Archive for April, 2012

UK Economy (update)

GDP and Government Debt

With tax receipts in yesterday’s report showing a decline (year on year) in Income Tax and no, post inflation, growth in Production, VAT or Corporation Tax, it is no real surprise that GDP was a disappointment. Plus, as I said yesterday, some of the warm March impetus will not be available until the revisions.

GDP had several positive and negative influences…….. Positive: Govt Health sector, Sports Activities, Amusements and Recreation, Office Admin, Computer Programming, MotionPicture/Video/TV programme production, Retail Food and Beverage…. Negative: Financial Services, Construction, Mining/Quarrying, Agricultural/Forestry/Fishing

The warm weather will have had a positive influence on outdoor activities with the added bonus of early spring shopping. This does not bode well for the second quarter although the extent of any negative influence is hard to tell. What I can say is that the extreme weather seen in April has slammed on the breaks to any spring awakening. Hopefully the Queens celebration and the Olympics will be a able to lift the gloom after what will be  negative Q2 GDP. Construction of new houses will have been given a boost (Q2) from the Governments incentive to first time buyers of new homes. How sad this ill judged incentive will only benefit the developers sell overpriced new homes to the young who will then be trapped in negative equity.

Wednesday, April 25th, 2012 Debt, GBP, Predictions, UK No Comments

UK Economy.

I have written many blogs on the state of the UK economy. I believe they have and will continue to prove correct. The earliest entries back in December and January highlighted the deep seated problems. I think the media frenzy this week, on will we or wont we avoid a double dip recession is quite frankly bordering on the pathetic. If GDP for Q1 is minus 0.1% the headlines will condemn the government. If it is +0.1%, all is well. With the figure being released with only around 70% of the data makes for revisions later. The fact that retail activity blossomed in March with the early spring means it may have come too late to make the first estimate. If I had to guess I would say slightly negative now with an upward revision later. But I don’t care about the past. The most important data release this week is the government borrowing estimates for March. Last month the borrowing figures were a negative surprise to the market. Of course one months data is not sufficient to paint a trend. I was then and am still of the belief that the governments finances are on a very poor trajectory. Income tax receipts (March) are unlikely to be robust (see UK Unemployment) with so many high income jobs being lost in the city. March is not a big month for Corporation receipts so no big shocks there. VAT will be positively influenced by the warm weather (as seen in Retail Sales). On the negative, Interest payments are behind the curve for the quarter and could be much higher than the usual big quarterly cost. Below you will see the monthly Receipts and Expenditure over the last two years. They hardly paint a picture of austerity. Receipts amble along with the extra VAT  giving some help whilst expenditure has for the most part been up on last year. The debt will not stop growing at this rate. The new tax year will bring a surge in additional receipts but as you well know that will have negative impact on disposable incomes. Within three months the FX markets may have realised that the UK is just as much a basket case as Spain or Italy. The only difference so far has been an independent currency which has allowed us some manufacturing growth impetus due to its weakness. With our main trading partner going into an economic tailspin, China not yet loosening and the USA and Japan facing ticking debt time bombs, why would a highly indebted, poor trade prospect currency with no safe haven status be worth anything. I could well imagine Sterling testing its all time low against the Dollar which from memory was around $1.08. Maybe if Gordon Brafoon had not sold a chunk of our Gold reservers for some shiny beads and a copy of Andy Stewart singing  Donald Where’s Your  Troosers?  we might have better credibility. Estimates for Public Sector net debt range from unchanged £12.9bn to £14bn. As expenditure was way above trend last month it could revert this month. I still expect a deficit at the high end or worse.

UK Government Expenditure

UK Government receipts

I have been totally wrong on Sterling to date. My expectations earlier in the year were far too negative. The market saw events otherwise. I am not going to change now. As you can see if you click on the chart below. We are due some fireworks soon. Either we break out of this pennant formation to the upside or to the downside. Either way it is likely to be a sharp move with a $1.85 target if I am wrong and $1.40 if I am right. At $1.40 inflation would become unbearable with Petrol/Diesel up 10p a litre to start.

