CONSUMER

U.S. Household Net Worth Hits Record

The net worth of U.S. households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to a Federal Reserve report released Thursday. Even adjusted for inflation using the Fed’s preferred gauge of prices, U.S. household net worth—the value of homes, stocks and other assets minus debts and other liabilities—hit a fresh record. (…)

Driving most of the past year’s gains was a record-setting rally in the U.S. stock market, which saw the broad Standard & Poor’s 500-stock index soar 30% last year. The increase in stock prices has disproportionately benefited affluent Americans, who are more likely to own shares. The value of stocks and mutual funds owned by U.S. households rose $5.6 trillion last year, while the value of residential real estate—the biggest asset for middle-income Americans—grew about $2.3 trillion, the Fed figures show.

Holdings of stocks and bonds as a share of overall net worth, at 35%, is at the highest level since the dot-com bubble burst in 2000, Fed data show. That means that even as wealth increases, it’s increasingly going to the affluent.

In addition to the affluent, much of the wealth surge is going to older Americans. Both groups are less likely to spend their gains and more likely to save, Mr. Emmons said. Meanwhile, sheer demographics—the retirement of the baby boomers and America’s aging population—are increasing the ranks of the nation’s savers. (…)

Younger families in particular continue to lag behind in the wealth recovery. The average young family—led by someone under 40—has recovered only about a third of the wealth it lost during the crisis and recession, the St. Louis Fed said in a recent study. By contrast, the average wealth of middle-aged and older families has recovered to roughly precrisis levels.

(…) total U.S. household debt was about 109% of disposable income in the fourth quarter, down from a peak burden of around 135% in 2007, Fed data show. A more manageable debt burden could prompt American households to borrow and spend more at a time when the job market remains sluggish and income growth weak.

Indeed, overall household borrowing rose an annualized 0.9% last year, the biggest percentage rise since 2007. Last year also saw the smallest decline in mortgage debt since 2008, a sign that fewer Americans are entering foreclosure and some more are taking out new mortgages. Other types of consumer credit grew 6% last year, though much of these gains were student loans.

As the housing-market recovery continues, more Americans are regaining equity in their homes, which makes it easier for them to trade up, refinance debts and borrow. A measure of owners’ equity as a share of the value of real-estate holdings hit 51.7% in the fourth quarter, up from 50.6%. (…)

RICH PEOPLE GETTING TIRED PULLING ECONOMY

Or is it only the weather?

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 0.3% comp for February, missing its 1.9% final estimate. The 0.3% result is the weakest showing since August 2009’s -2.4% SSS result. Including the Drug Store sector, SSS growth rises to 1.8%, below its final estimate of 2.8%. 45% of the retailers missed their estimates. During the first two weeks of February, retailers were severely affected by bad weather. Those that beat expectations, said this was offset by improved weather during the last weeks of February, and tax refunds.

Our Thomson Reuters Quarterly Same Store Sales Index, which consists of 75 retailers, is expected to post 0.9% growth for Q1 (vs. 1.7% in Q1 2014). This is below the 3.0% healthy mark. Moreover, due to the amount of negative guidance for Q1 2014, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter (Feb). Since the beginning of the year (January 2014) the Same Store Sales growth estimate for Q1 2014 was 2.4%. Today, it is 1.3%.

From Rich Yamarone’s Orange Book: Executives Await Spring Thaw as Outlooks Remains Under the Weather

Just as fourth-quarter economic growth was revised downwards, so too have earnings expectations been downgraded. The outlooks for many industries have worsened, especially those with large exposure to the household sector, such as retailers and restaurants, and some of the more commercial businesses in basic
materials and capital goods. The true underlying tone of the economy has been obscured by widespread and economically-compromising snowstorms across the entire U.S. It may take a spring thaw to get a clearer perspective.

The CEO Economic Comments Sentiment Index for the week ended March 7 was 49.59, essentially flat from the Feb. 28 reading of 49.77.

Investors don’t seem to care. After all, spring is coming!

