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

Natural Gas

NEW$ & VIEW$ (24 MARCH 2014)

Gavyn Davies: An unmistakable shift in the Fed’s centre of gravity

(…) But in a wider sense there has been an unmistakable shift in the FOMC’s centre of gravity in the past few months. The key to this shift is that the mainstream doves who have dominated policy decisions in the past few years have now essentially stopped arguing against either the tapering of the balance sheet or the start of rate hikes within about a year from now. Only the isolated Narayana Kocherlakota remains in the aggressive dovish corner.

The markets still seem entirely untroubled by this impending headwind for asset prices, but it is the new reality, unless the economy slows sharply.

(…) why did the bond and (briefly) the equity market sell off after the FOMC meeting? Undoubtedly, the main reason was Ms Yellen’s willingness to define what the FOMC meant by the “considerable time” between the end of tapering and the start of rate increases. She said this was “something on the order of six months”. Even if this was a rookie mistake (which is hard to believe), it still revealed very clearly what she was thinking, and it was a shorter period than most investors would otherwise have inferred from the word “considerable”. (…)

Where does this leave the big picture for US monetary policy? The smoke signals are confused. Wage inflation remains too low, as Ms Yellen specifically pointed out. But it is surely significant that the hawkish shift in the dots is the first time this has happened since QE3 was launched in 2012.

Previously, the predicted date of initial rate increases has tended to be shifted further out almost every time the dots have been published. And this is where I believe we are learning something new about the attitude of the “mainstream doves” who have dominated Fed policy since 2008.

These mainstream doves have increasingly accepted that the falling unemployment rate may be telling the truth about labour market tightening, with less expectation that the participation rate will rebound. They have now abandoned the “Evans rule”, which previously envisaged a period in which inflation could rise to 2.5 per cent, and the Fed’s 2 per cent inflation target once again resembles a ceiling.

The optimal control approach to policy, under which rates would be deliberately kept lower than indicated by standard policy rules in order to ease policy at the zero lower bound, is no longer in favour. Instead, the path for rates is determined by the FOMC’s assessment of “headwinds”, which can rapidly change.

And there is increasing evidence that the FOMC as a whole, not just the hawks, is concerned about an excessive reach for yield in the financial system, as it certainly should be. (See the forensic Tim Duy on this.)

The upshot is that the committee has moved a long way from the highly unconventional territory it occupied a year ago. Paul Krugman complains that the liquidity trap has been replaced with a “timidity trap”. Timid or not, investors for the first time in years now face a two-way risk in US monetary policy.

Economic Conditions Snapshot, March 2014: McKinsey Global Survey results

Concerns about geopolitical instability and its implications for global growth have surged, according to McKinsey’s latest survey on economic conditions. Seventy percent of all respondents cite geopolitical tensions as a risk to growth in the global economy over the next year, up from 27 percent in December, as the recent turmoil in Ukraine and Russia has left executives across Europe divided.

On average, executives remain optimistic about conditions in both their home countries and the global economy, though sluggish demand still tops their list of domestic concerns. Among non-eurozone respondents in Europe, however, economic expectations have taken a turn for the worse. They cite geopolitical issues most often as a risk to their countries’ domestic growth. Relative to their peers in the eurozone, they are much more negative about current conditions at home and in the world economy—and more pessimistic about economic prospects in the months ahead. (…)

On average, executives are as positive about economic conditions at home as they were in December. Forty-three percent say current conditions are better now than six months ago—close to the 49 percent of executives who, six months ago, expected conditions would improve by now—and 43 percent expect conditions will improve over the next six months. Across regions, respondents in North America and developed Asia remain the most upbeat. Yet those in Asia are much likelier now than in December to say conditions have worsened, and they are less likely than most others to expect improvements in the coming months. (…)

EM held back by weak global recovery Economies with reliance on commodity exports remain fragile

(…) In aggregate, emerging market exports grew 4.3 per cent year-on-year in January, up from 4.2 per cent in December, but this meagre uptick masks a sharp divergence in fortunes between regions. Latin America and some parts of Africa have performed poorly, while emerging Asia and eastern Europe have been relatively buoyant. Within regions, there have also been significant country-specific differences.

