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

***EARNINGS WATCH

NEW$ & VIEW$ (13 FEBRUARY 2014)

SOFT PATCH WATCH

USDA Projects U.S. Net Farm Income to Decline 27% in 2014 Federal forecasters expect U.S. farm income to decline 26.6% to $95.8 billion this year due to a sharp drop in corn and soybean prices.
Falling Property Values Hint at Trouble on the Farm Plummeting prices for corn and soybeans are weighing on land values and threatening a yearslong boom for U.S. growers.

(…) From 2009 to mid-2013, average prices for agricultural land in the U.S. rose by half, while in Iowa, Nebraska and some other Midwest farm states, prices more than doubled, according to U.S. Department of Agriculture data from last August. That helped fuel economic prosperity across the Farm Belt while stoking fears about a possible bubble.

Now there is mounting evidence the boom is fizzling out. Farmland prices in Iowa fell 3% over the second half of last year, and those in Nebraska fell 1%, according to estimates from the Farm Credit Services of America, an Omaha, Neb., lender that calculates weighted averages based on land quality. Reports from U.S. Federal Reserve Banks across the Midwest late last year showed prices flattening or slipping from the previous quarter. A monthly survey of Midwestern lenders by Omaha-based Creighton University in January found the outlook for farmland and ranchland prices was the weakest in more than four years.

Despite the falling property values, agricultural analysts say a repeat of past farm-belt collapses is unlikely. Farmer income is expected to remain strong and debt levels are low, according to USDA figures.

But prices have plunged for corn, a key U.S. crop. After rising to all-time highs in 2012—driven by growing demand and tight supply because of a historic drought—prices for the biggest U.S. crop dropped 40% last year, thanks to a record harvest of 14 billion bushels. The Federal Reserve warned in January that corn prices, then around $4.28 a bushel, won’t cover farmers’ anticipated cost of raising the crop this year. Prices have since climbed to about $4.40 a bushel, compared with about $8.31 in August 2012.

Soybeans, the nation’s No. 2 crop, have also lost value. Meanwhile, with the Fed scaling back its stimulus efforts, buyers of U.S. farmland face the prospect of higher interest rates after years of cheap borrowing.

The shifts have forced farmers to recalculate the value of productive land. (…) Falling land prices could cause economic ripples, curbing farmers’ ability to borrow money to buy new acreage, crop supplies or machinery. (…) A pullback in farmers’ spending could curtail construction of grain bins and livestock facilities as well as purchases of new machinery. Tractor company Deere & Co. predicted Wednesday that sales of farm equipment in the U.S. and Canada this year would decline 5% to 10% from 2013.(…)

The economic picture in the Farm Belt is expected to worsen. The USDA forecast Tuesday that U.S. farm incomes will dive 27% this year from 2013, to $95.8 billion, which would be the lowest level since 2010. Last year’s total was the highest since 1973 on an inflation-adjusted basis, but the continued slump in grain prices is expected to this year outweigh the benefits of having more corn and soybeans to sell. Still, even with the expected decline, the USDA reckons incomes will remain $8 billion above the previous 10-year average.

Michael Duffy, professor of economics at Iowa State University in Ames, Iowa, projects lower income for farmers could drive the price of farmland down 20% to 25% over the next several years. (…)

Southland Home Sales Drop in January; Price Picture Mixed

Southern California logged its lowest January home sales in three years as buyers continued to wrestle with a tight inventory of homes for sale, a fussy mortgage market and the highest prices in years. The median price paid for a home dipped from December – a normal seasonal decline – but remained 18 percent higher than January last year, a real estate information service reported.

A total of 14,471 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 21.4 percent from 18,415 in December, and down 9.9 percent from 16,058 sales in January 2013, according to San Diego-based DataQuick. (…)

Last month’s Southland sales were 17.3 percent below the average number of sales – 17,493 – in the month of January since 1988. Sales haven’t been above average for any particular month in more than seven years. January sales have ranged from a low of 9,983 in January 2008 to a high of 26,083 in January 2004.

“The economy is growing, but Southland home sales have fallen on a year-over-year basis for four consecutive months now and remain well below average. Why? We’re still putting a lot of the blame on the low inventory. But mortgage availability, the rise in interest rates and higher home prices matter, too,” said John Walsh, DataQuick president.

