(Related: FACTS & TRENDS: U.S. HOUSING TO STAY COLD)

Manufacturers Blame Expiring Tax Breaks For Restrained Investment More than a third of U.S. manufacturers say they’ll scale back investment plans this year because a pair of federal tax breaks expired at the end of 2013, according to a survey by the National Association of Manufacturers to be released Monday.

(…) The tax breaks, known to insiders as “enhanced Section 179 expensing” and “bonus depreciation,” helped firms write off costs associated with replacing old equipment or adding factory capacity. Almost two-thirds of manufacturers said they took advantage of them in 2012 and 2013, according to the NAM/IndustryWeek quarterly survey.

About 35% of firms responding to the survey said the expiration of those two provisions at the end of last year altered their investment plans this year. Among small and medium-sized manufacturers — firms with fewer than 500 employees — 40% said their plans changed. (…)

The survey of 318 NAM members was taken Feb. 13-28. About 42% said they plan to increase capital investment in the next year, while roughly 13% said they plan to decrease capital investment. About 10% expect to reduce their full-time workforce in the next year, while 42% expect to hire more full-time employees.

About 86% described the outlook for their business as somewhat or very positive, versus 14% who described the outlook as somewhat or very negative. The primary challenge, identified by 79% of companies, was an “unfavorable business climate” in terms of taxes, regulations and uncertainty about government actions. Nearly as many firms, 77%, said the rising cost of health care was a major challenge. (…)

CHINA

China Consumer Prices Rise 2% China’s consumer price index rose 2% in February from a year earlier, slower than a 2.5% on-year rise in January, while the producer price index fell 2% in February from a year earlier.

Consumer prices rose a modest 2% year over year and factory gate prices fell for what now makes two consecutive years of monthly declines, underscoring the weakness of demand.

The consumer price index in February compared with a 2.5% rise in January, according to data released on Sunday. Food prices were up 2.7% and contributed most of the increase. Non-food prices rose just 1.6%.

Meanwhile, the producer price index, which tracks prices for finished goods at the factory gate, fell 2.0% year over year, an even faster pace than in January, when it dropped 1.6% from a year earlier. (…)

China February exports tumble unexpectedly

(…) combined exports in January and February fell 1.6 percent from the same period a year earlier, versus a 7.9 percent full-year rise in 2013. Imports rose 10 percent year-on-year in the first two months, compared with a 7.3 percent rise in 2013.

Exports to the United States edged up 1.3 percent in the first two months from a year earlier, while sales to the European Union rose 4.6 percent, according to official data. (…)

Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong, said that inflated export data in January-February 2013 means that a direct year-on-year comparison can be misleading. Fake trade deals to sneak cash into China past the country’s strict capital controls were rampant early last year before Chinese regulators cracked down.

After adjusting for such distortions, export growth in the first two months of this year could actually be up about 8 percent, he calculated. (…)

China’s crude oil imports in the first two months of the year rose 11.5 percent from a year earlier, while imports of copper jumped 41.2 percent and iron ore shipments rose 21.8 percent, data from the customs administration showed.

Copper Slumps Again on China Worries

Copper for May delivery fell 2.6% to trade at $6,602 a metric ton, taking losses over the past two days to 5%, and the slide this year to 8.8%.

The latest trigger was an industry report Monday showing China’s manufacturing sector activity fell to a seven-month low, potentially damping demand for the metal used in everything from household plumbing to smartphones. (…)

Adding to the worries are concerns that many Chinese companies that have been struggling to raise cash have instead turned to a risky type of funding which involves importing copper and using it as collateral for bank loans. If the price of copper falls then borrowers will be forced to dump the metal to help cover losses, adding more selling pressure to the market.

“The copper plunge is tied to the growing use of the commodity as financing collateral in China—there are fears there that, with many asset valuations marked to copper prices, a continued sell-off could bankrupt those holding too much copper on their balance sheets,” Scott Schuberg, chief executive officer at Rivkin Securities Pty Ltd., said in a report.

China accounts for 40% of the world’s global consumption for copper. Already high level of copper imports in the first two months of the year has raised worries about a supply overhang.

China’s copper and copper product imports rose 27.5% on the year in February to 380,000 tons, but were down 29% on the month, data over the weekend showed.

Copper financing activity too has put a “cloud” over the total supply overhang at the moment, Australia & New Zealand Banking Group ANZ.AU -0.83% said in a report.

