May 12, 2013

2013 issue 9

Complex Recovery Paths

Major central bank activism and some surprisingly good economic data in the U.S. have lifted equity markets and also helped the credit markets continue their rally. Central bank policy has been focused on an emergency bailout footing to stave off sudden panic and is also is aimed at stimulating economic activity. This has involved incentivizing households and businesses to expand and take some more risk. But no new policy initiative is perfect not in implementation nor is it precise in its impact. Some in the markets and even in the Fed itself worry that the massive and unprecedented easing could be causing its own distortions and perverse side effects. Equally troubling is the reality that massive easing tends to smooth performance in the short run even as the risks take much longer to play out. It has clearly triggered a chancy search for yield that may yet lead to new asset bubbles and financial instability. There are numerous examples. One is highlighted on the this first page of the PunchLine and later on the credit pages. Bank lending to larger corporates has exploded, growing at rates not seen since the boom that was central to the great financial collapse. Also, Spanish and Italian benchmark borrowing costs are now at their lowest levels since the last quarter of 2010, as these high-yielding peripheral securities have caught the attention of both domestic and international investors. While the liquidity provided by key central banks -- including the move by the Bank of Japan to initiate massive monetary easing -- will likely continue suppressing yields, there is a serious argument to be made that the rallies have moved beyond fundamentals This increases the likelihood of more surprises, not less

MassiveJapaneseRallyCouldEndinTears

Greece's youth unemployment hits 60% as recession continues to cripple the country

Bernanke admits the Fed is looking at asset markets closely for signs of excessive risk taking.

US and EU Political Systems Struggling to Deal With 'New Realities'

The euro zones central bank did as little as expected, a 25 basis point drop in its main rate, to 0.5 percent. A lack of unanimity suggests it wont cut more soon, or start any bold initiatives. The ECB looks too divided to wage a tougher fight against a sinking economy.

Relentless quantitative easing is driving markets to extremes. Central banks want more GDP growth. But they also get extra low yields, high commodity and asset prices, hurting many consumers. They also get markets which rely on even more easy money - and which could fumble at some point...

April Jobs Stronger Than Expected but Recovery 'Very, Very Slow
US employment growth beats expectations with increase of 165K jobs in April, unemployment rate falls to 7.5%

Emerging Asian neighbors are bracing for a surge in capital flows after Japan's unprecedented bid to pump up its long-moribund economy but most believe the upside of cheap cash and a stronger Japanese economy outweighs the risks. JapanTrashesYen

OnlineRetailersCallInternet SalesTaxa'Nightmare'

FranceDeclaresAusterityOver asGermanyOffersWiggleRoom

Emerging again as a competitive exporter

Corporate earnings deserve high marks. However, if you go to the revenue side, it was not a good quarter. Less than half (48%) of the companies beat sales expectations and it looks like we're going to finish with no growth for the quarter

ECB Moves Markets, Not Economy

Corporatebondpricesrisetonew2013peak; YieldsinHYcontinuetoslide

ABRAHAM GULKOWITZ
abe@gulkowitz.com
917-402-9039

May 12, 2013

The PunchLine...

In This Issue
Complex Recovery Paths
Major central bank activism and some surprisingly good economic data in the U.S. have lifted equity markets and also helped the credit markets continue their rally. Central bank policy has been focused on an emergency bailout footing to stave off sudden panic and is also is aimed at stimulating economic activity. This has involved incentivizing households and businesses to expand and take some more risk. But no new policy initiative is perfect not in implementation nor is it precise in its impact. Some in the markets and even in the Fed itself worry that the massive and unprecedented easing could be causing its own distortions and perverse side effects. It has clearly triggered a chancy search for yield that may yet lead to new asset bubbles and financial instability. There are numerous examples. One is highlighted on the this first page of the PunchLine and later on the credit pages. Bank lending to larger corporates has exploded, growing at rates not seen since the boom that was central to the great financial collapse. Also, Spanish and Italian benchmark borrowing costs are now at their lowest levels since the last quarter of 2010, as these high-yielding peripheral securities have caught the attention of both domestic and international investors. While the liquidity provided by key central banks -- including the move by the Bank of Japan to initiate massive monetary easing -- will likely continue suppressing yields, there is a serious argument to be made that the rallies have moved beyond fundamentals This increases the likelihood of more surprises, not less

You Cant Handle the Truth The Likelihood of Unlikely Events... Households?

