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

NEW$ & VIEW$ (17 JULY 2014)

Economy Heating Up During Summer U.S. economic activity continued to expand over the summer, with spending on tourism, auto sales and retail sales growing and the country experiencing growth in employment, according to the Federal Reserve’s survey of regional economic conditions released Wednesday.

Stronger growth was seen in the New York, Chicago, Minneapolis, Dallas and San Francisco regions, with “modest” expansion in the rest of the country. In the Boston and Richmond, Va., districts, local economies were still expanding but at a slower pace than seen earlier in the year. (…)

The view of the housing market was also weaker, with the Boston, New York and St. Louis banks reporting that home sales were down from last year’s levels. Construction increased in several districts, but demand for properties was tepid in parts of the country. (…)

U.S. Home Builders Index Improves to Six-Month High

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo improved to 53 this month from an unrevised from 49 in June. The latest figure was the highest since January and beat expectations in the Informa Global Markets Survey for a reading of 50. The index of single-family home sales increased to 57, the highest level since January. The index of expected sales during the next six months jumped to 64, also the highest level since September. The NAHB figures are seasonally adjusted.

Realtors reported that their traffic index of prospective buyers improved to 39, also the highest level since January.

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Yes, traffic is at a 6-m high and is up 8 to 39 since February. But 39 in July remains substantially lower than the 47 average in non-recessionary periods between 1985 and 2005. It is however much better than the 17 average for Julys between 2006 and 2012.

U.S. Industrial Production Gain Slackens

Industrial output in the U.S. increased 0.2% during June following a 0.5% May rise, revised from 0.6%. Production in the factory sector rose 0.6% (3.5% y/y) after a 0.1% May slip, last month reported as 0.6%. Utility output fell 0.3% (+1.8% y/y) following a 0.4% decline.

Interestingly, IP for Construction Supplies rose 0.5% after a 1.3% gain in May which followed –0.8% in April. Are contractors signing more contracts?

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From BloombergBriefs:

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Empire State Factory Sector Index Moves To New High

The Empire State Factory Index of General Business Conditions jumped during July to 25.60 from 19.28 in June. The Federal Reserve Bank of New York reported that it was the highest level since April 2010 and beat expectations for a decline to 17.50 in the Action Economics Forecast Survey.

Based on these figures, Haver Analytics calculates a seasonally adjusted index that is compatible to the ISM series. The adjusted figure inched higher to 55.50 this month, the highest level since May 2012.

Improvement in the overall July index was led by a higher shipments reading to its highest level since May 2011. That was followed by a higher employment index which recouped most of its June decline.The new orders series inched higher to its highest level since June 2010. Elsewhere, the component series moved lower including the unfilled orders and the delivery times indexes. The latter indicated the quickest delivery speeds in three months.

Posting a sharp recovery was the prices paid index to its highest level since February. Thirty percent of respondents reported paying higher prices while five percent paid less.

Not mentioned in Haver’s account is that prices received rose 2.52 to +6.82.

Big Banks Lending to Businesses Rose in Second Quarter

Bank of America Corp. on Wednesday reported that average commercial loan and lease balances rose 6%. The bank also noted borrowers were using more of their credit lines.

On Tuesday, JPMorgan Chase & Co. said companies were more willing to borrow from their revolving credit lines. Utilization of those short-term financing vehicles rose by three percentage points during the first half of this year.

That is “is usually a pretty good measure of companies starting to expand,” said Jamie Dimon, chief executive officer, during a conference call with analysts.

The bank’s commercial and industrial loans grew 3% between the first and second quarters, while loans balances were up 9% compared with year-ago levels.

Citigroup Inc., for its part, reported Monday a 9% increase in corporate loans.

Michael Corbat, the bank’s CEO, said during a conference call that lending for trade and for financing mergers was up.

Wells Fargo & Co., which reported earnings last week, said that commercial and industrial loans were up 10% from the second quarter last year.

John Stumpf, Wells Fargo’s chairman and CEO, told analysts that companies in the energy sector and commercial real estate borrowed heavily in the quarter.

“As I’m out talking with customers…there is more optimism,” he said.

