Consumer credit spikes higher

Consumer credit increased at a seasonally adjusted annual rate of 6.5% during the fourth quarter says the latest data from the Fed.

Non-revolving credit increased at an annual rate of 9.5%. Non-revolving credit is a loan with a fixed principal and monthly payment for things like cars.


The data also shows that much of the demand for consumer loans is met by credit unions whereas commercial bank holdings of such loans is flat to down (charts above).


On the percent basis against the GDP, consumer credit is way down from its 2003 peak. It has reached the low in HS of 2010.

During the last two recessions, interestingly enough, consumer credit as percent of GDP rose.

China recovery spikes iron ore, coal still unclear

Since their precipitous drop below $100 per ton in early 2012, iron ore prices have come back dramatically and the trend in the ore price is a good indicator of what is going on in China.

The rise in ore prices also helped Australia shrink its trade deficit for December. Australia’s trade data also confirms the industrial expansion in China as the export numbers to China, at A$7.1 billion, were third highest on record.


On the volume basis, Australian shipments of iron ore to China were up 20%.

In the first half of 2012, some analysts were predicting an even more dramatic price collapse in iron ore down to levels below $60.

Meanwhile, Chinese economic numbers have improved but some folks have raised a flag that these rosy numbers are rigged by the Chinese authorities. If so, than we should expect to see effects of that on the iron ore prices.

Finally, the troubled coal is failing to track the iron ore higher but that could be interpreted as both bullish and bearish, depending on one’s belief about the future of coking coal.

For example, an argument could be made that coking coal could, at best, stay flat because of a lack of robust demand, too much regulation and a switch to gas in steelmaking, particularly in the US.


We could also sample a representative name in the coal space, like ANR, for some technical suggestives and note the short-term bearish head and shoulder formation and claim that the golden cross – higher 50 DMA than the 200 DMA – may eventually roll over.

A bullish take on coal may draw its narrative on record steel output globally that needs coking coal to sustain itself while China, the marginal price driver, is far away from drawing natural gas from its shale deposits.

Therefore, watching what ANR does right around these levels at $8.50 maybe critical for both, the coal and iron ore.

Some shippers optimistic on passing on a rate hike

Container shipping companies are seeking a rate hike on spot freight pricing on Asia-North America routs and this is a second piece of good news in this space in many years.

Notes Reuters:

Whether the shipping firms, who have been hit hard by overcapacity, are able to successfully implement the spot rate hikes and base their annual contract talks on that price will have a significant bearing on their profitability for the year. Up to 70 percent of Asia-U.S. container trade is governed by annual contracts.

Industry leader Maersk Line is among those seeking price hikes.

Back in January, the head of dry bulk shipper Golden Ocean said that the shipping business is “beginning to see the light at the end of the tunnel”. His statement than was first positive news in the shipping space since 2008 when the industry cliff-dived.

The announcement that the shippers are seeking rate hikes does not necessarily mean that they will get them, but is a second positive news in this sold-off space that many do not want to touch.

Still, such marginally small news often foreshadows the bottom in the industry so it is worth a watch.

Chinese increase gold imports from Hong Kong

Chinese gold imports from Hong Kong in December have doubled from October, data shows. The pace of gold imports was also up in November.


Gold imports from Hong Kong are important indicators of investor demand in China because Chinese banks issue gold certificates to investors of gold and have to import it to back that up.

The import figures in the chart, of course, is not for the gold certificate backing only nor does in represnt the entire picture of Chinese gold demand but rather just a rough indicator of Chinese investor demand for gold.

Securitization also caused riskier corporate lending, Fed

Mortgage securitization led to the huge financial fiasco from which we are still trying to recover, but such approach to lending, the originate-to-distribute model, also led to higher risk in corporate lending, says New York Fed.

“We show that during the boom years of securitization, corporate loans that banks securitized at loan origination underperformed similar, non-securitized loans originated by the same banks,” writes João Santos.

If a bank does not want to hold a loan it originates, than, the author says, the bank is not as diligent in scrutinizing the quality of the borrower, it cares much less to monitor such loans but does this anyway in order to scoop up the origination fee.

“We found that the loans banks securitize are more than twice as likely to default or become nonaccrual in the three years after origination,” says Santos.

The performance statistic between loans that the bank keeps and the loans that it securitizes is very apparent: only 6% of the kept loans default while securitized loans default at 13% rate, more than twice the loans that the bank cares about.

Apparently, everyone seems to have known this statistic so “loan investors, including banks, expect that securitized loans will perform worse.”

Full paper available here.

Housing going gangbusters in Dallas & other market stories

As I’ve traveled last 2 weeks, and tried to keep clear off stocks and markets, one thing I could not help look out for is the anecdotal evidence on housing… and down in Dallas, the housing is going gangbusters, at least in areas where homes are priced at $400K and above.

Foreclosed units are virtually all gone and real-estate agents are stumping all over to offer a guaranteed price and a sale within specified time and often they just end up buying the home and getting a better price for themselves.

Again, this is anecdotal evidence but if used homes are in such demand in such a large state, new housing ought to be able to exploit these pricing pressures and jack up prices.

Now back home, in Michigan, as I was driving into my subdivision, the promo on the builders banner listed a price that was $10K higher than the week before when I departed.

