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)

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (3 APRIL 2014)

U.S. Private Sector Adds Jobs U.S. businesses last month returned to a modest pace of hiring seen before harsh winter weather curtailed job growth, a survey of private-sector hiring said.

Private-sector payrolls in the U.S. increased by 191,000 new jobs in March, according to a national employment report compiled by payroll processor Automatic Data ProcessingInc. and forecasting firm Moody’s Analytics.

Chart of the Day: Ignore ADP
Construction Spending Holds Up

The Commerce Department said Tuesday that total construction spending edged up 0.1% in February after a 0.2% decline in January (initially reported as a 0.1% gain). Despite the harsher-than normal weather this winter, building outlays in January and February are up almost 9% from the same time in 2013.

While most attention is paid to housing, the nonresidential building sector is also doing much better than in the darkest days of the recession. (The sector also fell by a smaller magnitude than housing did.) Spending on private commercial projects is up 13% from a year ago, with communication projects up 51.5% and lodgings up 40%. But given how far spending dropped during the downturn, the industry still has plenty of room to grow.

Store Rents Rise as Construction Slows Owners of shopping centers and malls raised rents for the 12th consecutive quarter, a sign that retail landlords are getting a boost from the slowly improving economy and low level of commercial real-estate construction.

Asking rents at strip centers rose 0.4% in the first quarter from 2013’s fourth quarter, to $19.42 per square foot, the highest level since late 2008, according to data company Reis Inc. At large regional malls, asking rents rose half a percentage point to $40.15 per square foot, also the highest since the end of 2008. (…)

Landlords have been able to raise rents in this climate largely because of the dearth of new construction in recent years. Developers completed just 626,000 square feet of strip shopping centers in the first quarter of 2014, roughly one-fourth the level of construction from the previous quarter, and the lowest level since the beginning of 2011, according to Reis.

Construction was especially low in the first quarter because of bad weather. “Construction activity is suddenly back at the nadir we hit in the wake of the recession,” said Ryan Severino, an economist with Reis. “It speaks to the fragility of the market. In general, there’s not a lot being built.” (…)

ECB Keeps Rates on Hold as Officials Discuss New Measures
China Stimulus Puts New Focus on Growth Target Credit Growth Likely to Continue to Accelerate, Despite Fears of a Credit Bubble

China’s latest economic stimulus can be seen as more of a statement of priorities than a powerful effort to jump-start growth. The message: growth trumps concerns about a credit bubble.

On Wednesday night, the government’s top decision-making body, the State Council,announced a spending package consisting of new railways and subways, low-income housing and tax breaks for small business. But there was no price tag attached to the measures and most were part of the annual economic work plan announced last month. “It’s insuring projects in the pipeline will actually happen and may be a little accelerated,” said Royal Bank of Scotland RBS.LN -0.43% economist Louis Kuijs.

More significant could be the announcement of how the projects will be financed. The government plans to “encourage commercial banks, pension funds and insurance institutions to actively participate in shantytown renovations,” the State Council statement said. In other words, expect credit growth to continue to accelerate, despite widespread fears of a credit bubble. Over the past five years, credit in China has grown at a clip similar to the U.S., Europe, South Korea and Japan before bubbles burst there, producing deep recessions. (…)

One reassuring sign to some economists: the package also includes new ways of financing spending that could spread credit risk. The government called on China Development Bank, the country’s largest policy bank, to set up a body to issue specialized home-financing bonds to support shantytown reconstruction and other infrastructure development.

Bank of America BAC -0.63% Merrill Lynch, in a note to clients Thursday, said policy banks taking on such a role would help shift debt from local governments to federal authorities, whose debt burden is much lower.

(…) Beijing will have to be smart about the investments it makes for them to have much effect. For instance, the railway spending is aimed at central and western China, according to the State Council. But the International Monetary Fund has found that much of the spending in those regions fails to deliver the payoff prior investments in coastal China once did. That is because it is far from clear China’s plans of turning central and western China into a new low-wage region for export-oriented companies makes sense. Exporters may choose to stay on the coast or move overseas instead. (…)

Brazil raises rates to two-year high Increase to 11% seen to mark end of tightening cycle
Russian economy shrinks, survey suggests Latest sign of output contracting following Ukraine crisis

The composite PMI output index for Russia, released by HSBC bank, dropped from 50.2 in February to 47.8 in March as businesses particularly in the service sector grew more worried about the future, bringing their expectations close to the historical low during the financial crisis in late 2008.

World food prices jump again in March: U.N.’s FAO Global food prices rose to their highest in almost a year in March, led by unfavorable weather for crops and political tensions over Ukraine, the United Nations food agency said on Thursday.

