapid capital outflows sparked by the “taper tantrum” that rocked developing economies globally. Both countries have also been acting to cut stubborn current account deficits – something that can be achieved through lower demand for imported goods.
The Bank of Thailand said the economy was unlikely to grow by even 3% this year, down from a forecast of 4% as recently as November. Thailand saw growth slow to 0.6% YoY in Q4’13, from 2.7% in Q3.
Sentiment among large Japanese companies jumped to an all-time high in the January-March period, amid hopes for a consumer spending binge ahead of the April 1 sales tax increase, a government survey showed Wednesday.
The same survey predicts sentiment will drop sharply to become pessimistic overall in April-June, the quarter most likely to be hit by a fall in consumption under the higher tax. The results also indicate, however, that the setback to sentiment will be short-lived, with a quick recovery in the following quarter returning the index to a positive figure. Government officials say there’s no reason to doubt the results, based on a poll of 8,240 companies.
Hmmm…here’s a reason to doubt:
Japanese Consumer Pessimism Hits New High Under Abe Japan Inc. may be whistling a happy tune on the back of robust profit growth and a weaker yen, but a key survey shows that consumers aren’t in a similar Abenomics-induced state of rapture.
(…) The Cabinet Office’s monthly Consumer Confidence Index contracted for the third straight month in February to 38.2. That’s the worst reading since Mr. Abe entered office in January 2013 and the lowest since September 2011. Respondents were even more pessimistic than during Mr. Abe’s year-long term as prime minister between September 2006 and September 2007.
Undercutting hopes that consumers would have a greater urge to get in some last-minute shopping ahead of a sales tax increase in April, sentiment toward buying durable goods fell sharply in February, continuing a trend that started in October. (…)
More from Japan Business Survey:
But the survey has less encouraging news too. It predicts the bumper profits currently being enjoyed by corporate Japan will soon come to an end. For the fiscal year starting in April, pretax profits at big businesses are expected to fall 4.8%, following a 24% jump in the current fiscal year, as sales are expected to dip 0.1%, after a 4.0% gain this year. The results suggest that the cheap yen effect engineered by the government of Prime Minister Shinzo Abe and the Bank of Japan has largely run its course.
Capital expenditure is also forecast to fall 5.1% in the new fiscal year, following an estimated 9.9% jump in the current fiscal year.
But there are reasons to doubt that:
Officials note, however, that capital expenditure estimates in the survey tend to start very low and rise as the year progresses. The minus 5.1% forecast is actually better than the minus 6.5% predicted at the beginning of the current fiscal year. (…)
Why a Jump in South Korea’s Jobless Rate is a Good Sign In South Korea, a jump in the unemployment rate is being seen as a positive economic indicator, because it shows a surge in the number of people looking for work.
The government said Wednesday that the seasonally adjusted unemployment rate surged to 3.9% in February from 3.2% a month earlier, its highest level in almost four years. (…)
The number of employed rose 835,000 in February from a year earlier — the fastest growth since March 2002 — but the labor market was unable to fully absorb the surge in job seekers. The country’s population of those employed or actively seeking employment increased by a record 1.02 million.
South Korean officials noted that the jump in job seekers was also due to a new set of college graduates entering the labor market. (…)
The central bank expects the economy to grow 3.8% this year and 4% in 2015, up from 2.8% last year.
As Ed Yardeni’s chart illustrate, EMs seem to be in “buy low” territory.
But there are so many moving parts in this story, including the highly murky China situation, that I don’t see a solid enough story to reduce the high uncertainty risk. First rule in investing is “Don’t lose money”. Second rule: “Never forget rule #1”.
If you are still wavering, being attracted by apparent low valuations, you should read Prem Watsa’s piece on China that I will post today (here). When (not if) things unravel in China, the world will change tremendously. Also, remember that the above valuation chart use FORWARD earnings.
A Globe and Mail analysis has found that a key measure, used by economists, underestimates the degree to which rents have been rising in the market. That inflates what is known as the price-to-rent ratio, feeding into fears that the market is overheated.
A report to be released Wednesday by housing economist Will Dunning reaches a similar conclusion, going further and arguing that price growth likely has been overestimated.
Economists believe house prices are too high: Rock-bottom interest rates have spurred consumers to take on more mortgage debt than they otherwise might. (…)
But the most bearish diagnoses of the market have been relying on flawed uses of data.
A report by New York-based economists for Deutsche Bank declared in December that Canadian home prices were overvalued by 60 per cent – the most in the world – with Belgium next at 56 per cent. “Canada is in trouble,” it warned.
It looked at a variety of indicators to assess Canada, including the debt-to-income ratio and record condo construction. But the conclusion that home prices topped the global list for overvaluation was based on two measures, price-to-rent and price-to-income. The report said that the price-to-rent ratio was 88 per cent above its historical average, and the price-to-income ratio 32 per cent above its historical average. The economists averaged those two numbers, and got 60.