These discrepancies not only help to reveal the influences suppressing an export-led emerging market recovery, they also identify differing levels of vulnerability among fragile five and other emerging economies to further market turmoil.

On the optimistic side, India and Indonesia appear to be graduating if not quite yet from the fragile five then at least from the grouping’s critical list. Their current account deficits have been shrinking as a percentage of GDP mostly because whopping currency depreciations last year – 28 per cent for the rupee and 20 per cent for the rupiah between May and August – have brought significant reductions in imports.

Stock, bond and currency markets in both countries are already rewarding this turnround, even at a time of instability in Ukraine and continued fears over the unwinding of US monetary stimulus. But these upbeat readings do not obscure the fact that such deficit reductions derive more from slumping domestic demand than from a resurgence in developed world purchases of Indian and Indonesian exports.

“Indeed, there are still reasons to be relatively gloomy about the emerging market export story,” said David Lubin, head of EM economics at Citi.

“In the US, for example, [there is] evidence to suggest that non-energy import growth has been considerably weaker than it was at similar stages of the US cycle at any time since 1980,” Mr Lubin added. “And the persistence of the eurozone’s current account surplus suggests that prospects for a sharp increase in import demand there are weak.”

Part of the problem with US and EU demand, says Louis Lam, Greater China economist at ANZ Research, is that it has not yet broadened out to include electronics, which account for between 30 to 60 per cent of total exports from countries such as Malaysia, Thailand and the Philippines.

Until such a broadening in US and EU demand takes place, the export fortunes of Southeast Asia will continue to be dictated by Japan – where demand has been relatively strong – and by China, where a slowdown in construction investment this year has sent non-food commodity markets into a tailspin.

The spectre of weakening Chinese imports of iron ore, copper and other resources looms large for Brazil, South Africa and Indonesia among the fragile five, but is also negative for Chile, Colombia, Russia and Peru, says Mr Botham, who has ranked emerging markets according to their vulnerability to a Chinese slowdown. (…)

Non-food commodity exports account for well over 80 per cent of total exports to China in Columbia, Chile, Brazil and Peru. The same is true in South Africa, Russia and Turkey, while in some frontier markets such as Zambia, reliance on copper exports to China is so heavy that the national currency, the kwacha, has depreciated against the US dollar by as much as 8 per cent in the past month.

The stresses afflicting China, therefore, add emphasis to hopes that a strong upsurge in US, EU and Japanese demand for emerging market exports will soon materialise. But in the absence of such a recovery, two fragile five members – Turkey and Brazil – appear particularly exposed because their current account deficits failed to improve in the fourth quarter of last year.

South Africa did manage to shrink its deficit but remains vulnerable because it did so largely by raising interest rates and hobbling its domestic economy to reduce imports. Overall then, the outlook for an export-led solution to emerging market woes appears remote. “Looking ahead, in theory, the currency falls over the past year could – in time – support a rise in manufactured goods exports,” said a Capital Economics research note. “But…we’re not holding our breath.”

Bundesbank Says German Growth to Slow

Germany should see strong economic growth in the first three months of the year before slowing down in the next quarter, the country’s central bank said Monday.

“Germany is poised to see a substantial boost to its economic expansion in the first quarter,” the Deutsche Bundesbank said in its monthly report.