(pg 8) (pg 9)

Lots of recovery signals but far off the normal recovery path. Numerous questions remain for a once free-spending sector whose housing and mortgage finance machinery have not just collapsed but are severely damagedThe previous boom cannot and should not be recreated But the world aches for a vibrant U.S. consumer with job growth (pg 10)

(pg 1)

In This Issue Engines of Growth

(pg 2)

There will be far-reaching repercussions from this weak recovery path combined with the awkward easing easing policy of central banks. But what choice is there? And lets not forget that the challenges are clearly an international affair, rife with politics and therefore difficult to resolve (pg 3)

A Closer Look Data Detective Pumping iron Credit Matters Credit Concerns Deal or No Deal in Europe The DNA of Business Some More Industry Specs Real Estate and Construction Will Life Ever be the Same?

(pg 11) (pg 12) (pg 13) (pg 14) (pg 15) (pg 16) (pg 17) (pg 18) (pg 19) (pg 20)

New Directions The New Geography of Business U.S. Break Out Potential The Return to Normal

(pg 4) (pg 5) (pg 6) (pg 7)

Contact information:

Abraham Gulkowitz
phone: 917-402-9039

email:abe@gulkowitz.com

Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.

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Engine Drivers
Eurozone Economic Confidence Falls More Than Forecast
Eurozone economic confidence declined more than expected in April with broad-based contraction across sectors excluding consumer sentiment, survey data showed

US consumer spending rises, The private sector comes to U.S. economy's rescue

Europe's Manufacturers Face a Test

Europe's industrialists are steeling themselves for a difficult six months, forecasting at best a stabilization in their business, and at worst a further drop in sales. Volumes on the Asia-Europe container trade sllid nearly 10% year on year in March, because of demand weakness in Europe, resulting in volumes for the quarter sinking into negative territory. According to the latest data from Container Trades Statistics, volumes from Asia to northern Europe declined 9.7% year on year in March to 698,052teu. As a result, volumes for the first quarter on the trade slipped 2.8% to 2.1 million teu. Until March, volume growth on the trade had been relatively stable, increasing 2.2% year on year in January and declining 0.6% in February.

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New Directions

US Rate On 15-year Mortgage Falls To New Record At 2.56 Pct.

China Export Gains Spur Renewed Skepticism of Figures

Chinas export growth unexpectedly accelerated in April even as shipments to the U.S. and Europe fell, spurring Bank of America Corp. and Mizuho Securities Co. analysts to say the figures were inflated by fake reports. The 14.7 percent increase, reported by the General Administration of Customs in Beijing today, was led by a 57.2 percent jump in shipments to Hong Kong that highlighted suspicions of false transactions used to mask capital flows into China. A customs spokesman said last month that the agency would investigate the extraordinary gain in trade with Hong Kong. The report deepens skepticism on the reliability of trade data from the worlds largest exporting nation, with Royal Bank of Scotland Group Plc saying export gains may be overstated by 9 percentage points. Regulators announced a crackdown this week on companies using trade reports to disguise speculative money inflows chasing a yuan thats already exceeded last years gains against the dollar.

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The New Geography of Business

Massive Shift of Wealth The creation of extraordinary personal wealth in China coupled with fears of confiscation and social instability has caused what is probably the greatest transfer of assets abroad in China's history. A recent study by Boston Consulting Group (BCG) and China Construction Bank (CCB) estimated that wealthy Chinese households hold around 2.8 trillion renminbi (453 billion dollars) in offshore assets, equivalent to 3% of China's 2011 GDP. Chinese accounted for 9.1 billion dollars of purchases of US homes in the last financial year, the secondlargest source country after Canada

Urban violence is a persistent problem in Latin America, with cities such as San Pedro Sula, Acapulco and Caracas notorious for their high rates of crime. This is owing to a combination of factors including political instability, the growing presence of powerful criminal groups and the inability of the security forces to crack down on crime.
Foreign investment in Italian holiday properties is rising as Germans, Britons and Russians take advantage of a market where locals are struggling to purchase even a first home. Residential sales in the country dropped almost 26 percent last year amid a plunge in mortgage lending, almost two years of recession, and uncertainty surrounding a new tax on primary residences.

India Cuts Policy Rate

The Reserve Bank of India lowered its policy interest rate by a quarter of a percentage point to 7.25%, but said the inflation risk leaves it "little" space for further easing.

The European Commission Friday suggested granting more time to some European countries to adjust their finances after issuing fresh forecasts pointing to a delayed economic recovery amid dire jobs conditions and drying-up of credit to households and businesses.

Australia is set to become the world's largest liquefied natural gas (LNG) producer. Japan, the world's largest LNG importer, is its largest market by far. The LNG 17 Conference in Houston last month highlighted the challenges facing Australian producers and Japanese buyers. Cost escalation is jeopardizing projects in Australia, where huge reserves are being developed for export to the strongly growing Asian market. Meanwhile, there were repeated calls for new pricing mechanisms from Japan, whose electricity prices were described as spiraling out of control.