“Two of the bigger questions hanging over the housing market right now are,‘How much pent-up demand is left out there?’ and, ‘Will inventory skyrocket this year as more owners take advantage of the price run-up?’” Walsh continued. “Unfortunately, we’ll probably have to wait until spring for the answers. When it comes to statistical trends, January and February are atypical months that haven’t proven to be predictive over the years.” (…)

China auto market growth slows sharply in January

Growth in China’s auto market slowed to 6 percent in January, a third of the rate seen in December, partly weighed down by sluggish sales of commercial vehicles likes trucks and buses.

The relatively slow growth in the world’s biggest auto market was also due to the week-long Chinese New Year holiday, or Spring Festival, starting at the end of January that resulted in fewer working days compared with 2013, analysts said. Most dealers close during the holiday, which fell in February last year.

The China Association of Automobile Manufacturers (CAAM) said on Thursday passenger vehicle sales rose 7 percent from a year earlier while commercial vehicle sales, which make up around 15 percent of the entire auto market, were virtually flat.(…)

The overall market grew 17.9 percent in December last year and ended the 2013 year with a growth rate of 13.9 percent. (…)

OIL

IEA Cuts Emerging-Market Demand Forecast

In its closely watched monthly oil market report, the International Energy Agency, which represents some of the world’s largest oil consumers, said it trimmed its oil-demand forecast for developing countries by 80,000 barrels a day in the first quarter. (…)

Still, the IEA Thursday slightly increased its overall demand forecast for the year by 125,000 barrels a day to 92.6 million barrels a day, citing improving prospects for the U.S. economy. (…)

Oil prices: well managed, behaving well:

 image image

CANADIAN HOUSING
Report warns of excess supply of rental units in Toronto and Vancouver

(…) The large number of condos that are still being built in both of those cities will lead to an excess supply of rental units in the coming years, and will likely cause their condo vacancy rates to rise by 0.3 to 0.4 percentage points, Mr. Tal adds. The shift is significant considering that Toronto and Vancouver boast the lowest overall vacancy rates outside of Alberta. But it will not be enough to derail the housing markets in those cities or cause a sharp drop in rents, Mr. Tal predicts. (…)

Mr. Tal says vacancy rates will probably rise in the coming few years and rent inflation will ease. “But a careful analysis of the magnitude of the projected supply/demand mismatch suggests a much gentler adjustment than feared by many,” he writes.

The Calgary area has a vacancy rate of 1 per cent, and Toronto and Vancouver are each at 1.7 per cent. The majority of Canadian cities, accounting for about 45 per cent of the population, have higher vacancy rates, stretching from 2.5 per cent in Winnipeg to 11.4 per cent in Saint John.

Mr. Tal estimates that the average number of people per rental unit in big cities last year was 2.1, down from 2.4 10 years earlier. The trend toward smaller families and one-person households has raised the demand for rental units by close to 10 per cent during the past decade.

When you add it all up, the picture that emerges is of a market that reached its peak at a national level in 2012, and is now beginning a moderate decline, Mr. Tal says.

Veritas Investment Research analyst Ohad Lederer published a report in November arguing that Toronto’s rental market might be at an inflection point. “We believe recent claims of robust rental market increases should be taken with a grain of salt,” he wrote.

“In one possible scenario, the Toronto rental market may no longer absorb supply as it comes on stream, resulting in lower rents and increasing cash outflows for landlords, who then decide to sell, at first in a trickle and then in a thunderous herd,” he added. “In this scenario, condo prices could drop dramatically, given relatively small unit sizes that do not attract a wide segment of potential buyers and the already weak underlying fundamentals.”

Mr. Tal says the “real challenge for investors down the road won’t be falling rents, but rather higher financing or opportunity costs when mortgage rates eventually rise.”

EARNINGS WATCH

S&P updated its earnings score sheet as of Feb. 10 with 358 (79%) S&P 500 companies having reported Q4 results. The beat rate is 66% and the miss rate 23.5%, in line with Q3’13 results. Beat rates are particularly high in IT (76%) and Financials (72%). Excluding these two sectors, the beat rate drops to 61.8%, down from 64.4% in Q3.

Q4’13 operating EPS are now seen reaching $28.70, down $0.53 in the last 10 days. Trailing 12 months EPS would thus total $107.75, up 5.4% from their level after Q3’13 and up 11.3% YoY. Revenues are up 5.7% YoY in Q4, bringing operating margins to a new record of 9.85%.

