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)

Invest with smart knowledge and objective odds

THE DAILY EDGE (30 August 2017)

Growth in U.S. Home Prices Accelerated in June Limited inventory and strong buyer demand are pushing up prices faster than wages

The S&PCoreLogic Case-Shiller Indices, which cover the entire nation, rose 5.8% in the 12 months ended in June, up slightly from a 5.7% year-over-year increase reported in May. The 10-city index gained 4.9% over the year, down from 5% in May. The 20-city index gained 5.7%, identical to the previous month. (…)

After seasonal adjustment, the national index rose 0.4 % month-over-month, the 10-city index remained flat and the 20-city index rose 0.1%.

After seasonal adjustment, 14 out of 20 cities saw prices rise in June. (…) (Charts from The Daily Shot)

   
Hurricane Harvey will be most expensive U.S. natural disaster at up to $160 billion: AccuWeather
Will hurricane season derail growth?

Just a couple of weeks ago, the National Oceanic and Atmospheric Administration warned that due to warmer sea surface temperatures “the 2017 hurricane season could be the strongest since 2010”, with two to five major hurricanes expected before the end of November. As hurricane Harvey just showed, one can expect tragic loss of lives and significant damage to property. Does that mean hurricane season will derail U.S. economic growth this year?

U.S. real GDP growth and employment creation indeed tend to soften a bit on average in the quarter during which the hurricane event takes place. But as today’s Hot Charts show, the economy bounces back sharply in subsequent quarters in part due to reconstruction efforts. So, hurricane season won’t sway the Fed as it attempts to normalize monetary policy. Instead, what could restrain the Fed is the ongoing political storm brewing over Capitol Hill which has potential to precipitate a government shutdown or even a U.S. sovereign default. (NBF)

image
  • But where will they find the construction workers for the reconstruction?
image
Fallout From Harvey to Disrupt Energy Markets Around the World Tropical Storm Harvey is upending the flow of oil and petroleum all around the world—a consequence of the growing influence of the U.S. in the global energy industry.

(…) The area has become an increasingly critical link in the global energy chain. Shipments from the region now satisfy 6% of global demand for oil and other liquid petroleum fuels—twice as much as in 2012, according to Barclays PLC.

That means Harvey, which was the most powerful storm to hit Texas in half a century, is likely to cause shortages that affect consumers from Houston to Beijing. Countries like Mexico, which relies on the U.S. for as much as half of the gasoline it consumes, according to the U.S. Energy Information Administration, are the most likely to feel the effects, analysts said. (…)

Some 17% of gasoline made at the Gulf Coast and 39% of the diesel produced there this year has been exported, according to consultancy Turner, Mason & Co.

Exports of crude oil itself, which were largely banned before 2015, have grown from a trickle to surpass 1 million barrels a day at times this year, winding up in China, the Netherlands and Peru.

Harvey has shut off much of that flow. Ports along the Texas coast, including Houston and Corpus Christi, have been closed, and now some in Louisiana are shut as well. (…)

More than 15% of oil refining capacity has been shut due to the storm, and that number is climbing as Harvey has started to track eastward, threatening more plants. The storm has choked off crude supplies to the plants that have continued to run. (…)

It isn’t clear how disruptive Harvey will prove to be. If refineries sustain significant damage, they could be down for months. But even if producers, pipelines and fuelmaking plants can ramp up relatively quickly, analysts said its effects may linger. (…)

(…) As the storm’s widespread devastation has come into focus, several analysts say that much, if not most, of the 1.4 million barrels of oil produced daily in the Eagle Ford shale of South Texas has been cut off and may not return for weeks. The Eagle Ford, which is on the doorstep of Corpus Christi where the storm made landfall, is second in output in the state only to the Permian Basin of West Texas.

Early indications from a handful of companies are that the severity of the storm was much greater than expected but damage to fields was moderate, according to Paul Sankey, an equities analyst with Wolfe Research. Many big shale producers in the Eagle Ford shut their oil and gas wells before Harvey made landfall as a hurricane Friday. (…)

“The effect to shale could linger given the extent and catastrophic level of forecasted flooding, which interferes with shale logistics,” said Benny Wong, an analyst with Morgan Stanley . (…)

More than 15% of U.S. refining capacity is closed in the wake of the storm. That prompted crude prices to drop more than 2.5% since Friday to $46.44 a barrel, largely because closed plants don’t need to buy any crude.

If they stay shut, or if the ports where they are located sustained damage that takes weeks to repair, producers won’t be able to turn their spigots back on. Prolonged refinery outages could lead to fuel shortages in different parts of the country. (…)

Restarting wells may not guarantee that they resume flowing at the same rate, he said. On a technical level he fears that shale wells, once shut off, could lose pressure. Most of his company’s production wasn’t shut in as it lies in areas west of the storm’s path.

