Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

COMMODITIES

NEW$ & VIEW$ (11 MARCH 2014)

GLOBAL FOODFLATION RETURNS

I have been posting about rising food prices in recent months. National Bank Financial has the wrap up:image

Lack of global inflation was the one factor that surprised the economic community in 2013. Excess supply in many countries was one of the explanations put forward. The other main driver in our view was the decline in global food prices. As measured by the CRB foodstuff, they plunged 14% in 2013, the biggest decline since 1986. Given the importance of the food component in the CPI of many countries, there was only one direction for headline inflation to take last year. Yet, a key development that has yet to gain much publicity since the start of 2014 is the dramatic rebound in food prices.

As today’s Hot Charts shows, in the span of only 48 trading days, the CRB foodstuff has already regained all of the ground lost in 2013. This development flies in the face of the most recent World Bank projection calling for a continued decline in food prices this year. Many central bankers are still musing about the lack of inflation. Perhaps some of them will soon need to start looking the other way.

The chart below superimposes core CPI (blue) and CPI-Food-at-home. Total CPI slowed from nearly +4% in late 2011 to +1.0-1.5% lately, but the bulk of the decline was due to a big slowdown in energy and food inflation, the latter tumbling from +6.3% in September 2011 to +0.4% in recent months. The “deflation threat” many pundits are talking about is not apparent at all in core CPI and in the median CPI which have both remained in the 1.6-2.0% range in 2013 (see INFLATION WATCH here).

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The U.S. Department of Agriculture has predicted that food prices will rise this year by as much as 3.5%. It has warned that the drought in California could have a significant and lasting effect on the price of fruits, vegetables, dairy and eggs.

Food accounts for about 15% of total CPI. If U.S. foodflation were to accelerate from +0.4% to, say, 4% by the end of 2014, it would add 0.5% to total CPI. This could be offset by slower energy inflation (9% of CPI) like in the back half of 2008 and 2011, but it might not be. While 0.5% more inflation may not sound much for most economists (remember how they dismissed the threat of rising mortgage rates last year), it is a big deal for most Americans whose wages are rising less than 2% and core CPI is already at +1.5-2.0%.

Recall that PPI-Food jumped 1.0% in January. Core PPI rose 0.4% following December’s +0.3% gain (+4.3% a.r. last 2 ms) and is up 1.7% YoY. Also, nonpetroleum import prices also rose 0.4% in January.

There are so few observers worried about inflation these days that we must pay attention. Remember Bob Farrell’s rule #9:

When all the experts and forecasts agree — something else is going to happen

Higher inflation would not only hurt the economy, it would also negatively impact interest rates and equity valuation. Rising inflation would decrease the Rule of 20 fair P/E. From its current 18.4 (20 – 1.6), a 0.5% higher inflation rate would reduce the fair P/E by 2.7%.

Ghost And, there is also this:

El Niño warning puts farmers and commodities investors on alert

Commodities investors and farmers are on alert after the third official warning in a week of an El Niño weather phenomenon emerging that could affect food and energy markets already reeling from extreme weather in many parts of the world.

El Niño refers to a warming of Pacific sea surface temperatures that occurs naturally every few years and can trigger drought in some parts of the world and floods in others, depending on its strength.

Australia’s Bureau of Meteorology said on Tuesday the tropical Pacific subsurface had “warmed substantially” over the past few weeks, meaning sea surface temperatures were likely to rise in coming months.

A recent burst of westerly winds over the far western Pacific was also the strongest seen since at least 2009, the last time an El Niño developed, the bureau said.

Its warning comes a week after the US weather forecaster said there was a 50 per cent chance of an El Niño developing this summer and days after Japan’s weather bureau raised its forecasts of such an event. (…)

“The last strong El Niño in 1997-1998 is estimated to have caused billions of dollars worth of agricultural damage in the US alone.

Any damage to crops and the rise in food prices could hit poorer countries, some of which are already feeling the effects of higher import prices due to the volatility in emerging market currencies. (…)

Both west Africa and southeast Asia face the risk of droughts caused by El Niño, as do Australia and India. Other commodities at risk include wheat, sugar, cotton and rubber.

