U.S. GDP: THE PROBLEM IS PRODUCTIVITY
David Rosenberg:
The economy is clearly showing its verve and only the trade gap is preventing real GDP growth from surging in excess of a 4% annual rate in Q2. (…) the labour side of the economy is behaving as if we have a 4% growth economy. That auto sales are at eight-year highs of 17 million units or that the ISM combinations are at a firm 55 merely add credence to that view (not to mention factory orders at a six-month high). (…)
The problem this cycle is with productivity growth which has been faltering badly.
Meanwhile, commodities are helping the 99%:
Prices for soybeans, corn and wheat fell sharply on Friday after the U.S. Agriculture Department projected bigger-than-expected harvests and stockpiles this year, extending months of market bearishness for three of the biggest U.S. crops by value.
Soybean futures dropped about 3%, wheat fell by more than 4%, and corn prices slid to the lowest level in nearly four years as the USDA, in its closely watched monthly World Agricultural Supply and Demand Estimates report, said favorable weather is expected to lead to big jumps in crop production this year, outpacing demand.
Cotton prices also fell Friday, ending at the lowest level in two years, because the USDA increased its estimate for U.S. production by 10% to 16.5 million bales in the year beginning Aug. 1.
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WTI Slides Below $101 as Supply Risks Ease; Brent Hits Three-Month Low
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Prepare for Crude Oil to Keep Dropping on Libya to U.S. Supplies: Energy
Wells Fargo Results Show Lending Fears
Overall, Wells Fargo posted a 3.8% rise in second-quarter net income from a year earlier to $5.73 billion. Per-share earnings of $1.01 met analyst expectations, but revenue slipped 1.5% to $21.07 billion. With the latest profit gain, Wells Fargo eked out its 16th quarter in a row of growth in year-over-year net income but broke a streak of record profits over nearly four years, based on data from FactSet.
Wells Fargo’s credit-loss provisions totaled $217 million, compared with $652 million a year earlier and $325 million in the prior quarter. Improving credit has bolstered financial results at banks across the industry, although that trend is expected to slow as lending rebounds.
Like many of its rivals, Wells Fargo, based in San Francisco, is awash with savers’ money—average deposits rose 9% to $91.7 billion in the three months ended June 30 compared with the same period a year earlier—but is struggling to deploy them because of the low returns on many loans and investments.
As a result, Wells Fargo’s net interest margin—a key profitability figure that measures the difference between what a bank makes on lending and what it pays depositors—narrowed to 3.15%, compared with 3.47% a year earlier and 3.20% in the prior quarter. It was the lowest net interest margin in at least the past three years, according to FactSet. (…)
John Shrewsberry, Wells Fargo’s chief financial officer, said in an interview the bank isn’t concerned about its lower net interest margin. “We won’t stop taking our customers’ deposits,” he said, adding that Wells Fargo would rather sit on the cash than risk putting it to work in investments that might later suffer losses. (…)
Wells Fargo—the country’s biggest provider of home loans—saw mortgage originations fall about 58% from the year-earlier quarter to $47 billion, driven by a persistent slump in refinancing activity that has outweighed any gains in loans for new home purchases.
Some 74% of home loans were purchase mortgages, up from 44% a year ago, suggesting home buyers may be beginning to fill the gap left by the end of the refinancing boom.
Still, the bank offset the weakness in its mortgage business, which now accounts for roughly 8% of revenues, by stronger lending in other areas. Total loans grew 3.6% from a year earlier to $828.9 billion. Commercial and industrial loans climbed 10%, or $19.4 billion; auto loans jumped 11%, or $5.4 billion, and credit-card lending rose 10%, or $2.4 billion. (…)
Euro-Zone Industrial Output Slumped in May
The European Union’s statistics agency Monday said output from factories, mines and utilities fell by 1.1% from April, although it was up 0.5% from May 2013. That was the largest month-to-month drop since September 2012.
Economists said the scale of the decline was likely exaggerated by the fact that the May 1 public holiday was on a Thursday, with many workers also taking the following day off to create a longer, four-day break including the weekend.
It may have been the calendar in May (BTW, energy IP was +3.0% in May), but what was it in March and December (both –0.4%). Last 3 months: –0.8%, last 6 months: –1.0%.
