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 (13 June 2017)

NFIB

The May Index continues the remarkable surge in small business optimism that started the day after the election. Small-business confidence shot up to near record levels last November and still hasn’t come down. The Index for May matched its strong performance in April of 104.5. The Index has been at a historically high level for six straight months. In May, five of the Index components posted a gain, four declined, and one remained unchanged. Labor market indicators remained strong, capital spending remained high, and reports of improved sales trends also increased in frequency.

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U.S. Wholesale Inventories & Sales Decline

Inventories at the wholesale level fell 0.5% during April following a 0.1% March uptick, revised from 0.2%. It was the second decline in the last four months, and halved the y/y increase to 1.6%.

Wholesale sales dropped 0.4% (+7.3% y/y) following a 0.2% decline, revised from no change. A 0.3% rise was expected in the Action Economics Forecast Survey.

Nondurable goods sales were off 1.1% (+7.3% y/y as petroleum sales fell 1.5% (+33.2% y/y).

Wholesalers’ inventory-to-sales ratio held steady at 1.28, down sharply from the 1.36 average in Q1’16.

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Loonie Surge on BOC Bets Signals Break From Commodities

The loonie’s June 12 rally showed it’s breaking free from commodity prices, which tumbled. The currency surged after Bank of Canada Senior Deputy Governor Carolyn Wilkins signaled in a speech that economic growth is broadening and that the central bank, when it comes to stimulus, may need to let up on the gas. “The hawkish nature of the speech is the first acknowledgment from the bank that the next move is likely to be a hike,” CIBC’s Avery Shenfeld wrote. (Bloomberg Briefs)

  • Time for a more hawkish Bank of Canada

In its May rate-announcement press release, the Bank of Canada described the Canadian economy’s adjustment to lower oil prices as “largely complete.” That in itself should
be enough to call into question the current overnight rate of 0.50%. The justification for the Bank’s policy stance seems even more questionable at a time when full-time employment is surging among prime-aged workers (those most likely to borrow money). A total of 196,000 full-time jobs have been added in this age group over the last seven months, the best such run in 20 years. This is an environment supporting credit growth, consumer spending and the housing market. (…)

We now expect the Bank of Canada to raise the overnight rate 25 basis points in October, three months earlier than previously assumed. (NBF)

Saudi Arabia Cuts U.S. Oil Exports to Ease Supply Glut The kingdom is slashing its U.S. oil exports to a near three-decade low for this time of the year, intensifying its efforts to reduce bloated inventories that have been pummeling crude prices.

The state-owned Saudi Arabian Oil Co. expects its sales to the U.S. will drop below one million barrels a day in June, then slide to about 850,000 barrels a day in July, according to people familiar with the matter. Saudi Aramco expects its August exports to decline by another 100,000 barrels a day, these people said, which would be the lowest export amount for that month since 2009. (…)

The fall in Saudi exports could reflect a number of other factors. Rising U.S. production means domestic refiners need less of Saudi Arabia’s crude, and the end of Aramco’s refining joint venture with Royal Dutch Shell PLC leaves the Saudi company with fewer buyers of its crude output. Saudi exports usually fall during the hot summer months because the kingdom requires more crude to generate electricity. (…)

U.S. imports from Saudi Arabia declined to 1.17 million barrels a day in March from 1.34 million barrels a day in January. ClipperData, a vessel tracking firm, said they averaged about 1.1 million barrels a day in April and May. (…)

OPEC’s output rose 1% to over 32.14 million barrels in May, led largely by increases from three of its 14 members: Libya, Nigeria and Iraq, according to the cartel’s closely watched monthly market report.

The increase from Libya and Nigeria wasn’t a surprise because those countries were exempted from any obligation to cut as they try to come back from sabotage and violent disruptions to their supplies.

But Iraq agreed last December, and again in May, to some of the largest production cuts undertaken by the cartel. Instead its output increased over 44,000 barrels a day to over 4.4 million barrels a day. (…)

Saudi Arabia, OPEC’s biggest producer and the world’s biggest exporter, raised its production slightly to 9.94 million barrels a day in May from 9.938 million barrels a day a month earlier, according to OPEC, citing sources such as shippers, analysts and industry executives.

The Saudi kingdom itself told OPEC its production fell by 66,200 barrels a day last month to 9.880 million barrels a day. (…)

What, Me Worry?

The accident-waiting-to-happen follow up, from John Mauldin:

If you missed the April 21 Daily Edge:

Please take the time to watch and analyse the accompanying charts if you are even remotely serious about investing. The video is courtesy Steven Bregman and Horizon Kinetics. The chart book is courtesy Steven Bregman and Horizon Kinetics as well as Grants Financial Publishing via Valuewalk.

THE DAILY EDGE (24 April 2017)

Buyers Surge Into Market as Spring Home Buying Season Begins Existing home sales rebounded in March, as buyers flooded into the market for the spring season and were only partly deterred by a shortage of inventory.

