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: 27 APRIL 2023

Durable Goods Orders Up 3.2% in March, Better Than Expected

March’s new orders for manufactured durable goods came in better than expected at $276.4B, a 3.2% jump from last month and higher than Investing.com’s 0.7% forecast. The series is up 4.6% year-over-year (YoY). If we exclude transportation, “core” durable goods were up 0.3% from last month and up 0.5% from last year, the smallest annual change since November 2020. (…)

The high monthly volatility in durable goods hides the real trends. It’s been a bad quarter however one looks at it.

fredgraph - 2023-04-27T062528.824

Manufacturers’ shipments were still up 4.4% YoY in February but the poor showing in the Cass Freight Shipments index, -4.0% in March, means the goods recession is continuing.

Trucking company TFI International’s CEO yesterday said that industry shipments were down 10% YoY in Q1 with most of the damage in March, continuing in April.

Hope comes from S&P Global’s April flash PMI: “growth in manufacturing new orders was only fractional, albeit returning to expansion for the first time in seven months”.Image

Transports and Small Caps stumble as the S&P holds steady This is one of the widest divergences between the market and those indexes since 1928

(…) It turns out that the fears triggered by lagging cyclical indexes like Transports and Small-Caps were not consistently justified. Over the next six months, the S&P rose 80% of the time, with an impressive average return and decent risk/reward profile. The biggest concern is that the few losses were double-digit, and two were sustained for months afterward.

It was more of a worry for Small-Cap stocks, even using total return. Over the next couple of months, Small-Caps showed a negative median return, with risk well above reward. They recovered quite a bit over 6-12 months, but average returns were still at/below random.

For the Transports, it was more of a mixed bag. They continued to lag over the next month or so, then returns rebounded to above-average levels. They tended to show positive returns less consistently than did the S&P 500, however.

Small U.S. domestic businesses will likely be more impacted by more frugal regional banks.

Bank Turmoil Seen Crimping Credit at Double Powell’s Estimate

US bank stress will tighten credit by twice as much as expected by Federal Reserve Chair Jerome Powell, said economists surveyed by Bloomberg, tipping the economy into recession.

Almost all of the economists expect the Federal Open Market Committee to hike interest rates another quarter percentage point at its May 2-3 meeting, to a target range of 5% to 5.25%.

But the higher borrowing costs will be amplified by the fallout from the March collapse of two US banks, which a majority of the economists found to be equivalent to a Fed hike of about half a percentage point or more. Powell has estimated the impact at roughly a quarter point. (…)

The Fed’s H.8 report shows total loans and leases dropping abruptly in the last 2 weeks of March but turning back positive in the first 2 weeks of April. CRE loans also declined in late March but are flat so far in April.

(…) The fastest-growing segment is private credit—loans to companies generally too small to issue bonds but who want to avoid more restrictive bank loans. Since the start of 2008, private credit has grown almost sixfold, to $1.5 trillion, according to the IMF—bigger than the high-yield bond or leveraged-loan markets. At $4.4 trillion, those three markets are worth more than all banks’ commercial and industrial loans, at $2.7 trillion.

Private credit is issued by funds managed by firms such as Ares Management Corp., HPS Investment Partners LLC, Blackstone Inc., BlackRock Inc., Apollo Global Management Inc., Carlyle Group Inc. and Goldman Sachs Asset Management, many of whom are also prominent private-equity managers. (The IMF’s $1.5 trillion figure also includes business-development companies and middle-market collateralized loan obligations.)

Private credit is mostly financed with investor capital that is locked up for a few years, “so there is no run risk” as with deposits, commercial paper and repo loans, the IMF said. And while some private credit is subject to interest-rate risk, the loans are often floating-rate and thus adjust upward with interest rates. Fund managers can compensate by charging more on new loans, financed out of maturing loans or capital that investors are obligated to supply when asked, dubbed “dry powder.”

But the IMF does cite several risks. Private credit often funds leveraged buyouts of companies more vulnerable to economic slowdowns, competition has led to laxer loan terms, and “managers of private-credit deals often finance deals of other managers, which concentrates risk,” it said. The investors who commit capital to private-credit funds also do so for private equity and other alternative assets, the sort of “interconnectedness” that has amplified stress in the past.