Europeans apparently did not use the longer week-end to shop as May retail sales were unchanged after falling 0.2% in April. Last 3 months: +0.1%, last 6 months: +0.1%. Core retail sales: last 3 months: –0.4%, last 6 months: +0.4%.
Draghi Seen Delivering $1 Trillion to Banks in ECB Offer Mario Draghi’s newest stimulus tool will hand banks more than 700 billion euros ($950 billion) of cheap funding, economists say.
The European Central Bank president’s targeted lending program for banks will boost credit for the real economy as planned, and at the same time help keep the financial system flush with cash, according to the Bloomberg Monthly Survey of 45 economists.
The ECB has identified lending to companies and households as a key weakness in the euro area’s fragile recovery. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately provide as much as 1 trillion euros.
Low rates change Germans’ housing habits
(…) A property boom in the German capital pushed up the value of the average apartment by 27.5 per cent from 2010 to 2013, according to property researchers bulwiengesa. Prices in towns and cities across the country have soared by a fifth over the past four years. Since 2012, the average time it takes to sell a house privately has fallen by almost a fortnight to eight weeks, figures from property website immobilienscout24.de show. (…)
“There are signs in the real estate market of price developments that are dangerous,” Wolfgang Schäuble, Germany’s finance minister, warned last month.
The Bundesbank, which along with the finance ministry and regulator BaFin, sits on the Financial Stability Commission, the body tasked with maintaining the health of the financial system, said earlier this year that property prices in the big cities were now overvalued by as much as 25 per cent.
Germany remains a nation of renters. The owner occupancy rate is just 53 per cent, according to Eurostat, compared with 78 per cent in Spain and a euro area average of 67 per cent. The rate has barely changed since 2010.
Barriers to home ownership, such as transaction costs of around a tenth of a property’s value, are high. Strong tenants’ rights and a vibrant rental property market also help in swaying Germans from becoming homeowners. But conditions are ripe for change. (…)
There are anecdotal signs that cheap money is already shifting attitudes, with the younger generation increasingly viewing property as a sound investment. In research on Frankfurt’s property market early this year, bulwiengesa reported mounting interest from people in their 30s. (…)
Canadian Dollar Drops as Jobs Loss Supports Central-Bank Caution
In Canada, a Central Banker’s Unusual Approach Head of Bank of Canada Looks Beyond Economic Models for Clues
Central-bank economic models failed to foresee the storm that devastated the global economy in 2008. Stephen Poloz, the head of Canada’s central bank, the Bank of Canada, is trying an alternative approach he thinks will have better foresight: actual human beings.
In a December speech he compared the world’s central bankers to “the sailors of another era who were driven far off course by a nasty storm. When things calmed, they found themselves in the Southern Hemisphere. Suddenly the navigational chart that they relied on—the night sky—was completely different.”
(…) Since taking over in June 2013, Mr. Poloz has pushed staff and himself to look beyond models for on-the-ground evidence to understand Canada’s economic challenges.
His director of Canadian research traveled to Calgary to quiz energy companies about the investment outlook and to Toronto to talk to big retailers about competitive pressures in setting consumer prices. (…)
One example: The central bank’s models said a U.S. economic recovery and a decline in the Canadian dollar should lead to a jump in exports and economic output. But it hasn’t.
Mr. Poloz and his staff have been turning to exporters for answers. His conclusion: Some key sectors, like auto-parts manufacturing, have lost competitiveness, leading the U.S. to buy more from lower-cost producers such as Mexico and overseas. Thus a weaker Canadian currency and more U.S. growth aren’t helping them much and Canada’s economy has become uncomfortably more dependent on housing and household spending. (…)
About 10 subsectors, including machinery, equipment, building materials and aircraft, have in fact recovered as expected, or are doing even better. But 21 others, including the auto sector, food and beverage suppliers and chemical makers, are no longer as competitive as they were before the recession when they take their goods to market in the U.S.
As the researchers drilled down and talked to companies, they found that in some industries–clothing, textiles and furniture, for example–competition from lower-cost producers, including China, picked up steam. Trade deals also eliminated some textile tariffs. New entrants started to make bigger inroads; suppliers to the auto industry cited tougher competition Mexico and Korea.
