US 4Q13 GDP: Housing Contribution (Or Lack Thereof) and Demand Leakage

With today's GDP release, we can see that activity in the fourth quarter was somewhat less than first reported.  Adding to the bad news, the housing contribution to GDP growth was -.3% in the fourth quarter.  This is obviously disappointing given the trillions of dollars of QE, aimed directly at the housing market.



On the other hand, there was improvement in one important indicator.  In the GDP report, the BEA gives us data on final sales to domestic purchasers (which measures final sales of goods sold to US consumers, regardless of where the product was produced) and final sales of domestic product (which measures final sales to US consumers of good made in the US).  The difference between these two final demand series is a good proxy for the demand leakage of imports.  In the fourth quarter, demand leakage continued to decline, now just above $450 billion.  This is a discernible improvement from the end of 2011 where it was $600.

Luxottica: Languishing or Thriving?

Along with today's release of encouraging retail sales data across a number of European countries came the similarly positive earnings results for Luxottica.  A look at our point-and-figure charts suggests that the trend for the company's stock is all but certain.  The stock's performance relative to the MSCI Europe shows the beginnings of a flag formation:



And, when compared to the MSCI World Index, we see a comparable pattern:



For clues as to whether the flag formations in the relative charts will be resolved to the upside or the downside, we can consult the absolute price chart for the company's stock.  Here, we see that the high performance trendline (dominant since early 2012) is being tested by the current consolidation.  A failure of this level of support leaves quite a bit of room for the price to fall before it encounters the traditional 45-degree bullish support line and could dampen management's enthusiasm:



Of course, if support holds, we could see continued outperformance of this European luxury retailer.  How likely that is, we cannot say for certain-- but we would note that, as a general rule, advances are rarely longer than the width of their underlying base.

Dr. Copper is Suspicious of This Rally in Stocks

Although stocks have erased losses from earlier in the year and are now making new all-time highs, the metal with a PhD in economics is acting a bit less sanguine. Indeed, copper failed to make a new high in February and has now broken it's medium term uptrend line despite the strength in stocks. A continuation of this behavior could be taken as a signal that stocks are ahead of themselves in discounting an acceleration in global economic activity.

NYSE Margin Debt Rises (Again) To An All-Time High

Margin debt in NYSE accounts increased again in January to an all-time high. This series tends to top out before major market corrections occur. Margin debt is now at an all-time has a percentage of total market capitalization. Also, margin debt as a percentage of nominal GDP is just about equal to levels seen in July 2007 (h/t to John Hussman for the third chart below).

Drug Retail On A Roll

While the MSCI World consumer staples sector is not the source of scorching growth, there are some decent growth opportunities.  Let's start by calibrating the drug retail industry within the consumer staples sector.  We calculate the average year over year growth rate embedded in analyst estimates for all companies in the MSCI World drug retail industry.  On, average over the next four years, the drug retail industry possess the highest top-line growth estimates of all industries.



Analyst revisions have also been on the upswing for the drug retail industry.  Here we show the 3-month change in the level of growth estimates for each of the next four years.



Revisions breadth has also been strong in the drug retail industry, with 67% of the companies experiencing rising top-line estimates over the last three months.



Top line improvements have no doubt contributed to the drug retail industry turning in the second best performance within the consumer staples sector for the last three months.

Has Australian Mining CapEx Peaked? What Would That Mean For Australian Employment?

Mining CapEx in Australia posted another down quarter in 4Q13 and was down about 7% vs peak CapEx spending that occurred in 4Q12 (Chart 1). Granted, CapEx is still at a high level, but we may be seeing some of the first signs that the trend in mining investment has reversed. Indeed, when we overlay the CRB Commodity Index on Australian mining CapEx spending we observe that the CRB Index leads mining CapEx by about 5 quarters and it is clearly headed lower (Chart 2). If this trend continues it would likely put further upward pressure on the Australian unemployment rate (Chart 3).

World Inflation Fell In January To Lowest Level Since 2009

One of the ways we look at inflation around the world is by taking a simple average of 33 different countries year-over-year percentage change in CPI. By this measure, in January, year-over-year change in World CPI fell to it's lowest level since November 2009. According to the Citi Inflation Surprise Index, the majority of the developed and emerging world are experiencing negative inflation surprises. The exceptions appear to be Japan and Australia.

Foreign Investors Were Net Buyers of Japanese Stocks for First Time in 4 Weeks, But Trend Remains Down

For the week ending February 21st, foreign investors were net buyers of Japanese stock for the first time since the middle of January (Chart 1). The trend, however, remains that foreigners are dramatically reducing their buying of Japanese shares to the point where cumulative purchases (or sales) over the last twelve weeks is about to turn negative (Chart 2). We observe a strong correlation between the level of the JPY/USD and foreign purchases of Japanese stocks (read foreign stock sales = stronger yen). If foreigners continue to sour on Japanese stocks we would therefore expect the yen to strengthen relative to the USD.  