A rise in the Pacific sea temperatures would also affect fish catches in Peru, the world’s biggest fishmeal exporter. Fishmeal prices are already at historically high levels due to increased demand from the aquaculture and livestock industries. Any price increases will filter into fish and meat prices as fishmeal is used to feed the multibillion-dollar fish farming industry as well as pigs and poultry. (…)

McDonald’s U.S. Sales Down for Fourth Month

In another sign of the continued pressures on the fast-food industry, McDonald’s Corp.MCD -0.31% on Monday reported disappointing U.S. same-store sales for February, its fourth straight month of declines, despite aggressive TV promotions during the Winter Olympics of products such as its $5 20-piece chicken nuggets.

MacDonald’s U.S. same-store sales in February fell 1.4%, after a 3.3% drop in January. The U.S. division has missed Wall Street expectations for seven straight months, according to Thomson Reuters. Overseas, European comparable sales rose 0.6%, while sales in Asia, Middle East and Africa dropped 2.6%. International sales have been hurt by weak demand in Australia, Germany and Japan.

Without the weight of a stronger dollar, total world-wide sales would have risen 2.2%, instead of a 0.6% decline in February, the company said.

Like retailers across the board, McDonald’s again cited weather as a negative factor. (…)

But weather does not seem to hit everybody equally:

According to the National Restaurant Association’s 2014 industry forecast, just 29% of quick-service restaurants forecast an increase in sales from last year’s level, versus 55% for fast-casual chain operators. And while 40% of quick-service restaurants forecast profit declines this year, only 16% of fast-casual eateries foresee such declines. Half of fast-casual chains expect profit to rise from 2013 levels.

CHAIN STORE SALES RISE

Weekly chain store sales rose 1.3% last week bringing the 4-wk m.a. up 1.9%. We will be bumping against Easter sales in coming weeks.

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UNCERTAINTY CONTINUES TO BE THE ENEMY OF SMALL BUSINESS The one “green shoot” in the January survey, a surge in hiring plans, was crushed by the continued onslaught of a wintry recovery

imageOPTIMISM INDEX
The Small Business Optimism Index fell 2.7 points to 91.4, a substantial reversal in an unexciting January measure but ends a 3 month improvement trend. Only one of the Index components improved, three were unchanged, and six were lower, indicating that the small business half of the economy is still adding little to growth beyond that needed to support population growth.

LABOR MARKETS
Forty-seven (47) percent of the owners hired or tried to hire in the last three months and 40 percent reported few or no qualified applicants for open positions. Twenty-two (22) percent of all owners reported job openings they could not fill in the current period (unchanged). This suggests that the unemployment rate did not change much in February. Thirteen (13) percent reported using temporary workers, down one point from January. Job creation plans gave up January’s welcome gain, falling 5 points to a seasonally adjusted net 7 percent. NFIB owners increased employment by an average of 0.11 workers per firm in February (seasonally adjusted), virtually unchanged from January. Seasonally adjusted, 12 percent of the owners (down 1 point) reported adding an average of 3.0 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (down 1 point) an average of 2.7 workers.

INVENTORIES AND SALES
imageThe net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 points to a net negative 8 percent, typical of the 2013 experience. Sixteen (16) percent cite weak sales as their top business problem, still above levels experienced in “normal” times. The net percent of owners expecting higher real sales volumes plunged 12 points to 3 percent of all owners, reversing our previous gains.

The pace of inventory reduction continued, with a net negative 2 percent of all owners reporting growth in inventories (seasonally adjusted), two points lower than January and trending toward balance. However, stocks are still considered excessive in spite of this long period of net reductions. The net percent of owners viewing current stocks as “too low” deteriorated 2 points to a net negative 4 percent. This is due primarily to a large deterioration in sales expectations. Consequently, the net percent of owners planning to add to inventory stocks fell 2 points to a net negative 5 percent indicating little appetite to add to stocks in the current environment.

THE FRENCH DIFFERENCE

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Markit’s Retail PMI:                                                               FRANCE                                                                 GERMANY

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Italians should not be mocking the French: image

NEW$ & VIEW$ (10 MARCH 2014)

U.S. EMPLOYMENT:

1- FACTS IN THE MAINSTREAM

Jobs Rebound Eases Fear of Spring Stall Jobs growth picked up in February suggesting resilience in the labor market that should allow the Fed to continue rolling back its bond-buying program.

