Monday, July 8, 2013

A Stock Market Warning Flag Has Been Raised

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. May’s M-PMI raises yet another warning flag about the flagging prospects for S&P 500 revenues. Nevertheless, I still expect that global nominal GDP will increase by 5% this year and 5% next year. Revenues should grow by at least as much. However, the latest data points aren’t supportive of this relatively upbeat outlook.

The M-PMI is highly correlated with the y/y growth rate in S&P 500 revenues. The latter rose only 1.3% during the first quarter. The purchasing managers’ index suggests that this growth rate might have worsened rather than improved during the second quarter, when I expected to see an improvement.

I monitor the consensus expectations for S&P 500 revenues and earnings per share based on weekly data compiled by Thomson Reuters I/B/E/S. Their revenue estimates for 2013 and 2014 have dropped sharply during the first four weeks of May to new lows. They now expect revenues to grow 2.2% this year and 4.4% next year.

stocksDr. Ed's Blog


Today's Morning Briefing: Mood-Altering Drugs. (1) All Fed all the time. (2) Making the pain go away. (3) Lockhart giveth what Williams taketh away. (4) M-PMI is bad news for revenues. (5) Industry analysts curbing their enthusiasm for revenues. (6) Yet forward earnings rising to new highs. (7) Industry analysts see more upside to margins. (8) Focus on overweight-rated Financials. (More for subscribers.)

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11 More Fascinating Maps From The Ultra-Addictive MapsOnTheWeb Tumblr

Rob Wile | Jun. 4, 2013, 11:07 AM | 1,827 |

We recently brought you 13 maps from MapsontheWeb, the most addictive Tumblr in the world.

They post four or five every day.

So here are 11 more that we love.

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Reuters Review Crushes Meredith Whitney's New Book On State Economies

Municipal bond expert Cate Long wrote a pretty serious take down of bank analyst Meredith Whitney's new book on state economies in Reuters this morning.

Whitney detractors, today is your lucky day.

The analyst is probably as well known for her accurate (negative) forecast of Citibank as she is for her still inaccurate call that state municipal bonds are about to collapse.

Her newest book, 'The Fate of the States: the New Geography of American Prosperity' is another call to arms on the latter point. Long, however, argues that Whitney is about a year too late to be arguing that the states are going down the toilet (except for maybe Puerto Rico).

From Reuters:

Whitney’s book may be a useful intro for those who have not followed the fiscal struggles of state and local governments over the past five years. At 206 pages it’s a fast read. But I would encourage readers to view it as the opinion of one analyst who has often been wrong. In one memorable case, the Nevada State Treasurer Kate Marshall went after Whitney for her errors in calculating the liabilities of her state.

Yikes.

For the full piece, head to Reuters>

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Big Japanese Appliance Maker Says It Will Boost Domestic Manufacturing If The Yen Falls To 105

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. Reuters | Jun. 4, 2013, 7:12 AM | 386 |

TOKYO (Reuters) - Japan's Panasonic Corp said it will boost domestic production of washing machines and other appliances to half of its overall output from about a third should the yen weaken to 105 to the dollar, reversing a strategy of shifting production offshore.

At 105 yen or lower it will cost less for Panasonic to build appliances it sells in Japan rather than importing them from factories abroad, Kazunori Takami, the head of the appliance business, said at a press briefing in Osaka.

Since becoming president of Panasonic a year ago, Kazuhiko Tsuga has made profitability a priority for Takami and other division leaders.

A weakening yen has already spurred some foreign companies including Apple Inc to raise prices as the currency shift eats away at their income in Japan.

(Reporting by Reiji Murai; Writing by Tim Kelly; Editing by Stephen Coates)

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Stocks Are On A Massive Winning Streak That Traders Are All Talking About Today

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Dave Lutz of Stifel, Nicolaus passes along the topics about which he is chatting about with traders.

The top topic: The Tuesday Streak.

Morning, US futures are starting slightly better today, as we go for 21 straight up Tuesdays for the DJIA.  This mirrors the slight bounce in EU Markets, as the DAX is near unchanged, but EU fins are jumping 1% as yields are dropping in the PIIGs.   The biggest overseas mover was the Nikkei, which jumped over 2% - it’s biggest one-day advance in 3 weeks – after being hit for over 1.6% in the morning session.   Most of the upside is attributed to Abe’s comments ahead of his presentation to Parliament tomorrow about Pension caps on Equity Investments being lifted.  Shanghai got hit for over 1% on light news flow as the street awaits a large data-dump from them Friday night – Aussie’s market added 25bp, despite the RBA standing pat on Interest Rates (Dovish outlook). 

