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

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THE DAILY EDGE (2 August 2017)

U.S. Personal Income Stagnates and Spending Slows

Personal income was unchanged during June (2.6% y/y) following a 0.3% May rise, revised from 0.4%. A 0.4% increase had been expected in the Action Economics Forecast Survey. Figures back to 2014 were revised and last year’s increase in income was lowered to 2.4% from 3.4%. The 5.0% increase in 2015 was increased from 4.4%. (…)

Wages & salaries improved 0.4% (2.5% y/y) following a 0.1% uptick. (…)

Disposable income was unchanged (2.6% y/y) following a 0.4% rise. Adjusted for price changes, take-home pay eased 0.1% (+1.2% y/y) after a 0.5% jump.

Personal consumption expenditures improved 0.1% (3.8% y/y) following a 0.2% rise. A 0.1% uptick had been expected. Earlier figures were little revised. Adjusted for price change, personal spending held steady (2.4% y/y) after a 0.2% rise. Real durable goods purchases eased 0.1% (+5.3% y/y) after a 0.2% rise. Real nondurable goods spending fell 0.2% (+1.5% y/y) following a 0.4% gain. Real spending on services rose 0.1% (2.2% for a second month.

The personal savings rate eased to 3.8% and the downward revisions to income resulted in the May rate being lowered to 3.9% from 5.5% Surprised smile, along with downward revisions to earlier periods.

The chain-type price index held steady (1.4% y/y) for the second straight month. Excluding food & energy, prices increased 0.1% (1.5% y/y) also for a second consecutive month. Durable goods prices fell 0.2% (-2.0% y/y), down for the fifth straight month. Nondurable goods prices fell 0.2% (+0.5% y/y), after a 0.8% decline. Services prices rose 0.1% (2.3% y/y), following a 0.2% rise.

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  • How were US households able to maintain this level of spending when income growth has been tepid? The answer seems to be that Americans dipped into their savings. The chart below shows the post-revision savings rate. (The Daily Shot)

Source: Capital Economics

Some Insurers Seek ACA Premium Increases of 30% and Higher Major health insurers in some states are seeking 2018 premium increases on Affordable Care Act plans of 30% or more, according to new federal data.

Big insurers in Idaho, West Virginia, South Carolina, Iowa and Wyoming are seeking to raise premiums by averages close to 30% or more, according to preliminary rate requests published Tuesday by the U.S. Department of Health and Human Services. Major marketplace players in New Mexico, Tennessee, North Dakota and Hawaii indicated they were looking for average increases of 20% or more.

In other cases, insurers are looking for more limited premium increases for the suites of products they offer in individual states, reflecting the variety of situations in different markets. Health Care Service Corp., a huge exchange player in five states, filed for average increases including 8.3% in Oklahoma, 23.6% in Texas, and 16% in Illinois. (…)

Insurers face a mid-August deadline for completing their rates. The companies have until late September to sign federal agreements to offer plans in 2018. In some cases, insurers warn, the figures revealed by federal regulators may not reflect their up-to-date thinking. (…)

“There’s a lot of risk associated with the uncertainty in Congress right now, and we are pricing appropriately for that risk.” (…)

The exchange in California said Tuesday that insurers there were seeking an overall average increase of 12.5%—but there would be an additional 12.4% boost layered onto middle-tier “silver” plans if the cost-sharing subsidies aren’t paid.

However, in a number of cases, insurers’ rate requests are well above 20% because of market factors not directly tied to the federal uncertainty. Anthem has warned that it may need to add 18% to 20% to its existing rate requests if the cost-sharing payments aren’t locked in, and it may pull back in more states beyond the five exchanges where it has disclosed plans to leave or sharply reduce its footprint. (…)

Car Makers Report Steep Sales Fall Auto sales sharply declined in July, the seventh month of a slowdown punctuated by manufacturers’ reluctance to sell discounted cars through leases and car-rental chains.

Sales fell 7% last month, compared with a year earlier, according to Autodata Corp. Research firm J.D. Power said manufacturers typically pull back on sales incentives after the July Fourth holiday, “but this year elevated inventory levels coupled with the sales slowdown, have compelled them to maintain aggressive discounts throughout July.” (…)

Overall industry demand softened over the first seven months of 2017, falling about 3% in June, according to Autodata. The development ushers in an expected plateau for auto sales, an important driver for the broader U.S. economy.

Sales to government fleets, commercial buyers and rental-car companies have fallen 7.8% in that period, according to J.D. Power, while sales to retail customers at dealerships fell less than 1%. (…)

That’s being felt across supply chains, with rail shipments of automobiles and vehicle parts falling at a double-digit pace in recent weeks. The inventory problem is hitting car makers from two directions: while new cars are stacking up at dealerships, the supply of cheaper used vehicles is swelling, and that has cut into the automobile leasing business that has taken a bigger role in moving cars.