Producer Price Index Rises Above Expectations

June Producer Price Index (PPI) for Final Demand rose 0.4% month-over-month seasonally adjusted. Core Final Demand was up 0.2% from last month. The unadjusted year-over-year change in Final Demand is up 1.9%, little changed from last month’s YoY of 2.0%.

Fed Unveils a New Job-Market Index

(…) So four Fed staff economists have come to the rescue with a new “labor markets conditions index” that uses a statistical model to summarize monthly changes in 19 labor-market into a single handy gauge.

The new index–described in a post on the Fed’s web site in May–makes its public debut in the Fed’s semi-annual monetary policy report to Congress.

When the line is above zero, the job market is improving. When it’s below–as it was during the recession–the job market is deteriorating. So how’s the Fed reading the latest wiggle? It “suggests that labor market conditions have strengthened further this year,” the Fed says. “While increases in the index slowed a touch at the beginning of this year, partly reflecting the effects of unseasonably cold and snowy weather this winter, the pace has picked up again in recent months.”

In her testimony to Congress this week, Ms. Yellen said that “significant slack remains in the labor markets” and noted that wages are rising very slowly, all of which points to an economy which has not yet fully recovered from the Great Recession and still needs the sustenance of low interest rates.

The new index includes familiar government metrics–the unemployment rate, the fraction of the population working or looking for work, the length of the average work week, the number of people quitting their jobs–as well as private-sector surveys of help-wanted ads and consumer and business attitudes. (…)

FED WATCH
Auto European Car Sales Continue Bumpy Recovery

New car sales rose 4.5% in the European Union in June as widespread discounts and government-sponsored incentives kept a European recovery afloat despite shrinking demand in Germany, the region’s biggest market.

Auto manufacturers reported that new registrations, which closely mirror sales of new cars, rose to 1.19 million vehicles in June from 1.14 million cars a year ago, according to the latest data from the European Automobile Manufacturers’ Association, known by its French initials ACEA. Demand rose 6.5% in the first six months of the year to 6.6 million vehicles.

The data show that the EU car market grew for the 10th consecutive month, putting the 27-nation bloc on track to show annual growth in auto sales for the first time after a six-year slump.

Euro zone June inflation unchanged at low levels as expected

Consumer prices in the 18 countries using the euro rose 0.1 percent on the month in June for a 0.5 percent year-on-year gain — the same annual inflation rate as in May, data from the European Union’s statistics office Eurostat showed.

Core annual inflation – which excludes the volatile prices of energy and unprocessed food – stood at 0.8 percent in June, unchanged from May.

China Plays Big Role in U.S. Bond Rally Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China.

The Chinese government has increased its buying of U.S. Treasurys this year at the fastest pace since records began more than three decades ago, data released Wednesday show. The purchases help explain Treasurys’ unexpectedly strong rally this year. The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013. Yields fall as prices rise.

The world’s most-populous nation boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014, according to the U.S. government data. The buying has been fueled by China’s efforts to lift its export-driven economy by weakening its currency, the yuan, against the dollar, market analysts said, a strategy that encompasses hefty purchases of U.S. assets.

China officially holds roughly $1.27 trillion of U.S. debt, about 10.6% of the $12 trillion U.S. Treasury market. (…)

The rise in China’s Treasury holdings disclosed Wednesday marks the biggest first-five-month increase since record keeping began in 1977 and surpasses the $81 billion of Treasury debt bought by China for all of 2013, according to Ian Lyngen, senior government-bond strategist at CRT Capital Group LLC. (…)

China’s purchases come as U.S. issuance slows, amid higher tax receipts from an improving economy. Mr. Young at Nomura Securities International estimated that net supply of Treasury notes and bonds this year would be $650 billion to $690 billion, down from $836 billion last year and $1.565 trillion in 2010.

The Fed has been dialing back its monthly purchases as well. Mr. Young said the central bank’s buying this year would account for about 38.5% of net Treasury issuance, down from 65% last year.

China hasn’t been the only big buyer this year. Japan, the second-largest foreign owner of Treasury bonds, increased its note and bondholdings by $9.56 billion during the first five months of the year. Including bills, Japan’s holdings of Treasury debt was $1.2201 trillion. (…)

Who will buy when the Fed is done this fall? Consider this chart from JPM Asset Management’s David Kelly:

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Investors Seek China Discounts

By the end of the second quarter, the MSCI Asia excluding Japan stock index had risen just 6% in the past three years versus a 48% surge for the Standard & Poor’s 500-stock index. Chinese stocks this year have again been some of the world’s worst performers, down about 2% in Hong Kong and Shanghai despite recent rises amid China’s “mini-stimulus” drive.

