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

ceteris non paribus

THE DAILY EDGE (7 September 2017)

DC politics getting murkier:

Trump Stuns GOP by Dealing With Democrats on Debt, Harvey Aid President Trump stunned fellow Republicans, as he sided with Democrats on a proposal to attach emergency aid for Hurricane Harvey victims to measures to keep the government funded and its borrowing limit suspended until mid-December.

(…) If approved by Congress, the agreement would defer the threat of a partial government shutdown and a default on the country’s debt until Dec. 15 and dispatch the first $7.85 billion installment of Harvey relief, clearing the three most pressing items from the crowded September legislative agenda. (…)

Just hours earlier, House Speaker Paul Ryan (R., Wis.) had called Democrats’ proposal to combine Harvey aid and a three-month debt limit increase “ridiculous” and “unworkable.”

(…) The Republican president’s move Wednesday raised questions about whether he will now turn to Democrats to reach deals on tax reform and immigration. (…)

Although Mr. McConnell said he would vote for the combined package, other GOP senators said Wednesday they weren’t sure whether they would support it, even after Vice President Mike Pence and Budget Director Mick Mulvaney explained the deal to Senate Republicans at their weekly closed-door lunch. Mr. Mnuchin fully supported the president’s decision once it was made, a senior Treasury official said. (…)

The deal will be a tough sell among House Republicans. House Rules Committee Chairman Pete Sessions (R., Texas) said it was going to take work for the GOP leadership to sell the deal to rank and file. (…)

Today’s WSJ editorial:

(…) What really happened is that Mr. Trump overruled his Treasury Secretary and GOP leaders who wanted a debt-ceiling increase to run past the 2018 election. Mr. Trump instead gave Democrats exactly what they want, which is to set up an even steeper fiscal cliff on debt and spending in December when Republicans hope to be focusing on tax reform.

Republicans will now have to take at least two difficult votes to raise the debt ceiling, while Democratic leverage will increase when the day of reckoning comes. The chances of a government shutdown in December have now risen sharply, or at least they have if Mr. Trump wants to pass something with more than a few Republican votes.

Mr. Trump may not like GOP leaders Paul Ryan and Mitch McConnell, but is he trying to elect Speaker Pelosi? As Nebraska Sen. Ben Sasse put it in a press release: “The Pelosi-Schumer-Trump deal is bad.”

Part of the problem is that Congressional Republicans once again helped put themselves in this box. Congress can’t let the U.S. default on its debt, so the majority party has to raise the debt ceiling whether it likes it or not. The smart GOP play was to attach a long-term debt increase to some other must-pass legislation and get it over with. One and done.

In familiar self-defeating fashion, the usual House suspects refused, insisting that the debt ceiling get a stand-alone vote. House Freedom Caucus Chairman Mark Meadows and Republican Study Committee leader Mark Walker also claim to be miffed that the debt-limit increase won’t include spending cuts.

Yet most of these same Members won’t vote to raise the borrowing limit no matter what they’re offered. They find the actual work of governance beneath their dignity. Their mutiny means that Mr. Ryan lacked a GOP majority to raise the debt ceiling, which meant he had to go hat in hand to Mrs. Pelosi for Democratic votes. She and Mr. Schumer came up with their three-month gambit, which Mr. Ryan immediately labeled “ridiculous” and “unworkable,” only to be sandbagged by Mr. Trump.

This may all sound like inside baseball, but it’s politically relevant because it illustrates the Republican inability to govern. The Senate killed health-care reform. The House can’t pass a budget resolution that is essential for tax reform. Mr. Trump is sore that Republican leaders failed on health care, so he now undermines their fiscal strategy and all but hands the gavels to Democrats. Readers might take note and hold off on spending that tax cut.