Will we make it to 21? We'll see.

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RICHARD KOO: Japanese Stocks Crashed Because The Japanese Knew Something That Foreign Investors Didn't

In his latest piece, Nomura economist Richard Koo examines the recent crash in the Japanese stock market, which has tumbled 15% since just May 22.

"The prevailing view is that we are finally seeing a reaction to this excessively rapid move, and if so this is a healthy correction," he begins. "The reality, however, may be somewhat more complicated."

Koo argues that the primary driver of the big upward move in the Japanese Nikkei 225 so far has been hedge funds outside of Japan who were previously betting against the euro.

Then, last September, when the ECB introduced a new monetary stimulus program that undermined the fear in the market that the euro could collapse, those international hedge funds had to find something else to bet against.

Koo writes (emphasis added):

Late last year, the Abe government announced that aggressive monetary accommodation would be one of the pillars of its three-pronged economic policy. Overseas investors responded by closing out their positions in the euro and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher.

I suspect that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible. Had they understood this, they would not have behaved in the way they did. 

Japanese investors, Koo asserts, did understand this. That's why they didn't join in when international hedge funds started buying up Japanese stocks in size (emphasis added):

Whereas overseas investors responded to Abenomics by selling the yen and buying Japanese stocks, Japanese institutional investors initially refused to join in, choosing instead to stay in the bond market.

Because of that decision, long-term interest rates did not rise. That reassured investors inside and outside Japan who were selling the yen and buying Japanese equities, giving added impetus to the trend.

However, Japanese investors' initial aversion to the long Nikkei trade couldn't last forever.

"Even though the moves in the equity and forex markets were led by overseas investors with little knowledge of Japan," says Koo, "the resulting improvement in sentiment and the extensive media coverage of inflation prospects forced domestic institutional investors to begin selling their bonds as a hedge."

That selling caused yields and volatility to rise in the Japanese government bond market, which spooked investors and arguably sparked the big unwind in the Nikkei trade.

But why should rising bond yields be such a bad thing for the "Abenomics" story of experimental economic stimulus in Japan that international investors have placed their faith in by running up Japanese stocks? After all, higher yields reflect rising inflation, which is one of the main goals of Abenomics.

The problem, according to Koo, is that a rise in inflation before the Japanese economy starts to recover is bad news:

The Bank of Japan began buying longer-term JGBs on 4 April with the goal of pushing yields down across the curve. The outcome of those purchases, however, has been exactly the opposite of what Governor Haruhiko Kuroda intended, with long-term bond yields moving higher in response.

Domestic mortgage rates have increased for two consecutive months as a result. This is clearly an unfavorable rise in rates driven by concerns of inflation, as opposed to a favorable rise prompted by a recovery in the real economy and progress in achieving full employment.

The more the market senses the BOJ’s determination to generate inflation at any cost, the more interest rates—and particularly longer-term rates—will rise, adversely impacting not only Japan’s economy but also the financial positions of banks and the government...

Since there is no increase in bank earnings from additional lending activity and no increase in tax revenues from a recovering economy, the financial positions of banks and the government deteriorate in direct proportion to the rise in long-term interest rates.

In other words, rising rates aren't bad if they reflect a strengthening economy, because the losses banks will sustain in their bond portfolios will be offset by increased revenues owing to a stronger economy in general.

Again, though, Koo does not think that is the scenario unfolding in Japan right now:

Only 22% of people surveyed by the Nikkei felt Japan’s economy is actually recovering (27 May 2013), suggesting relatively few have benefited from Abenomics’ honeymoon thus far.

Moreover, an increase in long-term rates at a time when 78% of the population is not personally experiencing a recovery is most likely a “bad” rise in rates, and the authorities need to address it very carefully, keeping a close eye on private demand for funds. 

All of this means that the big upward thrust in Japanese equities that began late last year has likely come to an end, at least for now.

"The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher," says Koo. "This means further gains in equities will require stronger corporate earnings and a recovery in the economy."


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