Purchases of previously owned homes, which account for the vast majority of U.S. sales, increased to a seasonally adjusted annual rate of 5.71 million last month, up 4.4% from February, the National Association of Realtors said Friday. That was their highest pace in 10 years.

The increase comes after home sales dropped a revised 3.9% in February because of rising prices and mortgage rates and a shortage of inventory.

Compared with last March sales were up 5.9%. It also marked the third time in five months that sales have reached a cyclical high. (…)

Inventory increased 5.8% at the end of March from a month earlier, but it was still down 6.6% from a year earlier. (…)

The median sale price rose 6.8% in February from a year earlier, to $236,400.

There is some evidence that new buyers are also finally starting to enter the market, although rising prices remain a deterrent. First-time home buyers made up to 32% of the market, unchanged from February and up from 30% a year ago.

In the first quarter, Tian Liu, chief economist at Genworth Mortgage Insurance, said the company saw a 5 percentage-point increase in the share of mortgages issued to first-time buyers to nearly 50%. The company specializes in the type of low down payment loans experts say could help lure young buyers into the market. (…)

Once again, real estate is often more local than national: if national existing home sale are perking up, it really is because of a strong market in the South:

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This chart plots the South and the rest of USA:

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Could be the cold weather in March in most of the U.S…but the South. But there is also this trend that must leave many people cold on purchasing a house (BloombergBriefs): 

Brick-and-Mortar Stores Are Shuttering at a Record Pace Years of overbuilding and the rise of online shopping have come to a head, resulting in the planned closure of thousands of stores by chains such as Payless, RadioShack and Bebe.

Through April 6, closings have been announced for 2,880 retail locations this year, including hundreds of locations being shut by national chains such as Payless ShoeSource Inc. and RadioShack Corp. That is more than twice as many closings as announced during the same period last year, according to Credit Suisse.

Based on the pace so far, the brokerage estimates retailers will close more than 8,600 locations this year, which would eclipse the number of closings during the 2008 recession.

At least 10 retailers, including apparel seller Limited Stores Co., electronics chain Hhgregg Inc. and sporting-goods chain Gander Mountain Co., have filed for bankruptcy protection so far this year. That compares with nine retailers that declared bankruptcy, with at least $50 million liabilities, for all of 2016. (…)

According to Moody’s Investors Service, the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years. (…)

Despite the view that shoppers prefer to try on clothing in physical stores, apparel and accessories are expected this year to overtake computers and consumer electronics as the largest e-commerce category as a percentage of total online sales, according to research firm eMarketer. (…)

It is less profitable to do business online than in a brick-and-mortar store, largely due to the higher shipping, customer-acquisition and technology costs of the digital world. Retail margins on average fell to 9% last year from 10.5% in 2012, according to consulting firm AlixPartners LP. Over that period, e-commerce sales increased to 15.5% of total sales from 10.5%.

(…) there are chains that continue to grow, such as off-price retailer TJX Cos., which is opening hundreds of stores under its Marshalls, T.J. Maxx and HomeGoods banners, as it steals market share from Macy’s Inc. and other traditional department stores. (…)

Employment in retail trade has stalled (+0.3% YoY in March) while hours worked keep declining:

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Each million dollar of sales going from store to non-store retailers cost 2 net jobs at the retail end. That’s some 130k lost retail jobs since 2009. E-Com retail sales are now $102B representing 8.3% of all retail sales. Food sales are now being attacked. As on-line sales keep rising, the pace of bankruptcies and store closures is accelerating.

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More on this here and here.

Wal-Mart Brings Price War to Groceries Wal-Mart’s fight to defend its low-cost reputation is helping to extend the longest food-price decline in decades.

(…) Wal-Mart is spending to beat competitors’ prices and test strategic price drops, mostly on food and household goods sold at Wal-Mart stores in the Southeast and the Midwest, say people familiar with the tactics. (…)

In a presentation to suppliers in February, Megan Crozier, Wal-Mart’s senior vice president of packaged goods, said Wal-Mart wants its prices to be 15% lower than its competitors’ 80% of the time, according to attendees. (…)

Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Wal-Mart stores were 5.8% lower than a year ago, while those in the Atlanta and Southern California markets were 4.9% and 2.7% cheaper, respectively. (…)

Kroger Chief Financial Officer Mike Schlotman recently said pressure from Wal-Mart, which sells more food in the U.S. than any grocer, was mounting. “We certainly have seen them do things better than they historically have,” he said. (…)

Year-to-year food retail prices declined for the 16th month in March, the longest stretch since 1956. But some believe the trend will reverse this year as commodity prices climb out of a multiyear rout. Moody’s expects prices for food consumed at home to rise 1% in 2017. (…)

That said, retail food prices have been rising MoM since January (+3.0% a.r. in Q1’17) and wholesale prices are back up YoY after jumping at a 6.7% a.r. in the last 4 months.

