Month: November 2014

Submitted by Chris Martenson Via Peak Prosperity,

 

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There was much hope for America’s struggling brick-and-mortar retail outlets that aided by plunging gasoline prices, Americans would come out in droves to chase Black Friday (and increasingly Thanksgiving) blockbuster deals on the ground across America’s increasingly troubled shopping malls and retail outlets. And while there was the usual hysteria on select occasions (see this post for video evidence), for yet another year American shoppers spent slightly less money during Thanksgiving Day and Black Friday than across the same two days in 2013, according to research firm ShopperTrak. Sales at brick-and-mortar retail stores came to about $12.29 billion on Thursday and Friday, a 0.5% decrease to the $12.35 billion spent during the same two days last year.

A notable feature of the start to 2014 holiday spending was pulling even more demand up front, to the day when families traditionally sat at home in a post-turkey dinner food coma, with customer traffic rising by 27.3% on Thanksgiving Day compared with a year earlier, while falling 5.6% on Black Friday. Not surprisingly, in a scramble to attract as many of the early spenders as possible, more stores than ever opened their doors this Thanksgiving. Nonetheless, Black Friday is still the dominant shopping day with shoppers spending nearly three times as much, or $9.1 billion, on Friday than on Thursday.

“We’ve seen an increase in Thanksgiving shopping  over the past few years at the expense of Black Friday. More stores are opening, and earlier, which has caused a shift in shopping patterns. While Thanksgiving store visits increased 27.3%, Black Friday was down about 5.6%,” commented ShopperTrak founder Bill Martin.

Of course, there is a need to spin the data as it will hardly support the recovery theme if a year after what was said to be the worst holiday-shopping season since 2009, sales deteriorate once more.

“We need to be cautious about looking at a single day or two in projecting the season’s total,” says Martin. “In 2013, the Black Friday weekend produced a 1% gain, underperforming the 3.1% gain for the entire season. There is a significant amount energy left in the consumer with 7 of the top 10 sales days of the year yet to come, including Super Saturday which is projected to be the number one spending day of the year.”

But while conventional retail outlets remain challenged, with plunging gasoline prices not doing much to stimulate that family trip to the mall, online spending continues to rise. Sales online the day after Thanksgiving surged 22% from a year earlier as record numbers of Americans opt to avoid the mall mania altogether and just do their shopping through a computer or smartphone.

As Bloomberg reports, the gain outpaced online shopping on Thanksgiving as heavy Black Friday promotions attracted consumers, researcher ChannelAdvisor Corp. Among the biggest beneficiaries with EBay and Amazon, where spending rose by 27% and 24%, respectively, on Black Friday over last year. Needless to say, none of this provides a glimpse into the actual bottom line of retailers: it is possible that as the war for the American spending dollar heats up, that more online vendors are merely selling at zero or negative margins, arend Amazon is all too familiar with.

Some other comments from Bloomberg:

Black Friday online shopping was done less on mobile devices this year than on Thanksgiving, slipping to 46 percent from 49 percent, the company said. The rates of actual purchases also declined from Thursday, perhaps because consumers were more selective or finding hot items out of stock, Morrisville, North Carolina-based ChannelAdvisor said.

 

IBM Benchmark said Black Friday online sales rose 9.5 percent, and mobile sales jumped 25 percent. For Thanksgiving, mobile sales on smartphones and tablets accounted for 52 percent of online traffic.

So with the start to 2014’s holiday selling season already in the history books, here are some observations from company executives on the key trends they are seeing:

Macy’s Inc. Chief Executive Officer Terry Lundgren, who opened the doors at the department-store chain two hours earlier than last year, said activewear and outerwear have been big sellers so far for men, women and children. “This is an outerwear season for the cold-weather climate stores,” Lundgren said in an interview with Bloomberg Television today. “There was a little snow coming down and it motivated people to buy more coats.”

 

Target Corp. showed that consumers weren’t deterred by last year’s breach in which payment-card data was stolen. CEO Brian Cornell said he was “encouraged by early results” after Target.com had record online sales on Thanksgiving, which was up 40 percent, helped by free shipping. Meanwhile, Target stores — which also opened two hours earlier than last year — attracted large numbers of shoppers, Cornell said in an interview.