U.S. PMI signals solid improvement in operating conditions

July survey data signalled a solid improvement in operating conditions in the US manufacturing sector. The upturn in business conditions was largely driven by marked and accelerated expansions in both output and new orders. Meanwhile, firms added to their payrolls and raised purchasing activity at the quickest rates since February. Business confidence reached a six-month high, as firms became more optimistic regarding future output. Inflationary pressures remained relatively muted, despite a pick up in the rate of input cost inflation.

The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.3 in July, up from 52.0 in June to signal a further improvement in the health of the sector. Notably, the latest improvement in operating conditions was solid and the strongest in four months.

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Production at US manufacturers increased for the fourteenth month running in July. The pace of expansion accelerated from that seen in June to a solid rate. Panellists commonly attributed the upturn to higher client demand.

New orders received by US manufacturing firms grew at a solid pace, recovering from the nine-month low seen in June. A number of respondents noted that the expansion in new business was due to larger client bases and an increased willingness to spend. That said, orders from abroad decreased for the first time in ten months, albeit only slightly.

Backlogs of work fell for the third month running in July. Respondents commonly stated that outstanding business had decreased due to job creation and efficiencies made in the production process. Notably, the latest expansion in staffing levels was the strongest in five months.

In line with greater production schedules, firms increased their purchasing activity and to the greatest extent in five months. At the same time, companies signalled higher inventories of both post- and pre-production items in July. Stock building was generally linked to increased output and greater client demand. However, stronger demand for inputs and stock shortages at vendors led to a further lengthening in average delivery times.

Business confidence among US manufacturing firms improved to a six-month high in July. Stronger optimism was generally linked to more encouraging market conditions and stronger client demand.

Average input costs rose at a modest pace in July. Anecdotal evidence linked input price inflation to higher component costs and supplier shortages. Meanwhile, average prices charged by US manufacturing firms increased at a modest pace.

The ISM factory sector composite index fell to 56.3 during July from June’s unrevised reading of 57.8. (…)

Declines in the component series were numerous. The new orders series fell m/m to 60.4, down from the February high of 65.1. (…)

The employment figure declined m/m to 55.2, also up from a low of 46.2 early in 2016. (…)

The export order index eased to 57.5, down slightly from the March high of 59.5 (…).

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U.S. Construction Spending Activity Deteriorates

The value of construction put-in-place posted a surprisingly soft reading of -1.3% in June (+1.6% y/y), versus expectations (according to the Action Economics Forecast Survey) of a 0.4% increase. Revisions were mixed, with a slightly higher May report partially offsetting a sharply lower April figure. The net effect was a downward adjustment of 0.7 percentage points to past months.

Since peaking late last year at nearly a 10% y/y gain, construction spending has moderated sharply. The weakness has been particularly acute in the past three months, as total construction spending has fallen by 2.8% in that time.

While residential spending continues to post solid 9.0% y/y gains, the last three months have been down, reflecting sharply lower improvements and multi-family structures. These categories tend to be very volatile.

Public construction spending has been weak as well. Public nonresidential spending declined 8.1% in the past three months and 9.5% in the past year. In June, every major category of public nonresidential spending declined. The biggest contributors to the June drop were education (-5.5%) and roads (-6.6%).

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EARNINGS WATCH

From Thomson Reuters as of yesterday a.m.:

  • 315 reports in, 72% beat rate and +5.6% surprise factor for blended Q2 EPs up 10.9% (+8.0% on July 1).
  • Revenues: +4.9% (4.6%).
  • Q3E: +7.3%. Q4E: +12.3%.
  • Trailing 12-m EPS: $125.25.
Big Oil Bites the Low-Price Bullet Investors need to make sure companies can keep paying their generous dividends.

Major oil companies seem to have moved through the stages of grief about low prices, finally arriving at acceptance. During the latest round of sector earnings delivered in recent days, Royal Dutch Shell ’s RDS.B 0.55% boss Ben van Beurden even said oil could be “lower forever”: BP said Tuesday it is targeting a future break-even oil price of $35 to $40 a barrel. The question for investors is whether they and their global peers can protect their precious dividend payouts in this brave new world. (…)

  • .
The GOP Pivots to Tax Cuts
Is Trump’s Republican Support Starting to Crumble?
Don’t Succumb to Crazy White House Fatigue

THE DAILY EDGE (4 November 2016)

Strong U.S. job growth, rising wages boost December rate hike prospects

Nonfarm payrolls increased by 161,000 jobs last month amid gains in construction, healthcare and professional and business services, the Labor Department said on Friday.

Adding to the report’s strong tone, August and September data was revised to show 44,000 more jobs created than previously reported. Average hourly earnings increased 10 cents in October. As a result, the year-on-year gain in wages last month was the largest in nearly 7-1/2 years. (…)

The unemployment rate fell one-tenth of a percentage point to 4.9 percent, in part as people dropped out of the labor force. (…)

Average hourly earnings increased 0.4 percent in October after advancing 0.3 percent in September. That pushed the year-on-year increase to 2.8 percent, the biggest gain since June 2009, from 2.7 percent in September. (…)

The average workweek held steady at 34.4 hours.

Construction payrolls increased 11,000, rising for a second straight month. But manufacturing employment fell 9,000 last month, falling for a third straight month.

Retail sector employment surprising fell 1,100 jobs, despite anecdotal evidence retailers had embarked on early hiring for the holiday season.

Professional and business services payrolls rose 43,000.

Healthcare and social assistance employment increased 39,100 last month. Temporary-help jobs, a harbinger for future hiring, increased 6,400. Government employment rose by 19,000 jobs.

(…) Recall that in September, the Household Survey revealed that the number of part-time workers soared by 430,000 as full-time workers actually declined by 5,000. The trend continued in October, when another 103,000 full-time jobs were lost, which was offset by a 90,000 increase in part-time jobs. In other words, the transition to a part-time worker society appears to have resumed after a hiatus. (…)

The same series on a historical basis, shows that full-time jobs have been giving way to part-time jobs in recent months as Obamacare starts to bite, and as retail hiring picks up a the expense of all else.


Same thing up North:

From September to October, part-time employment jumped by 67,000 spots and full-time fell by 23,000, according to Statistics Canada’s monthly labour report. Analysts polled by Bloomberg had forecast a loss of 15,000 positions.

Part-time work has underpinned the country’s job creation over the past 12 months. Of the 140,000 new positions, 124,000 are part time. (…)

(…) The reports incorporate millions of salaries collected on Glassdoor from U.S. workers and apply a proprietary machine learning algorithm to estimate trends in local pay. (…)

The October 2016 Local Pay Reports reveal median base pay rose 2.8 percent overall for the U.S to $51,404. Currently available in five metros, the Local Pay Reports show the fastest median salary growth was in San Francisco at 4.2 percent to $65,927 — well above the U.S. average of 2.8 percent. San Francisco is followed by healthy wage growth in Los Angeles (3.9 percent growth to $58,827 median base pay), New York City (3.9 percent, $60,365), Chicago (2.8 percent, $55,864). Houston’s wages are growing slowly, below the U.S. average at 1.6 percent to $54,462.

Overall, booming tech and professional services employment in the San Francisco Bay Area largely explains that metro’s rapid pay growth. Similar booms in tech and professional services are fueling pay growth in New York City and Los Angeles, as well as strong growth in some blue-collar fields. By contrast, the Houston metro has been adversely affected by falling oil prices this year, causing below-average wage growth.

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Note: 3-month moving average trend in median base pay at the overall U.S. level. Source: Glassdoor Economic Research (glassdoor.com/research)

Productivity Jumped in Third Quarter U.S. worker productivity advanced at the best rate in two years during the third quarter, but the broader trend remains consistent with a decade-long decline.

Nonfarm business productivity, measured as the goods and services produced by American workers per hour, increased at a 3.1% seasonally adjusted annual rate in the third quarter, the Labor Department said Thursday. The change reflected a strong increase in output while hours worked increased only slightly. (…)

Compared with a year earlier, productivity was flat in the third quarter. (…)

Unit labor costs at nonfarm businesses rose at a 0.3% annual rate in the third quarter. Economists surveyed by the Journal had expected growth at a 1.2% pace. The small increase was a slowdown from the second quarter’s revised 3.9% advance. Rising unit labor costs can erode profits and put pressure on firms to raise prices.

Thursday’s report showed inflation-adjusted hourly compensation advanced at a 1.7% pace last quarter, a modest acceleration from the second quarter. (…) (Charts from Haver Analytics)

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U.S. Factory Orders and Shipments Trend Higher

Manufacturing sector orders improved 0.3% during September following a 0.4% increase in August, revised from 0.2%. Three month growth rose to 8.4%. New orders for durable goods declined 0.3% (+1.4% y/y), which was revised from the advance report of a 0.1% easing. (…) Shipments of durable goods gained 0.8% (-1.1% y/y), led by a 2.2% recovery in transportation equipment shipments (-1.3% y/y).