Nonfarm payrolls grew by a seasonally adjusted 175,000 in February, the Labor Department said Friday, following a two-month stretch of weaker growth. The unemployment rate ticked up to 6.7%, in part because more people joined the workforce.

The Labor Department revised up only modestly its estimates for payroll gains in prior months, with January’s gain now estimated at 129,000 instead of 113,000 and December’s gain at 84,000 instead of 75,000. The average increase of 129,000 over the past three months is far below last year’s average of 194,000.

Average hourly earnings rose 2.2% in the past year, a possible sign of less slack in the labor market that could help many newly unemployed get back to work faster.

Winter weather proved less of a drag than some had feared. Construction jobs, which can be sensitive to weather, rose 15,000 in February on top of a 50,000 gain in January. Retail jobs fell by 4,100, but employers in the leisure and hospitality sector added 25,000 jobs.

The workweek among rank-and-file retail staff dropped to 29.6 hours—the lowest on records back to 1972.

The nation’s labor-force participation rate held steady at 63%, near historical lows. The ranks of the long-term unemployed—those out of work more than 27 weeks—swelled 203,000 to 3.8 million.

The workweek for production retail employees was below 30 hours for consecutive months for the first time since 2009. That could reflect closures of malls and other retail outlets due to weather and disruptions to transit systems that prevented many employees from commuting to work.

However, other factors could also be at play.

Retail sales eased in January and stores may have cut back on hours in response. The hours worked figures have also been closely watched to determine if employers are reducing hours to avoid the health-care law’s requirement for large companies provide health insurance for full-time workers.

Weather appears to be the culprit. The Labor Department data showed 6.9 million Americans worked part time due to the weather last month. That is ten-times the number reported a year earlier and well above the February average of 1.5 million the past decade.

2. imageFACTS NOT IN THE MAINSTREAM

  • The positive view from National Bank Financial:

The February employment report was all the more interesting as it confirmed the continued shift from part-time to full-time employment. According to the household survey, there has been a cumulative gain of 1.5 million full-time jobs in the past six months, the best performance in two years. This development suggests that the U.S. recovery remains on track and that the recent bout of soft economic reports is mostly due to unusual weather. On that point, the Bureau of Labor Statistics reported that 600,000 people missed some work due to bad weather in February, 50% more than what is normally observed during that month.

  • But different ways of looking at the same data show drastically different trends. Which one is best?

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Here’s why we are all driving blind:

  • December was the weakest month with 84k new jobs. Weather was only partly blamed, supported by the 20k construction jobs lost.
  • Weather got much worse in January and February but employment rose at a faster clip both months. Construction added 65k jobs during the harshest weather in many years (see AND NOW, THE WEATHER REPORT within the March 7 New$ & View$). Must have been inside jobs, or workers got used to the weather…
  • Total employment rose 388k in the 3 months to February 2014. Goods producers produced a mere 70k of these jobs but their 23k average monthly gain was very close to their 26k average of the previous 11 months. The weather seems to have left them cold! On the other hand, private service providers froze in their tracks as they provided only 107k jobs on average between December and February, a significant 40% slowdown from their January to November 2013 average of 183k. Is it only the weather? Or is it a reflection of a consumer retreat due to an income squeeze? For, excluding government transfers, real personal income has been flat since September 2013.

Mrs. Yellen is right, we need more data for more clarity. The hope is that job growth will spring back up with spring scheduled in 10 days. To get back to a 200k three-month average growth rate, employment needs to jump by 296k in March, or average +212k in March and April. The average gains during the first 11 months of 2013 was 204k. We clearly need a good spring break although even spring may be unseasonal. Easter is very late this year.

Or, the BLS may revise all the numbers upward and tell us all was fine. Who knows, they might also revise the weather upward!