Meanwhile, Across the Channel...

As we saw yesterday, Germany's Q4 GDP release was neither surprising nor very exciting.  A similar look at today's release of output in the U.K. reveals a more constructive picture:



With positive contributions from all sectors-- and a sizeable rise in business investment-- the trend on this country's heat map is skewed decisively green.
U.K. equities, by contrast, are the worst performing among all of Europe's major indices so far this year, having gained just over 1%:

Mortgage Purchase Apps At 18-Year Low and New Home Sales At 5-Year High

The housing data has been all over the place so far in 2014. The good news today is new home sales jumped nearly 10% month-over-month to a five year high level of 468K for January. Strength in new home sales was led by the South while new houses sold in the Midwest and West are actually negative on a year-over-year basis. The bad news today is that mortgage applications for purchase last week dropped to it's lowest level since the week of August 25th, 1995. Mortgage rates rose slightly last week but are still lower year to day. 

Check Up On Technology Sector Topline

The MSCI World information technology sector is a real contrast when it comes to sales expectations. In the table below, we measure the year over year growth rate of sales for each of the next four years for the industries within the technology sector.  We also average that growth rate over the next four years and have sorted the table by this column.  In general, the software based industries represent the highest growth expectations while hardware based represent the lowest.

MSCI World Information Technology Industries Sales Expectations



Recently, however, some the hardware based industries have been experiencing rising sales revisions. All the computer hardware companies have experienced rising sales revisions over the last six months, 92% of electronic component companies and 75% of office electronics have as well.

Breadth of Sales Revisions For Current Year

No Surprises In German GDP

Today's release of GDP data for Germany's Q4 was decidedly dull and in-line with market expectations.  A quick look at the components over the last five years (on a year-over-year basis) illustrates that, while Europe's strongest economy may be the best in a struggling bunch, the economy is far from booming:

Without even seeing the exact figures, it is obvious when looking at the above 'heat map' (green is highest and red is lowest) that growth has moderated in every category since late 2010/ early 2011.

Leaders Of European Performance... Are Utilities

Over the last 20 days, as stock markets around the world have recovered from their January sell-offs, an interesting thing has happened.  Defensive stocks are leading the rebound.  As an example, in the MSCI World Europe index, the utility sector is the best performer, up 7.57% on average.

MSCI Europe Sector Performance


The move has been a pretty powerful one too, as measured by the following stats:
1) Over 100% of the 21 European utilities are above their 20 day moving average



2) 71% are making new 20 day highs



3) 100% of the companies have realized positive performance over the last 20 days



4) 65% of all trading days have been up days for the sector

Digging Deeper Into Japanese Outperformance

We've noted on several occasions over the last week the recent outperformance of Japanese shares, so we thought it fitting to dig even deeper into the topic. In the below two tables we show the 1-week sector performance (equal weighted) and the top performing companies in Japan over the period. Some observations are as follows:

• Cyclical groups that carry a lot of leverage, and especially financials, have lagged badly
• Cyclical groups that employ less leverage (tech) have performed well
• Bond substitutes (telecom and utilities) have done well while growth counter cyclicals (health care, staples) have also beaten the average

Japanese 1 Week Performance by Sector:


Top Performing Japanese Companies Over the Last Week:

US Home Prices Losing Momentum

The Case-Shiller Home Price Index has now had back to back monthly declines for the first time since Oct-Nov 2012. Granted the declines were small but we are seeing other evidence that housing prices lost some momentum at the end of last year. For example, one way we like to track momentum is by using diffusion indices. In the case of the home price index we measure the number of cities that have seen price increases over 1-month, 3-month, and 12-month periods. We then plot this on a scale of 0-20 (if all 20 cities are showing price increases the diffusion index would register a 20 and vice versa). Currently, the 1-month diffusion index is down to 7 which is the lowest level since February 2012. The 3-month index is down to 9 which is also the lowest level since February 2012. The good news is the 12-month is holding firm at 20.

What Does Today's Ifo Survey Say About Tomorrow's GDP Release?

Continued improvement in Germany's main business climate indicator-- it is the highest it has been since July 2011-- would seem to support further increases in the country's GDP:



We take note, however, that the expectations component of the survey fell for the first time since last September's slight drop:

Correlation with Treasury Bonds The Most Significant Factor Driving Stocks Last Week

Individual stocks' correlation with treasury bonds was the most significant factor driving stock price changes last week, with an r-squared of .88. Stocks' correlation with the yen also continued to be a significant driver of returns over the last week.  



Over the last month, however, the fundamental factors have dominated.