The Food and Agriculture Organisation’s (FAO) price index, which measures monthly price changes for a basket of cereals, oilseeds, dairy, meat and sugar, averaged 212.8 points in March, up 4.8 points or 2.3 percent from February. The reading was the highest since May 2013. (…)

In March, FAO’s cereal price index rose significantly for the second month in a row, jumping 5.2 percent to its highest value since August 2013 due to unfavorable weather in the south-central United States and Brazil, along with uncertainty over grain shipments from Ukraine.

The sugar price index saw the greatest percentage increase, rising 7.9 percent on the previous month due to drought in Brazil and reduced sugarcane output in Thailand.

Dairy was the only index to ease, the first fall in prices since November 2013, affected by reduced purchases by China and strong supplies in New Zealand, FAO said. (…)

‘Wealth Effect’ Drives Vacation-Home Sales Sales of vacation homes are surging again, the result of rising wealth in higher-income households and renewed confidence in the housing market.

The number of second homes acquired for part-time personal use jumped 30% last year to 717,000 homes, according to an annual survey by the National Association of Realtors. The gain was the largest since the association started tracking second-home sales in 2003.

Although the number of second homes sold last year is well short of the high point of nearly 1.1 million in 2006, last year’s jump signals a rapidly changing sentiment about the value of residential real estate, which just a few years ago was considered a poor investment amid the broad market bust. (…)

Overall, vacation homes accounted for 13% of U.S. home sales last year, up from 11% in 2012, according to the Realtor association survey. Their median price last year was $168,700, up 12.5% from 2012.

Regionally, the South accounted for most vacation home sales last year—41%—likely due to its mild weather. Next was the West, with 28%; the Northeast, with 18%; and the Midwest, with 14%. Florida tends to propel the South to the forefront of the vacation-home market.

Safe to say here that weather is a factor! Winking smile

SENTIMENT WATCH

The “Smart Money Index” that subtracts the S&P 500′s performance during the first half-hour of trading and adds the last hour has plummeted by over 20% during the past two weeks. This shows a repeated pattern of buying during the early morning and selling in the afternoon. Since at least 1998, the index has never suffered a decline like this over a two-week period. The only time that volatility neared this kind of level was late 2007 / early 2008. We’re not reading that much into it, but generally a rapidly declining SMI when stocks are near a high leads to sub-par returns going forward. (…)

…but is not reading that much into it…He goes on with the “bullish but” speak:

That said, by my work there are no signs the secular bull market is coming to an end. One of the few negatives I see on a short/intermediate term basis is that the number of new 52-week highs is shrinking. Also suggesting there may be some more downside to come is the Russell 2000 (RUT/1151.81), which has traveled below its 50-day moving average (DMA) of 1162.67. Historically small capitalization stocks, as represented by the RUT, are the first to display weakness. That weakness is also apparent in the various NASDAQ indices that have likewise violated their 50-DMAs. So far, however, the D-J Industrials (INDU/16323.06), D-J Transports (TRAN/7451.36), Value Line Arithmetic Index (VLA/4413.33), the SPX, etc. have not traveled below their 50-DMAs. For the record those moving averages are 16120.53, 7372.75, 4380.27, and 1834.05, respectively. Eventually the stock market will resolve its current range-bound indifference, but until it does I remain [image]cautious on a trading basis.

Saut could have argued that the “Smart Money Index” may not be that smart nowadays given this chart:

  • Tell me, do these investors qualify as “smart money”?
Investors Clamor for Risky Debt Investors are snapping up low-rated securities backed by companies, home mortgages and car loans at a clip rarely seen since the financial crisis, as fund managers and others tire of paltry yields on safer assets.

Buyers poured $3.42 billion into taxable U.S. high-yield mutual funds and exchange-traded funds in the first quarter, outpacing the year-earlier period’s $1.76 billion total, said fund tracker Lipper, and following a full-year outflow of $4.98 billion in 2013. At the same time, robust demand for the lowest-rated portions of some asset-backed securities has enabled issuers to cut offered yields, investors said.

The actions highlight the widespread expectation that the Federal Reserve will keep interest rates low for at least another year even as the economy picks up speed. The conditions should keep defaults low, investors said, enabling purchasers of the debt to pocket returns above those from more highly rated offerings.

“The world seems a safer place than it did two years ago, or even a year ago,” said John Kerschner, global head of securitized products at Janus Capital Group Inc., which manages $174 billion. Buying high-quality debt alone is “not going to put meat on the table, and you have to take a little more risk.” (…)

Freddie Mac, FMCC -0.76% the government-backed home-loan financing company, on Wednesday sold $966 million of derivatives backed by mortgage loans. Demand for the Structured Agency Credit Risk notes—debt that enables private investors to shoulder more of the risk of financing the U.S. housing market—was strongest in the riskiest, unrated portion of three classes of notes sold. Investors registered $10 of orders for each dollar of so-called M3 notes sold. Holders of the M3 notes share in any losses first.