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Tuesday, April 24th, 2012 Debt, GBP, GDP, National Debt, Predictions, UK No Comments

APMoellerMaersk..Yen..SuezCanal (Update)

AP Moeller Maersk

I have written many articles on the shipping Industry. In January I published a 16 year chart which I believed showed a seriously long trend head and shoulders formation. Well, since then several analysts upgraded the stock and forced it to the high of its long term downtrend. From that peak it has fallen 20% and is back to the January level. The sector news continues to be bleak but again some analyst are talking positively due to the significant freight rate increases forced through recently. The only way these increases have any chance of sticking is to raise the already high level of vessels laid up at anchor. I for one do not expect them to stick and why should they. A worrying trend for the biggest fleet operator in the world is that despite a 5% uptick in volume through the Suez Canal in Q1 (see chart below), there was only a 0.40% increase in the number of ships. With the worlds fleet continuing to grow each month, eventually the Net Asset Value will have to be cut dramatically. Shipbuilding yards will, by the second half of 2012, offer a buy one get one free deal. They (shipbuilders) will not all survive.

AP Moeller Maersk (APMM) 1996 to date (click on chart)

Suez Canal tonnage 2007 to date (click on chart)

Most of the Q1 growth in tonnage came in January. Since then the spring uptick has been very sluggish.

Japanese Yen  (click on chart)

I have written many times on the impending peril that Japan faces. I have forecast that much further Yen weakness will eventually help the Nikkei above the Dow. In the same January blog, as mentioned above, I showed a 40 year Dollar/Yen chart which highlighted the peak of the Yen. It will go much lower. The updated chart below includes the uptrend (vs $)  from 2007. The long term moving averages are still firmly in place for that weakness to continue.

Tomorrows posting will be about the downfall of the UK. Within 3 months we will be talking about austerity for real not the austerity light which we have been lead to believe will solve our debt crisis.

 

Monday, April 23rd, 2012 Predictions No Comments

US Economic health check

Lie on your side…breath in…this wont hurt…Not the words you want to hear from a burly, rugby playing Australian doctor wearing extra large sterile gloves.

Sorry, I was thinking of the time I had my Appendix out. All in all not a great experience.

It is that time again. An update of the BNSF rail freight data. Only this time it is much more exciting! I have added two addition components of the Freight Wagon (Carload) segment. They are Sand/Gravel and Lumber/Wood. Given the importance of the construction industry and its widely forecast recovery (from what is presumed to be the bottom of the cycle) these two new sub-components should pick up any trends. If you click on the first box, you will see the updated and improved data. The second box will reveal a chart showing the 2012 growth or contraction rate (%) versus 2011.  I am unsure how much of an effect the earlier Easter has had on the figures but it is interesting how weak the two construction components have been over the last two weeks. Still too early to call. Given the tail wind of the warm winter it is only now that the true picture of the economy is emerging. The next update will be very interesting (to me at least). It is clear that without the light vehicle demand, Uncle Sam would be in a pretty dire shape. It could be very interesting if the explosion at the main resin supplier (to the auto industry) leads to production halts. Inventory for Cars has fallen to 44 days in April versus 48 in March. This is below normal levels. Production is up 17% this year with an additional 570,000 vehicles in Q1. Truck inventory, another regular theme, is stable at 66 days

 

 

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Friday, April 20th, 2012 BNSF, GDP, US Economy No Comments

BRICs and Steel (update)

