NEW$ & VIEW$ (29 OCTOBER 2015): Fed Up? Earnings Up!

Fed Keeps December Rate Hike in Play Officials remove explicit mention of concern at overseas tumult, delivering warning to markets

Federal Reserve officials explicitly said they might raise short-term interest rates in December, pushing back against investors who have bet that the central bank wouldn’t move this year.

The message appeared to have the desired effect. Before the Fed released its policy statement Wednesday, traders in futures markets put about a 1-in-3 probability on a Fed rate increase this year; after the release, that probability rose to almost 1-in-2. (…)

Officials pointed specifically in the policy statement to their Dec. 15-16 meeting as a moment when they might act on rates. Individual officials have signaled before that they expected to move before year-end, but the Fed’s policy-making committee hadn’t previously pointed so explicitly in an official statement to the potential timing of a rate increase. (…)

The Fed said in deciding whether to raise rates “at its next meeting” it would “assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.”

Having pointed explicitly to the December meeting, the Fed has potentially set itself up for criticism if it doesn’t follow through. (…)

• Fed crafts clearer message on US rates December rise in crosshairs despite enduring divisions

(…) Divisions within the central bank over whether it should move without good evidence of accelerating inflation and wages are still very real. (…)

“They went out of their way to brace the markets,” said Robert Tipp, chief investment strategist at Prudential Fixed Income. “It was a surprise return to the active, potentially hawkish side from what seemed a pretty cautious posture in the last meeting.” (…)

What U.S. Growth Looks Like Without the Government Spending Slowdown If the government hadn’t pulled back on spending since 2010, the economy would have grown at near a 3% pace.

(…) From 2010 through the first half of 2015, year-over-year economic growth was 0.9 percentage point lower, on average, than it would have otherwise been without the government pullback, according to an analysis of Commerce Department data. (…)

The drag lessened somewhat over the past year to about a 0.5 percentage point. That coincides with a federal budget agreement that blunted the impact of automatic spending cuts known as the sequester. The level of government spending has begun to rise again, but it’s still growing at slower pace than the rest of the economy.

The latest budget proposal, which Congress is considering this week, would boost discretionary federal spending further, by around $80 billion over the next two years. (…)

Japan’s Industrial Production Unexpectedly Rises in September

Output climbed 1 percent from the previous month, exceeding all 32 estimates in a Bloomberg survey, which had a median forecast for a decline of 0.6 percent. Electronic parts, devices and chemicals led the advance last month, in the face of a Chinese slowdown that has undermined Japanese exports. (…)

Production slid 0.9 percent from a year earlier. Companies forecast it would jump 4.1 percent in October from September, before dropping back 0.3 percent in November.

Significant contributors to the output gain in September included electronic parts and integrated circuits used for smartphones and other devices as well as cosmetics. Production of cosmetics increased ahead of sales of new products. (…)

China’s Premier Floats New Five-Year Growth Minimum of Around 6.5%

(…) The nation needs annual growth of at least 6.53 percent in the next five years to meet the government’s goal of establishing a “moderately prosperous society,” Li said in an Oct. 23 speech to Communist Party members, according to people familiar with the matter who asked not to be identified as the remarks weren’t public. (…)

China’s central bank shouldn’t adopt quantitative easing to flood the economy with too much money, Li said, according to the people. (…)

China also faces challenges including disinflation and overcapacity, while companies are facing difficulties in operations, Li said. He said policy makers need to restructure the economy to avoid the middle-income trap and not purely emphasize speed. (…)

Li, speaking to the Communist Party Central Committee’s Party School, underscored China’s avowal to avoid cheapening the yuan as a tool to stoke exports. Recent depreciation in the currency has been a “market action,” he said, according to the account. The program to bolster international use of the yuan will continue to advance, he said, while capital flows across borders have brought challenges to monitoring. (…)

The premier said fiscal and financial risks are increasing, and that the stock-market rout suffered earlier this year was caused by leverage, such as a surge in margin financing. Growth cannot return to the days in excess of 10 percent, though it can stay in a reasonable range, Li said. (…)

FT Alphaville adds:

As Deutsche’s Jim Reid said, “We’re not sure whether something was lost in translation that explains why the second decimal is so important but that is a direct quote… While this doesn’t appear to be the new official target of the Chinese government, the comments are a big signal that China’s government look set to lower their growth target when we eventually hear the outcome from the four-day meeting.”