As a nervous holder of Lennar (LEN) stock, such anecdotal evidence sooths the anxiousness because virtually all housing names appear overextended, unless the future is rosier than what the market is pricing.

Eventually, though, all of these housing names, including LEN, will be a subject to a sell-off, because as we approach some critical market levels – circa 14,250 on Down – all of the names will be subject to a sell off.

Meanwhile, to get to that Dow level, which we talked about back in September of last year (read it here), we will need the banks to move higher.

Having in mind that the stocks are not done going higher, and the likelihood that in this last leg the banks will likely go up as well, one other thing I did last week was to add to my BofA (BAC) and Citigroup (C) positions. These two names are the most undervalued among the big-box gambling houses, at least based on their price per book, while sporting a nice price chart that is suggestive that the consolidation action (sideways) is closer to a move in some direction, likely higher in this case.

Finally, the ferocity of this ongoing rally should become a worry once we go into a sell-off phase because these 1,000 points built on no bumps higher could just as easily get retraced back because there are no bumps on the way down.

For a good reading on the market issues, below are some stories:

- New Highs in Sight, Barron’s
- Don’t Be Fooled by the GDP Report: The Economy Is Gaining Strength, Morningstar
- No, there probably isn’t a bond bubble, Washington Post

Investment pro sees treasuries dropping to 1%

Yields on treasuries will drop significantly says Gary Shilling, an investment pro whose approach to investing has, over the long term, been one of the best.

Says Shilling:

I predict a further decline in the 30-year Treasury bond yield to 2 percent from 3.2 percent now, though not before the grand disconnect ends. That further rate decline would produce a 30 percent total return in one year on a 30-year coupon Treasury, including interest, and 44.9 percent on a zero-coupon bond.

I also expect the 10-year Treasury note yield to drop to 1 percent from about 2 percent, though the total return would only be 10.4 percent, largely due to its shorter maturity. It would be 11.2 percent on a 10-year zero-coupon note.

Such drops in yield could be orderly, meaning driven down by the Fed, or disorderly, driven down by a market panic in face of a significant credit event.

Shilling is not very clear but seems to imply that  the Fed will drive the rates down but he also cites China as a potential melt-down threat that makes owning Treasuries attractive.

Worth a read, with part 2 of it coming tomorrow.

China, US, Europe PMI’s spike higher

Manufacturing in China and US grew this month at the fastest pace in about two years while Eurozone growth, although negative, stopped droping and has turned higher as German PMI rose.

pmiChina’s purchasing managers index rose to 51.9 in January, the highest since January 2011, as the new export orders sub-index also rose to 50.1.

Reading above 50 means expansion. Export index in December clocked 49.1.

China looks like it is nicely bouncing off the bottom but issues with the credibility of data persist.

Eurozone PMI jumped by more than expected to 48.2 from December’s 47.2 as Germany’s composite PMI rose to a 12-month high of 53.6 from December’s 50.3.

The jump “in euro zone PMIs might be just a German story, a sign that the euro zone economy is far from being out of the woods,” said Annalisa Piazza at Newedge Strategy but an analyst from ING says that the “end to the recession may not be far off. Indeed, today’s data clearly support the view that Germany might lead the euro zone out of recession in the first of half of this year”.

In the US, unemployment claims dropped more than expected to the lowest level since January 2008.

Job gains averaged 153,000 per month in 2012.


The remarkable Vixx flagging caution

As stocks grind higher and the wall of worry keeps crumbling, many market observers say that higher stocks on lack of care is a troubling sign.

One measure of potential trouble are the Vixx, or the volatility measures which have dropped to levels rarely seen.


At about 12.5, Vixx are at levels that occur minority of time says Nicholas Colas of chief market strategist at ConvergEx.

According to his data, Vixx has traded below 14 only 21% of the time in the past 21 years.

Moreover, only 9 times in nearly 6,000 trading days has the Vixx closed below 10.

Colas says that “if you cannot get your head around that benign scenario, you must – repeat MUST – treat current equity prices with real caution.”

Another reason that we should be worried about stocks is that many money managers see 2013 as a good year although some have also suggested that the increased optimism at Davos is even a better indicator that bad things are ahead of us.

Anyway, a we are scraping the floor of carelessness, such past experience, highlighted in the chart above, are typically followed by bad times in stocks.

Steel makers face rough road ahead says analyst

Steel producers will face a tough 2013 as heavy overcapacity will shake out weakest of the makers says survive, Ernst & Young’s mining and metals consultant.

“In Europe there are zombie mills, they are dead mills being almost entirely propped up by state assistance through direct subsidies or indirect arrangements,” says Ernst & Young’s Mike Elliott.

Meanwhile, India will continue to add to the productive capacity thus exacerbating the global steel glut.

“We don’t see overcapacity getting better in 2013. Despite a continued increase in demand for steel and some shut downs of capacity, there is already too much new capacity committed and under construction, to turn things around in 2013,” says Elliott.

He thinks that 2013 will be crucial and marks it as “the last of the bad years” as the steel space, he says, will recover in 2014.

“This might be the last of the bad years as we think 2014 will already be a bit better but for those who are already weak the challenge will be to make it through the end of this period. Some may have a shock to their ability to survive,” says Elliott.

In 2012, global crude steel production hit 1.548 billion tons, up 1.2% from 2011, according to data released by the World Steel Association on Tuesday.