We have had 18 additional reports in the last 3 days. With 84% of the S&P 500 market-cap in, the picture is almost complete. RBC Capital does an excellent job monitoring and analysing earnings. Total revenues are up 2.2% (+2.4% ex-Financials) and EPS are up 7.8% (4.6%). Where it gets interesting is in the breakdown between domestically and globally oriented companies (ex-Fin) which are roughly 50-50 in the Index. RBC calculates that domestic companies revenues grew 4.4% in Q4’13 vs 2.1% for global companies. Domestic profits grew 10.3% vs 4.3% for global companies.

Back to S&P numbers: estimates for Q1’14 are fairly stable at $28.01, up 8.7% YoY and only $0.12 lower than 10 days ago.

With trailing 12m EPS reasonably solidly set at $107.75 (only about 100 companies to be tallied), the Rule of 20 sets fair value at 1972 (20 minus core CPI of 1.7% = Rule of 20 P/E of 18.3 x 107.75, January CPI will be released Feb. 20). Fair value is thus 8.3% above current level.

Equity markets had a brief 5.8% setback in recent weeks (U.S. growth scare and EM rout) but are now realizing that earnings are still rising, inflation remains subdued, interest rates are kept excessively low and the financial heroin keeps flowing albeit at a somewhat reduced rate. Note how the Rule of 20 Fair Value (yellow line on chart) has spiked thanks to rising trailing earnings.

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Downside? 1715 on the rising 200 day m.a., which is also 17.5x on the Rule of 20 P/E (half way between 15-20), some 6% below current levels. Trailing 12m EPS could rise another 2% to $110 after Q1’14.

So 8-10% upside to fair value, 6% downside to fundamental and technical resistance. Not bad. Yet, there is this soft patch risk. How soft a patch? How soft Europe? How bad China? Dunno, but watching carefully. Today’s earnings headlines are nothing to reassure:

    Europe MSCI Revenues Remain Downbeat

    The forward revenues of the EMU MSCI is also falling, and has been doing so at a faster pace recently, suggesting that the region may be especially hard hit by weaker growth among emerging economies. The only good news is that the forward profit margin seems to have bottomed early last year and is recovering slowly.

    Punch FT’S GAVYN DAVIES (A dose of humility from the central banks)

    (…)  past week, we have had major statements of intent from Janet Yellen, the new US Federal Reserve chairwoman; from the European Central Bank; and from the Bank of England. After multiple hours of fuzzy guidance about forward guidance, the clarity of previous years about the global policy stance has become much more murky. Central banks are no longer as obviously friendly to risk assets as they once were – but they have not become outright enemies, and they are unlikely to do so while they are concerned that price and wage inflation will remain too low for a protracted period.

    It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week.

    The first point to make about Ms Yellen is that she has declared herself to be the agent of continuity not the harbinger of a significant regime shift at the Fed. (…)Economists at the Fed, like the Congressional Budget Office, have been moving towards supply-side pessimism, implying that more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.

    There are also signs of supply-side pessimism at other central banks.

    The BoE’s latest Inflation Report has reduced productivity growth projections, and says that the amount of spare capacity in the economy is only 1-1.5 per cent of GDP, despite the fact that the level of GDP is still below the 2008 peak. To the extent that its latest phase of forward guidance is decipherable, the BoE seems to be eager to reassure markets that the bank rate will rise very gradually, and to a low end point, but it does not fully eliminate the possibility that the first UK interest rate rise will come this year.

    The ECB also has a pessimistic view of the supply side, which explains why it does not see any urgent need for a big monetary policy change as inflation drops towards zero. That does not mean it will refuse to cut interest rates into negative territory next month. My interpretation of the supposedly “neutral” steer from Mario Draghi’s press conference on Thursday last week is that the ECB president said only that more information would be needed before action would be taken. That information would come in the form of the ECB’s inflation forecast for 2016, which would be published earlier than usual.

    A sensible guess at that forecast can be made, given that it will depend on market forward rates for oil prices, which are falling. JPMorgan reckons the likely forecast for eurozone inflation in 2016 will be 1.5 per cent, compared with 1.2 per cent in 2015. That seems to offer Mr Draghi enough evidence of a prolonged period of exceptionally low inflation, which is what he needs to get the German Bundesbank to support action. But it does not point to a threat of outright deflation, without which ECB balance sheet expansion looks improbable. Mr Draghi went out of his way to differentiate between these two different states of the economy last week.

    Pointing up If the central banks are becoming more pessimistic about the supply side, this could spell danger for markets that have perhaps already priced in a strong medium-term recovery in GDP towards previous trends. Without the prospect of this GDP recovery, the high share of profits in current GDP could start to pose problems, especially if the central banks are expected to raise short rates within a year or two. Regardless of the path for short rates, asset purchases are petering out everywhere except in Japan, and Chinese liquidity withdrawal is adversely affecting Asian monetary conditions.