“It’s not just a matter of flipping a switch,” he said. “There is significant risk in those wells not coming back to previous levels.” (…)

WE’RE BACK UP THERE!

Source: S&P Global Market Intelligence (Via The Daily Shot)

These borrowers must be hoping this won’t happen:

(…) Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said this month he wanted to curtail companies’ capacity to deduct net interest payments from taxable income to pay for tax cuts. The comments virtually ensure the topic will feature prominently in the coming tax debate, expected to begin in earnest after Labor Day. (…)

Ending or limiting that deduction is key to funding the House tax plan. Repeal would raise $1.5 trillion over a decade to replace some of the revenue lost from a corporate rate cut and immediate deductions of capital expenses, according to the Tax Foundation, a conservative-leaning think tank. (…)

Now, that won’t happen, nor will much really happen:

  • One for you, 19 for me: Trump and tax

President Donald Trump launches his tax-reform agenda today in Springfield, Missouri. As a candidate he promoted a mix of corporate and individual rate-cuts and deduction rises; the Tax Policy Centre, a think-tank, estimated those would reduce federal revenue by $6.2trn while increasing the federal debt by $7trn within a decade. Most agree that America’s byzantine tax system needs overhauling, but the devil is in the details: one reason that no major tax reform has been accomplished since 1986 is that the trade-offs are both mathematically and politically difficult. But Mr Trump, still smarting from Congress’s failure to repeal Obamacare and lacking any significant legislative achievements so far, needs a win. That makes the president’s Twitter attacks on Mitch McConnell and Paul Ryan, Republican congressional leaders whose support he needs, all the more baffling. Perhaps he reckons his base prizes the spectacle of him fighting the establishment more than any actual achievements. (The Economist)

  • From David Rosenberg:

viewer.aspx (14)

THE DAILY EDGE (28 August 2017)

Still travelling along the coast of Nova Scotia…

U.S. Existing Home Sales Ease, as Prices Also Dip

Sales of existing homes fell 1.3% (+2.1% y/y) during July to 5.440 million units (AR) from a slightly revised 5.510 million in June. It was the lowest volume of sales since August 2016. Expectations were for 5.570 million sales in the Action Economics Forecast Survey.

Sales of existing single-family homes fell 0.8% (+1.7% y/y) to 4.840 million while sales of co-ops and condos dropped 4.8% (+5.3% y/y) to 600,000.

By region, total existing home sales fell the most in the northeast, 14.5% (-1.5% y/y), to 650,000 from 760,000 in June. Sales in the Midwest fell 5.3% (-1.6% y/y) to 1.250 million from 1.320 million. But sales improved in the west, 5.0% (+5.0%) to 1.260 million from 1.200 million, and those in the south gained 2.2% (+3.6% y/y) in July to 2.280 million from 2.230 million in June.

The median price of all existing homes sold decreased 1.9% (6.2% y/y) to $258,300.

The number of homes on the market was down 1.0% (-9.0% y/y) to 1.92 million. There was a 4.2 months’ supply of those homes available for sale, up from a recent low of 3.5 months in January, but down from 4.8 months a year ago.

large image

Housing is weak, sedan sales have been declining and now, SUV sales are slowing:

And this won’t help, neither the Midwest economies nor SUV sales:

Crop Scouts Foretell Another Bumper U.S. Harvest

(…) Such a haul would add to a global glut of grain that has pushed down crop prices and is expected to drag down U.S. farm incomes in 2017 for the fourth year in a row. (…)

That’s bad news for farmers squeezed by high seed and land costs and rising farm output in countries like Brazil and Russia. The U.S. Department of Agriculture expects farmers to make half as much money this year as they did in 2013. (…)

Speaking of nature, naturally:

Ford to Look Beyond Credit Scores in Sales Push The auto maker’s financing unit has decided to change its approval process to look beyond credit scores in an effort to pump up sales. By assessing credit in new ways, it hopes to be able to better predict risk among a broad array of borrowers.

Ford Motor Credit says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans. (…)

A string of smaller financing providers, including credit unions and online lenders, have also been assessing factors outside of credit reports and scores for applicants with thin credit records. (…)

Wells Fargo & Co.’s auto lending volume fell 45% in the second quarter from a year earlier due to tightening underwriting standards. Ally Financial Inc.’s auto loan originations fell 8.5% for the same period. (…)

Ford Credit says it doesn’t think its decision will lead to more losses because it will be reviewing more data than it currently checks on loan applicants. While the overall result will likely be more loan approvals, there will be some tightening as well as because some borrowers who currently get approved might not under the new model. (…)

Factors such as whether applicants supplied the same cellphone number on previous loan applications and whether they have occupational licenses could help to green-light their loan applications, said Mr. Moynes. (…)

Business Investment Gains Renewed Momentum Demand for long-lasting factory goods plunged in July, but a sharp drop in aircraft orders masked underlying signs of strength.