Now, lets keep these other stats in mind:

  • Consumption of goods has declined in both December and January.
  • Weekly chain store sales rose only 1.9% YoY in February, less than 1% in real terms.
  • Thomson Reuters’ Same Store Sales Index was up only 0.4% YoY in February, the weakest showing since August 2009.
  • Car sales have declined 6.5% from their recovery high of last November, unchanged YoY in February.
  • Existing home sales have been weak for the past 7 months.
  • [image]New home sales rose seasonally adjusted in January, the slowest (meaningless) month of the year. They have been essentially flat at a low level throughout 2013.
  • While economists and central bankers debate on deflation risks, inflation stats get uglier. Total CPI was +0.9% YoY last October, +1.2% in November, +1.5% in December and +1.6% in January. Core CPI is +1.6% while the median CPI is +2.0%, unchanged for the past 6 months.  Core PPI jumped 0.4% MoM in January following a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Nonpetroleum import prices rose 0.4% in January. House and rent prices have been rising rapidly. Food-at-home prices jumped 0.7% MoM in January and the BLS is now forecasting they will rise 2.5-3.5% in 2014. We shall see how the California drought impacts fruits and vegetable prices. Gasoline prices rose nearly 8% since early November, 5.5% in the last month. Cold weather is certainly at play here but Brent crude is $109/bbl, up 12% from its April 2013 low while WTI is up 20%. Beef and pork prices are supposed to rise shortly.

Let’s hope it’s only the weather.

Pace of Student Lending Shows Signs of Easing

The pace of student borrowing from the federal government slowed for the third straight year in January, an indication that a major driver of overall consumer debt may be decelerating.

The increase in student borrowing in January, typically the top month of the year for education loans, was the smallest gain to start the year since 2010, according to Federal Reserve data released Friday.

The January gain of $28 billion over the previous month was $1 billion below the increase posted in January 2013 and well off the all-time peak of $37 billion recorded in January 2011. The numbers are not seasonally adjusted. The latest figure could foreshadow a slowing pace in federal student lending this year. (…)

Since the government performs no credit checks for most student loans, many Americans resorted to student loans to fund their expenses (Student Loans Used for More Than School).

Surging Home Prices Are a Double-Edged Sword

The U.S. housing market faces a challenge at the start of the spring sales season: higher prices. (…) But those gains have a painful edge, too, especially because prices have bounced back so strongly . The increases have rekindled concerns about affordability, particularly for first-time buyers, and could damp the gains of a housing rebound still in its early stages.

“Prices ran up so fast in 2013, it hurt first-timers’ ability to become homeowners,” said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. “It’s going to be a slower recovery than people had hoped because a number of people have been priced out of the market.”

Home values nationwide are up 11% over the past two years, according to real-estate information service Zillow Inc., leaving values around 14% below their 2007 peak. Mortgage rates, which jumped a full percentage point to about 4.5% in the past year, have sharpened worries over housing affordability.

Even as prices have increased, housing still appears affordable by one traditional gauge. Since 1990, American homeowners have spent about 24% of monthly income on their mortgage payments, according to data from Morgan Stanley. Today, that payment-to-income ratio stands at around 20%, below the long-run average.

The problem with that view of affordability: It assumes borrowers have great credit and large down payments. The ratio isn’t favorable for first-time buyers and others with lower incomes and smaller down payments, which increases their monthly financing costs. The payment ratio for first-time buyers was around 24% at the end of last year, in line with its long-run average, according to the Morgan Stanley analysis. (…)

Making matters worse, home prices are going up fastest in markets that are already expensive, such as San Francisco and Los Angeles. Just 32% of California households at the end of last year could afford the monthly payments on a median-priced home in the state of $431,510, assuming a 20% down payment, according to the California Association of Realtors. That was down from 56% of households that could afford the payments on a $276,040 median-priced home in early 2012.

Rising prices are only part of the problem for first-time buyers. Inventory shortages and tougher mortgage-qualification standards benefit buyers who can make large down payments and those who can forgo a mortgage altogether. Because many markets have low supplies of homes for sale, all-cash buyers have routinely beat out first-time buyers by guaranteeing a quick, worry-free closing for sellers.

Pointing upMeanwhile, federal officials have repeatedly increased insurance premiums on loans backed by the Federal Housing Administration, which serves many first-time buyers because it requires down payments of just 3.5%. While mortgage rates at the end of 2013 reached their highest levels in more than two years, the all-in cost of an FHA-backed loan—due to insurance-premium increases—was closer to a five-year high. (…)

(Related: FACTS & TRENDS: U.S. HOUSING TO STAY COLD)

Manufacturers Blame Expiring Tax Breaks For Restrained Investment More than a third of U.S. manufacturers say they’ll scale back investment plans this year because a pair of federal tax breaks expired at the end of 2013, according to a survey by the National Association of Manufacturers to be released Monday.

