Top of the morning

Carl Riccadonna, former Deutsche Bank economist who is now with Bloomberg, writes that the American economy’s expansion cycle isn’t set to die of old age:

Assessing the “relative age” of the current cycle depends more on the critical macroeconomic fundamentals than counting the quarters from the last recession. All else being equal, economies with growing populations and positive productivity growth are similarly inclined to grow. The U.S. economy is blessed with both of these assets.

Economic downturns materialize when imbalances develop and ultimately are worked off. The most common cause of recessions since the end of World War II has been excessive inventory accumulation, which ultimately resulted in a pullback in factory output, layoffs, etc. More recently, the economy has witnessed downturns resulting from excesses in capital investment (2001) and housing (2007-09). In this regard, many of the problems plaguing the economy earlier in the current cycle may now actually contribute to its longevity.

The sluggish pace of hiring and investment means that companies are thinly staffed and in need of additional capital investment as the demand for output continues to grow. Housing inventory remains in short supply and the level of business inventories is lean relative to sales. In turn, upon evaluating the major sectors of the economy where recession-causing imbalances are likely to develop, there is little evidence of excess at present — and this appears unlikely to change in the foreseeable future.

On the homefront

A broad-based rally gave the TSX a solid gain to kick off the week, with eight of ten sectors moving higher. The near-contract for WTI crude oil futures surged above $76 per barrel overnight. Though some of that advance has been curtailed, that should provide good support for Energy stocks on Tuesday. TSX 60 futures are trading to the upside ahead of the open.

 

The Canadian dollar is trending downwards against its U.S. counterpart after rising on Monday afternoon to trade at 0.885 this morning.

 

Struggling retailer books another loss. Sears Canada (SCC) released its Q3 results today. The company’s quarterly loss – its tenth in its last 15 reports – was $1.16 per share. Same-store sales declined by 9.5 percent compared to the same period in 2013. “These results are disappointing,” admitted Ron Boire, interim CEO. On Monday, JP Morgan Chase announced that its agreement to service Sears Canada’s credit card business would end on November 15, 2015. The two parties are searching for a customer to take on this portfolio. In the event that one is found, this could result in a fee of $174 million paid by JP Morgan to Sears Canada. Sears Holdings no longer holds a majority stake in this Canadian division; it raised about $380 million (U.S.) through a rights offering, which reduced its stake from 51 to 12 percent.

 

Competition Bureau investigating Loblaw’s pricing strategies. Investigators have subpoenaed a number of Loblaw’s (L) suppliers in an investigation into how the company’s pricing practices may have changed in the wake of its acquisition of Shoppers Drug Mart. A spokesperson for the retailer said this probe was “not new news.” To be fair, Loblaw’s parent company, George Weston (WN), did have some good news this morning, as its Q3 adjusted earnings per share from continuing operations came in two cents higher than expected at $1.59.

 

Talisman may be close to pipeline sale. Bloomberg reports that Talisman Energy (TLM) is considering a sale of its pipeline operations in the Marcellus Shale to Regency Energy for more than $1 billion (U.S.), news which gave the stock a shot in the arm on Monday. The Canadian energy firm, which counts billionaire activist investor Carl Icahn among its shareholders, has been looking to slim down and raise cash by divesting non-core assets.

Daily dispatches

Chinese home values dropped 2.6 percent year-over-year in October, according to Reuters. That’s a signal the targeted, small-scale stimulus enacted to support this sector has been insufficient. On an annual basis, home prices fell in 67 of the 70 cities surveyed by the National Bureau of Statistics. “The Hang Seng and Shanghai Composite are both struggling with investors focusing on another round of weak property prices data,” writes IG market strategist Stan Shamu. “It is clear investors are struggling to find bright spots at the moment and the main central banks will have to be at the forefront of any risk rally.” More bad news: direct investment into China from abroad fell 1.2 percent in the first ten months of 2014 relative to the same period in 2013.

 

Japan to hold a snap election before the year is out. Speaking in the wake of an unexpected contraction in Q3 that sent Japan back into recession, Prime Minister Shinzo Abe announced that he would dissolve the nation’s House of Representatives on November 21. Though no formal date was declared, the next election is widely expected to be held in mid-December. Abe is looking to push back the next increase in the sales tax, currently scheduled for October 2015, by 18 months. The prime minister indicated that this would be the last time the implementation of a sales tax hike would be delayed. More stimulus, both fiscal and monetary, appears to be on the way.

 

Germans became much more optimistic in November, with the ZEW Economic Sentiment index for the country surging by much more than expected (from -3.6 to 11.5), snapping a 10-month streak of declines. The release of Q3 GDP figures released last week showed the euro zone’s economic engine didn’t slip into a technical recession, a fact which may buoy confidence in the next survey.

 

Inflation in the United Kingdom unexpectedly edged up by a tenth of a percentage point to 1.3 percent in October. Subdued levels of inflation provide support for Bank of England Governor Mark Carney to maintain low rates and the use of unconventional monetary policy.