NFIB DECEMBER SURVEY SUPPORTS THE LONESOME COWBOY
The Small Business Optimism Index gained 2.3 points, at long last taking the Index back to its pre-recession average and the highest reading since October 2006. While last month’s gain was accounted for just 2 of the 10 Index components (expected business conditions and real sales), the gain in December was broad-based, with 8 components advancing, one unchanged and one declining by just 1 percentage point. The single component posting a decline was expected business conditions 6 months out. Last month, this component posted a 16 point gain, so the 1 percentage point decline simply confirmed the very strong gain in November.
Job creation plans improved 4 points to a seasonally adjusted net 15 percent, one of the stronger readings in NFIB survey history.
Sales prospects are looking up. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months gained 6 points, rising to a net 2 percent. Eleven percent cited weak sales as their top business problem, one of the lowest readings since December 2007. A net 20 percent of all owners expect improved real sales volumes, up 6 points on top of November’s 5 point gain. These readings are very supportive of stronger capital spending in 2015.
Sixty percent reported outlays, up 3 points from November and the strongest reading since December 2007, the peak of the last expansion. Of those making expenditures, 42 percent reported spending on new equipment (up 3 points), 23 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (up 2 points) and 12 percent spent money for new fixtures and furniture (up 2 points). The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 29, the best reading for this expansion but still a bit weak historically.
Meanwhile, check out that jump!
Americans Become More Positive About Jobs in January
Serving as another indication of the public’s perceptions of an improving economy, 45% of Americans now say it is a good time to find a quality job, up from 36% in December, and as high as this indicator has been since May 2007.
Germany Posts Balanced Budget
Germany’s government wrote budget history last year, posting its first balanced federal budget since 1969, a year earlier than previously planned, the finance ministry said Tuesday. (…)
The government is aiming for a balanced budget again this year.
Ich bin ein European!!
Italy Output Rises More Than Expected Boosting Recovery Optimism
Production increased 0.3 percent from October, when it stalled, national statistics office Istat said in Rome today. Economists had forecast a 0.1 percent increase, according to the median of 16 estimates in a Bloomberg News survey. Output fell 1.8 percent from a year earlier when adjusted for working days. (…)
Here’s a real time, down-to-earth, indicator:
“Based on my experience in the waste management industry which is by definition at the very end of the consumption chain, I can say that the weakening of the domestic demand hadn’t stopped by the end of the year,” said Angelo Bruscino, head of the youth branch of Confapi, an organization of94,000 small-and medium-size businesses employing about 900,000 workers.
And a more mundane one:
In November bank loans to the private sector fell 1.6 percent from a year earlier, the Bank of Italysaid yesterday in a report. Non-performing loans rose in the same month 18.4 percent annually, the central bank also said.
European banks face $52 billion in litigation costs: Morgan Stanley Royal Bank of Scotland and Barclays may have to pay some of the biggest bills from an estimated $52 billion in fines and other litigation costs facing Europe’s banks in the next two years, Morgan Stanley analysts said.
U.S. and European banks have paid $230 billion in litigation costs since 2009 and could pay out another $70 billion by the end of 2016, mostly from the 20 largest European banks, they said in a research note on Tuesday.
European banks have paid out about $104 billion so far and the $52 billion they still have to pay, much of it related to foreign exchange trading and U.S. mortgage mis-selling, could restrain how much they pay in dividends, the analysts said.
The analysts predicted Barclays could have to pay another $8.3 billion, HSBC $7.7 billion, Lloyds $6.1 billion and Germany’s Deutsche Bank $5.1 billion.
U.S. banks are more advanced in their litigation payouts, the analysts said. Five major U.S. banks have paid out $128 billion and are forecast to incur another $18 billion.
JPMorgan analysts this week also said British banks faced additional litigation provisions. They forecast the big four banks faced 15.1 billion pounds ($22.8 billion) of extra provisions for litigation in the next two years, to add to 11.6 billion pounds of reserves they already have set aside for such payouts.
China Export Machine Delivers Again in Prop for Growth
Exports rose 9.7 percent in December from a year earlier, exceeding the 6 percent median estimate in a Bloomberg News survey. Imports fell 2.4 percent, compared with projections for a 6.2 percent decline, leaving a trade surplus of $49.61 billion, the customs administration said in Beijing.
For December, exports to the U.S. climbed 9.9 percent from a year earlier, while shipments to South Korea surged 31 percent. Exports to Japan fell for a fifth straight month.
