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 (25 May 2017)

Home Sales Slip amid Housing Shortage Home sales declined in April, a tepid start to a spring selling season marked by a dearth of homes available for purchase.

Sales of previously owned U.S. homes last month fell 2.3% from March’s revised level to a seasonally adjusted annual rate of 5.57 million, the National Association of Realtors said Wednesday. (…)

The supply of homes on the market has fallen year-over-year for 23 consecutive months, according to NAR. There was a 4.2-month supply of homes on the market at the end of the month, down from 4.6 months a year ago.

Properties typically stayed on the market for 29 days in April, down from 34 days in March.

The decline in inventory comes at a time of strengthening demand. The share of first-time buyers climbed to 34%, up from 32% in March, as young people began to re-enter the market in force. (…)

Buyers purchased more than 25% of homes on the market in April, a 13-year high, according to Mr. McLaughlin’s analysis.

The median sales price in April was $244,800, up 6% from a year earlier. Sales in April were up 1.6% compared with a year earlier,. (…)

BTW, existing home inventory fell 9.0% YoY in April!!! Sales are up 1.6%.

large image(Haver Analytics)

The headwind: (The Daily Shot)

RBC’s economists see nothing alarming from this next chart. I see what looks like changing trends. How can that be with unemployment so low?

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U.S. GDP GROWTH

The PMI data for January to March were historically consistent with GDP growing at an annualised rate of 1.7% in the first quarter, which compared with an official GDP estimate of 0.7%. For the first two months of the second quarter, the PMI data are signalling an annualised GDP growth of 1.5%.

There is an 89% correlation between Markit’s PMI and GDP:

Still on low gear. Employment growth also seems set to keep slowing down.

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Manufacturing looks particularly weak:

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Why Earnings Have Investors Feeling So Happy Earnings at U.S. companies grew at the fastest pace in the first quarter in nearly six years, the latest boon to a bull market that has stretched into its ninth year.

(…) Sales are picking up after many companies had turned to reducing costs and delaying investments in infrastructure to boost profits through the recovery from the financial crisis. Revenues are expected to grow by 7.7% from the year-earlier period, according to FactSet, the highest rate since the fourth quarter of 2011. Sixty-four percent of companies beat analysts’ expectations for revenue for the latest quarter, according to analysis from FactSet, above the five-year average of 53%.

Companies also are spending less to repurchase their own shares this year, easing some investors’ concerns that buybacks have been pumping up earnings growth. Share repurchases among firms are tracking 18% lower than a year ago and 1.4% lower than the fourth quarter of 2016, according to S&P Dow Jones Indices data as of Wednesday. (…)

Ten of the 11 sectors in the S&P 500 are on track to post quarterly earnings growth in the first quarter, with financial and technology companies reporting among the biggest improvements, according to FactSet. (…)

“When we look at how earnings came in this quarter and how they’re expected to come in the rest of the year, people’s concerns about the stock market should really be allayed,” said Jonathan Golub, chief equity strategist at RBC Capital Markets.

S&P 500 companies have now posted earnings growth for three straight quarters, after five consecutive quarters of declines, according to FactSet. The rebound is expected to continue. Analysts polled by FactSet estimate the broad index will post earnings growth of 6.8% for the second quarter and 11% for the full year.

Much of that is because a prolonged slump in commodities prices eased at the end of last year. About a third of the S&P 500’s earnings growth in the first quarter came from energy companies, according to FactSet, where results improved alongside oil prices, which sank to their lowest levels in more than a decade in early 2016. (…)

Some comments to curb your enthusiasm:

  • The better revenue growth was mainly in commodity-sensitive sectors. Revenue beat rates were average to weak in Consumer Discretionary (52%), Staples (36%), Financials (53%), Telecom (25%) and Utilities (46%). Overall, the revenue surprise factor was 1%.
  • Q1 was indeed quite strong. Q2 is shaping up like a very tilted barbell with 6 key sectors expected to show EPS growth of only 0.6%, down from +2.4% on March 31.