It would also be a well flagged lowering of said growth target (from around 7 per cent) but to be approved anyway as it represents another step towards reality (chart below of various estimates courtesy of Bloomberg) and away from an old model of economic growth which most think needs to be put aside rather quickly.

(Same Li Keqiang at the bottom there, naturally. He of the now less useful, if not abused, index and the very useful wikileaked quote that “All other figures, and especially GDP statistics, were ‘for reference only’, Li told the Ambassador, with a broad smile on his face.”)

Which brings us back to what that GDP target is all about. Obviously, the true growth level matters, in terms of rebalancing in particular, but the GDP fetish, as Justin Fox puts it, isn’t about that. Why target at all if that was the case? And it’s not about employment as poor counting and low connectivity between the two measures appears to demonstrate.

The most rational explanation we’ve come across is that the GDP target is a way to get people moving within a very top-down system – that includes production targets etc so a downshift matters even if it has to be directional due to a form of path dependency built into the number. Which is, basically, why it’s always the direction that matters *shrug*

Or, from JCap’s Anne Stevenson-Yang (again):

A key reform that was much discussed at the 18th Party Plenum involved reducing reliance on GDP targets to motivate the bureaucracy. It was thought internationally that removing GDP growth targets would signal a shift to quality-of-life rather than quantitative measures of value.

In reality, discussion of the GDP target has revolved around eliminating an industrial production target , not eliminating an overall target. That is because government planners correctly anticipated in the last FYP period that industrial production was peaking and could not grow further. Targets for agriculture and for service industry growth were accordingly raised. In the event, too much of China’s GDP is dependent on manufacturing and so governments moderated their ambitions: some have eliminated industrial production targets within “redlined” en- vironmentally sensitive areas. Some have issued ambitious agricultural targets and de-emphasized manufacturing. But without a GDP target the government would lack a key organizational tool: how else to reach across such vast expanses of territory and motivate bureaucrats across the kingdom?

China Abandons Three-Decade-Old One-Child Policy to Lift Growth

The party’s decision-making Central Committee approved plans to allow all couples in China to have two children, the official Xinhua News Agency said Thursday at the end of a four-day party gathering in Beijing.

• China Abandons 37-Year-Old “One-Child Policy” – Here Are The Implications

Oil majors rush cuts to hit $60 break-even Shell’s decision to axe a Canadian project shows extent of the downturn

(…) Unusually — and in contrast to the $200bn-plus of future spending shelved by energy companies since last year’s crude price collapse — work on Carmon Creek was well under way. This was no flight of fancy. Shell had already taken the decision to invest: it was clearing the site, procuring major equipment, building accommodation for staff, and starting work on wells.

Its late move to down tools, says Anish Kapadia of energy investment bank Tudor Pickering Holt, shows how companies “are getting yet more aggressive on capex cuts and return expectations” — and suggests Shell is “moving towards the ‘lower for longer’ camp” on oil prices.

(…) any new project requiring an oil price of more than $60 a barrel — almost 50 per cent below last year’s peak — is now either being scrapped or deferred until industry costs have come down sufficiently.

Hence BP’s decision to delay its Mad Dog 2 project in the Mexican Gulf. Along with French oil major Total, the UK-based energy group has pledged to balance its books on $60 oil, aiming to cover its dividend from cash flow by 2017. Norway’s Statoil also says the “break-even” price for its Johan Castberg project in the Arctic, awaiting a green light, is now $60 a barrel.