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The PunchLine...

U.S. Breakout Potential

Geopolitics Raised in Gas Debate
The debate over whether the U.S. should export some of its natural-gas bonanza is increasingly shaped by geopolitical implications. Proponents of U.S. gas exports, including current and former lawmakers, say that exporting some U.S. gas would bolster America's relations with allies in Europe and Asia, weaken the hold of major energy producers such as Russia and help further isolate Iran. Critics worry any strategic advantage would be outweighed by eroding the benefit cheap energy offers U.S. industry at home. North Dakota provides about 11% of the U.S. oil production and the Bakken accounts for 40% of the nations increase in domestic oil production in recent years. The Bakken oil boom has led to strong growth in employment and record low unemployment rates in that region. Tight labor markets and high wages in the Bakken have also given rise to countless anecdotes from business owners complaining of difficulty finding qualified workers and having to pay higher wages to keep them.

'Sold in the USA' Stocks Beating S&P 500 Index

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The PunchLine...

The Return to Normal ?

U.S. auto lenders will likely report further weakening in asset quality metrics this year, driven mainly by lower used car values, a loosening of underwriting terms and further seasoning of loan portfolios, according to Fitch. Credit losses and delinquency rates increased on a year-over-year basis for all major auto lenders in the first quarter, and we expect that trend to continue as asset quality metrics retreat from historically strong levels reported in 2012. For Fitch-rated issuers, average credit losses increased 16 bps year-overyear in 1Q'13, and delinquencies were 67 bps higher than the year-earlier quarter.

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YouCant Handle the Truth

Let'sTaketheConoutofEconomics
Demographics Japan Japan's population fell by 284,000 in the year to October 2012, the largest decrease in both number and rate since comparable data began in 1950. Meanwhile, the population aged 65 years and above rose by 1.04 million to exceed 30 million for the first time and account for 24.1% of the total. The population aged 14 years and below fell to a record low of 13%. Japan has among the world's longest life expectancies; its fertility rate (the expected number of births over a lifetime) is among lowest. This combination means that its population is growing older and shrinking.

Corruption complicates security at Sochi Olympics

President Vladimir Putin has staked his reputation on the 2014 Winter Olympics, scheduled to take place in Sochi, a city on the Black Sea coast, near the Abkhazia border. As preparations for the games enter the home stretch, the Russian government has intensified efforts to ensure security at the event. The threat of terrorism at international sporting events has been highlighted by the recent bombing at the Boston Marathon. The ethnic and religious background of the Boston marathon bombing suspects has intensified fears of a similar attack in Sochi and the possibility that the Boston bombing will be used for a further crackdown on minority populations, primarily in the North Caucasus.

World Corruption Professional services firm Ernst & Young published its 12th annual fraud survey on May 7. Known for its large global sample and methodological rigour, the survey provides important insight into the perceptions of business executives regarding corruption, fraud and other types of misconduct. This year's results suggest that the pressures of economic downturn make executives more inclined to consider corruption and fraud as acceptable business practices. Despite the increasingly tough enforcement of anti-bribery laws, some executives continue to regard corruption as the only way to operate in certain geographical and sectoral contexts.

The chart illustrates why the bulls are running in the loan market. For one, the average price of S&P/LSTA Index loans reached a 6.5year high of 98.39 on April 30, up from 98.17 a month earlier and 96.79 at the end of 2012. Moreover, when TXU is excluded, the average Index price is within striking distance of par, at 99.29 at the end of April.

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The PunchLine...

The Likelihood of Unlikely Events

The U.S. central bank is sticking with loose monetary policy and hefty asset purchases. But with stocks at record levels and home prices up 9.4 pct in a year, asset values are heading higher even if growth isnt. The Fed needs to counter bubbles as well as economic sluggishness. The tech giant Apple sold 30year paper with a coupon under 4 pct. Markets have also seen a surge in dividend recaps, PIK toggles and other throwbacks to the precrisis leverage boom. One culprit is central banks sucking supply and squashing rates. Such distortions usually end badly.
A decade of zero or low growth in Europe would weigh on most of the continent's corporate sector, but the scale of the impact would vary significantly, Fitch Ratings says. A scenario analysis of the potential winners and losers from a Japanstyle lost decade puts utilities and telecom companies among those most at risk, while the gaming sector could benefit from deregulation as governments search for ways to increase tax revenues.