    Yet the prospect of genuinely hostile central banks for markets still seems some way off. Above all else, policy committees seem highly uncertain about the right path for interest rates now that asset purchases are ending. But there is an emerging degree of consensus that global inflation, notably wage inflation, remains inconsistent with their mandates.

    The Romers wrote: “Central bankers should have a balance of humility and hubris.” At present, they seem to be leaning towards humility about what they know and can achieve. In an environment of unavoidable doubts about the labour market constraints that they are facing, it seems that they will let wage inflation increasingly act as the judge and jury for the stance of policy. Their latest refrain is that inflation will return to target, but only over a prolonged period, and that wage inflation will be the crucial signal.

    Only when wage inflation starts to rise should markets really start to worry.

    So, our central bankers are quietly acknowledging that labour supply may be lower than previously thought. That has been my point in recent months. In the same FT today:

    German companies court older workers Labour shortages force employers to offer incentives

    (…) “German companies are facing a labour shortage. It is difficult for them to get competent, highly skilled employees,” said Nils Stieglitz, professor of strategic management at Frankfurt School of Finance and Management. “One way to compensate is to extend the lifetime of their employees.”

    As a consequence, Prof Stieglitz said, pressure was mounting on German employers to offer a better work-life balance to retain older employees. (…)

    As governments across Europe have pushed through plans to raise retirement ages, Germany, the continent’s strongest economy, has taken a step in the opposite direction.

    The country recently unveiled draft legislation to lower the retirement age to 63 for workers such as Mr Brockmann who have contributed to the system for 45 years.

    The government estimates that, each year, about 200,000 workers will be able to retire early under this legislation – a proposal that will cost €60bn between its planned introduction in July and 2020.

    The remainder of the workforce will be required to keep to the current retirement age, which is being raised from 65 to 67. (…)

    The plan has also been criticised by German business leaders, who have had to work hard in recent years to hang on to older employees.(…)

    Germany’s working-age population is expected to fall 7 per cent by 2025, according to projections from the United Nations Population Division, in part because German women have been having too few babies for more than 40 years.(…)

    Finally, my suspicions on January’s U.S. employment report are shared by David Rosenberg:

    It’s ‘as if 100,000 service-sector jobs went missing,’ Rosenberg says

    David Rosenberg, chief economist and strategist of Gluskin Sheff, says the weakness in the data came on the services side of the ledger — which doesn’t make sense to him when looking at both the ISM and ADP surveys. The employment component of the ISM services index was a strong 56.4% in January, and ADP said 160,000 private-sector services jobs were created during the month. “It’s as if 100K service sector jobs went missing in the payroll report,” he said.

    (In the chart, the blue bar represents what the Labor Department says of private-sector services employment, and the red bar is ADP’s tally.)

    He said the headline number “did not pass the proverbial sniff test,” and that the strong showing of the household survey is closer to the mark and more consistent with what actually is going on in the economy.

    NEW$ & VIEW$ (10 FEBRUARY 2014)

    Slow Jobs Growth Stirs Worry Over Recovery A hiring chill hit the U.S. labor market for the second straight month in January, reflecting employers’ reluctance to take on new workers despite some of the nation’s strongest economic growth in years.

    U.S. payrolls rose a seasonally adjusted 113,000 in January after December’s lackluster gain of 75,000 jobs, marking the weakest two-month stretch of job creation in three years, the Labor Department said Friday.

    Yet the unemployment rate ticked down to 6.6%—the lowest level since late 2008. The decline came because more people found jobs last month as opposed to last year when it fell in part because of unemployed Americans abandoning their job hunts and dropping out of the labor force. (…)

    The report left several puzzles unanswered, including the dichotomy of solid growth and weak hiring. Throughout the recovery, businesses have been able to boost production at a faster pace than employment. That trend could also be supporting GDP growth despite the hiring slowdown. (…)

    The latest data suggest weather may have slowed hiring in December, but not in January. (…) Payrolls in construction, an industry often hardest hit by frigid temperatures, grew by 48,000 last month after December’s decrease of 22,000. The manufacturing sector added 21,000 jobs last month. The construction and manufacturing sectors tend to pay higher wages than retail jobs, which declined by 13,000 last month.