The stocks of Asia’s biggest economy have fallen deep into the discount bin, trading about 9 times their forecast earnings, compared with 11 times for the broader region and nearly 15 times for global stocks.

Profits and margins have been under pressure in China in recent years in part due to overcapacity problems. CEBM Research sees signs of stabilization:

(…) data shows that the huge production capacity created by the four trillion RMB stimulus plan in 2009 has come onstream over the past few years, and the capacity utilization rate of industrial enterprises has begun to stabilize at a low level. Excessive pressure caused by excess capacity has been released quite thoroughly.

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Perhaps you should consider these BloombergBriefs charts before jumping in blind:

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Buyout Shops Must Dig Deeper Into Wallets for Purchases

Private-equity firms purchased 41 companies in the second quarter in leveraged buyouts, the busiest quarter since 2007, according to S&P Capital IQ LCD. And they fetched some of the loftiest valuations paid since that period, S&P said. (…)

Many firms have little choice but to keep making deals, despite the rising prices. Several private-equity firms have raised multibillion-dollar buyout funds in recent years. These funds typically lock up cash for 10 years or so, meaning firms have limited periods during which to invest before they have to begin selling assets to return investors’ cash.

By dollar volume, there was $47.6 billion in LBOs in the second quarter, the third-highest quarterly total since 2007, according to S&P. Most of these deals were for closely held companies, businesses cast off by big corporations and the holdings of rival private-equity firms. Prices for these assets have risen alongside those of public companies.

During the second quarter, the average cost of leveraged buyouts of $500 million or more was 10.17 times the target companies’ earnings before interest, taxes, depreciation and amortization, or Ebitda, according to S&P Capital IQ. That is well above the average cost of 8.58 times Ebitda over the past 20 years and is similar to prices in the 2007 buyout boom and in the late 1990s tech-fueled bull market, when the average multiples were above 10. (…)

Confused smile ANIMAL SPIRITS

As P/E multiples rise, strategists are going out of their ways to find justification for these lofty multiples, if not for even loftier P/Es. I have seen a similar chart many times lately and I am fed up. Consumer sentiment is one of the most useless stat around being coincident at best. In fact, the best correlation I have seen is with gasoline prices: consumer sentiment shifts along with gas prices!

So using it to justify, even predict P/E multiples is beyond reason. Sure, one can, like Northern Trust here, draw a line through a cloud of points and assert that

growing confidence in the future increases animal spirits and the willingness to invest in riskier assets, generally driving equity prices higher, which reinforces consumers’ current and future prospects. Given the most recent University of Michigan Consumer Confidence Sentiment reading of 82.5, and past cycle average readings in the low 90s, we think the market has room to move higher.

The reality is that the vast majority of the data points fall within the red rectangle I drew within which there is no discernable trend up or down. In fact, for any consumer sentiment measure between 65 and 100, P/Es have been anywhere between 7 and 27. FYI, the UofM June 2014 Index of Consumer Sentiment is 82.5. Confused smile

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NEW$ & VIEW$ (16 JULY 2014)

U.S. RETAIL SALES STRONGER THAN PORTRAYED IN MEDIA

Retail sales climbed 0.2% in June, the smallest gain since January, the Commerce Department said Tuesday. Excluding autos, retail sales climbed a sturdier 0.4% last month.

Outlays at restaurants, clothing outlets and department stores picked up, while purchases of cars, furniture and building materials fell.

That reversed the performance seen in earlier months when sales of home goods and furniture rose, a reflection of Americans still making trade-offs while constrained by weak wage growth. (…)

Tuesday’s report did show retail sales were higher in May than previously estimated (+0.5% vs +0.3%), leading to a quarter of moderate growth after an abysmal winter. Many economists subsequently upgraded their estimates for second-quarter growth of gross domestic product. Most projections now hover around a 3% annual pace, which would serve only to reverse a first-quarter contraction of 2.9% that many economists blamed on severe snow storms and cold weather.

