China Inflation

Small Business Confidence Hits a 7.5 Year High

(…) Not only was November’s reading the highest since 2007, but it also took the headline index comfortably back above its historical average of 96.0 since 2000.

This looks like an upside breakout.

JOLTS Mixed; Private Sector Momentum Continues

The Job Opening and Labor Market Survey (JOLTS) showed continued momentum in the private sector labor market, with the Private Quit Rate holding steady at 2.2%, its 9th month in a row at or above 2%. Total Quits fell slightly. (…)

The total separations rate (quits, layoffs, and other separations such as retirements or deaths combined) rose to its highest level of the cycle.  While there are demographic effects that have a significant impact on this particular indicator that do not have as much influence over Quits or Layoffs, it’s still a notable high and indicates confidence on the part of workers.

Looking at Total Job Openings, the number of openings is just a hair below the cycle high set in August after a decline in September, and stands at 4.834 million, its 9th month above 4.0 million.

Looking at the same statistic via a rate (instead of gross numbers) shows that while total openings declined, private openings continue to rise steadily.

In all, the JOLT report confirms the strength in November’s payroll employment.

CASS FREIGHT INDEX REPORT November Freight Activity Higher than Expected; All Signs Point to a Strong End to 2014

China Inflation Softens

Producer prices fell 2.7% during the month, the statistics agency said Wednesday, for the 33rd consecutive month of decline, highlighting lower global prices for commodities such as energy, ferrous metals and chemicals as well as excess capacity in many Chinese industries.

China Car Sales Hit the Brakes

(…) The China Association of Automobile Manufacturers on Wednesday said passenger-car sales in November rose 4.7% from a year earlier to about 1.8 million vehicles. It was the weakest gain since February 2013, when the weeklong Spring Festival holiday dented sales.

    

The data come after some mass-market brands recorded declining sales last month. Nissan and Honda Motor Co. both saw November sales fall 12% from a year ago. Ford Motor Co.’s passenger-vehicle sales fell 5%.

Lackluster sales are leading to growing inventories for some brands. Data from the China Automobile Dealers Association show that beginning from June dealers have begun to hold inventories of between 10% and 20% higher than the same period a year earlier. (…)

In China, analysts regard one-and-a-half months’ worth of cars on lots as the “alert level” where dealers should begin to be concerned about high inventory. By contrast, dealers in developed markets can hold bigger inventories mainly because they rely less on selling new cars to make money.

In October, the latest month for which CADA data is available, dealers on average held 1.48 months’ inventory. (…)

Car makers are also holding more inventory, analysts say. Jochen Siebert, managing director of consulting firm JSC Automotive, estimated current inventory held by car makers stands at 1.2 million cars—roughly double the number held last year.

America the frugal: US Consumer Sentiment Survey The slow start to the US holiday shopping season is no anomaly. McKinsey’s latest Consumer Economic Sentiment survey finds that some six years after the Great Recession, Americans remain reluctant spenders.

(…) Consumers are still worried about losing their jobs (39 percent in 2014), and 40 percent of the consumers we surveyed said they are coping with the challenge of living paycheck to paycheck, up from 31 percent in 2012.

The significant economic pressure that families earning less than $75,000 a year feel has caused many of them to make spending adjustments in order to make ends meet. Roughly 40 percent of these households say they are making changes, including cutting back and delaying purchases, as compared with 22 percent of those in households earning at least $150,000 a year. (…)

While the number of consumers cutting back on spending has stabilized, Americans are still pinching pennies. Decreasing purchases of high-end brands and doing more one-stop shopping to reduce the number of trips are just as popular as they were last year, with 40 percent of consumers saying they have cut their spending over the past 12 months. An even bigger proportion of Americans (55 percent) say they continue to look for ways to save money, including paying more attention to prices, using coupons more often, shopping around to get the best deals, and buying more items in bulk. (…)

Almost 40 percent say they will probably never go back to their prerecession approach to buying. Twenty nine percent say they now have new attitudes and values about spending, a figure that’s up from 17 percent in 2010. An additional 24 percent claim that their opposition to increased spending is the result of a change in their economic situation.

Those who do want to return to previous spending levels say they are waiting until they pay down enough debt or rebuild their savings (32 percent). One-quarter are waiting until they are back at their old income levels.

Crude Oil Prices Continue to Fall

There was more negative news for prices late Tuesday, as the U.S. Energy Information Administration cut its 2015 global demand forecast for oil by 200,000 barrels a day to an average of 92.3 million barrels a day next year, because of weaker global economic growth prospects.

Oil price plunge means survival of fittest Crude at $70 puts at least 1.5m b/d of projects for 2016 at risk

BP expects $1bn job cuts charge Energy group seeks to shed several thousand staff

SHALE OIL: PAPA KNOWS BEST

Extracts from a WSJ interview last Saturday with Mark Papa who retired last July as CEO of EOG Resources, the drilling company that he made into the largest crude-oil producer in the lower 48 over his decade and a half as chief.

(…) As Mr. Papa reads the global market, the price slump is the result of “a bit more production” that has made all the difference—an additional million or so barrels of new oil daily amid world-wide demand of about 92 million barrels a day. Some of that is “unanticipated supply coming out of places such as Libya,” he says, but the major driver is U.S. shale oil.

In 2012, Mr. Papa explains, the year-over-year growth of domestic shale oil was about a million barrels daily, and last year growth slowed to 800,000. “The general feeling was that we’ve had flush production and the easy stuff had been had, and as you got into the third year, it was becoming a little more difficult to achieve this tremendous boost in production.” About 700,000 barrels for 2014 was the consensus.