BRICs and Steel

As I have said for a while, production capabilities in heavy industries is way above even the most optimistic of consumption demand forecast. So why the update? Well, with Chinese steel mills recording their all time high monthly production in March, it would appear all is rosy and demand must be just dandy. As you can imagine, I see things differently. In the first quarter, steel companies in China lost (estimated) 1 Billion Yuan versus a profit of 25 Billion Yuan Q1 2011. That makes them desperate to meet any demand from the important spring construction season. It is possible that this high level of production will  just end up as expensive inventory. In the last two weeks, volume traded on the Shanghai exchange has been very low. Prices are showing a downward bias. So what is demand upto? In the earlier BRICs and Steel report I highlighted the reduction in railway infrastructure investment for 2012. In February, investment spending (on the railways) hit a multi year low of Yuan 32.6, surpassing the previous low of Yuan 36 Billion immediately following the Zhejiang province disaster. On top of this, other heavy users of steel do not look to be on an upward trajectory. Shipbuilding, a subject I have highlighted so many times even I have become bored with it, will likely see a 50% drop in orders by the time 2012 is out. China took the mantle of worlds biggest builder from South Korea in 2011. As orders from previous years get completed and hopefully delivered (no guarantee as finance for completed delivery is getting scarce) many plants will be idled. The two other main consumers, construction and transportation, are also showing signs of slowing activity. In Q1 total vehicle sales (commercial and private) were down 3.4% on 2011 Q1. Forecast by the industry still point to growth of around 7.5% for the full year but given the shaky start and the two significant increases of state controlled fuel prices, these seem a little ambitious. As for construction, who knows. It is all down to the state as and when they start to loosen monetary policy. For now, the picture is one of much slower building project starts, this of course could change very quickly.

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Thursday, April 19th, 2012 BRICs, China, GDP, Shipping No Comments

UK Unemployment

A quick update.

The Bloomberg headline reads  `UK Unemployment unexpectedly falls as economy gains momentum` great news and very welcome relief to the government.

As you have come to expect, I will put a slightly different slant on things.

Looking through all the positive data there are a few facts which need expansion. Part time employment grew by 80,000 whilst full time fell by 27,000. Redundancies in the 3 month period were 174,000, up 11,000 on the previous period and up 47,000 on the 2011 period. This would not be a problem if vacancies were growing strongly. Sadly they were flat on the previous period and down 19,000 on 2011. Pay growth or rather the lack of it was the main feature. The negative divergence between pay and inflation is one I have highlighted on several occasions. One of the real worries is the continued downward pressure on the Velocity of money.This was highlighted in `Where is all this money coming from`.  Jobs in Starbucks or Waitrose do not make economic growth sustainable. Low paid jobs in services are masking the real problem.

Without doubt, the primary reason for growth in part time jobs was the very mild winter. In fact the biggest change in the incomes components was the 30% increase (month on month) of bonus pay for the Wholesale, Retail, Hotels and Restaurant sector.

As a side issue and one that needs urgent government attention if anarchy is not to prevail. Employment of UK born citizens was down 208,000 whilst employment for those born outside the UK was 212,000 higher.

All in all, these numbers do nothing to help the fiscal deficit. More on that next week. They do suggest that the Retail Sales number for March will hold up but only due to the sunshine and increased availability of WageDayLoans which is another time bomb of the debt culture.

Wednesday, April 18th, 2012 Consumer Debt, Debt, National Debt, UK 1 Comment

Hazard Warning Lights for Volvo, Scania and MAN.

Kenworth trucks announces job cuts.

The number two manufacturer of heavy trucks in the USA announced a 10% cut in employees at its Ohio plant last week. As I stated in Look beyond the noise, the potential for disappointment and production gluts was more than real. Following last years 70% increase in sales, expectations for a strong 2012 looked, to many, well founded. If the disappointing first quarter sales are not reversed, expect more substantial job cuts across the industry.

I believe European truck demand will shock the industry this year. The heavy segment saw (in March) its first year on year fall since the upturn began. Production has already been pared back to allow for a decline in 2012. I expect significant heavy job losses as it becomes clear demand will be far weaker. Why? Disposable income implosion. Demand throughout Europe will, in volume terms, fall throughout 2012. Disposable incomes are being squeezed from both sides. Higher taxation and real salary cuts on the one hand and erosion via inflation on the other. The most recent industrial/manufacturing output and sales data highlight the significant falls many industries are experiencing. I realise these were expected in the first quarter and most analysts have pencilled in a recovery in the second half. Somehow I just cant see that happening. Austerity is here to stay, at least for the next 3-5 years. In this benign economic environment the only way governments can reduce deficits is to tax more or spend less. Either way, disposable incomes fall. The economic peaks of yester year were achieved by the disposable incomes being greatly enhanced by the asset boom frenzy created by the Euro. The apparent elimination of risk in lending to poorly run, corrupt countries like Greece, Spain, Ireland and Italy reduced their borrowing costs to AAA levels. Of course they were going to spend! Now the rose tinted glasses have come off, reality has prevailed. It will be a long time before they positively affect consumption in Europe. In the mean time, the flow (volume) of goods throughout Europe will slow.