Uneven Showing

Just kidding The truth is that sales are pretty strong. Non-auto sales less gasoline & building materials, which go into the GDP calculations, gained 0.5% (+4.2% Y/Y) after gaining 0.3% in each of May and April. That is a 4.5% annualized rate in Q2. Ex-autos, sales rose 0.4% after advancing 1.0% in the previous 2 months. That is a 5.7% annualized rate. Core retail sales have been accelerating smartly since December as this chart (Doug Short) shows.

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Another good, revealing chart, this one from CalculatedRisk:

The momentum is continuing into July:image

This is not in retail sales:

Christie’s Sells $4.5 Billion of Artwork Christie’s International said it sold $4.5 billion of fine and decorative art during the first half of the year, up 22% from the same period a year ago.

Yellen begins to see the reality:

Fed’s Yellen Hedges Her View on Rates

“If the labor market continues to improve more quickly than anticipated by the [Fed],” she told the Senate Banking Committee, “then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned.” The Fed has held its benchmark short-term rate near zero since late 2008.

While continuing to stress that “a high degree of monetary policy accommodation remains appropriate,” Ms. Yellen’s acknowledgment that rates could rise sooner than planned marks a notable new hedge. She made a similar comment at a news conference in June, but without pointing out that the unemployment rate and other job-market measures were improving more quickly than officials expected. (…)

She pointed to low levels of labor-force participation and slow wage growth as signs of continued “significant slack” in the job market.

In answers to senators’ questions, she added the Fed has been fooled in the past during this economic recovery by “false dawns.” (…)

The Homeownership Rate for Millennials Has Hit Bottom

More millennials became homeowners last year, a sign that the homeownership rate among America’s young adults may have hit bottom, according to a new analysis of Census data published Wednesday.

While still historically very low, homeownership among 18-to-34-year-olds increased last year, even as it declined for 35-to-54 year-olds, according to a report by Jed Kolko, chief economist at Trulia Inc.TRLA -2.91%, the online real-estate information company.

Mr. Kolko’s analysis also says demographic changes among young adults, including delaying marriage and parenthood, account for nearly all of the declines in homeownership among young adults. Many of those changes, he says, were well underway even before the recession hit.

This undercuts the popular narrative that millennials have been irrevocably scarred by the housing bust. Rather, it suggests the subprime-mortgage bubble of the past decade fueled purchases that otherwise wouldn’t have taken place due to demographic changes that were already well underway.

The analysis, meanwhile, shows that homeownership rates for 35-to-54 year-olds remains at new post-crisis lows, even after adjusting for demographic changes.

The Trulia report calculates the homeownership rate slightly different from the Census. Where the Census counts the number of owner-occupied households divided by the number of total households, Mr. Kolko counts the number of owner-occupied households divided by the number of adults.

The Census tally shows the number of households that own instead of rent, which means that the homeownership rate can drop if the number of new renters outnumbers the number of new owners, even when both are increasing. For example, if more millennials move out of their parents’ basements, with the majority renting to rent apartments, this will lead to a decline in the homeownership rate.

Mr. Kolko’s adjusted version, what he calls the “true” homeownership rate, eliminates this distortion by looking at the entire population and not just those that have formed households.

The analysis shows that the “true” homeownership rate fell to 13.5% in 2012 from 17.2% in 2005. It ticked up slightly to 13.6% in 2013, though it is still lower than at any time since Trulia’s tally begins in 1983. The magnitude of the decline in the “true” homeownership during the housing bubble is actually larger than the decline reported by the Census’ published figures, which show the homeownership rate fell to 36.8% in 2012 from 44.1% in 2005.

The second part of Mr. Kolko’s analysis shows that almost all of the decline in the homeownership rate is due to demographic shifts and not the recent recession. For example, the marriage rate among young adults has dropped by more than a third since 1983. Deferring marriage means more Americans may also buy homes later in their lives. Young adults are more diverse. The share of non-Hispanic whites fell to 57% last year from 73% in 1983. (…)

The good news, he says, is that “there probably hasn’t been a huge shift in millennials’ attitudes towards homeownership…since today’s millennials are roughly as likely to own homes as people with similar demographics two decades ago.” The bad news, of course, is that these demographic shifts aren’t likely to reverse, leaving little room for young-adult homeownership to increase.

