5/3/2012: Weak Manufacturing PMI for February

In the next few posts I will be updating the current data on Irish PMIs. This first post will be focusing on core PMI data for Manufacturing. All original data is courtesy of NCB, with analysis provided by myself. Some of the indices reported are derived by me on the basis of proprietary models and are labeled/identified as such.

Taking from the top:

• Core Manufacturing PMI has posted shallower contraction at 49.7 (statistically insignificantly different from 50.0=no change) in February. This signals compounded contraction on January deeper rate of deterioration (48.3).
• 12mo MA for core PMI is at 50.3 with 3mo MA at 48.9. Previous 3mo period average was 38.4, so there is no consistent break from the shallow negative growth trend so far.
• Same 3mo period in 2011 averaged 54.9 and in 2010 - 48.5. Again, data suggests roughly similar dynamics today as in 2009-2010, not 2010-2011 period.

• New orders sub-index reached marginally above 50 in February at 50.1, marking substantial improvement since January 46.8 reading. 12mo MA is at 50.2 - in effect showing no growth in the last 21 months. 3mo MA remains strongly contractionary at 47.6
• New exports orders posted a deterioration and slipped into negative growth territory at 49.7 in February from 50.9 in January. 
• Output subindex clearly shows the established flat trend that is running since mid-2011. Output rose to 50.4 (statistically indistinguishable from 50) from contractionary 47.3 and is now running ahead of 3mo MA of 48.8, but behind 12mo MA of 51.5.

Chart below shows more recent snapshot of data with clear evidence of flat - zero-growth - trend since mid-2011.

Two charts below detail other components of the Index:

• Backlogs of work slightly improved to slower contraction-signaling 43.8 from 41.1 in January
• Quantity of purchases also improved by posting shallower rate of decline at 48.7 agains 47.1 in January
• Critically, February output prices posted deeper deflation at 47 against 48 in January. Output prices are now staying in deflationary territory since August 2011.
• Input prices inflation shot up in February to 60.5 from already inflationary 58.3.
• The two movements above mean profit margins have shrunk in Manufacturing - although more details on this in later post dedicated to profits margins in both Services and Manufacturing sectors.

Real disappointment comes from Employment sub-index:

• Employment sub-index in Manufacturing has posted slight acceleration in contraction from 49.5 in January to 49.3 in February
• The index is now running below 50 - on average - over 12 months. Last 3 mo MA is 49.8, which is down from same period of 2011 when it stood at 51.8.
• Given the above profitability trend, it is likely that Manufacturing Employment will not be posting any serious growth any time soon.

Next post will update data for Services PMI.

3/3/2012: Irish Merchandise Trade 2011 (preliminary estimates)

With some delay, updating Ireland's external trade figures for merchandise trade for December 2011 data. Instead of doing a monthly update, let's take a look at the annual figures. Please keep in mind that December numbers incorporated here are preliminary estimates by the CSO. And do also remember that this is trade in goods / merchandise trade ONLY - the CSO doesn't wish to distinguish it as such in its releases, but this data does not include trade in invisibles / services.

Chart below shows exports, imports and trade balance in goods trade:

•  Imports value posted significant increase in 2011 of 5.65% yoy after a shallow rise of 0.62% in 2010. 3 year average rate of change in imports remains deeply negative, however at -5.13%, a year ago it was -9.85%.
• Exports rose 3.88% yoy, reaching the level of €92.71bn, the second highest level in history after €93.68bn in 2002. Last year, exports rose 5.26% yoy. 3 years average rise now stand at 2.31% against previous year 3 year average increase of 0.05%.
• Trade surplus rose to another historic high of €44.32bn - up 2.0% yoy - a significant accomplishment, but a slowdown in the rate of growth of 10.64% achieved in the 2010. In 2010, 3 year average rate of increases in trade surplus was 19.62% and in 2011 it was 16.64%.
• Record trade surpluses have now been recorded in 2009, 2010 and 2011, implying that the 'exports-led recovery' is now full 3-years strong without a corresponding translation into full economic recovery.

Chart below shows imports intensity of our exports - the ratio of exports to imports expressed in percentage terms.