Fears over the sustainability of government debt have powered the political drive towards contractionary fiscal policy, despite tepid global demand, in the OECD. Yet a key empirical justification for this effort appears to have been discredited by a graduate student in recent published work, reigniting the debate over fiscal policy. Rising US government revenue from tax collections and bailout paybacks are shrinking the federal deficit faster than expected, delaying the point when the government will reach the so-called debt ceiling.

IMF cites current account concerns in Latin America

Spanish and Italian benchmark borrowing costs are now at their lowest levels since the last quarter of 2010, as the high-yielding peripheral bonds have caught the attention of both domestic and international investors. While the liquidity provided by key central banks -- including the announcement by the Bank of Japan (BoJ) on April 4 of aggressive monetary easing -- will likely continue suppressing yields in other regions, some investors believe the European rally is overdone. This increases the scope for at least a pause in target markets -- and even a serious correction.

The Next Pandemic: Not if, but When

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The PunchLine...

Households Brave New World

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A Closer Look

US consumer credit rose by $8.0 billion in March following an increase of $18.6 billion in February. Economists had expected credit to increase by $15.0 billion. While non-revolving credit such as student loans and car loans rose by $9.7 billion, the increase was partly offset by a $1.7 billion drop in revolving credit, which largely reflects credit card debt.

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Data Detective

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Pumping Iron - Old Economy New Challenges

Highway construction through the first two months of this year was up 2.4% from 2012's level, according to the U.S. Dept. of Commerce's construction put-in-place data for February. Combined with higher oil prices, that extra demand has helped to push ENR's price for PG-58 asphalt paving oil up 1.1% this month and 6.6% above a year ago.

Auto Sales Hauled Higher by Pickup Trucks

Detroit 3 gain market share in April on strength of pickups, crossovers

Japanese Car Makers Lose Their Midsize Edge

Ford Fusion, Hyundai Sonata, VW Passat, Others Pose Real Challenge After Closing Quality Gap

General Motors reported sales growth in China accelerated last month while Toyota Motor Corp.'s deliveries continued to lag. GM sales climbed 15 percent to 261,870 units in April, according to figures released today by the carmaker. Toyota reported sales fell 6.5 percent to 76,400 units, the ninth drop in 10 months. GM's sales of Buick and Chevrolet vehicles rose more than 20 percent as the company seeks to keep its lead in China among foreign automakers for a ninth straight year. That's at the expense of Japanese automakers who are still coping with the fallout of a territorial dispute that flared in September. GM Sinks $1.3 Billion Into Chinese Cadillac Factory

Iron Ore Seen Dropping by BHP as Supply Growth Tops Demand

Global iron ore supplies will expand faster than demand over the long term, lowering prices and reducing volatility of the raw material used to make steel, according to BHP Billiton Ltd. (BHP), the largest mining company. New seaborne cargoes will replace more expensive output, mainly in China, Alan Chirgwin, general manager of iron ore marketing, told a conference in Singapore today. He didnt give price forecasts or define long term. China is the worlds largest buyer of the biggest seaborne cargo after crude oil.

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Credit Matters-Know Risk

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Credit Concerns

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The PunchLine...

Deal or No Deal in Europe?

Is the slide in auto sector bottoming out?
Car sales rose in Germany and Spain last month, adding to signs that Europe's austeritydriven auto slump could soon bottom out. Spanish car sales increased 11 percent while registrations in Germany, the region's biggest market, advanced 4 percent for the first gain in six months, national industry body data showed on Friday. The numbers build on data showing that the drop in car sales in France slowed to 5 percent in April from a 16 percent fall in March. In Italy, where sales fell 11 percent last month, there was cautious optimism that political uncertainty ended.

Portugal's prime minister says he plans to raise the retirement age to 66 from 65 and lay off some 30,000 government workers in measures that aim to save 4.8 billion euros ($6.3 billion) over the next three years. Pedro Passos Coelho said in a televised address to the nation that the new measures are needed to ensure Portugal won't require another bailout. Portugal got a 78 billion euro rescue in 2011 after overspending, heavy debts and weak growth left it close to bankruptcy amid the eurozone's financial crisis. Poland Cuts Interest Rates to Record Amid Lack of Recovery Polands central bank cut its benchmark interest rate to a record low as the European Unions largest eastern economy struggles with slowing growth. The Narodowy Bank Polski lowered the seven-day reference rate by a quarter-point to 3 percent. Policy makers resumed reductions after a pause last month as inflation slowed to its weakest in more than six years and manufacturing shrank the most in 45 months in April. While the reduction in borrowing costs shouldnt be seen as a start of a new round of monetary easing, a further cut or unchanged rates are possible when policy makers meet next, Governor Marek Belka said

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The PunchLine...