    The health-care sector added just 1,500 jobs in January after a gain of 1,100 jobs in December. The sector had supplied a steady stream of jobs for years, raising more questions about whether the rollout of the Affordable Care Act last fall is restraining hiring.(…)

    To be sure, the report offered a few bright spots. In January, the size of America’s labor force actually grew, by nearly 500,000 people, as more people got jobs and looked for work.

    In addition, the ranks of the long-term unemployed—those out of work for six months or more—thinned, dropping to 3.6 million from 3.9 million. Some of that may have been partly due to more than 1.3 million Americans losing federal unemployment benefits in December; some of those workers may have given up their job search or taken jobs they otherwise wouldn’t. The Senate failed to advance a renewal of those benefits this past week. (…)

    This was the WSJ’s rundown of Friday’s NFP report, a good reflection of the confusion. After all, the narrative before December’s NFP report was that the U.S. economy was accelerating north of 3.0% GDP growth and 2014 would be a much better year overall. The reverse in the narrative was exacerbated by the plunge in the ISM Manufacturing PMI for January.

    Most if not all the negatives have been well publicized by the media. So, here’s a dose of optimism from factual data, just to keep us all balanced:

    • The annual revisions to the 2013 data were good news. The BLS had already said that March 2013 employment would be revised up by 369,000 jobs. The revisions from March through to December 2013, however, show an additional 140,000 jobs. The new data suggest the economy added 194,000 jobs a month in 2013, roughly 11,300 more than the previous estimates. This is 6.1% more new jobs per month on average than originally estimated. While December new jobs were only revised up by 1k, November’s were revised up by 33k. Monthly changes were revised up 52k in total for the first 6 months of 2013 and up 84k for the second half with 71k of the 84k revisions occurring in the last 3 months of the year. Upward revisions are a positive sign.
    • The Labor Department conducts two surveys for the employment report. The establishment survey of employers gave us the disappointing 113,000 nonfarm payrolls gain, while the household survey showed 638,000 new jobs added last month (or a still robust 616,000 removing the population control effect.)  While the two job measures often vary month-to-month, in the long run they track one another. Looking at year-over-year growth rates, the household employment numbers seem to be catching up to the steady rise in payrolls as reported by U.S. establishments. (WSJ)
    • In addition to the unemployment rate, Labor also calculates a broader measure of underemployment that includes the unemployed plus persons marginally attached to the labor force and people who can only find part-time work because of economic conditions. The rate has fallen by almost two percentage points in the past year, with a one-point decline in just the last three months.  At 12.7%, January’s rate is the lowest since November 2008. One driver: the rapid drop in workers who are working part-time but want full-time work. The number has dropped from more than 8 million in October to 7.3 million in January. Considering the strong number of jobs reported by households, those no longer working part-time probably gained full-time employment. That’s a plus for consumer spending and incomes. (WSJ)
    • There are two logical responses to losing [long term unemployment] benefits: either accept any job that is going, even at much lower wages than you want, or else stop looking.(…) Less in keeping with the benefits story, the percentage of the population participating in the labour force picked up from 62.8 to 63 per cent, suggesting that more people came into the labour force. (FT)
    • The percentage of working-age Americans with a job rose to 58.8% last month, the highest since October 2012.
    • The well publicized dismal January ISM Manufacturing report added to the slowdown fears. However, other reports tend to confirm that economic momentum continues. Markit’s U.S. Manufacturing PMI, which has tracked official data on factory orders better than the ISM, suggests that “ the underlying trend in new orders appears to have been as strong, if not slightly stronger, than late last year.” As the WSJ chart on the right shows, manufacturing employment has been gaining momentum in the past 4 months.
    • Markit’s Services PMI, a far more useful indicator for job creation, reached 56.7 in January, up from 55.7 in December with continued strong new orders and employment gauges. Markit says that “The headline index suggests service sector output continued to expand at a robust pace in January, with the latest increase in overall business activity the fastest for four months.”
    • The recent NFIB release revealed improved employment at small companies, the best job creators in the U.S.: “Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development (apparently undetected by BLS).”

    imageMarkit also believes that the underlying employment trend is better than what the official data paint:

    The hiring trend depicted by the official data is also bleaker that the picture painted by Markit’s PMI™ surveys, which have shown companies across
    manufacturing and services continuing to take on extra staff in significant numbers in recent months (in the region of 180-195,000) alongside resilient growth of
    output and order books.

    The PMIs, which had correctly signalled the robust rate of economic expansion in the second half of last year, indicate that growth remained robust at the start of 2014, with the January PMIs broadly consistent with GDP continuing to grow at an annualised rate of at least 3% in the first quarter. Such solid growth implies that the hiring trend is likely to revive again in February.