 

Craig Johnson, president of Customer Growth Partners, a retail consulting firm, said he’s seen robust sales of consumer electronics but weaker demand for clothing. Johnson, whose team visits the 30 largest U.S. retailers on Black Friday, said many Americans still don’t have much extra cash to spend. “The top 10 percent is doing fine, but everybody else is struggling,” Johnson said. “A lot of discretionary spending has gone to monthly, recurring bills — cable, cellphone, data plan, Netflix etc.”

 

Jesse Tron, a spokesman for the International Council of Shopping Centers, said shopper traffic was strong yesterday and today, with many consumers hunting for deals. “We’re seeing a lot of shoppers out there,” Tron said in an interview. “We’ll see how that translates into sales, but while they do browse and may make incremental sales, they’re not walking out empty-handed. Conversion rates are really strong, and if that carries over that’s good for sales.”

 

Matt Shay, CEO of the National Retail Federation, echoed the sentiment that consumers were turning out in force this year. The NRF’s research shows that most shoppers will head to discounters, with clothing high on their lists, Shay said. “The numbers look positive,” Shay said in an interview. “The stories we hear from the CEOs are all trending in the right direction.”

Because retail CEOs are known to be very accurate and unbiased commentators on confidence-boosting trends that result in higher stock prices and, hence, stock-based compensation… at least until the start of earning warnings season, which traditionally begins anywhere between 2 and 4 weeks after the start of the holiday season.

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Throughout the last few months, we have identified three forces that are shaping the investment climate:  the economic and monetary divergence that favors the US, the decline in commodity prices, and a slowing of China. These forces remain very much intact, and if anything, have strengthened and reinforcing each other.

 

The unexpected upward revision to Q3 US GDP is likely to be matched by a downgrade in Q3 eurozone GDP (to 0.1% from 0.2%) in the week ahead.  The slowdown in China, coupled with falling house prices, rising bad loans, and low inflation prompted the PBOC to deliver its first rate cut in a couple of years, and is spurring speculation of a cut in the required reserve ratio in the coming weeks.

 

There are two ways that the precipitous decline in energy prices and commodity prices more broadly, will impact the world economy.  US policy makers will likely emphasize the spur to growth.  The IMF, for example, estimates that a $10 fall in oil prices boosts world growth by 0.2%.  The decline in gasoline prices can be expected to boost discretionary spending by American households, who have largely forsworn the use of revolving credit (credit cards) during this expansion cycle.

 

On the other hand, European and Japanese officials will find in the decline in energy prices an additional obstacle in their mission to arrest the disinflation or deflationary forces.  Under Trichet, the ECB failed to look past the increase in oil prices in 2008, and hiked interest rates on the eve of a great economic downturn from which is has not yet escaped.  It is likely to repeat that from the opposite direction now.    It is likely to see the deflationary impact of the drop in energy prices rather than enhancing growth prospects.

 

 

The ECB meeting is one of four major central banks that meet in the week ahead (Australia, Canada, and UK central banks meet as well).  It is the only one that could do something.  Some believe that the Draghi and Constancio have expressed a sense of urgency that is consistent with announcing a sovereign bond purchase program at this week’s meeting.  We are less sanguine.

 

Moreover, we do not think that sovereign bonds are the next asset that the ECB will purchase. We think the supra-national bonds have much to commend themselves.  The ECB is already buying covered bank bonds, and with the Asset Quality Review and stress tests behind us, a case can be made for uncovered bank bonds.  The idea of buying corporate bonds has also been floated.

 

There is scope for some disappointment if our assessment of the ECB is correct and now sovereign bond purchase scheme is unveiled.  The euro could bounce and peripheral bonds may see some profit-taking after ten -year yields have fallen to record lows.  However, the forward guidance, and specifically the promise to do more if needed (to expand its balance sheet), which appears to have unanimous support, may prevent a significant reversal.  January or February may be a more likely time frame for more action.  The second TLTRO (expected take down 120-150 bln euros) on December 11, and the progress on the covered bond and ABS purchases will likely confirm that a wider range of assets need to be purchased if the ECB is going to meet is balance sheet goal.  In addition, pay down of the outstanding LTROs may weigh on the balance sheet, even if some is replaced by other refi facilities.