“The credit default news (of Chaori) is negative for the market,” which has been plagued by tight credit supply, said Li Yusheng, senior analyst at Beijing Antaike, who estimates that copper supplies in China are 600,000-700,000 tons more than the demand.

However, imports could still hover above the levels seen in the first six months of 2013 in the next month or two, as Chinese buyers likely booked more term imports this year and financing demand is still alive, just weaker, Sijin Cheng, an analyst with BarclaysBARC.LN -0.69% said. She expects copper prices to be under pressure in the short term.

China Auto Sales Gain

China’s auto sales were up 10.7% in the first two months of the year, on the back of strong demand in the world’s largest car market.

Data from the government-backed China Association of Automobile Manufacturers on Monday showed that motor-vehicle sales totaled 3.75 million vehicles in the January-February period, up from 3.39 million vehicles in the year-earlier period.

Sales of passenger cars totaled 3.16 million vehicles, up 11.3% from a year ago, the association said.

Market share for domestic brands in the first two months of the year was 22.5%, down from around 30% in the same period a year earlier.

Car exports from China were down 12% year-over-year to 123,800 vehicles in the combined January-February period, the industry group said.

China Weakens Yuan by Largest Degree Since 2012

The People’s Bank of China set the daily reference rate Monday at 6.1312, 0.18% higher than Friday’s 6.1201, the largest one-day change since July 2012.

Indian Industrial Output Likely Contracted in January

Industrial production, which includes the output of factories, mines and utilities companies, likely shrunk 0.40% from a year earlier, according to the median estimate in a poll of 15 economists by The Wall Street Journal.

In December, it contracted 0.6% after a 1.3% decline in November and 1.6% slide in October.

The weak forecast on the industrial data, which the government will announce Wednesday, underscores the wider slowdown in the economy that has seen growth plummet from close to 9% a few years back to under 5% in recent quarters. (…)

THE LOONIE: WHAT’S GOING ON?

Two views: first, from BMO Capital Markets:

After following commodity prices almost note-for-note in the past four years, the Canadian dollar has gone its own way in 2014. While commodity prices have — to the surprise of most — risen solidly so far this year (up almost 9% for the CRB), the C$ has dropped more than 3% (even with its recent rebound). And this separation is not due to some quirk in the CRB, as other more Canadian-centric commodity price measures have also made solid gains this year on strength in oil, gas and gold.

So, what’s going on?

We would make the case that the C$ was consistently overvalued during much of the past four years, and it has made a level adjustment back down to reality. However, with commodity prices stronger, and the BOC now decidedly neutral, markets are rapidly reassessing the bearish C$ view.

From Palos Management’s Hubert Marleau:

It is generally acknowledged by investors that the course of monetary policy can have serious implications for stock, bond and commodity market returns. What is less well known, is that the different monetary stance between trading nations like Canada and the USA, where money is allowed to freely ebb and flow, can alter the relative exchange value of their currency. In fact, there is plenty of empirical evidence and theoretical validity that when monetary policy is different than it ought to be amongst trading nations, currency markets usually absorb the shocks.

The performance of the Canadian economy ended 2013 on much stronger footing than first thought, surprisingly matching that of the USA. During the last quarter of 2013, the Canadian economy grew at the annual rate of 2.9% compared to 2.4% for the USA. Put simply, Canadian monetary policy should at the very least be similar to the one practiced in the USA.

As a matter of fact, a Canada-US comparison of the Palos Monetary Index, the inflation content of the Misery Index and the contribution of cyclical spending to GDP suggests that the Canadian monetary stance ought to be easier than it is in the USA. Yet, this is not the case. The Canadian yield curve is not as steep as it is in the USA; moreover, the cost of money and real rates are higher in Canada.

In this broad connection, it does not surprise us that the Canadian dollar has found a new trading range between 89 and 92 US cents and that long term Canada Bonds can attract foreign investors with 25bps less in yield than comparable US Treasuries.

It appears to us that the negative sentiment surrounding the Loonie is much more about the application of moral suasion by both the Federal Government and the Bank of Canada than anything else. A reversal of fortune for the Canadian Dollar could emerge if Statistics Canada continues to report improvements in trade balances and/or foreign investors start focusing on Canada’s strong fiscal position and/or Obama was to decide that the XL Keystone is in the interest of National Security. Turmoil in the Middle East, Venezuela and now Ukraine may force the White House to use the abundance of energy in North America to supply natural gas and crude oil to secure US interests abroad and provide energy to those who are hostage to Russian energy supplies.