Per chart above, our exports remain largely divorced from imports, which strongly suggests that the last 3 years (during which imports intensity was well above the historic average of 150%) the core driver for exports and trade balance performance was transfer pricing, not the real economic activity. Chart below illustrates the differential between volume of trade consistent with 9-year MA intensity and the actual volume of trade, with the MA-consistent trend stripping out some recent transfer pricing activity out of the exports figures (note, this, of course, is a highly imperfect measure, so treat the chart as being simply illustrative).

2/3/2012: Nama valuations - January 2012 update

In the previous post I looked at the latest data on residential property prices (link here). Here, let's update the Nama valuations numbers based on January 2012 property prices data.

Table below summarizes referencing of January 2012 numbers to two different dates: November 30, 2009  - the cut-off date for Nama market value assessments, and Q1 2010 - the first time Nama tried to call property market 'bottom'. So 'Loss' on nama book valuations refers to the percentage difference between the cut-off date value of properties and current value of properties according to RPPI - please note, this is an economic loss - not an actual loss to be provisioned for. Nama valuations inaccuracy index is reflection of Nama prediction - implicitly reflected in its business plans - that the property market in Ireland will bottom out in Q1 2010. Weighting to book assumes that on residential portfolio 70% of portfolio in in Apartments and 30% in houses.

Note that in the above I take account of Nama-applied Long-Term Economic Value uplift and net out the subordinated debt cushion of 5% for burden sharing (Nama loss cushion). When you think about it, we are paying six figure salaries to these boffins who are almost 30% wrong in their market predictions just 7 quarters out.

2/3/2012: Lending to Irish SMEs - a pipe dream that keeps piping

A quick thought. RTE reports on CBofI data from the standard banks lending surveys (I can't be bothered to dig through the pile of ECB data files on this right now, so let's take what they have (link here), even though it ain't much.

"Central Bank economists say that the lending conditions imposed by the banks are significantly tougher in terms of collateral requirements, interest rate charges, the size of loans available and the rejection rates. Central Bank Governor Patrick Honahan has said that the authorities have provided unlimited liquidity to the banks at very low interest rates and noted the importance of the SME sector for the economy as the main engine of job creation. ...the Irish Bankers Federation has insisted that banks are lending to SMEs contrary to new central bank research."

So here's a memo to the CBofI front desk:

You (CBofI) spent last 4 years

1. Actively and even preventatively protecting Irish majority-Zombie Banks and larger Investment Firms via regulatory and funding channels, stifling competition and restricting new entries; 
2. You, CBofI, have been incessantly talking about ensuring that the 'banks' are lending into the real economy;
3. You, CBofI, have allegedly 'adequately' recapitalized Zombie Banks for 2011-2013 period under PCARs with so much taxpayers dosh, the country is crocking under the weight of debts;
4. You, CBofI, have actively campaigned to reduce the scope of systemic insolvency resolution, thus, along with (3) above exacerbating investment funds shortages in the country by making sure the 'Banks' capture people's savings into perpetual mortgages & debts repayment scheme;
5. You, CBofI, are running the largest (per supervised institution) sized staff of all NCBs in the euro area and are still hiring new 'talents';
6. You, CBofI, have failed to put in place anything in terms of reforming the banking sector here, other than more protectionism, duopoly, risk de-diversification via geographically targeted deleveraging;
7. You, CBofI, have retained all the staff that was present during the systemic capture of the financial regulation in this country by the very same banks you are now protecting... 

So here's an unpleasant monetary arithmetic the Irish-style:

∑(i=1...7)= Whinging about Toughest Lending Conditions for SMEs in Europe 

What did you guys expect to come out of the above? Healthy, competitive, functional banking and investment sector? Really? I wouldn't call THAT a rational expectation.

PS: I am aware that we have many SMEs in trouble, unable to repay existent debts. But we also have loads of new companies - start-ups and existent enterprises - that can't even get trade finance against clean balance sheets.

2/3/2012: RPPI for January 2012 - Things are Getting Worse, Faster

Residential Property Price Index for January released yesterday shows continuation of a dramatic downward trend in property prices that continues to confound the rents data signals over a number of months now.

Top level data first, followed by Nama valuations-linked analysis in the subsequent post.