Fed’s analysis getting murkier:

  • Hurricanes Push Fed off Course Economic slowdown caused by Hurricanes Harvey and Irma will be enough to keep central bank from raising rates as expected in December
  • From the Beige Book:

Employment growth slowed some on balance, ranging from a slight to a modest rate in most Districts. Labor markets were widely characterized as tight. There were reports of worker shortages in numerous industries, most notably in manufacturing and construction. Firms in the Atlanta, St. Louis, and Minneapolis Districts said that they had turned down business because they could not find the necessary workers. Many Districts indicated that businesses were having difficulty filling openings at all skill levels. In spite of the tight labor market, the majority of Districts reported limited wage pressures and modest to moderate wage growth. That said, there were reports from firms in the Dallas and San Francisco Districts that labor shortages were pushing up wages.

A number of Districts indicated that pass-through to downstream prices was limited, with increases in input prices exceeding gains in selling prices.

From July 20 Daily Edge:

An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a great share of the 7 million who are unemployed.

Meanwhile:

Bank of Canada Surprises With Another Rate Rise The Bank of Canada raised its benchmark interest rate by a quarter-percentage point to 1%, saying stronger-than-anticipated growth—highlighted by a blockbuster performance in the second quarter—warrants the removal of “considerable” stimulus from the economy.

(…) Recent indicators, such as a report showing economic growth surged by a strong 4.5% annualized rate in second quarter, support “the bank’s view that growth in Canada is becoming more broadly based and self-sustaining,” the Bank of Canada said in a statement explaining its decision. “Given the stronger-than-expected economic performance, [the bank] judges that the removal of some of the considerable monetary policy stimulus is warranted.”

(…) the central bank said it would pay “close attention” to how the economy responds to higher borrowing costs, given households have accumulated record levels of debt. (…)

In its statement, the Bank of Canada said there had been “widespread strength” in exports and business investment. (…)

Yuan’s Sharp Rise Muddles China’s Growth Picture A recent surge in the value of the yuan has blindsided Wall Street and stands to complicate China’s efforts to simultaneously manage a slowdown in growth while deepening its ties to global markets.

CETERIS NON PARIBUS:

Western multinationals are fighting harder to hold on to their margins in China because of overcapacity and an improvement in the quality of Chinese-made products.

Companies including Merck MKKGY 1.52% KGaA, United Technologies Corp. UTX -1.44%and Honeywell International Inc. HON 0.03% are responding in myriad ways, from slashing costs to improving customer service. Still, several companies concede margins will stall long-term due to local competition.

“Our margins have been on a downward trend for over five years now,” said Philipp Baechtold, general manager at Eftec China Ltd., a Swiss chemicals company that produces glues and coatings for the car industry. (…)

Honeywell International, an industrials firm, in recent years also noticed a change in the quality of Chinese products. “Chinese companies are becoming more savvy,” said Shane Tedjarati, president of Honeywell’s high growth regions unit. “We cannot become complacent. We are benchmarking ourselves against Chinese companies,” Mr. Tedjarati said.

Chinese firms have always used price as a lever, said Joe Ngai, managing partner at McKinsey & Co.’s Greater China practice. (…)

According to a recent report by the American Chamber of Commerce in Shanghai, slightly more than 80% of U.S. companies said competition from Chinese firms is one of their most pressing issues. Even more, 93%, cited rising costs—which adversely affects margins—as a challenge. (…)

“When you have to match a price level that is much lower than yours, you need to scrutinize your specs,” said Jean-Michel Vallin, president at Faurecia China. “Chasing costs is part of our daily work,” he added. (…)

THE DAILY EDGE (28 July 2017)

Consumers, businesses lift U.S. economic growth in second-quarter

Gross domestic product increased at a 2.6 percent annual rate in the April-June period, which included a boost from trade, the Commerce Department said in its advance estimate on Friday.

Growth for the first quarter was revised down to a 1.2 percent rate from the previously reported 1.4 percent pace. (…)

The economy grew 1.9 percent in the first half of 2017, making it unlikely that GDP would top 2.5 percent for the full year. (…)

Consumer spending, which makes up more than two-thirds of the U.S. economy, grew at a 2.8 percent rate. That was an acceleration from the 1.9 percent pace logged in the first quarter.