 

The other central banks that meet are unlikely to do anything.  The Reserve Bank of Australia’s statement is likely to be dovish, though Q3 GDP to be reported next week is likely to show a respectable 0.7% quarterly pace.  Still, the RBA can be counted on to continue to warn that the currency is over-valued given the decline in commodity prices and the terms of trade.  What it is less likely to talk about is the attractiveness of its relatively high-yielding triple-A rated bonds for large pools of capital, including other central banks.

 

While a rate cut by the RBA next year is gradually being priced into debt markets, the Bank of Canada seems steadfastly on hold.  Although price pressures ticked up, Governor Poloz argues to look past what he says is a transitory in nature.   Canada reports its November jobs report at the end of the week.  After strong growth in September and October, a softer report is expected.   On the other hand, at the same time as its employment report, and despite the drop in oil prices, Canada will likely report a further rise in its trade surplus from the C$700 mln reported in September.

 

Our analysis shows a more complicated role of oil for the Canadian economy than many suspect.  In the east, for example, Canada imports more expensive Brent.  Canada is also the destination of US exports, being a loophole in the US restrictions).  The market nevertheless treats the Canadian dollar like a petro-currency. However,  to the extent that parts of the real estate market and consumer debt were built on prospects of peak-oil, the secondary impact of the drop in oil prices could have serious implications for the Canadian economy.

 

The Bank of England meets.  It is not going to do anything.  It won’t say anything.  In a couple of weeks, with the minutes, we’ll likely learn that the two dissents persist to favor an immediate hike. The market does not believe they will convince their colleagues, and to the contrary have steadily pushed out the first rate hike as reflected in rally in the December 2015 short-sterling futures contract.

 

More important than UK monetary policy, will be fiscal policy.  Chancellor of the Exchequer Osborne delivers the Autumn Statement.  With the drop in oil prices, which means lower North Sea oil tax revenue, there is little scope for pre-election fiscal gifts.  Indeed, despite the talk of austerity, the UK budget deficit for fiscal year that ended in April was 6.6% of GDP.  The appropriate comparison is the US, where the deficit has fallen from over 10% of GDP to less than 3% in the last fiscal year.  The UK structural deficit has hardly been addressed, and the Prime Minister’s push to deny immigrants from the EU welfare benefits (employed or not) for the first four years that they are in the UK is not a real answer.  

 

In Japan, the BOJ focuses on the core inflation measure, excluding the impact of the April 1 sales tax increase.  In Japan, the core measure includes energy.  Over the last several months, core inflation so measured has slipped below 1%, and a further decline looks likely as the decline in energy is larger than the decline in the yen’s exchange rate. There is increasing talk that the BOJ will likely be forced by the middle of next year to boost its efforts yet again.  The lower house election in a fortnight is the next main focus. The key issue is not if, but how many seats the LDP loses.

 

The US monthly jobs report is still arguably the most important high-frequency data point.  This may be surprising for two reasons.  First, the Federal Reserve has played down what this report measures.  Yellen has preferred a wider range of indicators of the labor market.  Second, the monthly non-farm payroll growth has been remarkably steady. The three-month average is 224k.  The six-month average is 235k, and the 12-month average is 226k.  And remember millions of people losing and landing jobs over the course of the month, what we see is just the net figure.  

 

Roughly half the decline in the US unemployment rate can be accounted for by the decline in the participation rate.  However, in October jobs report (in early November) saw a decline in the unemployment rate even though the participation rate rose.   One month can be a fluke.  This will be monitored closely going forward.  In any event, point is that the Federal Reserve’s  appears continue to have under-estimated the improvement in the labor market.

 

It is noteworthy too that the improvement in the labor market has been steady despite the volatility in the economy.  Although Q3 GDP was unexpected revised up, the economy appears to have slowed further in Q4.  It will interesting to see if the Beige Book picks up on this.  The Atlanta Fed’s nowcasting model has the economy tracking 2.3% in Q4 through  November 26.

 

The decline in oil prices has contributed to the decline in US 10-year yields.  The yield fell more than 14 bp on the week to finish at 2.16%.  It ranks as one of the biggest weekly declines this year. Although the S&P 500 made new record highs before the weekend, it reversed and finished the holiday-shortened session near its lows.  While we would not want to read too much into that action, it does seem that the S&P 500 have lost some momentum that may foretell a near-term pullback.  The energy sector accounts for an eighth of the S&P 500, but there are plenty of offsets (intense energy consumers, like airlines).