Daimler is number one in sales followed by Volvo, Man and Scania. Volvo has forecast a 9% reduction in European sales but a 20% increase in US sales. They have a very big margin of error on both, to the downside of course. I expect them to under-perform badly this year. The other players in the game are interesting. Scania is now effectively controlled by VW. MAN own 13% of the capital (result of failed take over) whilst VW own 45%. Last year VW gained a controlling stake in MAN thus combining the two into control (87% votes). It is clear VW wants to challenge Daimler’s global lead. It is only a matter of time before VW makes a bid for the rest of Scania. Scania has a reputation of high profitability and has excellent exposure to developing economies. It has one other very important factor. It is in the EU but outside the Euro. If the Euro core nations are forced (as I believe they will be) to break away from the weaker, debt laden, life support aided PIIGS, then production in Germany will become very expensive as the EuroMark becomes a global safe haven. The situation of VW, MAN and Scania reminds me of the ambitions of Deautsche Post who owned various shareholdings in the intermodal transport arena back in the late 1990`s. They saw the Internet shopping boom coming and put all those pieces together which included a full takeover of the Swedish transport group Bilspedition (BTL).

The UK is my next port of call. The next blog will highlight why I think the valiant efforts of George Osborne will not be able to avert the disastrous economic consequences resulting from the policies of Tony I Couldnotcare and Gordon Brafoon. The end is nigh for the UK.

Next will be back to shipping. An update of the AP Moeller Maersk chart will be interesting and a chat about why Japan has just announced a new low interest finance deal for anyone building ships in Japan. Once the worlds biggest builder and now on the verge of having no order book for 2014.

Remember, tranportation is the life blood of the world economy.

 

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Monday, April 16th, 2012 Euro, Shipping, UK 1 Comment

Look beyond the noise.

US Economic expansion.

Last week was all about the US employment report for March. The focus was so sharp that little else seemed to get much scrutiny. Given the frequency of revisions, one month is never enough to base sound long term opinions on, so I wont. There is a school of thought in the cynical blogosphere that weaker numbers were engineered lower thus giving the Fed justification for Q3. Given the proximity of the election when the decision is due, they will need all the help they can for justification without attracting Republican ire.

With the aid of a wider angle lens, I was not distracted by the unemployment numbers. I chose instead to focus on the nuts and bolts of the economy. Early last month I wrote about Class 8 truck demand Quiet in Class!..[ This continues a theme of mine centered on transportation of goods. Most recently that has been with reviews of BNSF rail freight volumes but earlier postings have been on the shipping industry The Perfect Storm and The Plimsoll line is clearly visible! ]… Last week saw the release of preliminary sales data for March Class 8 truck sales for North America. With the benefit of 3 months data for 2012, my earlier concerns for the economy can have some justification.  January 24,000 February 22,366 and March 19,682 against the 4Q 2011 average of 26,000. The preliminary number for March is 32% below March 2011. Why is that important? At the beginning of the year, the two main bodies for the truck industry were upgrading their forecasts for 2012. They centered around an annual expectation of 295,000 sales, well ahead of 200,000 needed to replace retiring vehicles and up 10%ish on 2011. March and April are normally the two most important months for sales as they herald the start of the haulage season fan-fared with the new year models, which normally carry a higher price tag. If April does not spring into life with renewed vigour, the order backlog (currently strong due to the ordering peak around December) will falter and the inventory level ( 62 days versus 52 in 2011) will rise. This, in the worst case scenario, could lead to awkward production gluts. In the third of my blogs on rail freight USA Freight Volumes I did suggest that the rise in container volumes (via rail) could be attributed to the sharp rise in diesel costs. This may have some correlation with the first decline in trucking jobs (0.1%) since July 2011 as seen in last weeks employment data.