They gathered rent data from the Organization for Economic Co-operation and Development, which in turn got the numbers from Statistics Canada, which compiles them for use in the consumer price index, a measure of inflation.
The data estimate price changes for a “constant quality” of rental units (comparing apples-to-apples units over time, or what economists call a “matched sample”). Statistics Canada says it is not meant to be a measure of change in prevailing market rents, and might not capture the shift away from apartments toward rented condos in cities such as Toronto.
The average rent for a two-bedroom apartment in the Toronto area last fall was $1,213 while the average rent for a two-bedroom condo was $1,752, according to Canada Mortgage and Housing Corp.
“Like the CPI in general, the rent index provides a measure of aggregate price change holding the quality of products constant (i.e., ‘pure price change’),” a Statistics Canada information officer said by e-mail. “Inferences concerning the change in the average prevailing market rents is not something that the rent index is designed to provide.”
Erwin Diewart, an economics professor at the University of British Columbia, says the federal agency should be taking depreciation into account since it is tracking a constant quality of product. (As the units age, their quality deteriorates and that should be factored in, or rent inflation is understated).
Even ignoring condos, the Statistics Canada rental index underestimates the market rise in rents, said economist Benjamin Tal of Canadian Imperial Bank of Commerce.
Mr. Tal calculated the price-to-rent ratio using apartment rents from CMHC. “Rent has risen twice as fast based on CMHC data than on CPI data,” he said. “The CPI numbers definitely understate the increase in rent … These numbers are widely used.”
The CMHC numbers are difficult to work with. The housing agency releases separate measures for apartment and condo rents. Mr. Tal used apartments, compiling data from various Canadian cities and then weighting them by population to arrive at what he believes is a reasonable national measure of rents.
Deutsche Bank’s analysis also relied on recent price data from the Teranet/National Bank house price index, and older data from the department of finance. Teranet seeks to go beyond averages by using a “matched” sample that tries to ensure a constant quality is being compared, only including homes that have sold twice.
It tries to factor out fluctuations that would occur in average prices from changes in the types and locations of homes that are selling. But Mr. Dunning argues that the price index is still exposed to bias because the actual quality of properties might have changed, for instance through renovations.
“The result might be that renovations of existing housing are causing the Teranet/National bank index to over-estimate the rate of house price growth in Canada,” writes Mr. Dunning, who has his own housing research business and is chief economist of the Canadian Association of Accredited Mortgage Professionals, which represents mortgage brokers.
“The price-to-rent ratio in Canada is indeed at an historic high,” but not nearly as far above its historic average as the OECD data would suggest, he concludes.
He also argues that measures of housing affordability have been distorted because economists are using posted mortgage rates (which have been about 5 per cent recently) as opposed to market rates (which for five-year fixed-rate mortgages have been in the neighbourhood of 3.5 per cent), making housing look less affordable.
Mr. Dunning is at the bullish end of the spectrum. He goes on to suggest that house prices are “justified based on record low levels of interest rates,” and might even be under-valued. (…)
(…) The possibility of Quebec separating from the rest of Canada. It has been more than two decades since the question of Quebec succession has been front-page news. However, the spring election in Quebec, in which the Parti Québécois is expected to win a majority, has reopened the issue.
International investors, now better schooled in the macroeconomic issues of separation thanks to the upcoming Scotland sovereignty vote, could well be taking a skeptical look at the next developed-market country likely to become embroiled in such a debate. Scotland and Quebec bear many similarities, including cultural distinctiveness compared to the rest of their country, and a wealth of natural resource – base commodities in the case of Canada and off-shore energy in Scotland.
With the sovereignty debate gaining momentum in Scotland ahead of the September vote and polls showing some possibility of success for the separatists, the currency markets could now be pricing in the possibility of a similar debate in Quebec. And since the investment view is forming outside of Canada rather than within, the currency market may be ahead of other financial markets, including bonds and equities, in discounting such a possibility. (…)
Buyback Binge Takes a Breather U.S. companies authorized $80 billion in stock buybacks last month, a 32% drop from last year’s record-setting amount but also the third-strongest February on record, according to data compiled by Birinyi Associates Inc.
(…) There were 140 companies that authorized buybacks in February, compared to 130 authorizations in the same period a year ago. But as the chart below shows, the $80 billion in authorizations fell below the $117.8 billion amount that was authorized in February 2013, the highest monthly total in records dating back to 1985, according to Birinyi, a Westport, Conn.-based market research firm.
Buybacks have an even more direct effect than dividends on companies’ share prices because they can boost earnings-per-share, a closely watched measure of profitability, by reducing shares outstanding, although some companies use the stock they buy to deliver shares to executives who exercise stock options.