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Trump administration warns tax receipts are coming in slowly, government could run out of cash sooner than expected

White House Office of Management and Budget Director Mick Mulvaney on Wednesday said that tax receipts were coming in “slower than expected” and that the federal government could run out of cash sooner than it had thought. (…)

BTW (via Evergreen Gavekal):

  • Per The New York Times’ May 13th issue, 2016 tax revenue came in below budget in 25 states, the most since the Great
    Recession.
  • Renowned economist and bond manager Lacy Hunt recently wrote that 10% of banks reported tightening credit card and
    consumer loans in the opening quarter of this year, nearly identical to what was seen just prior to the recessions in 2000 and
    2008.

Not a sign of a strengthening economy. Neither is that:

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Yesterday from BMO whose U.S. activities are concentrated in the Midwest region:

Bank of Montreal set aside C$259 million ($192 million) for soured loans, up 29 percent from a year earlier and the highest since at least 2011, tied largely to U.S. personal and commercial banking and corporate services, the Toronto-based firm said Wednesday in a statement. Analysts surveyed by Bloomberg had expected provisions of about C$200 million. Bloomberg’s Doug Alexander reports. (Source: Bloomberg)

Fed Minutes Signal Officials Ready to Raise Rates Soon Federal Reserve officials expected at their meeting this month that it would “soon be appropriate” to raise rates, according to minutes of the gathering, a signal the central bank could lift its benchmark rate in June.
  • “Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step” in raising rates, the minutes said.
  • “Participants generally indicated their assessments of the medium term economic outlook had changed little since the March meeting,” the minutes said.
  • Officials generally believed the deceleration in price pressures would prove temporary, though some expressed uncertainty about the greater-than-expected weakness.
  • Some officials at the meeting said stronger hiring and wage gains and larger declines in the unemployment rate could warrant a faster pace of rate increases, but a few said the Fed could move more slowly than currently projected if continued declines in the unemployment rate didn’t create obvious price pressures.

The Fed also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released Wednesday. Under the approach discussed, they would allow increasing amounts of those securities to mature over time, without reinvesting the proceeds. (…)

Officials were inclined to stick to that scenario even though the economy appeared to stumble in the first quarter, the minutes showed. Officials saw that slowdown as likely to be transitory. And while some expressed concern about recent softness in inflation, it wasn’t enough to knock them off track. (…)

Poloz Changes His Tone Amid ‘Encouraging’ Economic Data

While Governor Stephen Poloz left the benchmark interest rate at 0.5 percent Wednesday, he added new language stating “the current degree of monetary stimulus is appropriate at present.” Policy makers also said Canada’s adjustment to the oil price decline is “largely complete” and that “recent economic data have been encouraging” — with a “robust” labor market driving consumer spending and housing.

The language represents a slight change in tone for a central bank that up to now has been downplaying the recent run of strong data — pointing instead to persistent slack in the economy, especially relative to the U.S., as well as emerging geopolitical risks. Yet, it’s become a tenuous stance as economic numbers show a robust rebound. (…)

What Ten Million Simulations Tell Us about President Trump’s Chances of Achieving 3-Percent Economic Growth

President Donald Trump’s budget is premised on the projection that the United States will be able to raise its long-run economic growth rate to 3 percent a year. This rate allows the budget to assume large tax cuts and still project a balanced budget after ten years. This long-run forecast represents the largest divergence between an administration forecast and that of either the consensus forecast of the Blue Chip survey of private forecasters (2.0 percent) or that of the nonpartisan Congressional Budget Office (CBO, 1.9 percent) in many decades. (…)

Trump administration's growth disparity dwarfs those by previous administrations

Following up on THE SIX-HORSE HITCH:

BofA’s Hartnett Sees Stocks Approaching Peak Irrationality

GOLD

I don’t write much on gold since I don’t really understand its ups and downs. These charts interested me from the demand viewpoint (charts from RBC):

  • Overall demand is slowing. Only “investment” seems to be growing.

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  • Gold exchange traded products have been quite popular in the past year.

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  • Large, sustained decline in Indian demand:

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CBO’s Health-Law Report Sets Up Fight Among Senate GOP The health-overhaul bill approved by House Republicans would leave 23 million more people uninsured while reducing the cumulative federal deficit by $119 billion in the next decade compared with current law, according to an estimate from the Congressional Budget Office.