So even if private credit doesn’t have the sort of runs that befell banks last month, it could face the same pressure to retrench that banks do, aggravating the credit crunch and worsening the economic downturn. Fundraising by private-credit funds fell 42% last year from 2021, according to PitchBook Data. (…)

But there is little regulators can do about the underlying problem: Interest rates are likely to stay high because of stubborn inflation and an economy weakened by those high rates, which boosts loan defaults. As a result, strains will continue percolating through the financial system, though maybe not with the drama of a bank failure.

  • A jump in US tax inflows reduced the likelihood of a default in June, Goldman said. Tax receipt data for Tuesday—when paper checks for tax payments came in—outpaced the comparable 2022 day by 14%. (Bloomberg)
We Love Our Junk Food and Are Willing to Pay Up for It

As we approach the midway of this quarterly earnings season, it is normal to search for themes that can define our views about the economy and guide our thinking about what to expect from those companies who are yet to report.  Yet one theme seems to underlie the results, and that could bode poorly for investors who are hoping for rate cuts in the coming months (and our health).  The US consumer seems more than willing to pay more for their favorite brands, especially if they sell, um, comfort foods.

Consider some of the winners that we have seen over recent sessions.  Today’s big gainer, even more than Microsoft (MSFT), is Chipotle Mexican Grill (CMG).  CMG is up about 14% this morning, setting a new all-time high after beating estimates and offering positive guidance.  The company’s CFO stated that lower-income customers are returning to the restaurants even as prices have risen by about 10%.  In short, CMG has found that they can pass along price increases to their customers without penalty.

It would be one thing if a single company made comments like that, but we have heard something similar from Coca-Cola (KO), Pepsi (PEP), McDonalds (MCD) and Procter & Gamble (PG) all beat analyst consensus estimates and cited their ability to pass along price increases during their earnings calls.  For better or worse, we’re willing to pay up for our favorite hamburgers, soda, potato chips, and burritos.  Health ramifications aside, if the Federal Reserve’s goal is to combat inflation, this is a clear sign that their fight is far from over.

To be sure, it is not at all a bad thing that consumers have the means to afford their favorite brands.  An unemployment rate of 3.5% means that the vast majority of people who want a job have one.  The tight labor market means that people can afford their favorite goods and services and have the means to pay more for them if necessary.  It’s not only food.  We heard something similar from Kimberly-Clark (KMB), whose stock was boosted by brand loyalty to tissues, toilet paper and diapers)

Consumers make up the bulk of the US economy.  When they feel economic stress, they cut back and trade down to lower cost brands.  One could assert that MCD is the lower cost alternative when it comes to dining out, and the CMG CFO theorized that some of their growth could be coming from customers trading down from higher-end restaurants, but that doesn’t explain the resilience of other consumer products.  People who feel flush will feel ok about paying up for better-quality toilet paper.

The strong performance of consumer staples may be a key “tell” about why it seems that there is a huge divergence in the economy, and in the markets too.  There is no shortage of economists and pundits who are concerned about a recession on the horizon.  The persistent yield curve inversions tell us that is a key worry of bond investors.  On the equity side, we see institutional investors expressing pessimism about stocks, yet money continues to flow into individuals’ favorite names.

We are back at another “careful what you wish for” moment.  Fed Funds futures show an 83% chance for a hike at next week’s FOMC meeting, but also anticipate 3-4 cuts over the coming months.  If the consumer remains this solid, it is tough to imagine what sort of economic forces would justify an “about-face” from the Fed in a matter of months.  Unless there is a banking crisis that metastasizes beyond what we have seen so far or some other sort of financial accident, it is hard to see the consumer sector slamming on the brakes sufficiently to cause the FOMC to cede its fight against inflation.  If you like the idea of healthy consumers, it is hard to have it both ways.

Summers Says Inflation Won’t Get Back to 2% Without Downturn The former Treasury secretary said he is ‘not that optimistic’ about the fight against rising prices and that the Federal Reserve lost credibility by acting too slowly.
  • Summers said the right thing for the Fed to do at next week’s policy meeting is to raise rates by 25 basis points.
  • Regarding the recent banking crisis, he said that the fallout is leading to a “constriction of credit” that is doing some of the work of the Fed’s rate hikes. “We don’t need as much interest-rate increases as we would if the banking system were working smoothly,” he said.

  • Summers said the Federal Reserve has a tendency “to groupthink” especially around macroeconomic models. (…)
India’s Population Surpasses China, Shifting Global Order China has been the most populous nation in the world since at least 1750. But in April, India’s population is set to surpass China’s.