(…) The tax breaks, known to insiders as “enhanced Section 179 expensing” and “bonus depreciation,” helped firms write off costs associated with replacing old equipment or adding factory capacity. Almost two-thirds of manufacturers said they took advantage of them in 2012 and 2013, according to the NAM/IndustryWeek quarterly survey.

About 35% of firms responding to the survey said the expiration of those two provisions at the end of last year altered their investment plans this year. Among small and medium-sized manufacturers — firms with fewer than 500 employees — 40% said their plans changed. (…)

The survey of 318 NAM members was taken Feb. 13-28. About 42% said they plan to increase capital investment in the next year, while roughly 13% said they plan to decrease capital investment. About 10% expect to reduce their full-time workforce in the next year, while 42% expect to hire more full-time employees.

About 86% described the outlook for their business as somewhat or very positive, versus 14% who described the outlook as somewhat or very negative. The primary challenge, identified by 79% of companies, was an “unfavorable business climate” in terms of taxes, regulations and uncertainty about government actions. Nearly as many firms, 77%, said the rising cost of health care was a major challenge. (…)

CHINA
China Consumer Prices Rise 2% China’s consumer price index rose 2% in February from a year earlier, slower than a 2.5% on-year rise in January, while the producer price index fell 2% in February from a year earlier.

Consumer prices rose a modest 2% year over year and factory gate prices fell for what now makes two consecutive years of monthly declines, underscoring the weakness of demand.

The consumer price index in February compared with a 2.5% rise in January, according to data released on Sunday. Food prices were up 2.7% and contributed most of the increase. Non-food prices rose just 1.6%.

Meanwhile, the producer price index, which tracks prices for finished goods at the factory gate, fell 2.0% year over year, an even faster pace than in January, when it dropped 1.6% from a year earlier. (…)

China February exports tumble unexpectedly

image(…) combined exports in January and February fell 1.6 percent from the same period a year earlier, versus a 7.9 percent full-year rise in 2013. Imports rose 10 percent year-on-year in the first two months, compared with a 7.3 percent rise in 2013.

Exports to the United States edged up 1.3 percent in the first two months from a year earlier, while sales to the European Union rose 4.6 percent, according to official data. (…)

Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong, said that inflated export data in January-February 2013 means that a direct year-on-year comparison can be misleading. Fake trade deals to sneak cash into China past the country’s strict capital controls were rampant early last year before Chinese regulators cracked down.

After adjusting for such distortions, export growth in the first two months of this year could actually be up about 8 percent, he calculated. (…)

China’s crude oil imports in the first two months of the year rose 11.5 percent from a year earlier, while imports of copper jumped 41.2 percent and iron ore shipments rose 21.8 percent, data from the customs administration showed.

Copper Slumps Again on China Worries

Copper for May delivery fell 2.6% to trade at $6,602 a metric ton, taking losses over the past two days to 5%, and the slide this year to 8.8%.

The latest trigger was an industry report Monday showing China’s manufacturing sector activity fell to a seven-month low, potentially damping demand for the metal used in everything from household plumbing to smartphones. (…)

Adding to the worries are concerns that many Chinese companies that have been struggling to raise cash have instead turned to a risky type of funding which involves importing copper and using it as collateral for bank loans. If the price of copper falls then borrowers will be forced to dump the metal to help cover losses, adding more selling pressure to the market.

“The copper plunge is tied to the growing use of the commodity as financing collateral in China—there are fears there that, with many asset valuations marked to copper prices, a continued sell-off could bankrupt those holding too much copper on their balance sheets,” Scott Schuberg, chief executive officer at Rivkin Securities Pty Ltd., said in a report.

China accounts for 40% of the world’s global consumption for copper. Already high level of copper imports in the first two months of the year has raised worries about a supply overhang.

China’s copper and copper product imports rose 27.5% on the year in February to 380,000 tons, but were down 29% on the month, data over the weekend showed.

Copper financing activity too has put a “cloud” over the total supply overhang at the moment, Australia & New Zealand Banking Group ANZ.AU -0.83% said in a report.

“The credit default news (of Chaori) is negative for the market,” which has been plagued by tight credit supply, said Li Yusheng, senior analyst at Beijing Antaike, who estimates that copper supplies in China are 600,000-700,000 tons more than the demand.