Instead, “to the surprise of most people,” Mr. Papa says, including himself, daily U.S. production growth this year surged to 1.2 million barrels on average. Now “the expectation is or was at $100 oil that the U.S. would continue to grow at a million barrels per day per year, per year, per year. People forecast, my gosh, we have more oil on the market than we thought, and next year we’re going to have an even bigger surplus of supply over demand, and the following year even more, and so perception became reality and all of sudden—boom.” (…)

What happened is that “a step-change efficiency improvement” sneaked up this year as technology advanced and drillers found ways to make wells more productive and extract more oil from the same play.

The drop in oil prices doesn’t mean the U.S. is heading into a boom-and-bust crash, Mr. Papa believes, but momentum will “decelerate considerably” after about six months. “U.S. oil production growth is going to slow in 2015, 2016, 2017 simply because E&P companies”—the industry term for Exploration & Production—“are not going to have the cash flow to reinvest.”

The major U.S. shale fields—the Bakken regional formation in North Dakota, the Eagle Ford in south Texas, the Permian basin in west Texas and southeast New Mexico—“still yield positive economic returns” with oil at $70 or even in the mid-$60s, Mr. Papa says. “Fringe areas” like the mid-continent Mississippian or the DJ basin in the Rocky Mountains will become less attractive. And some highly leveraged drillers may be shaken out if prices remain low, while for others introducing more discipline and incentives for innovation. (…)

“Where we sit today with shale is the same place a petroleum engineer sat in the 1940s with a conventional sandstone reservoir,” Mr. Papa says. The best recovery rate then was 10% to 15%, leaving the rest underground, much like shale now—but since has climbed to 40% or 50%. The technology doesn’t yet exist for shale to yield similar shares, but Mr. Papa is confident that over the next 10 years it will emerge, “which basically means we’re going to double or more the amount of oil we’re going to recover. . . . Technology is always going to find a way to unlock each increment of resources.” (…)

Important chart via ScotiaCapital:

EARNINGS WATCH

Factset calculates that analysts have cut their Q4 estimates for the Energy sector by 20.5% (to $9.49 from $11.94) since September 30.

The estimated earnings growth rate for the S&P 500 Index in Q4 2014 is 3.4%, down from +8.3% on September 30 but Energy is only one reason since

Nine of the ten sectors have lower growth rates today (compared to September 30) due to downward revisions to earnings estimates. (…) The Materials sector has recorded the second largest decline in expected earnings growth (to -4.0% from 6.9%) since the beginning of the quarter. (…)

Not only has the estimated earnings growth rate for Q4 declined over the past two months, the estimated earnings growth rates for the first half of 2015 have come down sharply over this same time frame as well. For Q1 2015, and Q2 2015, analysts are currently predicting earnings growth rates of 5.6% and 6.8%, respectively. These earnings growth rates are well below the estimated growth rates of 9.5% and 10.4% for these same two quarters back on September 30. Similar to Q4, most of the decline in the expected earnings growth rates for both quarters can be attributed to analysts lowering earnings forecasts for companies in the Energy sector.

But there is this now:

Citigroup Sees $2.7 Billion Legal Hit Citigroup said it would spend $2.7 billion to bolster its legal reserves, wiping out the bulk of its expected fourth-quarter profit.

Bank of America, Citi Give Weak Outlooks for Trading Revenue

Bank of America’s chief executive, Brian Moynihan , said at an industry conference sponsored by Goldman Sachs Group Inc. on Tuesday that fourth-quarter trading revenue would be lower than both year-ago levels and the third quarter’s.

Citigroup’s CEO Michael Corbat estimated that the New York bank’s markets revenue would be down year-over-year by about 5%.

Fed Sets Tough New Capital Rule for Big Banks The Federal Reserve proposed tough new capital requirements for the biggest U.S. banks. J.P. Morgan Chase would face a capital shortfall of $21 billion under the proposal.

Eight of the largest U.S. banks will need fatter capital cushions as part of U.S. regulators’ latest efforts to make the financial system less risky.

The biggest impact will be felt by J.P. Morgan Chase & Co., the nation’s largest bank by assets, which is $21 billion short of the requirement, according to Fed officials. Fed Vice Chairman Stanley Fischer —in an apparent misstep—disclosed during an open meeting that J.P. Morgan is the only one of the eight banks to face a shortfall under the proposed rule. Fed staff had closely guarded details of the proposal’s impact on specific firms.

The proposal, which will be phased in starting in 2016 and take full effect in 2019, is aimed squarely at pushing big banks to shrink, an outcome regulators were explicit in saying they hope to encourage to reduce the likelihood a firm’s failure could require bailouts or damage the broader economy.

To meet the new capital charge, banks can either fund themselves with significantly more equity—which tends to be more expensive than deposits or borrowed money—than their smaller peers. Or they can get smaller and make other changes that would reduce the size of their extra capital levy. (…)

Most of the big, systemically important firms are already at the required levels but are likely to build larger capital cushions to keep them well above the requirement, analysts said, which could mean retaining a portion of their earnings every year. J.P. Morgan also is expected to meet the higher amount by retaining earnings. That could squeeze the ability of the big banks to return capital to their shareholders through higher stock dividends and stock buybacks, increasing market pressure on the banks to shrink or even break up. (…)

“This was not a great night for the banks,” said Jaret Seiberg, an analyst with Guggenheim Securities. If Fed officials include the surcharge in the minimum capital level big banks must meet to pass the Fed’s annual stress test—which Fed officials say they are contemplating—“then it could delay for years the ability of the biggest banks to boost their return of capital to shareholders. And this could all lead to more shareholder pressure on the biggest banks to free up capital by divesting businesses and getting smaller.”