French Economy Shows No Improvement

(…) The Bank of France’s monthly survey published Monday showed sentiment in manufacturing fell further below the long-term average of 100 to 98 in February from 99 in January. In services, the sentiment indicator was steady at 94 in February.

Based on business activity, the central bank kept its forecast for a 0.2% gross domestic expansion in the first quarter of this year from the end of last year.

Separately, statistics bureau Insee said French industrial production dropped unexpectedly in January, weighed down by a contraction in energy output. Analysts polled by Dow Jones Newswires had expected output to hold at the same level in January.

A steep fall in energy output masked an improvement in manufacturing output, which rose 0.7% in January from December. But analysts warn that combined with other areas of the economy, growth will be overall weak in the short term.

Meanwhile, Italian industrial production jumped 1% in January from December.

ECB’s Noyer Not Happy With Euro Strength

(…) “It is clear that when the euro starts to strengthen it creates additional downward pressure on the economy and additional downward pressure on inflation. Both cases aren’t warranted at the moment,” Mr. Noyer said in an interview with Bloomberg TV. “We are clearly not very happy at the moment.”

The euro has risen 6.5% against the dollar in the past year, sapping demand for European exports and bearing down on prices in the 18-member currency union. Annual consumer price inflation in the euro zone was 0.8% in February, well below the ECB’s target of just below 2%. (…)

Europe’s Lower-Gear Car Recovery Investors may be too optimistic on a rebound in vehicle sales in Europe, which are well below 2007’s peak.

Registrations of new cars in Western Europe were up 4.6% in January year over year, the fifth monthly increase in a row, notes the European Automobile Manufacturers’ Association. In February, while sales in France contracted, they expanded further in Germany, Italy and Spain, according to their national associations.

The average age of cars on European roads has risen from 7.7 years in 2007 to nine years, estimates Sanford C. Bernstein.

But consensus forecasts for growth of 5% to 6% in Western Europe to just over 12 million new cars this year could prove optimistic.

Sales in economically stronger markets already have improved. Germany is less than 200,000 vehicles below its long-term annual sales average, while sales in the U.K. are close to record levels, notes Nomura. Elsewhere, high unemployment makes recovery more challenging. Sales in Italy, Europe’s fourth-largest market by new-car sales, are still one million units below peak.

Other factors may put the brakes on recovery. Europe’s driving-age population is shrinking overall. The proportion of young adults with a driver’s license has stopped rising in France and Germany and is actually falling in the U.K., according to the Institute for Mobility Research.

Additionally drivers are seeking alternatives to owning their own wheels. Car-sharing programs could have more than 15 million members in 2020, up from 700,000 in 2011, forecasts Frost & Sullivan. That would likely weigh on new-car sales. In the U.S., each car that goes into a company like Zipcar means 32 subsequent purchases are avoided, says Alix Partners.

That could mean that Europe’s car market just doesn’t get back to its precrisis levels. IHS thinks new-car sales in Western Europe will barely reach 13.5 million to 14 million units by the end of the decade, below 2007’s 14.8 million peak.

Did you notice how currencies are back in the limelight? Canada has already acted, the BOC openly encouraging the market to stimulate exports. The Bank of China is now doing the same, by itself. The ECB is getting more and more worried that the strength of the Euro will undermine its efforts.

SENTIMENT WATCH

Are Small Investors a Sell Signal?

(…) Small investors, well known for poor market timing, are flocking back to stocks. Does that mean it is time to sell? (…)

The trend worries some strategists, who argue that small investors are notorious for clamoring to buy just before a market top. An analysis of small-investor sentiment shows that the widely held belief is true, but perhaps not reliable enough to warrant any major buying or selling on its own. (…)

AAII asks its members whether they think the stock market will rise, fall or stay the same over the following six months. The difference between the percentage of bullish investors and bearish investors is seen as a measure of how small investors feel that week. (…)

In the 1,362 surveys since July 1987 that are at least six months old, investors correctly guessed the direction of the S&P 500 slightly more than half of the time.