A very mild winter, especially in the first two months of the year, has boosted construction output in Europe’s largest economy. Production should also be strong in the first quarter, the central bank said, citing an upward trend in industrial contracts. Growth in the second quarter should be “considerably lower” than the first, the Bundesbank added.(…)

Data provider Markit said the preliminary composite purchasing managers index for Germany—which measures activity across the services and manufacturing sectors—slipped to 55 in March from February’s 56.4. It was the lowest level since December. (…)

Germany Inc. on Edge as EU Steps Up Response to Crimea

(…) The EU’s biggest economy has a lot riding on Russia. Volkswagen AG (VOW),Siemens AG (SIE), and HeidelbergCement AG are among the largest foreign investors there, the economic linchpin of a relationship nurtured by successive Berlin governments. Retailer Metro AG sells groceries to Russians, Adidas AG clothes the national soccer team, and Deutsche Lufthansa AG (LHA) flies to more Russian cities than any other western European carrier. (…)

Among the large countries that use the euro, Germany sends the highest proportion of its exports to Russia, about 3.3 percent, Olivier Bizimana, a Morgan Stanley economist based in London, said in a March 20 research note. Bilateral trade between the two countries hit 77 billion euros ($106 billion) last year, and German investment in Russia totals 20 billion euros, according to the German Association of Chambers of Industry and Commerce. (…)

“Germany will be harder hit than almost all other countries” by sanctions, especially if Putin retaliates by halting gas shipments, said Holger Schmieding, chief economist at Berenberg Bank in London. “A stop of Russian energy imports throughout next winter — that would stall the European and the German economic recovery.” (…)

Only Best Credit Scores Getting Mortgages Mortgage credit continues to loosen up, but getting a loan to buy a house is still difficult for the average American. This is especially true for people without top credit scores.

(…) The average FICO score for a conventional mortgage – one that’s sold to mortgage giants Fannie Mae and Freddie Mac — was 755 in February, according to Ellie Mae’s latest mortgage origination report.

The average FICO score for FHA loans – which are backed by the government and attract buyers with lower credit in part because FHA loans require down payment as low as 3% – was 686.

The U.S. average FICO score was 711 in October 2013, the latest available data, so conventional mortgages remain difficult to get for most borrowers. A look at the distribution of credit scores shows why this is: Banks continue to avoid the worst borrowers like the plague.

The accompanying chart, from CoreLogic, shows the historical credit score distribution of purchase mortgages. As you can see, the largest losses have been among buyers in the lowest two tiers, and they aren’t budging much.

Borrowers with FICO scores below 620 accounted for 0.35% or mortgages in January, down from about 13% in February 2003 and a peak of 17% during the frothiest peaks of the housing bubble. The best borrowers, with scores above 780, have taken their place, swelling from about 13% or originations in 2003 to a little less than 30% today.

But, as the chart shows, the share mid-range borrowers — those with scores of 640 to 779 — are in line with their historic norms.

Sinopec to Cut Spending

China Petroleum & Chemical Corp. said Sunday that it would reduce capital expenditures 4.2%. PetroChina Co. said Thursday that it would cut capital spending 7%.

Mohamed El-Erian
Markets underprice geopolitical risk

(…) While each geopolitical shock has been small on a standalone basis, in aggregate they are starting to affect a more meaningful part of the global economy. And few, if any, can be resolved easily. Meanwhile, leaders in Europe and the US will come under increasing domestic pressure to act more forcefully externally, weakening the circuit breakers.

Do not look to global co-operation as a way to diffuse most of today’s geopolitical tensions. Hampered by national politics, the effectiveness of multilateral institutions has failed to keep up with the increasing complexities on the ground.

This weakness could even start playing out in earnest in Ukraine in the next few weeks. All it would take is for additional blatant territorial intervention by Russia to trigger comprehensive financial and economic sanctions by the west. With Russia likely to retaliate by disrupting the supply of energy to western Europe, the world would be thrown into recession, along with renewed financial instability – a situation that would certainly derail capital markets.

While a notable risk, this is not the most likely scenario for the next few weeks. Instead, the situation is likely to stabilise temporarily at a new geopolitical equilibrium, albeit a fragile one, in which the west tolerates the annexation of Crimea and Russia’s “legitimate interests” there, while Russia pays lip service to Ukrainian territorial integrity and supports international help for the country while deferring some of its own claims.