Finally, Mr. Kolko finds that the true homeownership rate for 35-to-54 year-olds is still declining. Moreover, after adjusting for demographics, which haven’t been as pronounced for this part of the population as they have for millennials, the homeownership rate is at its lowest level in at least two decades. “The real missing homeowners are the middle-aged,” says Mr. Kolko.

This shouldn’t be a huge surprise. Most millennials weren’t buying homes eight years ago, when the foreclosure crisis hit, but many Americans who are 35-to-54 years-old today were much more likely to be purchasing homes last decade.

Yet:

Mortgage Applications Decrease in Latest MBA Weekly Survey

The seasonally adjusted Purchase Index decreased 8 percent from one week earlier to the lowest level since February 2014.

China GDP shows progress on rebalancing Shoppers contribute more to growth than investment

China’s economy grew by 7.5 per cent in the second quarter, topping expectations and suggesting stimulus efforts to stabilise growth have succeeded in offsetting the impact of a weak property market. (…)

Charts

Fiscal spending rose 26 per cent year-on-year in June, according to government data.

Industrial production, a key driver of China’s economy, rose by 9.2 per cent in June, the strongest pace since December, the National Bureau of Statistics said.

Fixed asset investment grew at 17.3 per cent year-on-year in the first half of the year, up from 17.2 per cent in the five months to May. Real estate investment continued to suffer, however, with growth slowing to 14.1 per cent in the first half from 14.7 per cent in the first five months. The resilience of overall investment even in the face of falling property investment suggests that state-backed projects have helped to fill the gap.

The 3.6 percentage points of overall growth generated by investment in the first half, however, was less than consumption, which contributed 4.1 percentage points. (Net exports contracted 0.2 per cent.)

The flagging property market is expected to drag on growth in the second half: inventories of unsold flats was up 30 per cent year-on-year by end-May, according to a report by E-house China. (…)

Charts  Charts

On a seasonally adjusted basis, GDP expanded an annualized 8.2%, an acceleration from 6.1% in the first quarter

Chinese credit grows fastest in 3 months

New credit totalled Rmb1.96tn ($316bn) in June, the highest monthly total since March and nearly double the amount from the same period last year, according to Financial Times calculations based on data released by the People’s Bank of China on Tuesday.

Broad M2 money supply increased by 14.2 per cent in June, ahead of the consensus forecast of 13.5 per cent.

Local-currency bank loans rose by Rmb1.08tn in June, well above expectations of Rmb915bn. Off-balance-sheet credit also rose sharply. Trust loans, the largest component of China’s so-called shadow banking system, rose Rmb91bn, up from Rmb40bn in May.

Strong El Nino Seen Unlikely by Australia as Pacific Cools
EARNINGS WATCH

(…) J.P. Morgan and Goldman reported that some clients had turned more active in the quarter’s final weeks, helping the banks avoid a steeper drop. Both banks still posted double-digit trading-revenue declines, and neither offered investors much comfort that the June pickup would continue. (…)

Goldman became the first big U.S. bank to boast higher quarterly revenue than it reported for a year earlier. The New York firm said total revenue climbed 6% to $9.13 billion, while net income rose 5.5% to $2.04 billion, or $4.10 a share. Analysts polled by Thomson Reuters expected per-share earnings of $3.05 on revenue of $7.97 billion.

Goldman leaned heavily on other businesses to offset the trading decline. Its investment-banking arm reported revenue of $1.78 billion, up 15% from a year ago. The firm had a record quarter in underwriting revenue, and merger-advisory revenue climbed 4.1%. Goldman’s own portfolio of equity and debt investments surged in value.

Goldman, which hadn’t offered a specific forecast earlier, reported that trading revenue in fixed income, currencies and commodities, or FICC, fell 8.6% from a year earlier to $2.22 billion. Citigroup on Monday reported its own FICC revenue had dropped 12%. (…)

J.P. Morgan, the largest U.S. bank by assets, posted net income of $5.99 billion, or $1.46 a share, for the second quarter, compared with $6.5 billion, or $1.60 a share, a year earlier. Revenue declined 3% to $24.45 billion, but both figures beat analysts’ projections as tracked by Thomson Reuters of $1.29 a share in earnings and revenue of $23.76 billion.