    Good Sign for Jobs: More Quitting The Outlook: The percentage of U.S. workers who voluntarily left their job—the “quit rate”—hit 1.8% in November, the highest during the recovery, in a healthy sign for the labor market.

    The percentage who voluntarily left their job—the nation’s “quit rate”—hit 1.8% in November, the highest in the recovery and up from a low of 1.2% in September 2009, according to the Labor Department. About 2.4 million workers resigned in November. Some retired or simply chose not to work. But most quit to hunt for a new job or because they had already found one.

    Figures for December, due Tuesday, will probably show further gains in quitting, economists say. (…)

    imageWhile more Americans are quitting, U.S. employers are still moving slowly to hire. A separate measure from the Labor Department that tracks the number of hires as a share of overall employment remained at 3.3% as of November, the latest data available, the same level as a year prior and well below the 3.8% average between late 2000 and 2006. “You want to see quits and hires going one for one,” says Jason Faberman, senior economist at the Federal Reserve Bank of Chicago.

    Economists say part of the reason the quit rate is rising is that more of the jobs the economy is creating are in industries like retail and restaurants, known for higher turnover and relatively low pay. Roughly 20% of November’s quits were in the “accommodation and food services” sector, up from 17.5% in the same month two years ago. By contrast, only 5.2% of November’s quits were in manufacturing, which tends to pay more, down from 5.9% two years before. As the share of jobs in high-turnover sectors grows, the overall quit rate would be expected to rise.

    Meanwhile, the longer-term picture suggests Americans are becoming less peripatetic when it comes to their jobs. The quit rate actually edged down during much of the 2000s, even when the economy was booming. After the 2001 downturn, quitting levels failed to return to their prerecession highs. Some 51% of U.S. workers have been with the same employer for at least five years, up from 46% in 1996, according to a January 2012 survey by the Labor Department.

    One reason for the growing stability is America’s aging population. Older workers change jobs less frequently than younger ones. But there are other drivers, including growing health-care costs that make some workers reluctant to leave the safety of jobs with good benefits.

    If such trends persist, it is likely that labor-market churn will continue decreasing over time. That could exacerbate an already deeply entrenched problem: long-term unemployment. Without more Americans leaving jobs for more promising positions, it is that much harder to find slots for people out of work for months and trying to get back in the game.

    To end the rundown of Friday’s NFP report: Average hourly earnings rose five cents. The length of the workweek was steady at an average of 34.4 hours. In effect, real wages have been rising throughout 2013 after declining the previous 28 months. But there is this problem:

    Low-Wage Hours At New Low As ObamaCare Fines Loom

    Low-wage workers clocked the shortest workweek on record in December — even shorter than at the depth of the recession, new Labor Department data showed Friday.

    The figures underscore concerns about the ObamaCare employer insurance mandate’s impact on the work hours and incomes of low-wage earners.

    It’s impossible to know how much of the drop relates to ObamaCare, but there’s good reason to suspect a strong connection. The workweek has been getting shorter in many of the same industries where anecdotes have piled up about employers cutting hours to evade the law’s penalties.

    While weather likely played some role in December, that’s not the driving factor. The low-wage workweek in November had already matched the prior record low — set in July 2013, just as the Obama administration delayed the employer mandate until 2015.

    Further, January’s data not yet broken down by industry subgroup show that rank-and-file retail workers saw another big fall in average work hours, matching a record-low 29.7 hours a week.

    In December, office supply chain Staples cut the schedules of part-time workers to a maximum of 25 hours per week, below the 30-hour threshold at which the Affordable Care Act’s employer mandate kicks in.

    In November, David’s Bridal reportedly cut even full-time salespeople and stylists below the 30-hour mark.

    ObamaCare’s penalties won’t apply until 2015, but they will reflect 2014 staffing levels, giving employers little time to adjust.

    More Jobs, Fewer Hours

    IBD’s gauge of the low-wage workweek, now at 27.4 hours, includes the 30 million nonmanagers working in private industries where pay averages up to $14.50 an hour.

    These industries boosted payrolls by 700,000 (nonsupervisors) in 2013, or 2.4%, but hours worked grew at half that rate. In effect, shorter hours would have explained 323,000, or 47%, of those new jobs.

    Again, weather wasn’t the primary factor. Even if the workweek had held steady in December, the workweek would have been responsible for one-third of the jobs added in low-wage private industries last year.