AND NOW, THE WEATHER REPORT

Courtesy of the Browning Newsletter via John Mauldin:

(…) Ironically, NOAA classified the overall temperature for the Lower 48 in January and early February as near average. This is because the above average warmth in the West balanced out the below-average temperatures east of the Rockies. (…)

For the 48 contiguous states, January was the third coldest January on record and broke more than 4,800 snowfall records. Below-average temperatures have also
dominated much of February as well from parts of the Midwest and Plains to the Northeast. (…)

Now, as spring approaches, the Atlantic warming will increase and we will begin to see a major shift in the overall continental weather pattern. The season will
become even more volatile as Gulf and Atlantic air creeps into the continent. This will create a battle of the air masses with the US particularly the Midwest, as the battleground. In many ways, this will create a break. For short periods, especially toward the middle of March, the jet stream will level out, allowing more warmth to flow into the Southeast and even the Mid-Atlantic states. To the west, this means the jet stream and winter rains will enter the West Coast further south, allowing rainfall to hit the Pacific Northeast and, occasionally, Northern California. This does not mean a “Miracle March” will break the drought – just that the West will get some much-needed precipitation.

Precipitation may not be as appreciated in the Midwest. The region has been so cold that an incredible 88% of the Great Lakes- Superior, Michigan, Huron,
Ontario and Erie—are now frozen over. That’s the largest ice cover the Great Lakes have experienced since 1994, and it means that there is an astounding 82,940 sq. miles (214,814 sq. km) of ice. (To give a sense of perspective, back in 2002, just 9.5% of the Great Lakes froze over. Normally, only 50% of the water surface freezes.) Historically this creates a cooler, wetter springtime, with frequent floods and delayed planting through Eastern Canada and the Midwest.

While the climate factors that are shaping this winter and spring are already surrounding North America, the factors that will shape this summer come from the distant Tropical Pacific. (…)

It is probable that there will be an El Niño this summer and, thanks to Mt. Kelud, it will have a moderate impact on global weather. This is very good news for the US but Australia and Indonesia need to prepare for dry conditions. India, which frequently sees its summer monsoons reduced by El Niños, especially if the Indian Ocean is in a negative phase of the Indian Ocean Dipole as it was in 2009, needs to be on the alert. (…)

Overall, between the extraordinarily cold Arctic air mass, the warming Atlantic and Tropical Pacific and the impact of Mt. Kelud, it looks as if it will be a volatile spring with late planting that will develop into an excellent growing season for most of North America. In years like this, farming is never easy, but the harvests tend to be
very good.

SENTIMENT WATCH

  Happy 5th Anniversary To The Bull Market 

  Companies Rush to List Shares Companies are launching IPOs at the fastest pace in years to take advantage of booming share prices and investor demand.

In the first two months of this year, 42 companies went public in the U.S., raising $8.3 billion and tying 2007 for the busiest start to a year for initial public offerings since 2000, when there were 77 in the period, according to Dealogic.

In 2013, by comparison—itself a strong year for IPOs—there were 20 such offerings in the first two months. (…)

The pace at which companies are making new public filings for IPOs is at levels not seen since 2000, according to Renaissance Capital LLC, an IPO research and investment firm. In January and February, there were 56 such company filings, topping the 35 in that period in 2007. While still not close to 2000s 159 filings, this year’s number might be even higher if not for new rules that allow companies with less than $1 billion in revenues to initially file for an IPO confidentially, which most eligible firms are taking advantage of.

Investors willing to take a chance on new listings this year have been rewarded handsomely. The average U.S. IPO in 2014 had risen 19% from its debut through Feb. 28 and 5% from where it closed after its first day of trading, according to Dealogic. The S&P 500 index, meanwhile, is up only slightly this year, though it is trading at record levels. (…)

By one key measure, investors are bidding more aggressively for newly minted shares this year than they have in more than a decade, paying a median 14.5 times annual sales, compared with six times in 2007, according to University of Florida finance professor Jay Ritter. At the height of the Internet frenzy in early 2000, they paid a whopping 30 times. (…)

So far this year, nearly three-quarters of companies that have gone public are unprofitable, according to Prof. Ritter of the University of Florida. Just under two-thirds have annual sales of less than $50 million. Both measures are at their highest in any year since 2000, although they don’t approach the levels reached in that era. (…)

(Bespoke Investment)

Draghi calls eurozone ‘island of stability’

(…) He said that although the events in Crimea would have a “severe” effect on Russia’s economy and an escalation of geopolitical tensions risked “great consequence” for the eurozone, the eurozone recovery should survive intact. (…)

The euro’s renewed status as a safe haven could, however, complicate the task of policy makers if it led to a further strengthening of the euro. Mr Draghi was uncharacteristically bold in flagging the euro’s strength as a big factor in the bloc’s struggle with disinflation.