But skeptics deride buybacks. They say the cash could be deployed in a more efficient manner; investing in research and development or buying an existing company are two options. And companies have a history of buying back shares at the wrong time. At the end of 2007, buyback activity was near record levels just as stocks were in the early stages of a precipitous drop.
Birinyi predicts buyback authorizations are running at a full-year annualized rate of $745 billion. That’s comparable to last year’s figure and well above $477 billion in authorizations in 2012.
The financial sector had 57 authorization programs last month, the largest among the S&P 500′s 10 large-cap sectors. Industrials had the greatest amount in dollar terms, coming in at $32 billion, Birinyi said. (Charts above from Birinyi Associates)
The next chart rom RBC Capital Markets illustrates that corporations continue to favour buybacks over dividends, in spite of their pretty poor timing record.
Engine of Wall Street profits sputters Investment banks face 25% fall in quarterly fixed income revenues
Wall Street’s once lucrative fixed income divisions are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25 per cent prompting banks to plan more redundancies on top of the tens of thousands of job cuts they have already made.
Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month. But other banks privately warn that their year-on-year declines could exceed 25 per cent after both institutional investors and banks shied away from trading. The first quarter is traditionally a high point for revenues.
Chevron raises projection for oil price Costs are rising and politics are constraining development
(…) John Watson, the chief executive, told analysts at a meeting in New York that the company was “bullish on oil” because of output declines at mature fields, political constraints on production in many parts of the world, and the rising cost of finding and developing new oilfields.
Chevron has raised the price assumption it uses when setting out its projections for investors from $79 per barrel for internationally traded Brent crude to $110 per barrel, its average over the past three years.
That is significantly higher than is implied by the futures market, which shows that the price of oil is expected to fall. (…)
Break-even prices for new oil developments could be over $100 per barrel, he said, after industry costs had doubled in the past decade.
The company showed a slide indicating break-even Brent crude prices for different types of oil, suggesting that US shale oil production needed about $65-$85 per barrel, while projects in Canada’s oil sands could need up to $100 and in deep water up to $110 per barrel to break even.(…)
With all the bubble chatter and talks of over-valued stock markets, I thought it was time to have a discussion with someone expert on the subject. In this case, that person would be Paul Desmond, chief strategist and president of Lowry’s Research.
Desmond has spent the past five decades analyzing markets; his research is widely regarded as both unique and insightful, winning numerous awards from various technicians’ groups. If you want additional background into his thinking process, have a read of the long interview I did with him in 2006 (Part I and Part II)
(…) He notes the health of a bull market can be observed by watching internal indicators that provide insight into the overall appetite for equity accumulation.
These four include:
1. New 52-Week Highs
2. Market Breadth (Advanced/Decline Line)
3. Capitalization: Small Cap, Mid Cap, Large Cap
4. Percentage of Stocks at 20 percent or greater from their recent highs
(…) What does all this mean for the current run? According to Lowry’s, “the weight of evidence continues to suggest a healthy primary uptrend with no end in sight.” For those concerned with a market top, that is rather bullish.
A few caveats about Desmond’s studies: Although he is rigorous and empirically driven, these data points all come from past market behavior. There are no guarantees that in the future, markets — that means you, Humans — will continue to operate the same way. Perhaps the changing structure of markets might impact market internals. Maybe the rise of ETFs will have an impact. Regardless, there are no guarantees the bull will continue.
However, based on the data Desmond follows, he makes a fairly convincing case that this bull market still has a ways to go before it tops out.
On the other hand, there are more and more such stories these days:
Zerohedge strikes again, posting an analysis from Citron Research (great name) unplugging PLUG:
Who is behind PLUG, and what do they do? This is simple: Plug Power sells fuel cell-powered forklifts …with fuel cells they acquire from Ballard Power. Nothing fancy here, folks. Same business model since the 2000 crash … Well over a decade as a public company, during which they have lost close to $850 million, while developing no IP or meaningful revenue growth.Profitability? Forget about it! (…)
Plug Power (PLUG):
Trades at 61x revenues
Market cap, fully diluted, (remember the warrants) currently valued $1.6 Billion
In the same vein, here’s a table from Fairfax Financial’s Prem Watsa’s letter to shareholders (thanks Gary). For those who don’t know Prem Watsa, he is often regarded as the Canadian Warren Buffett owing to his 21.3% compound annual growth rate since 1985.
Candy Crush seeks $7.6bn value in IPO
King, the London-based games developer behind the addictive app Candy Crush Saga, said it plans to raise as much as $530m in a US initial public offering that would value the company at almost $7.6bn at the top of its pricing range. (…)
More than three-quarters of King’s gross revenues coming from a single game: Candy Crush Saga.
This sort of speculation will end just like the previous tech boom in 1999 – 2000 – very badly!
Oh! there is also this: