Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: June 2017

THE DAILY EDGE (29 June 2017)

U.S. GDP Growth Revised Up to 1.4% in First Quarter The revision reflected stronger exports and consumer spending on services

(…) That was up from an earlier estimate of 1.2% growth, and forecasters expect a further pickup in the second quarter, which ends Friday. Macroeconomic Advisers on Thursday projected a 3.3% GDP growth rate for the spring quarter and the Federal Reserve Bank of Atlanta’s GDPNow model earlier this week predicted 2.9% growth. (…)

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In the first quarter, gross domestic product grew at just a 1.4% annual rate, while investment in capital equipment, new plants and the like increased 10.4%. Absent that gain, GDP would have grown by just 0.2%.

The jump in capital spending—the largest in five years—suggested companies were finally shaking off some off their caution. In truth, most of that spending was by energy companies ramping up drilling after oil prices recovered. With energy prices sliding, the rebound is looking short-lived.

Spending on energy-related equipment and structures (such as oil wells) counted for about 40% of the gain in capital spending in the first quarter. Since energy firms buy plenty of other items, such as transportation equipment, their share of overall capital spending was probably even larger.

There won’t be a repeat performance in the second quarter. Much of the gain in energy-sector spending in the first quarter likely came from purchases that were deferred in response to the crash in oil prices. (…)

A survey from the Federal Reserve Bank of Dallas released Wednesday showed that energy firms were less optimistic in the second quarter than the first quarter, and that fewer firms were increasing their capital spending. Comments from respondents to the survey exhibited plenty of worry. (…)

Economic Outlook from Freight’s Perspective – Gaining Strength

Not only have both the Shipments and Expenditures Indexes have now been positive for five months in a row, but they are showing accelerating strength. Throughout the U.S. economy, there is a growing number of data points suggesting that the economy continues to get slightly better. Some data points are simply less bad, but an increasing number of them are better, and even a few are becoming outright strong. The 7.1% YoY increase in the May Cass Shipments Index is yet another data point which confirms that the first positive indication in October was a change in trend.

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What specifically is driving recent volumes? Parcel volumes associated with e-commerce continue to show outstanding rates of growth, with both FedEx and UPS reporting strong U.S. domestic volumes. According to the proprietary Broughton Capital index in the most recent month available (May), airfreight has also been showing improving strength, with the Asia Pacific lane jumping 12.3% and the Europe Atlantic lane growing 4.3% on a YoY basis. As we have described in previous reports, the strength in the Asia Pacific lane buoys our confidence in continued strength in the tech sector [there historically has been a high level of correlation between Asia Pacific airfreight and semiconductor billings], and continued improvement in the Europe Atlantic lane buoys our confidence in the continued growth, albeit modest, in the overall European Union economy.

Over the last two years, rail volumes have been a significant part of the weakness in freight flows, but lately they have become increasingly less bad, and in recent weeks have turned overall positive. Although it was against a very easy comparison, the Association of American Railroads (AAR) reported that the trailing 4 weeks YoY overall commodity carloads originated by U.S. Class 1 railroads grew by 8.4%, and even intermodal units have turned positive up 5.5%. (…)

We continue to assert that the trucking industry provides one of the more reliable reads on the pulse of the domestic economy, as it gives us clues about the health of both the manufacturing and retail sectors. We should note that as the first industrial-led recovery (2009-2014) since 1961 came to an end, and the shift from ‘brick and mortar’ retailing to e-commerce/omni-channel continues, we are becoming more focused on the number of loads moved by truck and less focused on the number of tons moved by truck.

• Tonnage itself appeared to be growing and gaining momentum (three-month moving average reached +2.58 on a not seasonally adjusted basis in January). Unfortunately, February, March and April tonnage was -2.71%, 1.13%, and -1.18%, pulling the three-month moving average down to -0.86%.
• Dry van truck loads have now contracted on a YoY basis six out of the last eight months and eight out of the last ten months. The most recent month (April) reported by the American Trucking Associations (ATA) was down 2.42% and pulling the three-month moving average even further negative to -1.87%. But fear not, recent data out of DAT Solutions suggests that this may be getting better in June.

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Zumper National Rent Report: July 2017

This month, the Zumper National Rent Index reported that one bedroom median rent declined by 1.7% to $1,149, while two-bedroom rent decreased by 1.8% to $1,367. Overall, the Zumper National Rent Index values returned back to where they were a year ago. (…)

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Money Money A slide deck on America’s fiscal trajectory from Jason Furman.
Economic Conditions Snapshot, June 2017: McKinsey Global Survey results

(…) Respondents are as bullish on the global economy as they were three months ago: nearly half say global economic conditions have improved in the past six months. On the global economy’s prospects, too, respondents are more positive than negative. Nearly equal shares of executives say global conditions have improved (45 percent) and expect conditions will continue improving in the next six months (41 percent). (…)

Executives in India, who have long been the most upbeat, remain more positive than average about domestic conditions. But they are followed closely by their peers in Europe, 55 percent of whom say conditions at home have improved; those in the eurozone, where two-thirds cite improvements, are even more bullish. On the other end are executives in Latin America, the most likely respondents to say conditions have worsened: 39 percent say so, compared with the global average of 22 percent. Still, executives in the region are much more positive about current conditions than they were six months ago.

(…) respondents in North America are the least likely to say they expect improvements. Only 38 percent of executives now say so, compared with 48 percent in March and 53 percent in December. (…)

For the first time since March 2016, a larger share of emerging-market executives than developed-market executives predict their companies’ profits will increase in the next six months. At the regional level, those in India and in other developing markets are the most bullish on their companies’ prospects. (…)

Euro-Area Inflation Slows as Draghi Urges Prudence in Exit

Consumer prices rose an annual 1.3 percent in June — more than economists predicted — after increasing 1.4 percent the previous month, according to a flash reading by Eurostat on Friday. The core rate, which strips out volatile components such as energy and food, increased to 1.1 percent from 0.9 percent in May, also exceeding estimates. (…)

China Manufacturing Rose in June Amid Global Upturn
  • The manufacturing purchasing managers index increased to 51.7 in June, beating all estimates compiled by a Bloomberg survey of economists, and the 51.2 reading in May
  • The non-manufacturing PMI rose to 54.9 compared to 54.5 a month earlier
  • New export orders rose to 52.0, the highest level since April 2012
  • New orders climbed to 53.1 from 52.3 in May
  • Business activity expectations rose to 58.7 from 56.8 in May
  • Steel industry PMI for June eased to 54.1 from 54.8
  • Conditions at large and medium-sized enterprises diverged; larger firms index rose to 52.7 from 51.2 while medium business index slipped to 50.5 from 51.3
  • Services’ role in stabilizing the economy was reinforced; Delivery index rose to 72.2 aided by mid-term online sales promotions
Chinese Regulators Play Whac-A-Mole With Banks One of Chinese banks’ favorite tools for increasing leverage has staged a comeback just two months after a crackdown, highlighting the difficulties Beijing faces in its effort to cure the economy’s addiction to debt-fueled growth.

Chinese banks’ issuance of negotiable certificates of deposit in June nearly hit the high recorded in March, data from Wind Info showed. NCDs, a type of short-term loan, have become extremely popular in recent years with Chinese banks, especially smaller lenders due to their weaker ability to attract deposits.

During a clampdown on runaway debt in April, Chinese regulators warned banks against abusing the tool for speculative, leveraged bets in capital markets. But after a deep but brief drop, NCD issuance has risen again as regulatory attention appeared to ease in recent weeks, hitting 1.96 trillion yuan ($287.73 billion) this month, up sharply from 1.23 trillion yuan in May and just a touch below March’s record 2.02 trillion yuan. (…)

China introduced NCDs in 2013 as part of steps to liberalize interest rates, allowing banks to use the new fundraising tool to help set borrowing costs according to supply and demand.

The NCD market started taking off last year, as a rallying bond market encouraged banks, particularly the more aggressive and profit-driven smaller lenders, to use such short-term loans to further leverage their investments. (…)

There are signs that many banks are issuing NCDs to roll over maturing loans, giving themselves a lifeline to cover frequent short-term funding needs. (…)

Japan labour shortage hits 43-year high Latest data show increasing demand for workers but no sign of inflation

(…) The ratio of open jobs to applicants in Japan hit a 43-year high in May, as labour shortages in the world’s third-largest economy become ever more extreme. The closely watched indicator of Japan’s market rose 0.01 points to a reading of 1.49, the highest since February 1974, as companies struggle to fill positions from an ageing and shrinking workforce. The indicator covers all jobs, permanent and temporary.

New data suggest Japan’s economy is growing steadily and running at close to full capacity. But there is no sign of upward pressure on prices, meaning that the Bank of Japan will struggle to hit its 2 per cent inflation target. (…)

The rise in regular positions suggests companies are responding to labour shortages by improving conditions for workers rather than increasing pay. (…)

Headline consumer prices were up 0.4 per cent on a year ago, the same as in April, while the “core-core” consumer price index, excluding fresh food and energy, was unchanged compared with a year ago. (…)

Oil Prices Continue String of Gains After U.S. Production Drop Oil prices were up for the seventh straight session in their longest streak of gains since April, as investors continued to respond to a drop in U.S. production.

(…) Prices have rebounded after official data showed U.S. crude production dropped by 100,000 barrels a day last week. (…)

Meanwhile, demand growth globally is also clouding the outlook on crude prices. BMI Research data show that in the first quarter, U.S. fuel consumption was nearly flat compared with the same period last year, while South Korea showed smaller-than-expected growth and Japan’s demand contracted by 3% on year. (…)

(…) Analysts expect low prices to last. A poll of 14 investment banks, surveyed by The Wall Street Journal in late June, predicted benchmark Brent crude would average $55 a barrel this year, down two dollars from the May survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $52 a barrel this year, down two dollars from the previous survey.

Banks in the survey also downgraded their expectations for oil prices next year, predicting Brent crude would average $57 a barrel, down two dollars from the May poll. The banks expect WTI to average $55 a barrel in 2018, down three dollars. (…)

(…) A forecast released this month by the Canadian Association of Petroleum Producers sees the country’s output increasing by 270,000 barrels a day in 2017 and another 320,000 b/d next year. That combined two-year Canadian increase is equal to almost a third of Opec’s production cuts that it made with allies like Russia at the beginning of this year in an effort to raise prices. (…)

Rystad Energy, a consultancy, says production costs at mines have almost halved from $39 to $22 per barrel between 2014 and 2016, while in situ plants’ production costs have dropped from $18 to about $11 a barrel. (…)

Amazon enters top 5 in Global Brands 2017 ranking Tech companies dominate as they become a routine part of people’s lives

THE DAILY EDGE (29 June 2017)

U.S. Durable Goods Orders Drop, But Trend Improvement Remains in Place

New orders for durable goods declined 1.1% during May following an unrevised 0.9% April fall. Despite the decline, orders increased 2.7% y/y after falling 1.7% during all of last year.

The decline in durable good orders was led by a 3.4% fall (-2.5% y/y) in transportation bookings, which followed a 1.8% drop. The decline was paced by a 30.8% plunge (+11.6% y/y) in orders for defense aircraft. Civilian aircraft orders were off 11.7% (-37.4% y/y). Motor vehicle & parts orders rose 1.2% (5.0% y/y) after increasing 0.5%. (…)

Nondefense capital goods orders declined 2.4% (-3.2% y/y), about the same as in April. Orders excluding aircraft eased 0.2% and have been stable for four months. The 5.0% y/y increase compared, however, to sharp declines in 2015 and 2016.

Here’s the important chart from The Daily Shot:

U.S. Pending Home Sales Fall Again

The National Association of Realtors (NAR) reported that pending home sales fell 0.8% during May to an index level of 108.5 following a 1.7% April fall, revised from -1.3%.

Pending sales declined across most regions. The index for the West declined 1.3% after a 5.7% rise. For the South, the index fell 1.2% after a 3.5% decline. The index in the Northeast was off 0.8%, down for the third straight month. Remaining unchanged was the index for the Midwest after two months of decline.

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GM lowers outlook for U.S. 2017 new vehicle sales

General Motors Co (GM.N) now expects U.S. new vehicle sales in 2017 will be in the “low 17 million” unit range, reflecting a widespread expectation that the industry is headed for a moderate downturn, a top executive said on Monday.

“The market is definitely slowing … it’s something we are going to monitor month to month,” Chief Financial Officer Chuck Stevens told analysts on a conference call. “Pricing is more challenging.” (…)

He reiterated the company’s target to bring U.S. inventories of its vehicles down to 70 days’ supply by December from 110 days in June. (…)

With all the above, here’s a summary of the state of the U.S. economy:

CHICAGO FED NATIONAL ACTIVITY INDEX IN SLOW MODE

The Chicago Fed’s National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed’s website.