For the full year, China’s exports climbed 6.1 percent and imports rose 0.4 percent, missing the government’s target for trade growth of 7.5 percent.
OIL
Oil Extends Selloff on UAE Minister’s Comments Oil prices fell with bearish comments by United Arab Emirates’ oil minister pushing the U.S. oil benchmark below the $45 a barrel mark.
(…) Market participants estimate that the supply of crude is currently overshooting tepid demand for the commodity by as much as 2 million barrels a day. (…) Despite the rout, OPEC will maintain its decision to keep output unchanged, the United Arab Emirates’ oil minister said Tuesday. He said producers outside the group need to be rational and adjust their output according to the market. (…)
On Tuesday, strong data out of China, the world’s second-largest oil consumer, failed to boost sentiment. In December, the country imported 13% more crude oil than a year earlier, topping a previous record set in January 2014.
“The lack of any reaction from the market to the Chinese data indicates that demand factors play no role at present and that supply is the dominant factor,” Commerzbank wrote in a note.
China imported 30.37 million metric tons of crude oil in December, equivalent to 7.2 million barrels a day, according to government data. China’s overall exports also rose by a faster-than-expected 9.7% on stronger overseas demand, a small bright spot in the country’s slowing economy.
“The China data was strong and you would’ve thought it would support the market,” Mrs. Saltvedt said. “But the market expects that China is just stocking up while the prices are low, just as it did during the financial crisis. This is a temporary development.” (…)
Funny that producer stockpiles would be seen differently than consumer stockpiles.
The game of chickens is now fully on:
As Oil Slips Below $50, Canada Digs In for Long Haul Oil-sands operators, seeing long-term value, aren’t likely to shut off the tap any time soon.
(…) they have plowed billions of dollars into building up a sprawling industrial complex amid the surrounding forests.
And even as oil prices settled below $50 a barrel Monday for the first time in nearly six years, those companies are unlikely to shut off the tap anytime soon thanks to those huge upfront costs, combined with long-term break-even points and lengthy production lives. Unlike shale oil, which requires constant drilling of new wells to maintain output levels, once an oil-sands site is developed it will produce tens or hundreds of thousands of barrels a day, steadily, for up to three decades. (…)
Canadian Natural will continue expanding production because it expects higher volume will cut operating expenses at its mainstay Horizon mine, currently at 37.13 Canadian dollars a barrel, by at least another 10 Canadian dollars a barrel. (…)
Existing oil sands surface mines can make money at about $30 a barrel, and the most efficient underground oil sands projects run byCenovus Energy Inc. , a big Canadian operator, can stay in the black at $35 a barrel. (…)
“It’s not well understood just how robust the oil sands are. If you stopped expansion of the oil sands tomorrow, you would have no decline in the production base for decades,” Cenovus Chief Executive Brian Ferguson said. “What we do is design for 30-year flat production lives” at oil-sands fields, he said. (…)
Steve Williams, CEO of Canadian oil-sands giant Suncor Energy Inc., said on Nov. 27 that his company’s strong balance sheet would allow it to ride out the turbulence and stick with a bullish growth strategy. “Price volatility is a fact of life in our industry,” Mr. Williams said. “In evaluating any investment, Suncor takes a much longer-term view than days or months. We are able to take the perspective of pricing in decades.”
Suncor, the single largest oil-sands producer, is boosting capital spending next year to at least C$7.2 billion and lift will output by as much as 11%. Canadian Natural plans to increase production of oil and natural-gas liquids 7% in 2015 and spend $C6.2 billion. Syncrude Canada Ltd., a consortium whose oil sands strip mines are operated by Exxon Mobil Corp. , projects a 6% gain in production next year to 103 million barrels of oil, or about 275,000 barrels a day. (…)
(…) In Texas, the country’s top oil producer, officials on Monday said the windfall from the recent oil-shale boom will carry over to the budget for the next two fiscal years. But they are expecting the gush of cash from oil production to slow down considerably, projecting a 14% drop in oil-related taxes to $5.7 billion in fiscal 2016 and 2017. (…)
The consequences are more severe in Alaska, where oil-industry taxes account for 89% of the state’s operating revenue, and budget problems loomed even before oil prices dropped.
Alaska now has a $3.5 billion hole in its $6.1 billion budget, and Gov. Bill Walker has called on state agencies to reduce budgets by 5% to 8% for the coming fiscal year. The state expects to dip heavily into its $14 billion in reserves to bridge the gap, but officials acknowledge that is not a sustainable solution. (…)
And on and on in North Dakota, Louisiana, Wyoming, etc.