Ultimately, Freddie Mac sold $391 million of the M3 notes at a yield of 3.75%, which is 0.4 percentage point below the rate at which the company initially shopped the debt, investors said. (…)

The demand “is a combination of a good market…as well as a growing understanding and investor base” in the program, said Mike Reynolds, a director of portfolio management at Freddie Mac.

Security National Automotive Acceptance Co., a subprime auto lender that finances active-duty military borrowers, cut yields on the junk-rated slice of a $210 million asset-backed bond by 0.25 percentage point Tuesday after recording seven times the necessary orders, investors said. (…)

About 55% of single-B-rated junk bonds in the U.S. this year priced at the low end of their targeted yield range, suggesting heavy buyer demand, according to S&P Capital IQ Leveraged Commentary & Data. That compares to 34.8% for all single-B deals in 2013. (…)

Yield premiums on triple-C-rated bonds, one of the lowest rungs of the speculative-grade ratings ladder, are now 5.4 percentage points over comparable Treasurys, their lowest since July 2007, Barclays data show.

But strong demand also has led to some loosening of underwriting standards and covenants that afford buyers protection, investors said.

Companies have issued $1.9 billion of junk bonds that give issuers the ability to pay in additional debt rather than in cash, up from $1.2 billion in the prior year period.

In 2013, the total volume of these pay-in-kind, or PIK, deals was $12 billion, the most since 2008.

The Moody’s Investors Service covenant-quality index, which rates high-yield bonds for investor protections, with 1 the highest score and 5 the lowest, fell to 4.14 in March from 4.05 in February.

But many observers say they don’t believe the market has grown frothy. (…)

Mainly those observers actually selling the stuff.

NEW$ & VIEW$ (2 APRIL 2014)

Auto Auto Sales Return to Lively Pace A Gain of 5.7% Overall Reflected Strong Demand After Harsh Winter Passed

U.S. light-vehicle sales rose 5.7% last month to 1.54 million, exceeding many analysts’ expectations, and pushing the industry’s annualized selling rate to 16.4 million, according to research firm Autodata Corp.

Industry discounts climbed 7.9% in March to $2,773, while the average price paid for a vehicle rose only 1.2% to $30,986 in March over last year and was down from February, estimates car-shopping website TrueCar.com.

Smoothing out the monthly volatility, Q1’s average rate of 15.7 million units was just about equal to that of the last two quarters of 2013 as per this Ed Yardeni chart:So the jury is still out on the cyclical peak:

Keep on trucking! ‘cause car sales are weak. (Charts from Haver Analytics)

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Apartment Rents Climb as Vacancies Drop Apartment landlords continued to push through hefty rent increases at the start of the year, although the pace of the rises was slightly weaker.

Rental rates increased 0.6% during the first quarter, according to data from 79 U.S. metro areas that was released Tuesday by Reis Inc., a real-estate research firm. While that was a little slower than the 0.8% rise in last year’s fourth quarter, rents were up a hefty 3.2% from a year earlier and have risen 13% since rents began their upward trajectory in 2009.

And with vacancy levels falling, rents appear poised for further growth, according to Reis, which said the rental vacancy rate fell to 4% in the first quarter, down from 4.2% in the fourth quarter and half the level in 2009.

“Rents are at a higher base and still growing,” said Ryan Severino, an economist at Reis. “They will likely keep growing for the next few years.”

U.S. mortgage applications fell last week: MBA

The MBA’s seasonally adjusted index of refinancing applications fell 2.9 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, rose 0.9 percent.

The 4-week average of the purchase index is now down about 19% from a year ago. (CalculatedRisk with chart)

U.S. Construction Spending Growth Pulled Down by Severe Winter Weather

The value of construction put-in-place eked out a 0.1% rise (8.7% y/y) during February following a revised 0.2% January slip, initially reported as a 0.1% gain. Recently weak performance lowered three-month growth in construction to 7.7% (AR), roughly half its earlier high.

SPRING THAW:

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(…) All North Sea indicators point to an extremely weak market at present. The Brent market structure is in deep contango as refiners are in maintenance and arb opportunities to the Far East are scant ahead of peak Asian maintenance and thereafter terminal maintenance at the Forties VLCC loading point over May and June. Greater availability of Forties has coincided with weaker Urals differentials in NWE, triggering more intense competition and lower Forties prices, which were last assessed at discounts to the Brent forward strip.