However, imports could still hover above the levels seen in the first six months of 2013 in the next month or two, as Chinese buyers likely booked more term imports this year and financing demand is still alive, just weaker, Sijin Cheng, an analyst with BarclaysBARC.LN -0.69% said. She expects copper prices to be under pressure in the short term.

China Auto Sales Gain

China’s auto sales were up 10.7% in the first two months of the year, on the back of strong demand in the world’s largest car market.

Data from the government-backed China Association of Automobile Manufacturers on Monday showed that motor-vehicle sales totaled 3.75 million vehicles in the January-February period, up from 3.39 million vehicles in the year-earlier period.

Sales of passenger cars totaled 3.16 million vehicles, up 11.3% from a year ago, the association said.

Market share for domestic brands in the first two months of the year was 22.5%, down from around 30% in the same period a year earlier.

Car exports from China were down 12% year-over-year to 123,800 vehicles in the combined January-February period, the industry group said.

imageChina Weakens Yuan by Largest Degree Since 2012

The People’s Bank of China set the daily reference rate Monday at 6.1312, 0.18% higher than Friday’s 6.1201, the largest one-day change since July 2012.

Indian Industrial Output Likely Contracted in January

Industrial production, which includes the output of factories, mines and utilities companies, likely shrunk 0.40% from a year earlier, according to the median estimate in a poll of 15 economists by The Wall Street Journal.

In December, it contracted 0.6% after a 1.3% decline in November and 1.6% slide in October.

The weak forecast on the industrial data, which the government will announce Wednesday, underscores the wider slowdown in the economy that has seen growth plummet from close to 9% a few years back to under 5% in recent quarters. (…)

THE LOONIE: WHAT’S GOING ON?

imageTwo views: first, from BMO Capital Markets:

After following commodity prices almost note-for-note in the past four years, the Canadian dollar has gone its own way in 2014. While commodity prices have — to the surprise of most — risen solidly so far this year (up almost 9% for the CRB), the C$ has dropped more than 3% (even with its recent rebound). And this separation is not due to some quirk in the CRB, as other more Canadian-centric commodity price measures have also made solid gains this year on strength in oil, gas and gold.

So, what’s going on?

We would make the case that the C$ was consistently overvalued during much of the past four years, and it has made a level adjustment back down to reality. However, with commodity prices stronger, and the BOC now decidedly neutral, markets are rapidly reassessing the bearish C$ view.

From Palos Management’s Hubert Marleau:

It is generally acknowledged by investors that the course of monetary policy can have serious implications for stock, bond and commodity market returns. What is less well known, is that the different monetary stance between trading nations like Canada and the USA, where money is allowed to freely ebb and flow, can alter the relative exchange value of their currency. In fact, there is plenty of empirical evidence and theoretical validity that when monetary policy is different than it ought to be amongst trading nations, currency markets usually absorb the shocks.

The performance of the Canadian economy ended 2013 on much stronger footing than first thought, surprisingly matching that of the USA. During the last quarter of 2013, the Canadian economy grew at the annual rate of 2.9% compared to 2.4% for the USA. Put simply, Canadian monetary policy should at the very least be similar to the one practiced in the USA.

As a matter of fact, a Canada-US comparison of the Palos Monetary Index, the inflation content of the Misery Index and the contribution of cyclical spending to GDP suggests that the Canadian monetary stance ought to be easier than it is in the USA. Yet, this is not the case. The Canadian yield curve is not as steep as it is in the USA; moreover, the cost of money and real rates are higher in Canada.

In this broad connection, it does not surprise us that the Canadian dollar has found a new trading range between 89 and 92 US cents and that long term Canada Bonds can attract foreign investors with 25bps less in yield than comparable US Treasuries.

It appears to us that the negative sentiment surrounding the Loonie is much more about the application of moral suasion by both the Federal Government and the Bank of Canada than anything else. A reversal of fortune for the Canadian Dollar could emerge if Statistics Canada continues to report improvements in trade balances and/or foreign investors start focusing on Canada’s strong fiscal position and/or Obama was to decide that the XL Keystone is in the interest of National Security. Turmoil in the Middle East, Venezuela and now Ukraine may force the White House to use the abundance of energy in North America to supply natural gas and crude oil to secure US interests abroad and provide energy to those who are hostage to Russian energy supplies.

