Higher Material Costs Cut Into Margins; Export-Import Bank Under Pressure

The latest survey from the National Association of Business Economics concludes that “during the first quarter of the year, 31 percent of businesses surveyed reported higher material costs, more than double the 15 percent that saw costs rise in the previous survey.  Additionally, 35 percent reported rising wages and salaries at their businesses in the past three months, up from 23 percent in January.”  Furthermore, “‘It appears that businesses were not able to pass on costs increases, resulting in increased pressure on margins.’”  Also, “capital spending rose for 38 percent of respondents, up from 28 percent in January…31 percent said they expect their businesses to raise prices.  That’s down from the 43 percent who said they planned to raise prices in January.”  Meanwhile, some members of Congress are pushing to scale back the Export-Import Bank of the United States (alt), a major financier of loans and loan guarantees for foreign purchases of US products (for example, last year Ex-Im supported $37.4bn in US exports).  Opponents see “Ex-Im as the embodiment of ‘corporate welfare.’…’There are more than 59, and counting, export credit agencies around the world and they would like nothing more than to snatch up sales from US companies and create jobs in their countries,’ said Fred Hochberg, the president of Ex-Im Bank.”  Meanwhile, here’s a list of some of the “once defunct but now in production” factories around the country.

Japan’s Pension Investment Fund Is Going Long Sweet Emerging Markets

Japan is reshuffling its “Investment Committee of the $1.26 trillion Government Pension Investment Fund (GPIF), in line with Abe’s drive to have the fund make riskier investments and rely less on low-yielding government bonds…GPIF now targets 12 percent of its investments in Japanese stocks, 60 percent in domestic bonds, 11 percent in foreign bonds, 12 percent in foreign stocks and 5 percent in short-term assets…GPIF has said it plans to expand its investment in foreign bonds to emerging markets bonds, foreign high-yield bonds and foreign inflation-linked bonds.”  Meanwhile, Rob Arnott, says that emerging markets are in a “sweet spot”:  “Fear creates bargains.  When we buy something as contrarians, our clients routinely say, ‘Why are you buying this; don’t you see what’s going on?’  Our reply is, ‘Well, yes.  That’s why these markets got cheap.’  Two years ago, our allocation to emerging markets was really skinny.  Today, it is much, much greater because people are afraid…”  Here’s something else to consider: “The politics of the next 20 years is going to make the politics of the past 20 years look polite and serene.  But 30 to 40 years from now, we are going to be looking at a transition to a new steady state in which births equal deaths.”  Meanwhile, here’s Robert Shiller on Robert Shiller: “there’s no easy way to win in this market, so I’m thinking you have [to] diversify and probably keep something in stocks.”

Global: FICC And Thin: The Engine Of Investment Banking Is Spluttering

Trading in FICC (fixed income, currencies and commodities), once a major profit engine for the world’s largest investment banks, is in retreat: “In 2009, the world’s big investment banks earned nearly $142 billion from FICC — 63% of their total revenue, according to Coalition, a data firm.  By last year that had halved to nearly $74 billion, accounting for slightly less than half of revenue…In 2013 alone revenues from FICC fell by almost 20%…The disappointing numbers are rekindling an argument within the industry over whether FICC’s decline is merely cyclical or the start of a long-term slump in the profitability of banks’ trading businesses.”  The cyclical position goes something like this: FICC trading volumes have plummeted with interest rates.  Once interest rates go back up, banks will see a sharp loss in revenue as bonds they own will depreciate in value, yet FICC trading volumes may surge again, providing renewed revenue for investment banks.  The long-term slump position is basically this: thanks to new capital requirements and proprietary trading regulation, FICC may never reignite as a major profit engine for investment banks.

USA: 5 Things To Know About The State Of Mortgage Lending

1) Low-down-payment lending is still prevalent, however “banks are making more loans with down payments of 5% or 10% outside of the FHA; 2) No-money-down mortgages “still exist, too, though they are much harder to get than before the housing bubble”; 3-5) Credit standards are very tight, and may be inhibiting economic growth, however any easing will be careful not to fuel “reaching for clients”

USA: Fuels From Corn Waste Not Better Than Gas

A new study “paid for by the federal government and released Sunday in the peer-reviewed journal Natural Climate Change concludes that biofuels made with corn residue release 7 percent more greenhouse gases in the early years compared with conventional gasoline.  While biofuels are better in the long run, the study says they won’t meet a standard set in a 2007 energy law to qualify as renewable fuel.”