The DNA of Business

Workouts to Define Recovery

Iron Man is a bigger golden boy than ever with a $175.3 million opening weekend at the domestic box office for the superhero's latest sequel. According to studio estimates Sunday, "Iron Man 3" had the second-biggest debut ever, behind the $207.4 million start last year for "The Avengers," which teamed him with other Marvel Comics heroes. Opening a week earlier overseas, "Iron Man 3" has hauled in $504.8 million internationally, giving the blockbuster a worldwide total of $680.1 million. The summer box office season was jump-started by Iron Man 3 and its super(hero)-sized opening (2nd best all-time). While this is a healthy sign for the box office, the industry top 12 was still down ~13% from last year when The Avengers was tops with a record-breaking $207.4mm bow. YTD revenues and attendance are both tracking down 11%.

Apple sets 6-part deal to establish funding yield curve

Apple today filed to offer an SECregistered, sixpart benchmark transaction intended to establish a bona fide yield curve for the highprofile, but historically debt averse borrower, as it embarks on an aggressive shareholderreturn plan. The total bondoffering size has yet to be determined, but speculation over the last week has leaned toward an historic debut amount. On April 23, Apple officials said on the debtfree companys earnings call that we will access the U.S. debt markets over time, as it prepares to return roughly $100 billion to shareholders through calendaryear 2015. The plan is expected to weigh on domestically domiciled cash balances, as the company resists repatriating material amounts of offshore cash due to tax implications.

Citrus Disease With No Cure Is Ravaging Florida Groves

Poker devotees will soon be able to skip the smoky casino and legally gamble their dollars away on the couch - at least in the state of Nevada. A Las Vegas-based social gambling company is expected to launch the first legal, real-money poker website in the United States. The site, run by Ultimate Gaming, will accept wagers only from players in Nevada for now, but likely represents the shape of things to come for gamblers across the country. Internet poker, never fully legal, has been strictly outlawed since 2011, when the Department of Justice seized the domain names of the largest offshore sites catering to U.S. customers and blacked them out.

Regulators Scrutinize Auto Lenders Over Add-Ons

The Consumer Financial Protection Bureau has issued subpoenas to U.S. auto lenders over the sale of extended warranties and other financial products, expanding a civil probe that could slow the booming car-loan industry.

China Faces Fall in Factory Prices A sharp fall in factory pricesthe 14th consecutive monthly declinesignals further trouble for a Chinese economy already facing mounting debt and slowing growth.
Producer pricesa measure of prices of goods before they reach consumers dropped 2.4% in April, the sharpest decline since October, paced by particularly steep falls in the metals and chemicals sectors. That could add to concerns about China's slowdown in growth, say economists, because falling producer prices make it tougher for makers of industrial goods and commodities to make profits, pay off their debts and pay their suppliers on time. Part of a big surge in Chinese lending has been used to refinance debt or pay off interest of companies burdened by overcapacity

Home prices in US metropolitan areas saw their biggest year-over-year gains in more than seven years in the first quarter, evidence that the housing recovery is spreading across the nation.

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The PunchLine...

Some Industry Specs

Small investors are borrowing against their portfolios at a rapid clip, reaching levels of debt not seen since the financial crisis. Cutting Student Debt The White House proposes that the government forgive billions of dollars in student debt, cheering student advocates, but critics say it would encourage students to borrow too much and stick taxpayers with the bill.

U.S.retailerscontinuedtobestymiedby coolweatherinApril,leadingtogenerally lukewarmsamestoresalesforthemonth.

20CITYSurveyMaterialsCostsCONSTRUCTION 1913=100 May2013 Source:ENR IndexValue %changeMonth%changeYear Materials 2976.14 +0.8 +2.0 CEMENT$/TON109.910.0+2.3 STEEL$/CWT 49.95 +0.8 0.9 LUMBER$/MBF434.26 +1.0+10.5

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Real Estate and Construction Outlook

Congress Looks at REIT Tax Exemption A powerful congressional committee is examining the tax exemption that realestate investment trusts have enjoyed for decades as part of its comprehensive review of the tax code

More than 3 million square feet of vacant office space is slated to open next year at 1 World Trade Center and the neighboring tower under construction, 4 WTC. And another 2 million square feet are on the drawing board at 3 WTC, whose construction is stalled at seven stories for lack of commercial tenants

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Will Life Ever Be the Same?

This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot by guaranteed. The views reflected herein are subject to change without notice. No one connected to this publication accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. This publication may not be reproduced, distributed to any person for any purpose without express permission from TPL Advisory, LLC. Please cite source when quoting. All rights are reserved.

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