French Economy Shows No Improvement

(…) The Bank of France’s monthly survey published Monday showed sentiment in manufacturing fell further below the long-term average of 100 to 98 in February from 99 in January. In services, the sentiment indicator was steady at 94 in February.

Based on business activity, the central bank kept its forecast for a 0.2% gross domestic expansion in the first quarter of this year from the end of last year.

Separately, statistics bureau Insee said French industrial production dropped unexpectedly in January, weighed down by a contraction in energy output. Analysts polled by Dow Jones Newswires had expected output to hold at the same level in January.

A steep fall in energy output masked an improvement in manufacturing output, which rose 0.7% in January from December. But analysts warn that combined with other areas of the economy, growth will be overall weak in the short term.

Meanwhile, Italian industrial production jumped 1% in January from December.

ECB’s Noyer Not Happy With Euro Strength

image(…) “It is clear that when the euro starts to strengthen it creates additional downward pressure on the economy and additional downward pressure on inflation. Both cases aren’t warranted at the moment,” Mr. Noyer said in an interview with Bloomberg TV. “We are clearly not very happy at the moment.”

The euro has risen 6.5% against the dollar in the past year, sapping demand for European exports and bearing down on prices in the 18-member currency union. Annual consumer price inflation in the euro zone was 0.8% in February, well below the ECB’s target of just below 2%. (…)

Europe’s Lower-Gear Car Recovery Investors may be too optimistic on a rebound in vehicle sales in Europe, which are well below 2007’s peak.

Registrations of new cars in Western Europe were up 4.6% in January year over year, the fifth monthly increase in a row, notes the European Automobile Manufacturers’ Association. In February, while sales in France contracted, they expanded further in Germany, Italy and Spain, according to their national associations.

The average age of cars on European roads has risen from 7.7 years in 2007 to nine years, estimates Sanford C. Bernstein.

But consensus forecasts for growth of 5% to 6% in Western Europe to just over 12 million new cars this year could prove optimistic.

Sales in economically stronger markets already have improved. Germany is less than 200,000 vehicles below its long-term annual sales average, while sales in the U.K. are close to record levels, notes Nomura. Elsewhere, high unemployment makes recovery more challenging. Sales in Italy, Europe’s fourth-largest market by new-car sales, are still one million units below peak.

Other factors may put the brakes on recovery. Europe’s driving-age population is shrinking overall. The proportion of young adults with a driver’s license has stopped rising in France and Germany and is actually falling in the U.K., according to the Institute for Mobility Research.

Additionally drivers are seeking alternatives to owning their own wheels. Car-sharing programs could have more than 15 million members in 2020, up from 700,000 in 2011, forecasts Frost & Sullivan. That would likely weigh on new-car sales. In the U.S., each car that goes into a company like Zipcar means 32 subsequent purchases are avoided, says Alix Partners.

That could mean that Europe’s car market just doesn’t get back to its precrisis levels. IHS thinks new-car sales in Western Europe will barely reach 13.5 million to 14 million units by the end of the decade, below 2007’s 14.8 million peak.

Did you notice how currencies are back in the limelight? Canada has already acted, the BOC openly encouraging the market to stimulate exports. The Bank of China is now doing the same, by itself. The ECB is getting more and more worried that the strength of the Euro will undermine its efforts.

SENTIMENT WATCH
Are Small Investors a Sell Signal?

(…) Small investors, well known for poor market timing, are flocking back to stocks. Does that mean it is time to sell? (…)

The trend worries some strategists, who argue that small investors are notorious for clamoring to buy just before a market top. An analysis of small-investor sentiment shows that the widely held belief is true, but perhaps not reliable enough to warrant any major buying or selling on its own. (…)

AAII asks its members whether they think the stock market will rise, fall or stay the same over the following six months. The difference between the percentage of bullish investors and bearish investors is seen as a measure of how small investors feel that week. (…)

In the 1,362 surveys since July 1987 that are at least six months old, investors correctly guessed the direction of the S&P 500 slightly more than half of the time.

