Tuesday, February 18, 2014 - Econ Roundup

Econ Roundup

by Sinclair Noe

DOW – 23 = 16,130
SPX + 2 = 1840
NAS + 28 = 4272
10 YR YLD - .03 = 2.71%
OIL + 2.14 = 102.27
GOLD – 6.90 = 1323.30
SILV + .12 = 22.06

Homebuilders' confidence in the housing market declined sharply this month as the severe weather battering much of the nation keeps many would-be buyers at home. The National Association of Home Builders/Wells Fargo builder sentiment index dropped to 46. That's down from January's reading of 56 and is the lowest level since May. A reading of 50 is the tipping point between good and bad sales conditions.

Certainly one sector singing the blues over the cold weather has been the airlines. More than 500 flights were cancelled today; almost 1,400 flights cancelled yesterday for the Presidents’ Day holiday and more than 4,000 delayed. The big day for cancellations was last Thursday, when more than 7,500 flights were scrapped. That’s bound to have some effect on revenue and earnings.

Last week’s economic news was generally disappointing with weak payroll growth, mortgage applications slipping, retail sales dropping to the lowest growth rate of the recovery, and a sharp drop in manufacturing activity; that can’t all be blamed on bad weather. Several retailers didn’t even mention severe weather as they missed estimates for the holiday shopping season.

US auto dealers have about $100 billion worth of unsold cars and trucks sitting on their lots. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run up to the financial crisis and the auto-sales collapse of 2008-2009.

Inventories soared last year to the highest level of the recovery and were mostly responsible for the uptick in GDP in the second half of 2013. Inventory builds in the face of decelerating demand is a potentially troubling economic development. It's been a long time since we experienced an inventory recession, but prior to the past two financial market-induced recessions, inventory recessions were the more common cause of economic contraction.

If there was material upward pressure on aggregate demand because of an increase in economic velocity, it should be exerting upward pressure on long-term interest rates. However, throughout the second half of 2013, both the 10-year and the 30-year Treasury yields have been trading sideways, and this week are in the exact same spot reached on the July 5 peak. There may be some pent-up demand for housing and consumer durables and such, and maybe things will pick up when the weather finally thaws out. Whether the economy does or does not warm up with the weather; either way, it will likely be reflected at the long end of the bond curve.

The Kauffman Foundation and Legal Zoom released a fourth quarter survey of new business founders; 91% of business owners are confident their companies will be more profitable in the next 12 months, up from 86% saying that in the third quarter. Readings on the outlook for the overall economy and consumer demand also improved. With more customers expected, start-up founders plan to add staff. According to the survey 43% of respondents plan to hire more employees, up from 36% saying that in the third quarter.

Generic drugmaker Actavis says it will buy Forest Laboratories for about $25 billion in cash and stock, expanding its portfolio of specialty pharmaceuticals for neurological and other disorders. The deal means a major payday for activist investor Carl Icahn, the second-largest shareholder at Forest Labs.

Commodities revenue at the top 10 investment banks dropped 18% in 2013 in a third year of declines. Revenue from commodities for top banks fell to $4.5 billion last year from $5.5 billion the previous year. The banks' 2013 commodities revenue is less than a third of the $14.1 billion they racked up in 2008 at the height of the commodities boom.

The Federal Reserve Bank of New York reports that consumer debt in the US rose last quarter by the most in more than 6 years. Household debt increased 2.1%, or $241 billion, to $11.5 trillion, the biggest gain since the third quarter of 2007. The level of debt last quarter was $180 billion higher than a year earlier. Total indebtedness remains 9.1% below the peak of $12.6 trillion in the third quarter of 2008. Americans borrowed to buy homes and cars and to pay for education. Mortgages top the list at more than $8 trillion; student loan debt has now topped $1 trillion.

Of the 12% overall rise in student debt, a third came from borrowers with the worst credit history, or those with credit scores of 620 or lower. About five percentage points came from those with scores between 621 and 680, and roughly two points was from those in the middle quintile; scores between 681 and 720. The data suggest more people with poor credit scores are going to school to gain new skills, which eventually could lead to better jobs and higher earnings. Other data show that those with college degrees are much less likely to be unemployed and earn far more than those with only high school diplomas. Delinquency rates are going up from about 8.5% two years ago to 11.5% delinquency in the fourth quarter.