Revenue from fixed-income markets fell 15% from the previous year on what the bank said was “historically low levels of volatility and lower client activity across products.” (…)

J.P. Morgan finance chief Marianne Lake added that June brought “generally higher levels of activity.” But that momentum hasn’t carried into July so far, she said. (…)

Like other banks, J.P. Morgan reported that its investment bankers are picking up some of the slack for trading desks that are dealing with a sluggish environment. The bank’s equity-underwriting revenue jumped about 4%, and advisory revenue jumped 31%.

The New York bank again showed weakness in its mortgage business as it, like its peers, continues to reel from a sharp slowdown in refinancing. Mortgage originations of $16.8 billion fell 66% from the previous year.

But the weakness doesn’t suggest that consumers and businesses are on their heels. Average loan balances in the commercial-banking unit were $140.8 billion, up 7% from a year earlier and 2% from the previous quarter.

  • BofA’s Results Weaken Bank of America Corp. said second-quarter profit slid 43% as the banking giant was again weighed down by large one-time legal charges and a slump in mortgage originations.

(…) For the second quarter, Bank of America reported a profit of $2.29 billion, compared with $4.01 billion a year earlier. The results include a litigation charge of $4 billion, up from a year earlier charge of $471 million. On a per-share basis, earnings were 19 cents. Analysts polled by Thomson Reuters had expected seven cents a share including litigation. (…)

Excluding adjustments to the value of the bank’s debt, FICC trading revenue was $2.4 billion in the second quarter, up 5% from the year earlier, helped by a stronger performance from mortgage and municipal products, but partially offset by declines in foreign exchange and commodities.

Pointing up So far, 36 companies (11.3% of the S&P 500’s market cap) have reported. The beat rate is 64% per RBC Capital. So far earnings ex-financials are up 14.4% Y/Y, beating by 3.4% while revenues have surprised by 0.9%. Cum-financials but ex-Citi legal expense, S&P 500 EPS are up 6.5% Y/Y.

Star 30 MINUTES, that’s all it takes to listen to this excellent presentation by Dr. David Kelly, Chief Market Strategist for JPMorgan funds.

Not that his views are close to mine, just that he presents them so well with great charts, some of which I include today. His main points are that

  • The U.S. economy is set up for a rebound.
  • The direction of interest rates is up.
  • You should be cautiously over-weighted equities (my yellow light).
  • Valuations, while pretty close to historic medians, are still cheap when compared to fixed income yields given the S&P 500’s earning’s yield of more than 6% (on forward earnings).
  • International markets are improving on a cyclical and secular basis, with staying power looking ahead.
  • The Federal Reserve is out of “running room.”

Some great charts. World economies are improving:Interest rates will be moving up in the not too distant future:

This chart breaks down the sources of EPS growth over 20 years. Note how buybacks have not been such a big factor.

Maybe we should put more money in EMs:

More charts on world markets from Ed Yardeni:

Ninja Action on ‘Inversions’ Is Urged The Obama administration joined the growing debate over U.S. companies reincorporating overseas for tax purposes, urging lawmakers to pass legislation to limit the moves.

In a letter to leaders of the congressional tax-writing committees, Treasury SecretaryJacob Lew said lawmakers “should enact legislation immediately…to shut down this abuse of our tax system.” (…)

So far, Republicans as well as some influential Democrats in Congress have favored limiting inversions through a comprehensive overhaul. Some of those lawmakers believe a quick fix could worsen U.S. companies’ position.

“I don’t want to be part of legislation that ramps up the competitive disadvantage of being a U.S.-based company or makes U.S.-based companies more attractive targets for foreign takeovers,” Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a recent statement.

Finance Committee Chairman Ron Wyden (D., Ore.) also hasn’t pushed for a quick fix. In a Wall Street Journal op-ed in May, he said that “this loophole must be plugged.” But he indicated that he is still hopeful for a comprehensive tax rewrite that would limit inversions on a retroactive basis.

In the Treasury letter, Mr. Lew criticized corporations that move overseas to avoid the relatively high U.S. corporate tax rate, while continuing to operate from U.S. soil and benefiting from U.S. legal protections, infrastructure and basic research.

“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Mr. Lew wrote. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

In its letter, the administration also endorsed making the curbs retroactive, to May 2014.