The findings provide ammunition for the two competing factions that Senate Republican leaders need to pull together to pass a bill. Centrist Republicans, concerned about the number of uninsured, hope to make the House bill less far-reaching, while conservatives want to double down on measures the CBO suggests will lower premiums on average. (…)

Some Senate Republicans say privately that their effort to forge an agreement that can attract at least 50 votes faces a tough road. A working group of 13 Republican senators is pushing to come up with a proposal by Congress’s August recess, and if they don’t make progress in coming months, that could forecast trouble. (…)

(Washington Post)

Image result for batman robin imagesWhat Donald Trump Needs to Know About Bob Mueller and Jim Comey The two men who could bring down the president have been preparing their entire lives for this moment.

(…) President Trump impulsively fired Comey in the hope that it would shut down the Russia investigation; one week later, though, he finds himself facing not just one esteemed former FBI director but two: the first a wronged martyr for the bureau, and the second a legendary investigator without a hint of politics. (…)

NEW$ & VIEW$ (14 AUGUST 2014)

ROW slows to a grind, U.S. youth employment gets better, commodity prices drop and don’t worry about rising anxiety.
Youth Summer Employment Hits Six-Year High The number of Americans age 16 to 24 employed topped 20 million this summer for the first time in six years, the Labor Department said Wednesday. But the share of those in their teens and early 20s with jobs remains historically low, raising concerns about the productivity of the country’s future workforce.

Wednesday’s report showed the youth unemployment rate fell in July to 14.3% from 16.3% in 2013. That’s largely because the number of young people with jobs increased 2% from a year earlier to 20.1 million.

The fraction of those age 16 to 24 with jobs, the employment-to-population ratio, edged up to 51.9% in July from 50.7% a year earlier. The July figure is down from 59% recorded a decade earlier and well below the 69% peak touched in 1989. (…)

Does this explains that?image

MORE NOISE FOR MRS. YELLEN

David Rosenberg:

(…) the Fed and other central banks have so dramatically distorted the fixed-income market through their unprecedented buying of notes and bonds that it is impossible to interpret what Treasuries are actually saying about anything. More than 90% of the new issuance of U.S. marketable debt this year has been absorbed onto the balance sheets of the Fed, PBOC and the BOJ (…).

(…) with job openings at their highest levels since February 2001, hiring activity at a six-year high (voluntary quits too), the level of layoffs lower now than it was at any time in the 2002 to 2007 leveraged cycle when the unemployment rate approached 4%, and both NFIB and Manpower hiring intentions at cycle highs, it is getting tougher to make the case that zero is the appropriate policy rate for the economy at present.

Pointing up I mean, just to get to neutral, not tight, would mean at least 200 basis points of rate moves.

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200 bps just to get neutral! These are big steps for the old adage: Three steps and a tumble…

Speaking of tumble:

Prices have gradually ticked lower since mid-June, retreating more than 9%. The drop has helped bring relief at the pump for U.S. drivers, who are paying an average $3.47 for a gallon of regular gasoline, down from $3.62 a month ago, according to AAA.

Investors are concerned that if demand doesn’t pick up, the market will be swimming in crude. U.S. oil production hit a 27-year high in July, the Energy Information Administration reported Tuesday.

On Wednesday, the first oil shipment left Libya’s Ras Lanuf terminal since the port was blockaded last year. The supply threats that drove prices higher earlier this year haven’t materialized, either. Fighting in Iraq remains far from the country’s oil fields, while Western sanctions against Russia have largely steered clear of punishing the oil sector. (…)

Money managers, including hedge funds, in June placed record bets on rising U.S. and Brent oil prices, but many traders have unwound those wagers since.

As of Aug. 5, their cumulative bets on rising prices on the Nymex fell to the lowest level since January, while speculative wagers on higher prices for Brent hit the lowest level since February. (…)

To be sure, many analysts think the market is underestimating the risk of a supply disruption somewhere in the world. A loss of supplies from Iraq, the fifth-largest net oil exporter in 2013, or Russia, the second-largest net exporter, could send prices shooting higher. (…)

But others say that barring a surprise drop in oil supplies, prices could keep drifting lower. Rising U.S. and Canadian production should keep the market well supplied, reducing the impact of disruptions elsewhere, oil bears say.