Business spending on equipment rose at an 8.2 percent pace in the second quarter, the fastest since the third quarter of 2015. It was the third straight quarterly increase. (…)

U.S. Durable Goods Orders Jump; Aircraft Orders Soar

New orders for durable goods strengthened 6.5% (16.1% y/y) during June following a 0.1% May slip, revised from -1.1%. A 2.8% increase in orders had been expected in the Action Economics Forecast Survey.

The rise in orders reflected strength in bookings for nondefense aircraft & parts which more than doubled m/m. It lifted nondefense capital goods orders by 21.0% (38.4% y/y) following declines during the prior two months. Less aircraft, nondefense capital goods orders eased 0.1% (+5.6% y/y) following a 0.7% improvement. A 19.0 rise (36.1% y/y) in transportation sector orders also reflected a 0.6% decline (+3.2% y/y) in motor vehicle & parts orders.

Outside of the transportation sector, durable goods orders improved 0.2%. That lifted y/y growth to 6.8%, up from the declining trend in place during 2015 and 2016. Fabricated metals orders rose 0.7% (10.4% y/y) while primary metals orders ticked 0.1% higher (11.7% y/y). Machinery orders gained 0.2% (10.5% y/y) following a 2.3% jump, but electrical equipment orders fell 1.7% (+2.1% y/y). Orders for computers & electronic products slipped 0.3% (+2.3% y/y) for the second straight month as orders for computers & related products eased 0.2% (+0.5% y/y), the third decline in the last four months. Communications equipment orders strengthened 1.6% (-3.7% y/y).

image

Forecast: July U.S. LV Sales Fall Behind Year-Ago

A WardsAuto forecast calls for U.S. light-vehicle sales to reach a 16.9 million-unit seasonally adjusted annual rate in July, following June’s 16.4 million SAAR and resulting in a 5-month streak of sub-17 million figures. July’s SAAR would be significantly lower than the 17.8 million recorded in same-month 2016. The report is calling for 1.42 million light vehicles to be delivered over 25 selling days in July.

Canada’s economic growth blows past forecasts in May

The 0.6 per cent gain exceeded economists’ forecasts for 0.2 per cent, while April was unrevised at 0.2 per cent.

EARNINGS WATCH

As of end of day July 26 per TR:

  • 239 reports, 74% beat rate, +6.6% surprise factor.
  • Blended Q2: EPS: +10.7%, revenues +4.9%.
  • Q3E: +7.5%. Q4: +12.5%.
  • Trailing EPS: $125.29.
Amazon’s Expansion Takes Toll Amazon said quarterly profit fell 77% even as sales jumped, a sign of the high cost of its increasing dominance of retail.

Sales for the June quarter jumped 25% to $38 billion, satisfying Wall Street’s expectations of consistent double-digit growth. But Amazon’s bottom line took a hit, with operating income sliding 51% to $628 million and missing analysts’ $1 billion target.

(…) Amazon has claimed more than 40 cents out of every dollar spent online over the past year, according to receipt tracker Slice Intelligence, which has an online shopping panel of more than 5 million. Wal-Mart Stores Inc., in comparison, claimed about 1.7% of online spending over the same period. Amazon is now the second-largest apparel seller behind Wal-Mart after taking market share from Target Corp. and several department stores, according to a research note published by Morgan Stanley in April. (…)

Amazon said it will continue to spend heavily on its growth, signaling a period of lower profit. That is particularly the case in the third quarter, Mr. Olsavsky said, because Amazon bulks up on warehouse staff and delivery capacity ahead of the all-important holiday season. Amazon said its operating income could swing to a loss in the next quarter.

One of the bigger costs for the quarter will come from hiring new employees, part of its pledge to hire 130,000 U.S. workers through mid-2018. The company said on Wednesday it plans to host a giant job fair next week to hire for its 50,000 current U.S. warehouse openings. Amazon said Thursday that its global workforce rose by more than 31,000 in the second quarter to 382,400. (…)

Shipping expenses rose 36% and fulfillment costs jumped 41%, measures that reflect both Amazon’s growing share of the retail market and its drive to control its own logistics and shipping operations. 9…)

Apple in Awkward Spot After Trump’s Factories Remark Pressed by President Trump, Apple suddenly faces new pressure to build factories in the U.S., something it hasn’t done for years and has shown no signs of wanting to do.