    That’s not to say that overall job creation is weaker than it appears. That’s because the workweek has moved higher for non-low-wage workers. This group, including managers and those in higher-paying industries, is now clocking a longer week than prior to the recession.

    That divergence explains why many economists and nonpartisan arbiters like the Congressional Budget Office have concluded that ObamaCare has had no impact on part-time employment. The effect doesn’t show up in aggregate workforce data, but that is the wrong place to look.

    Finally, CalculatedRisk has a set of charts supporting slow but on going improvements in the U.S. labour situation:

    Not to say that all is good. We may well be in another soft patch (weaker housing, autos, energy costs, retailing, high inventories) but nothing too serious, especially since interest rates are backing down amid much softer fiscal headwinds.

    ISI’s company surveys, conducted weekly and covering a broad corporate spectrum, are holding up nicely in spite of the apparent excess inventories in the economy:

    image

    Speaking of higher energy costs, Joao Peixe at OilPrice.com points out:

    As natural gas prices climb, reaching over $5/mcf again on 4 February, and with an unseasonably cold winter, local utilities say that natural gas customers’ bills are 30-40% higher now than last winter.

    Last week, we saw natural gas prices rise above $5 for the first time in three years, then falling back a bit only to rise again on 4 February, with March futures trading above $5.25/mcf—or more than 6%, according to expert trader Dan Dicker.

    Customers are footing the bill for higher gas prices and the coldest November-January period in four years in the Midwest and Northeast.

    In Omaha, Nebraska, weather has been about 30% colder this year than last, and utility regulatory officials saying that gas use among customers is up while bills are up by 34-38% over last year.

    Utilities are paying high prices for gas because demand has been higher and consumption rates at a level that has reduced storage by about 17% over the average of the previous five years. (…)

    As Dicker noted for The Street, “Low stockpiles caused by sequestration and a rush of domestic exploration and production companies away from natural gas production in favor of shale oil is taking its toll and providing the first real and consistent support of prices since 2007. Suddenly, natural gas markets are vulnerable to price spikes and traders are afraid to be short.”

    If you think we’ve seen all of the bad weather for the year, the Browning Newsletter will discourage you, whether you live on the East, Central or West USA:

    In 80% of similar years, late winter remained cold in the Eastern and Central US through February. In 60% of these years, there was little to no slowing of the eastward sweep of storms, so while temperatures were cold, they were not as extreme as they were in mid-winter. The jet stream became less variable, hitting the Midwest and Upper South, but not as extreme in Texas and Gulf. At the same time, in 80% of similar years, more cool air and precipitation entered the Pacific Northwest and Western Canada. (In 40% of these years, some of this precipitation even hit California.)

    Here’s the bad news. This shows sign of being one of those 20% of years where the drought lasts all winter! Even though it has been more common during the past
    century for the infamous “Ridiculously Resilient Ridge to fade in late winter – allowing a “Fabulous February” or “Miracle March” to break or at least alleviate the Western drought – meteorologists don’t think it is likely this year. The High in the atmosphere is showing no sign of leaving.

    Meteorology is like the stock market: a game of probabilities.

    Canada sees slight bump to job numbers

    Employment rose by 29,400 jobs, recouping some of December’s losses. The jobs gain, along with a drop in the number of people looking for work, lowered Canada’s jobless rate to 7 per cent, the same level as a year ago.

    U.S. consumer credit posts biggest jump in 10 months

    Total consumer credit rose by $18.8 billion to $3.1 trillion, the Federal Reserve said on Friday. That was the biggest gain since February. Revolving credit, which mostly measures credit-card use, rose by $5 billion in December after climbing $465 million in November. Revolving credit figures can be volatile.

    Non-revolving credit, which includes auto loans as well as student loans made by the government, increased $13.8 billion in December. (Chart from Haver Analytics)

    French Economy Continues to Sputter

    (…) a survey by statistics bureau Insee showed industrial production dipped 0.3% in December from November. Economists expected only a 0.1% decline. It had risen 1.2% in November.

    In a separate report, the Bank of France forecast the economy will grow 0.2% quarter-on-quarter at the start of this year, marking a slowdown from the 0.5% expansion the central bank has forecast for the final three months of 2013. (…)

    Sentiment in manufacturing was stuck at the same level in January as December, at 99, just below the long-term average reading of 100, the central bank’s survey showed. Sentiment in services improved slightly, but remained even further below the long-term average at 94 in January.