That isn’t good by any means. If small investors always bet that stocks would rise, they would have been right 72% of the time. (…)

The AAII survey works as a better buy or sell signal at extremes.  After weeks when a net 38% or more of AAII members were bullish, the S&P 500 went on to lose 1.4% over the following six months on average. In weeks when a net 31% or more were bearish, stock prices subsequently climbed 11%. (…)

Lately, some researchers have come up with ways to detect specific emotions and how they affect stock moves. Richard Peterson, founder of MarketPsych, analyzes text in news stories, social media and other sources to estimate whether investors feel, say, “joy” or “trust” about specific stocks and sectors.

In particular, Mr. Peterson has found that anger—for example, a series of tweets about the Apple chief executive that say “Tim Cook is an idiot!”—is a better predictor of good returns than general bearishness. In international stocks, future returns are better when investors feel that a country’s government is unstable, he says.

Right now, the sectors that investors are angriest about on social media include Internet companies, industrials and banks, according to MarketPsych. Individual stocks registering angry sentiment include defense company General Dynamics, tech company Oracle and real-estate developer St. Joe.

Investor bullishness also seems to be a stronger sell signal for stocks with speculative attributes, such as those that deliver low profits or don’t pay dividends, Prof. Baker says. “Stocks that are difficult to value are more prone to sentiment,” he says.

And, right on cue:

Dot-Com IPO Insanity Returns With Coupons.com

This is one of those days where I realize I don’t understand anything about finance or capital markets. I’m a dinosaur. I don’t get it. People are saying things like “this time is different” again in news articles about initial public offerings by Internet companies, and they mean it. All I can do is watch, dumbfounded.

Today a 16-year-old company that loses money called Coupons.com Inc. went public. Had I been paying attention to Coupons.com sooner, I might have guessed after the disastrous post-IPO performance of Groupon Inc. that investors’ appetite for yet another online-coupon company would have been sated. But no, that would have been wrong.

Coupons.com, with Goldman Sachs as its lead underwriter, raised $168 million, selling 10.5 million shares for $16 each. And the stock rose as much as 103 percent to $32.43, making it today’s biggest gainer by far. If that doesn’t remind you of 1999, then you probably weren’t following the stock market back then.

The company has about a $2.3 billion stock-market value, which is more than 13 times its $167.9 million of revenue last year, when its net loss was $11.2 million. But like so many other companies in these golden times, Coupons.com simply told investors to exclude about $13 million of normal everyday expenses and, abracadabra, it claims to be profitable on a nonstandard, cockamamie “adjusted Ebitda” basis. It’s all part of the show.

One of the popular themes during the late 1990s dot-com bubble went like this: “It’s dumb for startups to show profits, because then investors might get some sense for what their limits are. So go ahead, lose money. The worst thing you could do is have a denominator in your price-to-earnings ratio that’s greater than zero, because then your ratio would be positive, assuming your stock hasn’t gone to zero yet. But if you lose money, that’s terrific, because it means the sky’s the limit.”

A lot of people bought into that concept, especially investment bankers and easy marks who signed up to take a flier on the greater-fool theory. But that rule about losing money applied to start-ups. It didn’t apply to companies that had been around for 16 years and still were losing money. Because if a company is still around after 16 years, it’s not a startup. It should be making money if it wants to go public. It should be making money, period. Or at least that’s how it worked in the old days when IPOs were for real companies with real profits.

Coupons.com has incurred net losses since its inception in 1998. It had an accumulated deficit of $168.8 million as of Dec. 31. The money the company just raised is only about $1 million less than that figure. So you have to at least admire the symmetry. Maybe in another 16 years, Coupons.com can come back to the markets for more money and do it all over again?

This is where that first idea I mentioned comes in. There must be something wrong with the way I’m wired. I obviously don’t get this. But Mr. Market does, whether you choose to imagine him as a man of great efficiency or as a hopelessly addicted angel-dust addict who has a habit of running into burning buildings and defenestrating himself every few years.

But at least I’m willing to admit I have a problem. So please allow me to excuse myself while I go check the Coupons.com website for a discount on some Kool-Aid. I have a hunch I’m going to need it.

Back to sanity:

Seth Klarman: Investors Downplaying Risk “Never Turns Out Well”

(…) If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.

(…) on almost any metric, the U.S. equity market is historically quite expensive. A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix, Inc. and Tesla Motors Inc. (…)

Contact: edgeandodds [at] gmail.com