Does this mean, then, that $60 is the new long-term oil price? Not necessarily. Big oil companies appear to have as little idea as anyone what the price of Brent crude will be this time next year — let alone five or 10 years’ time. (…)

Nevertheless, there are reasons why $60 is, for now, a sensible assumption. Although higher than the current spot price of $48, it is the price where investors believe oil will be in two years from now. Futures markets point not to a fall, but to a slow, drawn out recovery for Brent crude. And $60 is the price at which analysts believe much remaining US shale oil and gas — up to 10m barrels a day of peak production, according to Goldman Sachs — could be economic. (…)

Russia Oil Production Poised for Record as Industry Defies Slump

Production of crude and a light oil called condensate is on track to reach 10.77 million barrels a day in October, topping the previous month’s revised figure and setting a record for the second month running, according to Bloomberg estimates based on Energy Ministry data.

Russian production has withstood a collapse in oil prices amid a global supply glut, while output in the U.S. has fallen about 5 percent from its June peak. Oil-extraction and export tax rates shrink in Russia at lower prices, giving companies a buffer against the slump, while the weaker ruble has reduced costs.

“Russian oil companies are insulated from oil price corrections,” said Artem Konchin, an oil and gas analyst at Otkritie Capital in Moscow. “Through the tax framework, the government took the brunt of the blow, just as it used to take most of the windfall profits. The rest of the story is in the ruble depreciation.” (…)

Output from January to October averaged about 10.7 million barrels a day, a 1.3 percent increase over the same period in 2014, the data show. That’s in line with the Russian Energy Ministry’s full-year forecast for production of 533 million tons, or 10.7 million barrels a day. (…)

Also consider that oil exports are Russia’s sole major source  of dollars.

EARNINGS WATCH

Almost two-thirds of the way and it just keeps getting better!

• 267 companies (64.4% of the S&P 500’s market cap) have reported. Earnings are beating by 4.4% (4.3% yesterday) while revenues have met expectations (missed by 0.4% yesterday).
• The beat rate is 70% on EPS, 74% ex-Financials. Revenue beat rate is 36%.
• Expectations are for a decline in revenue, earnings, and EPS of -3.8%, -3.1%, and -2.0% (-2.3% yesterday). EPS growth is on pace for -0.4% –0.5% yesterday, –0.9% two days ago), assuming the current beat rate for the remainder of the season. This would be 7.2% excluding Energy (7.1% yesterday, +6.6% Tuesday and +4.5% last week). (RBC Capital)

In effect, Thomson Reuters’ tally now shows Q3 EPS at $29.46, up 1.7% from $28.97 two weeks ago. Trailing 12-m EPS would thus reach $118.70.

At 2090, the S&P 500 Index is up 11.2% from its Sep. 29 low when I first upgraded (essentially on valuation) and 7.2% since the second upgrade on Oct. 5 (adding my expectations of a good earnings season).

The Rule of 20 P/E is now 19.5 and “fair value” of 2148 only 2.8% above current levels. The risk/reward ratio is once again dangerously unbalanced which requires a re-assessment currently underway.

Importantly, the S&P 500 Index has closed above it 200-d m.a. which is back on a rising trend…

This looks like the Oct. 2014 snap back although the Russell 2000 has been lagging, so far…

Same day headlines! All serious media!

• Deutsche Bank to Cut 35,000 Jobs in Broad Revamp 

• Deutsche Bank to Shrink Workforce by About 26,000 in Revamp

• Deutsche Bank to cut work force by 15,000

• Deutsche Bank to cut 9,000 jobs

From the same media, same morning!

• Fed Fuels Appetite for Stocks

• U.S. Stocks Surge After Fed Holds Steady on Rates

• A More Hawkish Fed Rattles Investors

• Hawish Fed, Corporate Earnings Weigh European stocks edged lower Thursday, weighed by hawkish cues from the Federal Reserve and disappointing corporate earnings.

Who has ever heard of the Mendoza Line?

If stocks fall below the ‘Mendoza line,’ watch out!

(…) Similarly, the 2,000 level on the S&P is where market participants will change their minds about stocks, determining that they are in bad shape — which threatens to become a self-fulfilling prophesy that will lead to the actual acceleration of losses, said Streible.

“That is the level we keep testing,” he said in a Tuesday “Trading Nation” segment. “If we come back below 2,000, the market should continue going lower.”

Busy? Don’t even bother reading the whole article. Really not worth it, except to show that silliness is totally back.