The loan to deposit ratio in the US banking system recently hit a 35-year low, meaning banks now have more cash on their balance sheets and they aren’t loaning the money out. QE is the most likely reason for the shift from loans to cash. Both loans and cash are considered assets on a bank’s balance sheet, and most banks don’t want to hold excess cash reserves, but they clearly don’t want to lend when the interest rate charged does not compensate for the risk of the loan. Meanwhile, the Federal Reserve pays interest on excess reserves. That’s a no-brainer model for the banks. And we likely won’t see more lending until interest rates rise or the Fed cuts payments on excess reserves, or some combination of the two.

The non-partisan Congressional Budget Office has issued a report on the effects of raising the minimum wage. Over all, the budget office estimated that lifting the minimum wage to $10.10 and indexing it to inflation would reduce total employment by about 0.3 percent, or 500,000 workers. The CBO cautioned that its estimate was imprecise, maybe almost no impact, maybe more. On the positive side, increasing the minimum wage would bolster the earnings of about 16.5 million workers: $5 billion a year more for families living in poverty, $12 billion a year more for families earning from one to three times the poverty threshold.

According to figures released today by the Bloomberg New Energy Finance show, global spending on energy efficiency rose almost 5% in the past year to $14.9 billion. China spent about $4.3 billion; North American investment dropped 33% to $3.6 billion.

President Obama announced today that he is directing the Transportation Department and the EPA to draft new fuel economy standards for trucks by March 2015. Pollution from transportation is the nation’s second-largest source of greenhouse gas pollution. In 2011, the EPA issued its first round of fuel economy regulations for United States trucks and heavy-duty vehicles built in the model years 2014 to 2018, which the agency projects will reduce carbon pollution by 270 million metric tons, or the equivalent of taking 56 million passenger vehicles off the road for a year. Heavy-duty trucks represent just 4% of all vehicles on the highways but generate 20% of the carbon pollution produced by the transportation sector.

Three countries are experiencing civil unrest today: the Ukraine, Thailand, and Venezuela.

In Kiev, 5 people were killed in street protests and at least 150 more injured. The opposition is seeking to overturn constitutional changes that strengthened Russia-backed President Yanukovych’s powers and to put Ukraine on a path toward EU membership. The standoff began Nov. 21, when Yanukovych pulled out of a free-trade deal with the EU, opting instead for President Vladimir Putin’s offer of $15 billion of aid and cheaper gas.

Gun battles erupted in Bangkok and 4 people are reported killed with nearly 100 more wounded as authorities try to clear demonstrators from the streets. The government’s anti-corruption body announced it was filing charges against Prime Minister Yingluck Shinawatra for a rice subsidy scheme.

Last week, protests in Venezuela led to 3 deaths. Today, opposition leader Leopoldo Lopez surrendered to police and was arrested. Protesters planned more marches, while President Nicolas Maduro told oil workers to march in support of the government. The demonstrators are demanding Maduro's resignation and expressing a litany of complaints from inflation and crime to corruption and product shortages.

Twenty-three nations encompassing 40% of the world's population will go to the polls this year. When you exclude China, which never goes to the polls, that means well over half of eligible human voters can cast ballots this year; that includes some of the big emerging market players such as India and Brazil. Emerging market have been beaten down broadly speaking, but recovery will likely be unique and in part, a consequence of what happens in the ballot box.

BofA Merrill Lynch conducted a survey of 222 fund managers with nearly $600 billion collective in assets under management. The survey says investors now believe emerging markets are the biggest risk to global financial security. Five years ago emerging markets were considered relatively safe, and default risk and counterparty credit risk was considered toxic; now it’s considered no problem. In line with this thinking, fund managers have increased their portfolio allocations to global bank stocks to the highest level on record. Meanwhile, allocations to emerging markets have fallen to the lowest level on record. At least according to the survey.