    The Bank of France survey echoes others—Insee’s business sentiment survey for January was also stuck at the same level as December.

    imageThe weak industrial-production figures in December were partly explained by mild weather decreasing demand for energy in France. But manufacturing output was also disappointing as it failed to record any growth. (…)

    Markit’s Composite PMI for France registered 48.9 in January from 47.3 in December (chart above). Markit’s Retail PMI for France has been below 50.0 since October and French retailers remain pessimistic:

    The value of goods ordered by French retailers for resale decreased for a twenty-eighth consecutive month in January. Moreover, the rate of contraction accelerated since December.

    EARNINGS WATCH

    The Q4’13 earnings season is turning out to be pretty reasonable.

    While the market has pulled back quite a bit this earnings season, the underlying data for corporate America has been strong.  As shown below, 65% of companies that have reported this season (1,100+) have beaten bottom line EPS estimates, while 64% have beaten top line revenue estimates.  If these beat rates hold, it would be the strongest earnings beat rate seen since Q4 2010 and the strongest revenue beat rate since Q2 2011.

    • Factset updates us on S&P 500 companies :

    Overall, 344 companies (69%) have reported earnings to date for the fourth quarter. Of these 344 companies, 72% have reported actual EPS above the mean EPS estimate and 27% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is
    slightly above the 1-year (71%) average, but slightly below the 4-year (73%) average.

    In aggregate, companies are reporting earnings that are 3.3% above expectations. This surprise percentage is equal to the 1-year (3.3%) average, but below the 4-year (5.8%) average.

    The blended earnings growth rate for the fourth quarter is 8.1% this week, above last week’s blended earning s growth rate of 7.8%. The Financials sector has the highest earnings growth rate (24.5%) of all ten sectors. It is also the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 4.9% (unchanged from last week).

    In terms of revenues, 68% of companies have reported actual sales above estimated sales and 32% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is well above the average percentage recorded over the last four quarters (54%), and well above the average percentage recorded over the previous four years (59%). If the final percentage for the quarter is 68%, it will mark the highest percentage of companies reporting sales above estimates since Q2 2011 (72%).

    In aggregate, companies are reporting sales that are equal to expectations (0.0%). This percentage is below the 1-year (0.4%) average and below the 4-year (0.6%) average. The blended revenue growth rate for Q4 2013 is 0.8%, above the growth rate of 0.3% at the end of the quarter (December 31).

    At this point in time, 71 companies in the index have issued EPS guidance for the first quarter. Of these 71 companies, 57 have issued negative EPS guidance and 14 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 80% (57 out of 71). This percentage is above the 5-year average of 64%, but slightly below the percentage at this same point in time for Q4 2013 (86%).

    For Q1 2014, analysts are now expecting earnings growth of only 1.5%. However, earnings growth is projected to improve in each subsequent quarter for the remainder of the year. For Q2 2014, Q3 2014, and Q4 2014, analysts are predicting earnings growth rates of 8.2%, 12.2%, and 11.7%. For all of 2014, the projected earnings growth rate is 9.4%.

    Pointing upGuidance changes are only slightly worse than at the same time 3 months ago (for Q4’13) and one year ago (for Q1’13).

    The biggest drag on Q4 revenue growth is from the Finance and Energy sectors, revenues in Finance down -12.6% (with results from 78.5% of the S&P 500’s Finance sector results already out) and -5.4% in the Energy sector (55.6% of the sector’s total companies have reported). Excluding both of those sectors, revenue growth for the remaining S&P 500 companies that have reported results doesn’t look that bad – up +4.4%, compared to +4.6% in 2013 Q3 for the same group of companies and the 4-quarter average of +3.4%. Revenue growth has improved for the Transportation and Technology sectors and somewhat for the Industrials as well.

    So, margins keep rising as the Factset chart shows. Revenues ex-Finance, ex-Energy, are rising nicely in real terms and are not decelerating just yet. Productivity rose 3.2% QoQ in Q4’13 (+1.7% YoY) while unit labour costs fell 1.6% (-1.3% YoY). Mean reverting is not visible.

    World economy also looks reasonably good after all the January PMIs (Chart from Moody’s):

    image

    THE JANUARY EFFECT ON FEBRUARY

    From BofAML via ZeroHedge:

    February is bad for risk, especially after a down January

    February is a month when the S&P500 tends to take a breather. Since 1950 it has averaged a return of -10bps and risen 55% of the time. HOWEVER, after a negative January the month of February turns much nastier. In such instances, it averages a decline of -1.4% and with the odds of a decline rising to 63%.

    Here’s the chart for the 12 months of the year, courtesy of RBC Capital:image

    Contact: edgeandodds [at] gmail.com