Unfilled orders fell 0.4% (-1.6% y/y), the fourth consecutive monthly decline. It reflected a 0.6% drop (-2.6% y/y) in transportation sector backlogs. (…)

Inventories of manufactured products were little changed (-1.9% y/y) after a 0.1% rise. (…)

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Pointing up Getting away from the monthly seasonal adjustments and looking at the data on a year-over-year (YoY) basis suggests that the manufacturing sector remains in poor shape relative to last year. (The Daily Shot)

Trucking companies are braking hard on their fleet plans. Orders for heavy-duty commercial trucks in North America plummeted 46% in October from the same month last year, the WSJ’s Bob Tita and Loretta Chao report, providing a grim outlook for truck manufacturers in the coming year. The latest order reports from ACT Research and FTR were largely like the weak September snapshot of the market, but the new figures carry outsize weight because they signal plans for fleet upgrades and expansion for the coming year. That suggests a tough 2017 for truck makers unless carriers see a sharp turnaround in industrial shipping demand—an unlikely prospect for the coming winter months. Still, analysts at FTR point to recent stability in domestic freight markets and say orders may pick up once uncertainty surrounding the elections recedes. (WSJ)

OIL

Following Wednesday’s sharp rise in U.S. oil inventories, I suggested there might be a demand problem. The Daily Shot has this chart this morning:

Gasoline demand is now below last year’s levels.

Confused smile We have seen this movie many times before:

Saudis threaten to raise oil output again as sparring with Iran returns Old disputes between Saudi Arabia and rival Iran resurfaced at a meeting of OPEC experts last week, with Riyadh threatening to raise oil output steeply to bring prices down if Tehran refuses to limit its supply, OPEC sources say.

Old disputes between Saudi Arabia and rival Iran resurfaced at a meeting of OPEC experts last week, with Riyadh threatening to raise oil output steeply to bring prices down if Tehran refuses to limit its supply, OPEC sources say. (…)

“The Saudis have threatened to raise their production to 11 million barrels per day and even 12 million bpd, bringing oil prices down, and to withdraw from the meeting,” one OPEC source who attended the meeting told Reuters. (…)

The Saudi threat followed objections by Iran, which said it was unwilling to freeze its output, the same OPEC sources said. (…)

The Saudi OPEC delegation told their Iranian counterparts that Tehran should freeze output at 3.66 million bpd – the latest estimates of Iranian output by OPEC experts, known as secondary sources.

Iran has reported its output at 3.85 million bpd in September and said it would only cap its output at 12.7 percent of OPEC’s total ceiling – or 4.2 million bpd.

Iran’s counter-argument at the meeting was that Saudi Arabia has raised its output by almost 1 million bpd since 2014, and is now trying to convince others it would cut output by 400,000 bpd to get a deal, though in reality Riyadh has already won extra production and revenue, according to OPEC sources. (…)

“Working in oil industry is like operating at war fronts and we have to preserve our trenches by raising our production capacity as much as we can,” Ali Kardor, managing director of the National Iranian Oil Company (NIOC), told the oil ministry’s news agency Shana.

“The next OPEC meeting is near and we will never cease to recapture our quota in the organization,” he said on Monday, adding that Iran’s crude oil output was nearing 4 million bpd.

OPEC sources have said Saudi Arabia offered to reduce its output from summer peaks of 10.7 million bpd to about 10.2 million if Iran agreed to freeze production at around levels of 3.6 million-3.7 million bpd. (…)

The High Level Committee of experts will meet again in Vienna on Nov. 25 to finalize the details ahead of the next meeting of OPEC ministers on Nov. 30.

OPEC Secretary-General Mohammed Barkindo has said he is “optimistic” a final agreement will be reached.

An OPEC delegate, who attended Friday’s meeting, said he still hoped for a deal in November.

“People can look at it from different angles. The fact that discussions are still going on is a positive one. They are going to work on it, close to the ministers’ meeting,” the delegate said.

Money Average ACA premium increases.

Source: @NickatFP via The Daily Shot

EARNINGS WATCH
  • 410 companies (86.4% of the S&P 500’s market cap) have reported. Earnings are beating by 6.1% while revenues are surprising by 0.2%.
  • Expectations are for revenue, earnings, and EPS growth of 2.5%, 2.1%, and 4.2%, respectively.
  • EPS is on pace for +5.0%, assuming the current beat rate for the remainder of the season. This would be +8.5% excluding Energy.

Thomson Reuters’ tally now sees Q3 EPS up 3.9% (+3.3% yesterday) but Q4 estimates keep edging lower: +6.7% vs +6.8% yesterday.

Contact: edgeandodds [at] gmail.com