Now, just imagine what’s going on in oil producing countries such as Saudi Arabia, Venezuela, Russia, etc. Dipping (!) into their reserves is also not a sustainable solution…
A Rare Bull Emerges
Moody’s Analytics said it expects the price of crude to recover to $80 a barrel by the end of 2015 as the market comes back into balance.
“We are currently oversupplied by about 1.2 million barrels a day but the oil market is self-correcting and we expect it to balance later this year,” said Steven G. Cochrane, managing director of Moody’s Analytics.
Mr. Cochrane expects Brent, the global benchmark, to average $69 per barrel and WTI, the U.S. benchmark, to average $66 per barrel this year.
Historically, supply hasn’t outpaced demand for more than six quarters, but if production and demand remain on their current trends, there would be an oversupply for eight quarters, Mr. Cochrane said. History suggests, therefore, that there will soon have to be a change of course in the market, he said.
The biggest adjustment will come from the supply side. Most oil majors have already announced cuts in capital expenditure and smaller companies find it difficult to obtain credit, a trend further exacerbated by the expected interest rates raise by the U.S. Federal Reserve. Higher rates would make it more expensive to invest in oil exploration and production.
Demand is also expected to pick up. This will be helped by the low oil prices but also by the continuing industrialization in emerging markets. Passenger car sales in China have more than doubled in the past five years, says Moody’s Analytics. (…)
Investors Shift Bets on Fed A wave of global economic gloom has turned the U.S. money market on its head, with more investors now betting that the Federal Reserve will be forced to delay raising interest rates.
EARNINGS WATCH
Analyst Sentiment Dropping Like a Stone
Over the last four weeks, companies with negative analyst revisions outnumbered companies with positive revisions by 278. This works out to nearly 19% of the stocks in the index, and is close to the lowest levels we have seen in a year. In fact, the pace of revisions is more negative than it has been heading into any earnings season in at least a year.
Volatility to Dent Banks’ Results After lamenting that stable markets earlier this year were hurting trading revenue, many bank executives are likely to talk about how they were hurt by too many sudden price moves when they report fourth-quarter results this week.
Being on the wrong side of the trades!
Federal Reserve Bank of San Francisco economists, meanwhile, have pushed a view that the labor market is experiencing a phenomenon called pent-up wage deflation. This works as follows: Because companies were unable or unwilling to cut wages during the downturn despite an extremely weak labor market, they haven’t had to raise wages so much since. 
This pickup in aggregate incomes may be one reason why the number of people having to work at multitude jobs to bolster their income dropped 117,000 in December after a 389,000 plunge in November – this is a very positive hidden nugget in [Friday’s} report that highlights the extent to which family budget strains are being alleviated.
An inflation gauge closely watched by Federal Reserve officials has fallen to the lowest level in more than 14 years, extending a decline that investors and analysts say could complicate the central bank’s plan to raise interest rates this year.
HERE’S A GREAT CHART:
Big Vehicles Put U.S. Auto Makers Back in Driver’s Seat
The China Association of Automobile Manufacturers said Monday that it expects passenger vehicle sales to rise 8% to 21.25 million vehicles this year, compared with 9.9% growth in 2014. While that pace would be strong compared with weaker markets such as Western Europe and the U.S., it still marks a sharp slowdown from a 16% gain in 2013 and even higher rates in some previous years. 
Investing in commodities and commodity-related securities has always been a greater fool’s game. You get the deadly confluence of generally below average managements investing shareholder money in very expensive long-term projects based on numerous macro forecasts on which they have limited, if any, control, with analysts who spend the bulk of their time on the rear-view mirror pretending to see what’s coming. 
Choppy markets appear to have caught some bank trading desks flat-footed, wiping out gains they had accumulated earlier in the fourth quarter, traders and analysts said. Although not all big banks were hit with the holiday blues this past month, the late adjustments reflect the volatility in the results of the firms’ securities divisions, and how traders’ full-year performance can be cinched—or come undone—in a few frenzied weeks.
Employee compensation remains a top expense item at large Wall Street banks, and any move to trim those costs might indicate the firms tallied less revenue than they expected. Citigroup shares dipped slightly after The Wall Street Journal reported the cut to the bonus pool, ending the session down $1.16, or 2.2%, to $50.78, on a bad day for banking stocks.