That isn’t good by any means. If small investors always bet that stocks would rise, they would have been right 72% of the time. (…)

The AAII survey works as a better buy or sell signal at extremes.  After weeks when a net 38% or more of AAII members were bullish, the S&P 500 went on to lose 1.4% over the following six months on average. In weeks when a net 31% or more were bearish, stock prices subsequently climbed 11%. (…)

Lately, some researchers have come up with ways to detect specific emotions and how they affect stock moves. Richard Peterson, founder of MarketPsych, analyzes text in news stories, social media and other sources to estimate whether investors feel, say, “joy” or “trust” about specific stocks and sectors.

In particular, Mr. Peterson has found that anger—for example, a series of tweets about the Apple chief executive that say “Tim Cook is an idiot!”—is a better predictor of good returns than general bearishness. In international stocks, future returns are better when investors feel that a country’s government is unstable, he says.

Right now, the sectors that investors are angriest about on social media include Internet companies, industrials and banks, according to MarketPsych. Individual stocks registering angry sentiment include defense company General Dynamics, tech company Oracle and real-estate developer St. Joe.

Investor bullishness also seems to be a stronger sell signal for stocks with speculative attributes, such as those that deliver low profits or don’t pay dividends, Prof. Baker says. “Stocks that are difficult to value are more prone to sentiment,” he says.

And, right on cue:

Dot-Com IPO Insanity Returns With Coupons.com

This is one of those days where I realize I don’t understand anything about finance or capital markets. I’m a dinosaur. I don’t get it. People are saying things like “this time is different” again in news articles about initial public offerings by Internet companies, and they mean it. All I can do is watch, dumbfounded.

Today a 16-year-old company that loses money called Coupons.com Inc. went public. Had I been paying attention to Coupons.com sooner, I might have guessed after the disastrous post-IPO performance of Groupon Inc. that investors’ appetite for yet another online-coupon company would have been sated. But no, that would have been wrong.

Coupons.com, with Goldman Sachs as its lead underwriter, raised $168 million, selling 10.5 million shares for $16 each. And the stock rose as much as 103 percent to $32.43, making it today’s biggest gainer by far. If that doesn’t remind you of 1999, then you probably weren’t following the stock market back then.

The company has about a $2.3 billion stock-market value, which is more than 13 times its $167.9 million of revenue last year, when its net loss was $11.2 million. But like so many other companies in these golden times, Coupons.com simply told investors to exclude about $13 million of normal everyday expenses and, abracadabra, it claims to be profitable on a nonstandard, cockamamie “adjusted Ebitda” basis. It’s all part of the show.

One of the popular themes during the late 1990s dot-com bubble went like this: “It’s dumb for startups to show profits, because then investors might get some sense for what their limits are. So go ahead, lose money. The worst thing you could do is have a denominator in your price-to-earnings ratio that’s greater than zero, because then your ratio would be positive, assuming your stock hasn’t gone to zero yet. But if you lose money, that’s terrific, because it means the sky’s the limit.”

A lot of people bought into that concept, especially investment bankers and easy marks who signed up to take a flier on the greater-fool theory. But that rule about losing money applied to start-ups. It didn’t apply to companies that had been around for 16 years and still were losing money. Because if a company is still around after 16 years, it’s not a startup. It should be making money if it wants to go public. It should be making money, period. Or at least that’s how it worked in the old days when IPOs were for real companies with real profits.

Coupons.com has incurred net losses since its inception in 1998. It had an accumulated deficit of $168.8 million as of Dec. 31. The money the company just raised is only about $1 million less than that figure. So you have to at least admire the symmetry. Maybe in another 16 years, Coupons.com can come back to the markets for more money and do it all over again?

This is where that first idea I mentioned comes in. There must be something wrong with the way I’m wired. I obviously don’t get this. But Mr. Market does, whether you choose to imagine him as a man of great efficiency or as a hopelessly addicted angel-dust addict who has a habit of running into burning buildings and defenestrating himself every few years.

But at least I’m willing to admit I have a problem. So please allow me to excuse myself while I go check the Coupons.com website for a discount on some Kool-Aid. I have a hunch I’m going to need it.

Back to sanity:

Seth Klarman: Investors Downplaying Risk “Never Turns Out Well”

(…) If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.

(…) on almost any metric, the U.S. equity market is historically quite expensive. A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix, Inc. and Tesla Motors Inc. (…)