Should this indeed materialise, markets would again feel vindicated in having responded rather calmly to the Crimea crisis. Yet they should guard against complacency based on a simple extrapolation of the past. Underlying geopolitical tensions around the world have been gradually building towards a tipping point. Should this continue, it would quickly become evident that many markets are underpricing geopolitical risk.

THE U.S. ENERGY GAME CHANGER

Follow-up on my Oct. 2012 Facts & Trends: The U.S. Energy Game Changer:

Chemical Firms Pounce on Cheap Gas Chemical companies meeting in Houston this week will discuss how to ensure that multibillion-dollar bets on cheap natural gas pay off.

(…) the trend has given chemical and plastics producers a reason to expand in the U.S., creating jobs and reviving a sector of the economy that many people had written off.

The manufacturing renaissance sweeping across the U.S. today is a shift from the turn of this century, when it seemed unlikely that new petrochemical plants would be built in places such as the coastal region near the Gulf of Mexico, according to Dave Witte, general manager of IHS Chemical, an energy consulting group.

The assumption was that new petrochemical plants and associated investments in plastics, rubber resins and metals manufacturing would be focused in Asia and countries rich in natural gas, such as Iran. (…)

New petrochemical projects are under way, with Dow Chemical, Sasol Ltd., Phillips 66 and other companies building 48 factories and plant expansions, thanks to the plentiful natural gas now available in the U.S., the American Chemistry Council said.

The combined price tag for that construction: more than $100 billion, the council said. IHS Chemical estimated that $125 billion in petrochemical investments related to U.S. shale gas have been announced, with more likely to come.

In an about-face, the U.S. is drawing foreign manufacturing investments, Mr. Witte said. Inexpensive gas is luring Canada’s Methanex Corp to pack up its one-million-ton-a-year methanol plant in Chile and move it to Louisiana at a cost of $550 million. But all that building could cause construction costs to balloon as companies compete for a limited supply of labor and materials, particularly in Gulf Coast states, according to IHS.

The resurrection of U.S. manufacturing in the service of developing the chemical sector and pumping more oil and gas—including building machinery and fabricating steel and iron—is breathing new life into major metropolitan areas, according to an IHS report released last week that was commissioned by the U.S. Conference of Mayors.

From 2010 to 2012, energy-intensive manufacturing sectors added more than 196,000 U.S. jobs and increased real sales by $124 billion in the nation’s metro areas, according to the report.

Steel plants across Indiana’s Rust Belt and from Birmingham, Ala., to Knoxville, Tenn., to West Mifflin, Pa., have more orders for metal. And machinery-sector growth exploded between 2010 and 2012, with Houston leading the way, followed by Chicago, Detroit, Los Angeles and Milwaukee, the report said. “That means jobs,” said Lansing, Mich., Mayor Virg Bernero. “There are still people who need jobs, and advanced manufacturing is the ticket.”

And, BTW:

South Korea, the world’s second-largest importer of natural gas, is positioned to be the first Asian importer of U.S. natural gas, as it has contracted to purchase 3.5 million tons a year of LNG from the Sabine Pass project.

Houston-based Cheniere Energy Inc. operates the Sabine Pass LNG terminal, which is expected to be the first U.S. gas project to export LNG, with a total capacity of up to 13.5 million tons a year and shipments set to start in 2015. (WSJ)

WORDS OF WISDOM

(…) success in investing is not a function of what you buy. It’s a function of what you pay.

(…) what’s important is finding a company with good intrinsic value that will weather difficult economic times, which are sure to hit any long-term investment, and avoid losing money more than seeking big returns. As long as losses are kept to a minimum, he figures that there will be enough winners to pull up the average and provide good returns. The result is that Oaktree has averaged 23% returns over the last quarter century with 95% of all outcomes being positive.

He also warns students to stay away from assets without any intrinsic value (gold, internet start-ups, Bitcoin) because you are relying on other people’s opinion of what they are worth, while a company that pays dividends and will likely do so for many years has at least some baseline value. 

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

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