US Government Debt

On Thursday we will see the release of the Monthly Budget Statement. I have seen one estimate so far ($203bn). If this is confirmed, it will be the first back to back $200bn plus months that I can remember. It would lead to a Q1 deficit slightly up on last year and close to the record set in 2009.  Since the depths of the recession in Q1 2009 the economy has recorded positive GDP and unemployment has (headline rate) dropped significantly. Why then is the deficit still growing at such an alarming and unsustainable rate? Easy, the government are buying growth. As I highlighted in America breaks records…Swiner in USA the end of 2012 brings about some major problems for the newly elected government. It is impossible to think that by then the economy will have garnered enough momentum to overcome the fiscal drag which will inevitably follow.

CHINA.

The latest inflation data will not rest easy on the authorities who made much of last months significant decline. They have blamed the unexpectedly sharp increase (3.6%) on poor weather in the fresh food producing areas. This has lead to overall food costs rising 7.5% year on year. This, however, masks far more important moves in two important staples. Vegetables are up 20% year on year with Meat/Eggs 11%. The recent significant fuel price hike had little influence on the rate as it has a small weighting within the index. Presumably it will show up in later months as products are priced to contain additional transport costs. It is clear that inflation will continue to be a drag on any monetary easing the authorities have planned. To continue my transportation theme (and remember 90% of goods travel at some point by sea) Chinese shipbuilding orders are down 40% on the first two months of 2011.

Last week also saw the release of the Purchasing Managers reports for March. Whilst the state version showed continued strength at 53.1, the independent HSBC report fell to 48.2. Why? Well the state report by the Federal Logistics and Purchasing department is heavily influenced by state and large companies in its sample of 800, whilst the HSBC has 400 mainly small and medium sized companies. These smaller companies are much more focused on the world economy. Weaker overseas demand has been a drag on growth but finance, or lack of it, has also played a part in the current weakness. The authorities started a pilot scheme in Wenzhou last week aimed at relieving some of the well documented problems of underground financing.

 

 

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Monday, April 9th, 2012 BNSF, China, Debt, National Debt, PMI, QE, Shipping, US Economy, USD 1 Comment

Greek tragedy

My heart goes out to the Greeks.
Think, if you will for a moment, about the state of anguish felt by the man who took his life in Syntagma Square, central Athens, on Wednesday morning.
Dimitris Christoulas was a 77 year old retired pharmacist, with a wife and a daughter. Below is the note he left.
“The *Tsolakoglou government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting (although if a fellow Greek were to grab a Kalashnikov, I would be right behind him), I see no other solution than this dignified end to my life, so I don’t find myself fishing through garbage cans for my sustenance. I believe that young people with no future, will one day take up arms and hang the traitors of this country at Syntagma square, just like the Italians did to Mussolini in 1945”  
If you think the European politicians have done a good job rescuing the Euro. I urge you to think again. In obtaining a victory for a political union, we have damaged beyond belief the very fabric of a country. Yes, they should never have been allowed to join. Yes, they have voted for politicians who have lead them to destruction. Yes, they have failed to pay fair taxes. All of that is not in question. What they are more guilty of is following the trumpet call of the pro-European movement who promised great riches for all via a union of Europe.
The rescue of Greece was hailed as a victory by politicians who have spent hundreds of millions of tax payers money organising urgent heads of state and finance minister get togethers just to discuss the bail out. These politicians have never considered the fate of the people of Greece only the unimaginable and unacceptable destruction of the Euro. If they for one minute stopped and put the people of Greece first, the outcome would have been very different.
I beleiev that a Greece that was free from the Euro but within the Union could and would prosper. If all debt (I know this is all very simplfied) were converted into the new Drachma at a devalued rate of say 50%, the new cheap currency would herald a massive return of deposits and investment which have fled the country. A new fair and transparent government with lower but collectable taxation would reverse the massive black market and drive a legitimate and recordable economic expansion. This would all require tight European managent.
We all know this is not acceptable to the senior European politicians as it heralds a leap into the unknown and brings into question the whole purpose of a union. Spain and Portugal will need to go the same way, as tourism will be an understandable area where Greece will beneifit to others detrement.
So, whilst you are sitting at your trading desk with your Latte or Cafe Macchiato, think about the people who have lost everything just because its more important to keep the financial well being of those who beneifit from the European (EU) gravy train, alive and well!
*GeorgiosTsolakoglou was the first collaborative prime minister during Germany’s occupation of Greece during the Second World War.
Thursday, April 5th, 2012 Predictions No Comments