Durable goods orders fell 6.8% in July, but the decline was driven by aircraft orders, which had surged the month before. Stripped of the volatile transportation category, orders were up 0.5% from a month earlier and up 5.6% from a year earlier.

Orders for core capital goods, which exclude aircraft and defense and which many economists use as a proxy for broader business investment, rose 0.4% in July. They were up 3.5% in July from a year earlier. They bottomed in June 2016 and have risen six times in seven months. That pickup in business investment marks the best run since 2010, when the U.S. was coming out of recession. (…)

U.S. business investment rose at a 5.2% pace during the second quarter, following a 7.2% increase in the first quarter.

Haver Analytics’ Rubert Brusca remains prudent:

(…) Looking at the diffusion of sales acceleration (% sectors with sales accelerating), we find that sales are accelerating in 57.1% of the sectors over three months, in 42.9% over six months, and over one year orders accelerate in 85.7% of sectors. Those sector results are pretty solid-looking metrics.

However, when we weight the results for sector size, we find that the value of sales in sectors that are accelerating accounts for only 47.2% of shipments over three months, 17.8% over six months and 44.5% over 12 months. Acceleration is not really as important or broad-based when size is accounted for. It is mostly the smaller sectors that are doing the best for now.

EARNINGS WATCH

Approaching risky September, the earnings tailwind is strong as Thomson Reuters reports:

Through August 25, 491 companies in the S&P 500 Index have reported earnings for Q2 2017. Of these companies, 73.5% reported earnings above analyst expectations and 17.7% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 5.5% above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and above the 4.9% surprise factor recorded over the past four quarters.

IT and Utes provided the bulk of the unusual surprises in Q2:

image

Through August 25, 490 companies in the S&P 500 Index have reported revenues for Q2 2017. Of these companies, 69.0% reported revenues above analyst expectations and 31.0% reported revenues below analyst expectations. In aggregate, companies are reporting revenues that are 1.1% above estimates.

The estimated earnings growth rate for the S&P 500 for Q2 2017 is 12.1%. If the Energy sector is excluded, the growth rate declines to 9.4%.

The estimated revenue growth rate for the S&P 500 for Q2 2017 is 5.1%.. If the Energy sector is excluded, the growth rate declines to 4.2%.

Margins are up strongly with and without Energy. S&P data put operating margins at 10.22% in Q2, a record, and up from 9.03% in Q2’16. This in spite of Energy margins one third of their previous highs. Margins are up YoY in all sectors except Consumer Discretionary.

image

Companies are upbeat on Q3 with more positive and fewer negative pre-announcements so far than at the same time during Q2’17 and Q3’16.

image

image

Trailing EPS are now $125.98, up 9.4% YoY and a strong +6.7% from March 2017.

The S&P 500 Index is thus at 19.4x trailing EPS and the Rule of 20 P/E is at 21.1, 5.5% above the “20” fair value level. This is down rom 22.3 last March. TR estimates that 2017 EPS will reach $131.64 which would bring the Rule of 20 P/E to 20.3.

image

SENTIMENT WATCH

From Bespoke:

(…) Bearish sentiment has seen an even more pronounced move, rising from 32.8% up to 38.29%.  That’s the largest reading for the bearish camp since mid-April.  Also outside of a few weeks in the Spring where bearish sentiment spiked higher, you have to go all the way back to early 2016 to find a period where bearish sentiment was higher. (…)

The next several charts are from Ed Yardeni:

  • Investors’ Intelligence Sentiment does not show more bears…

image

  • The Put/Call ratio seems to be showing more bears:

image

  • Volume keeps weakening:

image

  • Transports are weak:

image

  • And surprises remain negative:

image

According to the FT, insiders at the big six banks by assets have in total sold a net 9.32m shares this year. Even excluding Warren Buffett’s big dumping of shares in Wells in April, sales by insiders outnumber purchases by about 14 to one.

But Lowry’s Research remains in the bull camp:

(…) As of the Aug. 18th low in the S&P 500, 44.4% of OCO small caps were down 20% of more from their highs vs. 18.3% of OCO mid caps and just 6.8% of OCO large cap stocks.

(…) divergences between the OCO Adv-Dec Line and the S&P 500 have emerged, on average, 4-6 months prior to the final bull market high.  And, despite the current weakness among small caps, no significant divergence has yet appeared. (…) 

In summary, although small caps are exhibiting widespread signs of weakness, it would be premature to conclude this weakness is a preamble to the appearance of the more timely indications of an approaching major market top. For now, small cap weakness serves primarily as a reminder that selective buying is becoming increasingly important, with an emphasis on the strongest stocks, principally among large caps.

Auto Thumbs down Mutual Funds Mark Down Uber Investments by Up to 15%