China’s growth and productivity will be challenged by its aging and slow growing population with fewer young workers to support them.

Image

@Noahpinion

THE DAILY EDGE: 22 DECEMBER 2022

***MERRY CHRISTMAS***

Retailers Need a Last-Minute Holiday Gift From Shoppers Discounts are back as stores try to entice cost-conscious customers. The strategy hinges on a final flurry of shopping this weekend.

(…) Higher discounts will come at the expense of profits, but chains don’t want to risk being stuck with excess holiday goods in the New Year. (…

Shoppers slowed their spending in November and early December, according to government data and research firms, raising the urgency of these final days. (…)

General merchandise sales for the week of Black Friday fell 5% compared with the same week in 2021, according to market research firm NPD Group, which tracks point-of-sale receipts. Sales were also less than the same week in 2019, the first time this year that general merchandise sales for one week fell below prepandemic levels, NPD said.

The declines deepened as December progressed with sales falling 2%, 5% and 7% in the weeks that ended Dec. 3, 10 and 17, according to NPD. (…)

Discounts peaked over the Black Friday weekend, fell in early December and began rising higher as the month drew to a close, according to DataWeave Inc., an analytics company that tracked prices across five categories, including apparel, shoes, electronics and furniture, on the websites of 35 U.S. retailers. Last year, discounts declined through early January after peaking during the Thanksgiving weekend. (…)

U.S. Jobless Claims Tick Up, Economy Grows Faster Than Previously Thought Third-quarter growth of 3.2% reflects stronger consumer spending amid tight labor market

New filings for unemployment benefits rose by a seasonally adjusted 2,000 last week but remain at historically low levels, the Labor Department reported Thursday. The 216,000 claims last week were in line with prepandemic levels, when the labor market was also tight, suggesting that employers are holding on to workers despite concerns about an economic slowdown.

In a separate report, the Commerce Department said third-quarter economic growth was stronger than previously estimated. The economy grew at a 3.2% seasonally adjusted annual rate, up from an earlier estimate of 2.9%, largely due to higher estimates of consumer spending. The third-quarter number snapped two consecutive quarters of contraction.

Continuing claims (black) have been rising steadily since early October and are now at pre-pandemic levels up from historically low levels. Laid off workers are no longer relocating easily.

image

U.S. Sales Managers See Continuing Growth, but Prices Rise Fast Again in December

Business Confidence among sales managers continued its fall back from the more optimistic views expressed in October, to significantly more cautious views on the likelihood of growth in economic activity over the next few months, including of course the festive season.
The Sales Managers Index, summarising trends in sales growth, confidence and staffing, consequently dipped below the levels registered in October and November, although remaining above the 50 “no growth” level.
The most negative aspect of the December data is without doubt the Prices Index, which continues to reflect significant price increases across many product and service sectors. (World Economics)

LEI for the U.S. Declined Again in November

The Conference Board Leading Economic Index® (LEI)for the U.S. decreased by 1.0 percent in November 2022 to 113.5 (2016=100), following a decline of 0.9 percent in October. The LEI is now down 3.7 percent over the six-month period between May and November 2022—a much steeper rate of decline than its 0.8 percent contraction over the previous six-month period, between November 2021 and May 2022. (…)

“Only stock prices contributed positively to the US LEI in November. Labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth. Interest rate spread and manufacturing new orders components were essentially unchanged in November, confirming a lack of economic growth momentum in the near term.”

The annual growth rate of the US LEI declined further in November

image


The trajectory of the US LEI continues to signal a recession

image

The chart illustrates the so-called 3D’s rule which is a reliable rule of thumb to interpret the duration, depth, and diffusion – the 3D’s – of a downward movement in the LEI. Duration refers to how long-lasting a decline in the index is, and depth denotes how large the decline is. Duration and depth are measured by the rate of change of the index over the last six months. Diffusion is a measure of how widespread the decline is (i.e., the diffusion index of the LEI ranges from 0 to 100 and numbers below 50 indicate most of the components are weakening).

The 3D’s rule provides signals of impending recessions 1) when the diffusion index falls below the threshold of 50 (denoted by the black dotted line in the chart), and simultaneously 2) when the decline in the index over the most recent six months falls below the threshold of -4.0 percent. The red dotted line is drawn at the threshold value (measured by the median, -4.0 percent) on the months when both criteria are met simultaneously. Thus, the red dots signal a recession.