(…) Supply-chain experts and analysts say the prospect of Apple building one plant in the U.S.—much less three—is highly unlikely. Apple has built a sophisticated supply chain in China because that is where component suppliers are located, and manufacturing workers are abundant there. Shipping iPhone or iPad materials to the U.S. for production would cut into Apple’s profit margins, observers say. (…)

‘Skinny’ Repeal of Obamacare Fails The Republican effort to dismantle the Affordable Care Act collapsed early Friday when a slimmed-down Senate measure to pare back selected pieces of the 2010 health-care law failed, undermining the GOP leaders’ efforts to deliver on a longtime campaign promise.

(…) But it’s not clear that any bill can move forward fast enough to affect the markets for next year, as insurers must file rates by mid-August and make final decisions about participation by late September. (…)

However, many companies have said that even if Congress never formally repeals the coverage mandate, they fear the Trump administration won’t strongly enforce it—or consumers will ignore it, figuring that it will likely be toothless.

President Donald Trump likely added to the industry’s alarm with a Friday-morning tweet in which he wrote: “As I said from the beginning, let ObamaCare implode, then deal. Watch!” (…)

The company hasn’t made a final decision, but it would “strongly consider not participating” in the exchanges without the cost-sharing payments and enforcement of the mandate, he said. “It just really begs the question, is this marketplace sustainable.” Independence has asked for a rate increase of around 8.5% on average for next year for its Pennsylvania marketplace plans, and the loss of the cost-sharing payments would add about 4.5 percentage points to that, while lack of enforcement of the mandate would add another 17 percentage points, he said. (…)

Anthem, which has already disclosed plans to leave three of the 14 state exchanges where it offers plans, also said that if the cost-sharing payments are killed, it will need to seek rate increases of around 18% to 20% on exchange plans. The insurer said those increases would come on top of significant hikes it is already requesting, which it said were 20% or more. (…)

In some rate filings that have already become public, insurers offered different estimates. Blue Cross and Blue Shield of North Carolina said that of its 22.9% proposed increase for 2018, 14.1 percentage points were from assumed loss of the cost-sharing payments. BlueCross BlueShield of Tennessee said that of its 21% boost, about 14 percentage points were tied to the lack of cost-sharing payments and 7 percentage points to the loss of enforcement of the mandate. (…)

Why is this important?

  1. We are talking of people’s health here.
  2. Health-related costs have soared nearly 25% since 2013, the year the ACA went into effect, acting as a significant drag on total consumer spending and retail sales. Meridian Macro Research calculates that health-related expenditures are now 15% higher than expenditures on housing and utilities.
  3. Health care is now 17.1% of total consumer spending, up from 16.2% in 2013, 15% in 2007 and 13.5% in 2000.
GOP Lawmakers Outline Tax Plan Top congressional Republicans and the Trump administration abandoned a controversial House GOP plan to tax imports and exempt exports from taxes, as they announced tax policy principles that resolved few other crucial issues.

(…) The statement emphasized a common goal of reducing individual and corporate rates and individual tax rates “as much as possible.” It also called for faster writeoffs for capital expenses, an idea meant to promote investment, though it stopped short of a House Republican proposal for immediate writeoffs. (…)

“This is a very public declaration that the key elements of the [House] blueprint are dead,” said Harold Hancock, a former GOP Ways and Means tax aide now at McGuireWoods LLP. “This has become a broaden-the-base, lower-the-rate exercise, and [will] not create a whole new tax regime for the United States.” (…)

CETERIS NON PARIBUS:
Japan Slaps 50% Tariff on Some U.S. Beef Japan said it would impose a temporary 50% tariff on frozen beef from the U.S. and several other countries, a move that could inflame trade tensions.

Contact: edgeandodds [at] gmail.com