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level. (Doug Short)

CFNAI and Recessions

  • There is no evidence that the US economic activity is accelerating as some economists (and the stock market) had been expecting. (The Daily Shot)

Next week we get the PMIs for June. We got a preview last week:

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Manufacturing is looking particularly weak:

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IMF cuts U.S. growth outlook, cites uncertainty around Trump policies The IMF cut its forecast for U.S. economic growth for this year to 2.1% from a previous estimate of 2.3%. Its leaders cited highly uncertain policies on tax reform and an agenda that hurts middle class Americans as well as long term challenges such as an aging labor force.

The Atlanta Fed:

GDPNow

The NY Fed:image

THE CB BACKSTOPS ARE WEAKENING:

(…) The market moves started on Tuesday when European Central Bank President Mario Draghi acknowledged a “strengthening and broadening” economic recovery in the eurozone. (…)

Speaking Wednesday at the same conference in Portugal, the chiefs of the Bank of Canada and Bank of England both suggested they’d be reducing monetary stimulus in the form of raising interest rates. The Canadian dollar and British pound spiked in response, and local bond yields headed higher. (…)

(…) The immediate trigger was a speech from European Central Bank President Mario Draghi arguing that as the eurozone recovery progresses, keeping policy unchanged would be a form of monetary loosening. Instead, the central bank could “adjust the parameters of its policy instruments.” In more straightforward terms, ultra-stimulative policy measures are set to be reined in, though Mr. Draghi emphasized that this would be a careful, gradual process. If they can, central bankers are likely to want to avoid a rerun of the “taper tantrum.” (…)

Confused smile June 20th:

“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anemic wage growth, now is not yet the time to begin that adjustment,” he said.

(…) “We’ve made very clear that we think it will be appropriate to the attainment of our goals to raise interest rates very gradually,” she said Tuesday in London. (…)

“Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said.

Yellen’s comment on asset prices follows remarks earlier on Tuesday by Fed Vice Chairman Stanley Fischer, who said increased valuations could only partly be explainedby an improving economic outlook. (…)

“What we would worry about is if it looked like inflation expectations were slipping because that could make low inflation become endemic and ingrained. So we certainly want to avoid that,” she said.

She added, however, that different gauges of inflation expectations were providing conflicting signals. “We don’t get a consistent story,” she said. (…)

OIL

This chart shows the breakeven price for the existing and new oil wells. At current levels, operating existing wells is still profitable, but new drilling is not. However, many energy producers have locked in much higher oil prices in the derivatives markets and will continue to drill. (The Daily Shot)

Source: @ConnectedWealth, @sobata417

Fed Clears All Banks on Payouts to Shareholders Big U.S. banks won approval from the Federal Reserve on Wednesday to return money to shareholders, suggesting regulators believe they are healthy enough to stop stockpiling capital.
ETF Buyers Propel Stock Rally

(…) ETFs bought $98 billion in U.S. stocks during the first three months of this year, on pace to surpass their total purchases for 2015 and 2016 combined, according to the Federal Reserve Board’s most recent quarterly tally of U.S. financial accounts. These funds owned nearly 6% of the U.S. stock market in the first quarter—their highest level on record—according to an analysis of Fed data by Goldman Sachs Group Inc. (…)

  • Mutual-fund ownership of the U.S. equity market in the first quarter fell to 24%, the lowest since 2004, according to Goldman.
  • There are more than 1,800 U.S.-listed ETFs with nearly $3 trillion in assets under management, offering push-button exposure to everything from 3D-printing stocks to bonds issued by governments in emerging markets, according to data provider XTF. More than 1,300 funds and $2.3 trillion are linked to stocks, while another 302 funds and $500 billion are tied to bonds.
  • U.S. corporate demand for stocks in the first quarter was the smallest in a year and a half, at $136 billion, according to Goldman. A separate reading showed that S&P 500 companies repurchased $133.1 billion of their own shares in the first three months of the year, down 18% from the same period a year earlier, according to S&P Dow Jones Indices. (…)

Meanwhile: In general, US-focused M&A activity has been robust in the first half of the year (the green diamond in the chart below shows the annualized figure).

Source: Credit Suisse (via The Daily Shot)

Merkel throws down gauntlet to Trump on trade German chancellor attacks ‘protectionism and isolation’ in combative speech
Senate GOP Scrambles to Rework Health Bill Senate Republican leaders scrambled to rework by week’s end their plan to dismantle the Affordable Care Act, but GOP senators remained mired in disputes.
Illinois Is in Deep Trouble Illinois is locked in a political stalemate, and is now in danger of becoming the first U.S. state ever to have its debt downgraded to junk status.

Contact: edgeandodds [at] gmail.com