 

Lastly, we note the three electoral decisions over the weekend.  First, it appears that Swiss voters handily rejected all three referendum issues that it faced this weekend.  This included the much-publicized measure that would have required the central bank to cease selling gold, boost gold holdings to 20% of reserves and repatriate its gold that currently sits in foreign vaults. Swiss voters also reject efforts to cut annual immigration by 75%.  The third motion that was rejected was aimed a abolishing a tax perk for wealthy foreigners. 

 

Second, the election in Taiwan has resulted in a stunning loss of the ruling Kuomintang. Premier Jiang Yi-huah quickly indicated plans to resign.  The Democratic Progressive Party will head the next government.  A key issue, according to local media, was the trade agreement struck with China last year.   Taiwanese President Ma Ying-jeou has promised to respect the electoral outcome, which can only mean some dilution in the effort forge closer ties with the mainland.  Over the last six years, nearly two dozen agreements have been struck.  A rearguard action to secure and protect what has been achieved will likely dominate the agenda until the 2016 presidential election. 

 

At the tine of this writing, the outcome of the general election in Moldova is not known. Russia is using various elements of power to cajole and intimidate Moldova.  It want Moldova to postpone implementation of the trade agreement with the EU.  To drive home is message, it has banned agriculture imports from Moldova, including wine, meat, fruit and vegetables.   It has also threatened to support the full independence of the Trans-Dniester region, in which it has fostered a break away movement.  

 

Note that Trans-Dniester region is not participating in this election.   This is part of the larger attempt by Russia to regain a sphere of influence, which includes Ukraine, Georgia and Moldova.   A pro-European coalition government is the most likely result of the election.  

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Whether as a result of an unprecedented scare campaign by the Swiss National Bank (most recently reinforced by Citigroup), or due to confidence that Swiss gold is as safe abroad as it is at home, or simply due to good old-fashioned “hanging chads”, today’s most awaited event has come and gone and the result – according to early projections by Swiss television SRF – is that the Swiss population overwhelmingly rejected a referendum to force the Swiss National Bank to hold some 20% of its reserves in gold in a landslide vote, with about 78% voting against what AP politely termed “protecting the country’s wealth by investing in gold.”

As Bloomberg reports, the proposal stipulating the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($540 billion) balance sheet in gold was voted down by 78 percent to 22 percent, according to projections by Swiss television SRF as of 1:00 p.m. local time. The initiative “Save Our Swiss Gold” also would have prohibited the SNB from ever selling any of its bullion and required the 30 percent currently stored in Canada and the U.K. to be repatriated.

A ballot box is emptied at a voting center in Zurich today.

That said the decision will likley not come as a surprise because while early polls gave the yes camp a surprising lead, subsequently polling showed a marked shift in public opinion, and forecast the initiative’s rejection.

The biggest winner, of course, is the Swiss central bank: SNB policy makers warned repeatedly that the measure would have made it harder to keep prices stable and shield the central bank’s cap on the franc of 1.20 per euro. That minimum exchange rate was set three years ago, with the SNB pledging to buy foreign currency in unlimited amounts to defend it.

“The SNB can feel confirmed in its policy,” said Martin Gueth, economist at LBBW in Stuttgart. “By rejecting the gold measure, voters have come out in favor of its current stance.”

Referendums are a key feature of Switzerland’s system of direct democracy, and are held nationally and at a municipal level several times a year. The gold initiative was launched by a handful of members of the European Union-skeptic Swiss People’s Party. Uneasy about the more than 100 billion euros the SNB holds, they contend their initiative will strengthen — not weaken — the central bank’s credibility.

 

However, SNB President Jordan labeled the initiative “dangerous” and his fellow board member Fritz Zurbruegg said accepting the measure meant the room for maneuver “on currency reserves would be dramatically restricted, with negative consequences for the Swiss economy.”

 

The central bank, based in Bern and Zurich, would have faced a three-year deadline for repatriating its bullion from abroad and five to meet the 20 percent benchmark. With the European Central Bank poised to enact more stimulus to boost feeble growth and inflation, economists surveyed by Bloomberg News in a poll published on Nov. 19 had expected the SNB to maintain its ceiling on the franc into 2017.