The latest forecasts assume that the euro will buy you $1.36. It is now worth two cents more than that and could rise further if tensions to the east of the eurozone intensify. While keeping to his usual line that the ECB does not target the exchange rate, he said currency movements were “very important for growth and price stability.”

He estimated that the strong euro had knocked around 0.4 percentage points off inflation. “That is a significant statement on how the exchange rate might influence our price stability objective,” he said.

Island of stability! Hmmm…Read on:

THE WEST AND RUSSIA PLAY A GAME OF CHICKEN KIEV

(…) Should the situation deteriorate, Russia could halt energy exports through the Ukrainian pipeline leaving just Nord Stream to pick up the slack – but even that could only cope with half the increase in volume that would necessitate. This could lead to significant increases in European energy prices, with potential repercussions for inflation that would further complicate Mario Draghi’s task. To make matters worse some 40% of the European Union’s natural gas imports come from Russia – though this amounts to 30% of total consumption. The gas is delivered through a large network of pipelines mostly crossing Belarus (to the Baltics) and Ukraine (to CEE states like Poland) – the Nord Stream pipeline (through the Baltic and Northern Germany) was meant to be a politically safe alternative but will not suffice. Some of the biggest importers of Russian gas in the EU are Germany and Italy where Russian natural gas imports account for roughly 30% of consumption and Greece where most of the natural gas consumed comes from Russia – cold winters ahead if things do not improve soon.

The weather could change rapidly in that region…

German Industry Off to a Strong Start An unusually mild winter helped lift industrial output in Europe’s largest economy, signaling that Germany is off to a good start this year, data from the country’s economics ministry showed.

Industrial output increased by 0.8% in adjusted terms in January, beating economists’ expectations of a 0.7% monthly rise. The December reading was also revised significantly higher. The ministry now says that output grew by 0.1% in the final month of 2013, a big improvement from the 0.6% decline originally reported.

The data follow unexpectedly strong manufacturing orders in January, according to figures released by the ministry Thursday, which suggest that Germany’s economy got off to a robust start this year. The overall rise in orders stemmed from both domestic orders and those outside of the euro zone, which increased by 7.2%. By contrast, orders from within the currency bloc fell by nearly 9% on the month.

Among the major categories, construction output increased by 4.4% on the month in January, while capital goods output increased by 0.8%. Manufacturing output grew by 0.3%. The economics ministry attributed the expansion in construction output to the unusually mild winter.

OIL 

Speaking with The Wall Street Journal’s Selina Williams this week, Mr. Scaroni predicted a coming fall in the oil price just as the industry is grappling to get costs under control.

New fields coming on stream in Brazil, the Barents Sea off Norway and onshore in the U.S. will lift supply, he said, while a shift from burning oil to gas will see demand drop. The result: $90-a-barrel oil, something that hasn’t been seen with any consistency since 2011.

  Meanwhile in Houston, Chevron boss John Watson told industry gathering IHS CERAWeek that oil companies need triple-digit oil prices. (…)

As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

That is why even with internationally traded Brent crude at about $110 per barrel – up from about $20 in the 1990s – this has not been a good time to be an investor in the oil industry.

Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify. (…)

All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices. (…)

In 2000, just seven companies tackled projects that cost $5 billion or more, according to Luc Messier, the head of project development and procurement for ConocoPhillips. Now there are more than 35. All are competing for the same service contractors, engineers and equipment, meaning costs are ballooning.

Even at the less-rarefied end of the market, competition for services will mean higher costs.

Energy business research and consulting firm Douglas-Westwood says the oil and gas industry will need to drill over 670,000 wells between now and 2020 to meet forecasts of demand. In 2013 over 79,000 development wells were drilled, the company says in a forecast paper. In 2020 this number will need to exceed 106,000. (WSJ and FT)