America breaks records…Swinter in USA

You cant trust the economic stats for Q1 2012. Watch the Weekly Unemployment Claims.

The list of data below is taken from the Minneapolis “Star Tribune” . Whilst this was not a record day, it does show the divergence from the norm is quite stark.

70 F. high in the Twin Cities on Thursday, just one degree away from the record of 71, set in 1945.

44 F. average high for March 22.

39 F. high temperature a year ago, on March 22, 2011.

4.5″ snow. A year ago the Twin Cities was enjoying/enduring a “plowable” snowfall. 4″ fell on March 22, another 4.1″ on March 23, 2011.

22.3″ snow so far this winter season, least since 1986-87, when 17.4″ fell at KMSP.

10th least winter snowfall since 1884 in the Twin Cities.

+16 F. March temperatures, to date, are 16 degrees warmer than average in the metro area.

16 new daily warm-weather record for the Twin Cities since March 10.

Throughout the Swinter of 2012 records have been tumbling both for record highs and the prolonged period of those highs. As another indication of the level of divergence, Bangor, Maine, saw a high of 83f last week verses the previous record of just 64f. The net effect on employment during this freak (at least the ski resorts hope its freak with the likes of Colorado down 7% on 2011) weather must not be underestimated. The weekly unemployment claims will be the first to show if the trend to higher employment is sustainable or on the whole, also just a freak of nature. Retail sales must have been very positively influenced. It will only become clear in the April/May period just how much purchasing has been brought forward. When you look at data from Master Card, it must make you wonder just how strong this period of strong growth is. Gasoline consumption during the spring break was down 5.6% on 2011. The 4 week moving average has fallen for 52 straight weeks and stands 6.6% lower than 2011. If employment was as strong as has been indicated and the jobs created were of high tax paying calibre (as I have questioned in previous blogs) the sharp rise in fuel prices would have been absorbed and demand at worst maintained.

The very positive affects of the corporate tax incentives (mentioned many times here) coupled with the Swinter of 2012, might have created the perfect storm. As the deadline for the automatic government spending cuts gets closer this may just have provided investors with an opportunity to sell while stocks last. By January 1st next year, US$ 1.2 TRILLION of spending cuts will be imposed on who ever is in power. Obama`s payroll tax cut and unemployment extension will expire. Geo. Bush`s crazy tax cuts will finally (hopefully) breathe a final breath. On top of all that, the afore mentioned corporate tax incentive which gave 100% relief on capital investments in 2011 and 50% in 2012, dies. It appears that the `Perfect Storm` has created conditions which allow investors an opportunity to sell and sit on the sidelines whilst analyst try to justify why they have so many BUY recommendations on stocks.

Europe will continue to drag the world down. As I have stated before Economageddon Dec 2011, countries like Spain have been lying about their fiscal position for a long time. Only now, and last weeks budget is the last nail in its coffin, will the Mediterranean economies return to what they know best, tourism.

Ireland… Never was a Silk Purse! will return to an Agricultural economy and the GDP in the Eurozone will fall much further than estimated. The austerity measures around the world to date, do not cut debt, merely slow its accumulation. Until we get to a point where politicians stop playing 5 a side soccer (for you Americans) with tin cans, the end cannot be reached.

 

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Monday, April 2nd, 2012 Consumer Debt, Debt, USD 1 Comment
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