Are US Equities Expensive or Not?: The Debate Over Shiller’s CAPE Ratio

There’s a debate on the pros/cons of using Robert Shiller’s CAPE (cyclically adjusted price earnings) ratio happening on the world wide web.  First of all, what it is: CAPE, or Shiller P/E, or P/E 10 Ratio “uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle.”  Basically you take the annual EPS for an equity index like the S&P 500, adjust for inflation, find the average, then divide the current by the average to find the CAPE ratio.  Here’s the problem: the CAPE ratio is currently at about 26, which is significantly above its historical mid-teens average and therefore suggests US equities are expensive.  Here’s another problem: using the CAPE ratio, some argued that US equities were overvalued by 40% in October 2009, which, turns out, was not the case (roughly 77% return for the S&P 500 since then).  Josh Brown argues that CAPE is useless as a market timing tool as it is “incapable of incorporating the evolution in some of the most fundamental influencers (changes in accounting standards, increase in stock ownership by household, new industries with new valuations etc.) on stock prices and then recalibrating itself accordingly — which means that its ability to make even long-term predictions is in doubt as well.”  John Hussman argues that CAPE may not be perfect, but the evidence speaks for itself: the CAPE ratio has correlated with real returns over 90% of the time since 1932.  The Financial Times sums it all up as a debate about how the world works and “seems to be a mirror for any preexisting optimism or pessimism.”  Goldman Sachs may be in the pessimistic camp, saying that “US equities are expensive relative to their own longterm history, as well as that of other developed and emerging markets.”  But don’t worry, Goldman doesn’t see a bubble since 1) credit growth isn’t excessive, 2) flows into US stocks haven’t been excessive, 3) sentiment isn’t frothy and 4) implosion isn’t an option (official Goldman decree!).  Furthermore, in a real bubbly scenario, “there seems to be a hinge point where investors go from thinking about quantifying economic trade-offs to a kind of binary framework where anybody who disagrees with them is demonized.”  So are US equities expensive?  Relative to Euro, Japanese and Emerging Market equities, Yes.  Relative to their own historical average?  It seems as if we could be on the expensive side of the spectrum, but I would argue that we aren’t at that hinge point just yet.  Also, a lot of investors think the market is overdue for a healthy correction; ask and ye shall receive.

USA: Lawmakers Unveil Massive $1.1 Trillion Spending Bill in Bipartisan Compromise

Looks like we aren’t going to shutdown the government this time: “Congressional negotiators unveiled a $1.1 trillion funding bill late Monday that would ease sharp spending cuts known as the sequester while providing fresh cash for new priorities.”  There’s a lot of new stuff in the bill (cut in funding to Afghanistan, cuts to the TSA, no more incandescent lightbulbs in Obama’s office), but I thought this was interesting: “In response to allegations that the administration has been stockpiling ammunition for use by federal agents, the measure also requires Homeland Security to provide detailed reports on its purchase and use of ammunition.”  Could be an interesting report for ammunition stocks like Alliant Techsystems Inc (ATK).

Stigma: Federal Reserve Discount Window and Pawned Bentleys

Apparently borrowing from the Federal Reserve makes you look weak or something: “[Discount Window] stigma is generally defined as banks’ reluctance to approach the DW out of concerns that, if detected, depositors, creditors or analysts could interpret DW borrowing as a sign of financial weakness…The economic consequences of DW stigma may be particularly severe during financial crises, preventing the Fed from effectively disseminating liquidity when it is most needed.  In addition, a bank that delays accessing the DW may resort instead to costly alternatives (such as fire sales of assets), which may further weaken the bank and add to financial system instability.”  Meanwhile, high-value pawnshops aren’t struggling with any stigma: “That pawnshops exist to lend money to those who fall on hard times is either a necessary or unfortunate facet of life, depending on one’s point of view.  But how does someone who once had enough money to buy a $450,000 Mercedes McLaren end up pledging it as collateral for a $190,000 pawn loan at a monthly interest rate of 2.5 to 4 percent?”

Holiday Retail Sales Somewhat Muted

Consumers didn’t lose track of their budget this holiday season: “57% of consumers said they spent what they planned during the 2013 holiday season, a bit better than the 54% saying that in 2012.  Another 26% said they managed to spend less, while only 14% spent more than expected.”  Meanwhile, “retail sales ticked up 0.2% in December…big-ticket items that are generally considered staples of the holiday season weighed on the number.  Sales at electronic and appliance stores fell by 2.5%, and auto dealers saw a 1.9% drop.”

Eurozone Industrial Production Gains; Spanish GDP Continues Slow March Upwards

“Industrial production across the [Eurozone] in November rose at the fastest pace in three and a half years, an indication that the currency area’s economy likely grew for the third straight quarter as 2013 drew to a close.”  Meanwhile, “Spain’s economy likely grew 0.3% in the fourth quarter from the third, as the country’s dire unemployment picture showed signs of improving more quickly than previously expected.”