1) Overall RPPI has fallen to 67.6 in January 2012, down 1.89% mom (the steepest decline since October 2011) and 17.36% yoy (the largest annual drop since January 2010). 3mo MA now stands at 68.87 and 12mo average rate of change is -1.58% monthly.

2) Index for house prices nationally fell to 70.4 in January from 71.7 in December 2011, implying a monthly decline of 1.81% - steepest since November 2011. Annual rate of decline is now 17.08% - the fastest rate of decline since December 2009. Annual rate of decline has been now rising every month since July 2011, same as for all properties RPPI.
3) Apartments prices index fell to 51.2 from 53.5 in December 2011, implying a 4.30% decline mom and 20.87% drop year on year. This marks the sharpest rate of monthly decline in prices since August 2011 and the sharpest drop year on year since March 2010.

4) Dublin properties index now reads 58.3 compared to December 2011 reading of 60.7. Mom prices are down 3.96% - sharpest on the record and yoy prices are down 21.11% - sharpest since February 2010.

Overall, relative to peak:

• All properties index is down 48.20%
• House prices index is down 46.67%
• Apartments prices are down 56.82%
• Dublin property prices index is down 56.65%

 Acceleration in declines in index readings is present for:

• All properties index since November 2011 for monthly changes and since July 2011 for yoy changes
• House prices index since December 2011 for monthly changes and for yoy changes since July 2011
• Apartments prices index since November 2011 for monthly and yoy changes
• Dublin property prices index since October 2011 for monthly changes and since July 2011 for yoy changes

In other words, things are getting worse faster.

2/3/2012: Few recent links

To tidy up a reading list:

1. Harald Uhlig's excellent essay on economics and reality - the links between empirical, implied and theoretical analytics. Worth a read. Link here.
2. Technical, but nonetheless insightful article on the returns differentials for actively v passively managed funds by Diane Del Guercio and Jonathan Reuter "Mutual Fund Performance and the Incentive to Invest in Active Management" NBER WP17491. The main results: known fact = actively managed funds underperform index funds in comparisons when returns considered exclude considerations of costs and services differentials. The study controls for differences across various mutual funds by controlling for 3 market segments: retail funds sold to investors, retail funds sold via brokers and institutional funds. The study finds that underperformance is strongest in the broker-sold segment and weakest in the directly sold funds segment. Authors find that "within the direct-sold serment, the risk-adjusted, after-fee returns of actively managed funds are statistically indistinguishable from those of index funds". Furthermore, "to rationalize differences in performance, we test for differences in the flow-performance relation across the three segments. We find that fund flows respond most strongly to risk-adjusted returns in the direct-sold segment. We find a wide variety of evidence that direct-sold funds respond to investor preferences for risk-adjusted performance by investing more in active management. Our findings suggest that the underperformance of the average actively managed fund reflects its weaker incentives to generate alpha rather than an inability to generate alpha. We argue that our findings also help to explain the continued demand for actively managed funds."
3. Another interesting paper from NBER by David Hummels et al, titled "The Wage Effects of Offshoring: Evidence from Danish Matched Worker-Firm Data" (WP17496) looks at offshoring and exporting effects on wages by skill-types. Per study: "We find that within job spells, (1) offshoring tends to increase the high-skilled wage and decrease the low-skilled wage; (2) exporting tends to increase the wages of all skill types; (3) the net wage effect of trade varies substantially across workers of the same skill type; and (4) conditional on skill, the wage effect of offshoring exhibits additional variation depending on task characteristics. We then track the outcomes for workers after a job spell and find that those displaced from offshoring firms suffer greater earnings losses than other displaced workers, and that low-skilled workers suffer greater and more persistent earnings losses than high-skilled workers."
4. Great paper on the effects of the Euro crisis on non-financial European firms by Stijn Claessens, Hul Tong and Igor Zuccardi (IMF Working Paper 11/27), titled "Did the Euro Crisis Affect Non-Financial Firm Stock Prices Through a Financial or Trade Channel?" The study finds that for stock price responses over the past year for 3045 non-financial firms in 16 countries: (1) policy measures announced impacted financially-constrained firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries, and (2) trade linkages with peripheral countries also played a role, with euro exchange rate movements causing differential effects.