The Bloomberg Commodity Index of 22 raw materials dropped 0.2 percent to 126.001 by 12:11 p.m. in London, after falling to the lowest since Feb. 3 and trimming this year’s advance to 0.2 percent.

  • Euro-Zone Economy Fails to Grow The euro-zone economy stalled last quarter after 12 months of weak growth, underscoring concerns that the region is mired in a deep rut of high joblessness and weak consumer prices. German GDP shrank 0.2%, a bigger drop than economists had expected.

Gross domestic product in the 18-member currency bloc was flat in the second quarter compared with the first, the European Union’s statistics office said Thursday. That translated into 0.2% growth in annualized terms, down from the first quarter’s 0.8% pace.

The euro zone’s three largest economies, which account for two-thirds of the region’s €9.6 trillion ($12.8 trillion) GDP, failed to grow. German GDP shrank 0.2% from the first quarter—a bigger drop than economists had expected—and Italy’s output fell at a similar pace. The French economy, the bloc’s second largest behind Germany, stagnated for a second straight quarter.

The region’s next largest economies, Spain and the Netherlands, posted some growth but not enough to offset weakness in their larger peers. (…)

Japan on Wednesday reported itseconomy contracted at an annualized rate of 6.8% in the second quarter following a strong first quarter inspired by an impending increase in the sales tax.

U.S. store traffic slipped 1.1%, its seventh consecutive quarterly decline. Sales at U.S. Wal-Mart stores, excluding recently opened and closed locations, were flat, in line with company expectations. Sales by that metric had fallen five straight quarters.

WMT is clearly losing market share, even while TGT has its own problems.

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Worried? Great, this is good:

Anxiety Can Be Healthy for Stocks E.S. Browning: With stock prices high and the globe unsettled, investors are feeling unusually anxious. Paradoxically, that could be a fine thing for markets, say strategists at Bank of America Merrill Lynch.

“When everyone thinks things look bad, that is when you want to buy,” said Savita Subramanian, chief U.S. stock strategist at Bank of America Merrill Lynch. “It is when everyone is positive that you want to sell.” (…)

Professional investors such as pension funds, insurance companies and hedge funds have reduced stock ownership since the spring of 2013, according to government data. Investors have shifted toward Treasury bonds. (…)

To protect themselves from declines, people are buying options at higher rates than at any time this year, said Phil Roth, an independent market analyst. These are signs of caution, not euphoria.

His conclusion: The stock market “doesn’t show significant vulnerability right now.”

Merrill’s strongest indicator in this domain is one it has been tracking since 1984. When the indicator has been at its current level, stocks have risen 98% of the time, Ms. Subramanian said.

The indicator is based on the advice offered by Wall Street strategists like Ms. Subramanian. In fact, it includes her recommendations. Embarrassingly, Wall Street advice is a contrarian indicator.

Wall Street strategists today are bearish. They recommend that investors hold just 51% of their money in stocks, far below the average recommendation of 60% over the past 15 years. That is well below the peak of 66% before stocks started to crumble in 2007. For Merrill, any average recommendation below 54% is a buy signal.

This indicator currently forecasts a 22% stock gain in the next 12 months.

Merrill also tracks the exuberance of money managers, who also are bearish. Its surveys show money managers holding 5% of assets in cash, the most since June 2012. That is up from 4.5% a month ago.

Mutual-fund data, meanwhile, indicate the same pessimism. Mutual-fund holdings of stocks whose performance depends on strong economic growth are the lowest since 2009, Merrill said.

“They are basically in the bunkers from a positioning standpoint,” Ms. Subramanian said. (…)

Once again, here’s the Investors Intelligence chart, courtesy of Ed Yardeni. See much anxiety there?

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See also INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL! and, if you missed it, THREE-STARRED EQUITIES.

Global Gold Demand Down 16% Global demand for gold slumped in the second quarter as Chinese and Indian buying returned to more stable levels following a record-breaking quarter a year earlier, the World Gold Council said Thursday.
Gold Consumption in China Shrinks 52% Amid Anti-Graft Campaign
Rosneft Calls for State Aid Russia’s largest oil company is seeking $42 billion from the government to weather Western sanctions.

The U.S. has banned its citizens from providing loans to Rosneft with a maturity longer than 90 days. Large European banks have followed suit.