The question now is what will happen to the Swiss France, which recently rose to a 26-month high against the euro. For many the concern that a successful gold referendum served as a catalyst to avoid going all in the CHF, as gold purchases would have weakened the currency. “If the euro crisis doesn’t get worse, then the minimum exchange rate will be defendable, said David Marmet, an economist at Zuercher Kantonalbank. Had the initiative been accepted, ‘‘instruments such as negative rates that don’t widen the balance sheet” would have been an option, he said.

With the referendum out of the way, the CHF may paradoxically find itself with a situation in which the inflows in the CHF force it to double down on defending the cap: economists have questioned whether the SNB will now find itself having to reinforce its cap with a negative interest rate on the cash-like deposits commercial banks keep with the central bank, making good on its threat to take further steps “immediately” if necessary.

And then there is the question of what happens to the tension in the gold swap market: as noted last week, the 1 Month GOFO rate had tumbled to the most negative in over a decade. It was not clear if this collateral gold squeeze was the result of Swiss referendum overhang or due to other reasons. The market’s reaction on Monday should answer those questions.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/N_1bPXjLLWo/story01.htm Tyler Durden

Picture: Part of German Gold Reserve

We can hear you think “yeah right, the ECB buying gold…”, but the title of this article did not fall from the sky; it is based on recent statements from a prominent member of the European Central Bank, Yves Mersch, who did not beat around the bush. The man from Luxembourg underlined that the ECB could start buying different types of assets to stimulate the economy when necessary. Not just government debt or mortgage-backed securities, but also stocks or ETFs. The Bank of Japan is already doing this today; buying into Japanese stocks and ETF’s. Mersch also pointed to other assets that fulfill a monetary role on the central bank’s balance sheet, such as gold.

Purchasing gold is not such a crazy idea for the central bank when you think about it. Contrary to the US central bank, the gold reserves of the ECB is marked-to-market on its balance sheet. Coincidence or not, but the balance sheet of the ECB went downhill from the moment gold got stuck in a downtrend.

Source: ECB / Stockcharts

The two charts above – the ECB balance sheet on the left and gold (in EUR) on the right – are so similar, that we started digging a bit deeper. The detailed balance sheet of the ECB, which we found on their website, clearly shows that gold carries a lot of weight compared to other assets. On a total of 597 billion euros, the value of the ECB’s gold position is 329 billion euros, which amounts to 55%. The contrast with debt securities (160 billion euros) or equity and/or investment funds (360 million euros) is huge. We annotated the table below to point out these assets on the balance sheet.

 

Source: ECB

According to Mario Draghi’s recent statements, the European economy has to pick up steam and to accomplish that, inflation needs a little push. A higher inflation rate is synonymous with expanding the central bank’s balance sheet, however, which is what Draghi implicitly mentioned to expect. The market presumes, however, that this balance sheet expansion will be the result of buying debt securities but, as you can see on the table above, there are other ‘line items’ that can achieve the same result, including the purchase of gold.

Ultimately, we expect the ECB to mix up its purchases. In southern Europe they would love the central bank to buy up their worthless bonds at par, but that is not what Germany is hoping for, for example. The Germans are fans of minimizing risk and gold indisputably is a big part of a safer approach. We would not be astonished, as a consequence, if the ECB soon surprises friend and foe with a unique expansive policy that includes both debt securities and physical gold.

The recent repatriation of Dutch gold reserves from New York could serve as a catalyst in that regard. Germany also wants to get part of its gold back, but they did not get the same service as the Dutch. If the ECB starts buying gold then, it could be a brilliant counterstrike that calms down the Germans at the same time. It would also create a lot of upward price pressure on the gold market, moreover, pushing the gold price and the value of the gold position on the ECB balance sheet upward. Two birds with one stone.

It would also end gold’s downtrend. Admittedly so, we did not expect the bottom formation process in gold to take this long and the fact that the gold price is still running in place is remarkable, ultimately, in a financial system where the balance sheets of central banks have grown beyond control with no end in sight (look at Japan for example).

Despite the fact that the trend in gold has not turned yet, it would be wise not to ignore the yellow precious metal. We are watching the central banks like hawks and their message is clear: inflation will rise at whatever the cost. There is no doubt in our minds that these central banks will do everything in their power to achieve their goal, even if it means buying gold and pushing the gold price higher. Thus, gold remains an important asset in every diversified portfolio. The analysis of the gold positions of central banks speaks louder than words at least.

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