The LEI has now declined for 9 consecutive months (-6.5% a.r.). That has only happened 5 times since 1959. On each occasion, the economy was either heading into a recession or already in one.

U.S. Population Growth Remains Sluggish Despite Uptick This Year America’s population grew 0.4% this year, new Census Bureau figures show, continuing historically slow growth that has added pressure to a tight labor market.

The slight uptick, in the third year of the pandemic, was still greater than the unprecedented low rate of 0.1% recorded in 2021.

The U.S. added 1.3 million people in the year that ended July 1 for a total population of 333.3 million. That included 245,000 more births than deaths, a surplus that has long supplied much of the nation’s growth. The other component, which measures people moving in and out of the country, grew by one million.

Population growth had been slowing before the pandemic, but had averaged more than two million a year over the last decade. As recently as 2016, the U.S. grew by 2.3 million people. (…)

More broadly, the population in the South grew by 1.1%, while the West gained 0.2%. The Midwest lost 0.1% and the Northeast declined 0.4%. (…)

Kenneth Johnson, a demographer at the University of New Hampshire, noted that 24 states had more deaths than births in the year covered by the report. “That is a staggeringly high number,” he said.

Before the pandemic, Mr. Johnson said it was unusual for even five states to record what demographers call a natural decrease between years.

“Clearly, Covid produced most of this natural decrease by pushing death rates and the number of deaths up,” he said. “But, long-term birthrates were already declining and deaths were rising prior to Covid.”

With so many states recording more deaths than births, Mr. Johnson said growth will have to come from other states or other nations. “For many states, if they are going to grow, it must be through migration,” he said.

Despite slow growth, projections by the Census Bureau and the United Nations show the U.S. is expected to continue growing at least through the middle of the century. By comparison, populations have begun to shrink in Japan and many Eastern European nations, as well as Germany, Italy, Greece and Portugal. China’s population of 1.4 billion might have peaked, growing just 0.03% in 2021. (…)

About 80% of last year’s population growth came from arrivals from abroad, up from about 40% a decade ago. (…)

In a separate report released Thursday, the Centers for Disease Control and Prevention said life expectancy in the U.S. fell again last year to the lowest level since 1996, after the pandemic and opioid overdoses drove deaths higher. Covid-19 was the third-leading cause of death for the second consecutive year, helping cut life expectancy to 76.4 years in 2021, down from 78.8 years before the pandemic in 2019.

Chipmaker TSMC in talks with suppliers over first European plant
Japan Inflation Hits Four-Decade High, Pressuring Central Bank in 2023 Japan’s core inflation rose at the fastest pace in nearly 41 years in November, fueling market speculation that the Bank of Japan would look to tighten monetary policy.

Core consumer prices—a measure that covers all prices except fresh food—rose 3.7% from a year earlier in November, the fastest pace since December 1981, government data showed Friday. (…)

Japan’s consumer prices excluding fresh food and energy prices rose 2.8% from a year earlier in November, well above the BOJ’s 2% target. That suggests inflation isn’t driven mainly by higher prices for imported oil and natural gas. (…)

Some are skeptical that Japan’s inflation picture has really changed—including the central bank itself. Its policy board expects the core inflation measure to fall to 1.6% in the fiscal year starting April 2023 because the prices of oil and some other commodities have stopped rising. (…)

image_2 (17)

(Goldman Sachs)

China Estimates Covid Surge Is Infecting 37 Million People a Day Nearly 18% of the population likely contracted the virus in the first 20 days of December.
Sad smile Red rose Scott Minerd, Guggenheim Partners’ Investment Chief, Dies at Age 63 An early member of the firm, he helped shape its growth from a startup to the manager of more than $218 billion in assets.

Mr. Minerd, 63 years old and a committed weightlifter known to bench press more than 400 pounds, died during his daily workout, the firm said. (…)

“As an asset manager, I’ve come to view conventional wisdom as the surest path to investment underperformance,” Mr. Minerd wrote in a biographical summary. (…)

In a 2020 interview with the Los Angeles Times, he took aim at elite universities, including the University of Pennsylvania. “These schools have huge endowments, and why are they not focusing their endowment on advancing a cause of essentially free education or at least education that provides complete support for people below certain income levels?” he asked. Mr. Minerd said he wouldn’t make donations going to “bricks and mortar and making the place look better when people who would be qualified to come there can’t afford to do it. And, of course, if we had more equal access to education, it would help address some of the issues around race and poverty.” (…)