As we have seen before in the US, it is predominantly light Brent-related crudes such as from Nigeria and Algeria that are being squeezed out of the Canadian import slate as US imports now make up almost one-third of inflows (see chart).The combined share of Nigerian and Algerian exports to Canada was last seen at only 13% in December, down from 26% a year before that. In barrel terms, this has seen imports from Nigeria and Algeria average 100,000 b/d over H2-2013, down 90,000 b/d y-o-y. While the continuing replacement of these African and North Sea light volumes should see US exports to Canada increasing, eventually these volumes will hit a limit and this will lead to the so-called “crude wall” – the point at which availability of light tight oil (LTO) on the USGC exceeds LTO processing capacity. LTO on the USGC will then begin amassing faster, leading to a blowout in crude differentials. This is a major factor behind the debate about lifting the US ban on crude exports.

So, summer is coming, and there’s a “crude wall” emerging.

Once the North American refining market is saturated with light sweet crude, two things could very likely happen.

1) There won’t be a home for foreign light sweet crude in the US at all, which will put pressure on the Brent complex.

2) The WTI discount will re-appear on a major level unless… exports are allowed, which could put further pressure on the Brent complex, if not the entire oil market, encourage US production shut-ins , or lead to even greater inventory accumulation in the US than we’ve already had.

Global PMI signals strongest quarter for nearly three years, but slowing momentum

The JPMorgan Global PMI™, compiled by Markit from its 24 national surveys, fell from 53.2 in February to 52.4 in March. PMIs fell in 16 countries and rose in only eight. The US, Czech Republic and Ireland led the worldwide PMI rankings, followed by the UK. Only three countries saw business conditions deteriorate, as signalled by sub-50 PMI readings. China saw the steepest decline, followed by Russia and then Greece, the latter slipping back in to decline after two months of growth at the start of the year.

Weakness was evident across the so called ‘BRIC’ emerging market economies. While China contracted for a third month running the Russian PMI has now
signalled contraction in eight of the past nine months. Brazil and India meanwhile showed only modest growth, meaning a GDP-weighted BRIC PMI fell from 49.0 to 48.5, signalling the largest decline since last July and the third successive monthly deterioration in business conditions.

Contraction in the major emerging markets contrasted with ongoing robust, albeit slower, growth in the main developed countries.

 image image

The surveys are broadly consistent with global production increasing at an annual rate of 4% in the first quarter, easing to nearer 3% in March. But several key indices suggest that the pace will continue to slow in the second quarter.

New orders rose globally at the slowest pace for five months, the pace weakening in all major developed economies including the US, UK, Eurozone and Japan.
China meanwhile saw new orders fall for a second successive month, registering the largest decline since August 2012 and boding ill for growth in other Asian
economies.

China Q1 GDP Y/Y May Have Slowed to 7.3%

Although there is a slight rebound in the official manufacturing PMI index in March, the reading is substantially lower than it was in March 2013. At the same time, most other indicators showed continued weakness in China’s economy. A weighted sum of the official manufacturing PMI and the HSBC China manufacturing PMI is touching the lowest level of the last 4 years. Based on this evidence, China’s GDP Y/Y may have slowed to 7.3% in Q1.

What makes things more worrisome is the new order sub-index of the official manufacturing PMI. The monthly new order index relative to the average same month reading from 2011- 2013 has been moving range bound for the past three years. This March, the new order index appears to have broken the lower bound of the range, which makes us more cautious on the growth outlook in 2Q14. (CEBM Research)

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Ford Cuts Jobs at Russian Plant

Ford Motor Co.’s Russian joint venture said it is cutting nearly 13% of its staff because of falling sales and a rapid weakening of the ruble, which has accelerated in recent weeks as a result of Western sanctions over Russia’s occupation of Crimea.

Foreign auto manufacturers have invested heavily in Russia in recent years but a 5% decline in overall sales last year because of a slowing Russian economy followed by further economic instability following the events in Ukraine, has cast a shadow over the once fast-growing market. (…)

Ford has been one of the fastest-growing companies in Russia in terms of local manufacturing, boosting production to nine lines from two since the beginning of 2012. But the company saw an 18% drop in sales in Russia last year as demand for compact cars declined sharply, according to the Association of European Businesses in Russia. In the first two months of this year, Ford sales have slipped a further 21% compared with the same period last year.

Sales of the Ford Focus, which is produced at the joint-venture’s St. Petersburg plant, fell 27% in 2013, and have fallen 41% in the first two months of 2014 compared with the same period last year. (…)

SENTIMENT WATCH

(…) the FTSE All-World equity index rise 0.1 per cent to 272.5, a seventh consecutive day of gains that takes the worldwide benchmark to its highest since December 2007. Another 2.6 per cent rise and the All-World will be in record territory.