Research on the subsectors published in a bank working paper in April suggested only about half of exporters will be helped by a lower Canadian dollar, since many sectors face longer-term competitive challenges. Many of the sectors that stand to benefit from a lower dollar, such as consumer products, are already among the sectors that have maintained their market share in the U.S. (…)
Another sign the bull market is nearing its end Analysis: Companies no longer want to buy their own shares, a worrisome sign
New stock buybacks fell to $23.2 billion in June, the lowest level in a year and a half, according to fund tracker TrimTabs Investment Research. In May, the total was just $24.8 billion, and the monthly average in 2013 was $56 billion.
That’s worrisome, according to TrimTabs CEO David Santschi, because “buyback volume has a high positive correlation with stock prices.”
The red arrows are from me to indicate that the correlation is far from perfect…even though the calculated correlation is 0.61. Note that since 2006, the correlation between EPS and the S&P 500 Index is 0.86 (0.97 since 1926).
So, keep reading.
EARNINGS WATCH
Analysts Have Not Slashed Earnings Expectations for Q2 to Date
The estimated earnings growth rate for the second quarter is 4.6% this week, slightly below the estimated growth rate of 4.8% last week. Small downward revisions to EPS estimates for companies in the Energy and Financials sectors were partially offset by small upward revisions to EPS estimates for companies in the Health Care sector, resulting in the small decline in the overall earnings growth rate for the index during the week.
Although the growth rate for the second quarter has dropped since March 31, analysts cut earnings estimates for the quarter by the lowest amount since Q2 2011. The percentage decline in the Q2 bottom-up EPS estimate (which is an aggregation of the earnings estimates for all 500 companies in the index and can be used as a proxy for the earnings for the index) was 1.7% during the quarter (to $28.96 from $29.45). This decline in the EPS estimate was lower than the trailing 1-year (-3.9%), 5- year (-2.9%), and 10-year (-4.6%) averages for a quarter. In fact, this marked the lowest decline in the bottom-up EPS estimate during a quarter since Q1 2011, when the bottom-up EPS estimate only decreased by 0.6% during the quarter (to $22.08 from $22.20).
S&P’s most recent update (July 10) shows that of the 27 companies that have reported so far, 16 beat (59%) and 8 missed (30%). Fourteen of the reports were from consumer sensitive companies. Seven beat and 6 missed.
Q2 EPS estimates are now $29.12 (per S&P), down from $29.24 on July 1.
The earnings season gets in higher gear this week with 157 reports. Important week!
SENTIMENT WATCH
Today’s main narrative, courtesy of Barron’s (Climbing a Staircase of Fear):
“The worst-case scenario that anyone sees today is a short-term correction of 5% to 10%.” (…)
“People think the risk is contained at 10%,” Hayes says. “Maybe it will be greater than that.”
That’s exactly what concerns Wells Capital Management’s Jim Paulsen, who thinks the correction, when it comes, could look a lot more like a bear market than your run-of-the-mill selloff. “I’d feel a lot better about a correction if everyone weren’t waiting in line with me,” he says. “Whatever correction we do get could scare everyone who was waiting to buy the dip.”
But wait, Paulsen is not through:
THAT POSSIBILITY ISN’T SCARING HIM AWAY, however. The reason: He believes the bull market isn’t over yet. Not even close. In fact, he thinks the S&P 500 could ultimately trade as high as 3,000 five years from now. Before you scoff, consider: It would take no more than earnings growth of 4% annually and a willingness of investors to pay 22 times those earnings. And he doesn’t want to miss the upside. “The worst thing an investor can do is get too focused on the chance of a temporary correction and miss the rest of this bull market,” Paulsen maintains. (…)
Family Dollar Stores
Kroger’s shoppers are “exhibiting less cautious spending behavior,” CEO Rodney McMullen told investors in June. “More customers perceive the economy to be in recovery” and are shelling out for things like premium pet food and organic products. 
It is a sharp turnaround for both markets, where investors until recently were overwhelmingly bullish, and a welcome relief for consumers, who had watched gasoline climb steadily for much of this year. 
World food 
Glass half-full or half-empty? 