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Oil Falls Below $50 as Surging U.S. Output Undermines OPEC Cuts

Commodity prices always tend to move towards the marginal cost of production (charts via The Daily Shot):

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wsjs-daily-shot-is-mid-america-waiting-for-economic-boom-that-never-comes (1)

EARNINGS WATCH

Still early but a pretty solid quarter so far:

From Thomson Reuters/IBES:

Through April 21, 95 companies in the S&P 500 Index have reported earnings for Q1 2017. Of these
companies, 75.8% reported earnings above analyst expectations, 7.4% reported earnings in line with analyst expectations and 16.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 63.6% of companies beat estimates, 15.6% match and 20.8% miss estimates. Over the past four quarters, 70.8% of companies beat the estimates, 9.6% matched and 19.7% missed estimates.

In aggregate, companies are reporting earnings that are 6.1% above estimates, which is above the 3% long term (since 1994) average surprise factor, and above the 4% surprise factor recorded over the past four quarters.

The estimated earnings growth rate for the S&P 500 for Q1 2017 is 11.2%.

The estimated revenue growth rate for the S&P 500 for Q1 2017 is 6.8%.

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TR calculates that S&P 500 EPS are now $121.85, finally exceeding their June 2015 level of $119.20. Trailing EPS are up 6.9% from their July 2016 low. With inflation stable in the 2.0-2.2% range, the Rule of 20 P/E is now 21.7 at this morning opening of 2370, where it was one year ago.

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The good earnings trend coupled with a stabilizing core CPI is helping equities deal with much weaker surprises

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Corporate America is set to unleash its biggest profit-reporting fest in at least a decade next week, with more than 190 members of the S&P 500 index .SPX delivering quarterly scorecards, according to S&P Dow Jones Indices data.

The lineup accounts for around 40 percent of the benchmark index’s value, or more than $7.7 trillion, and includes big names like Google’s parent Alphabet Inc (GOOGL.O), Amazon.com Inc (AMZN.O), Microsoft Corp (MSFT.O) and Exxon Mobil Corp (XOM.N). (…)

In the last week alone, expected S&P 500 first-quarter earnings per share growth rose to 11.2 percent from 10.4 percent, a more than 7 percent jump, according to Thomson Reuters data. (…)

US companies put brakes on cash spending Trump tax reform promises yet to lead to rise in investment

(…) In January, more companies said they were planning to draw down their cash reserves than to add to them — the strongest signal in two years of expansive intentions, from the quarterly survey by the Association for Financial Professionals survey.

Three months on, however, a majority of corporate treasurers said they have not done that, and a majority said they intend to hoard still more cash in the current quarter. (…)

Contrary to the indications in January, the percentage of treasurers who said they actually reduced cash balances in the past three months was just 27 per cent, compared to 32 per cent who held them steady and 41 per cent who increased them. (…)

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SENTIMENT WATCH
“Irrational Exuberance” Reading Explodes Higher

From Bespoke:

(…) As you can see in the “One-Year Confidence” chart, according to Yale’s survey, investors have gotten crazy bullish on stocks over the last few months.  Institutional investors are extremely bullish: less than 2% don’t expect gains for the Dow over the next year!  Individual investors are the most bullish since February 2004, when 93.4% expected gains.  Currently, over 90.9% expect further gains.

While investors are crazy bullish on the market over the next year, they aren’t attracted to the market’s valuation.  As shown in the second chart below, a historically low share of investors think the market is cheap; Valuation Confidence from both individual and institutional investors is near the lowest levels on record.

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So what do you call high confidence that the market will be higher a year from now while at the same time not liking the valuation of the market? Some would say “irrational exuberance.”  We decided to create an “irrational exuberance” indicator from this survey data which is simply Valuation Confidence subtracted from One Year Confidence.  As shown below, this reading has exploded higher recently for both institutional and individual investors.

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FYI: S&P 500 Index (Rule of 20 P/E):

  • June 2001: 1224 (29.3)
  • March 2009: 666 (12.3)
  • April 2010: 1188 (19.2)
  • Jul. 2010: 1010 (15.4)
  • Apr. 2011: 1372 (18.7)
  • Sep. 2011: 1131 (16.2)
  • Apr. 2017: 2355 (22.0)
European Stocks Aren’t As Cheap As They Look

(…) There are three big problems with the argument that the eurozone’s cheaper. Firstly, it is always cheaper. Second, the cheapness is concentrated in banks, which still scare many, and oil stocks, which only look cheaper in Europe because of the collapse in U.S. shale profits. Finally, being cheaper than the most expensive major market isn’t much help if Europe’s still expensive itself.

History shows investors demand a discount for European stocks, perhaps because of less economic dynamism, perhaps because of slower long-run profit growth, perhaps because employees have more say. The average discount since Thomson Reuters IBES data began in the mid-1980s is a discount of 2 points on the price-to-earnings ratio.

Europe’s current discount is even bigger than the historic norm, but all of it is down to banks and oil. Exclude those, and the discount for eurozone stocks is fractionally smaller than the long-run average.

Andrew Lapthorne, head of quantitative equity research at Société Générale , uses the valuation of the median stock to try to avoid being skewed by a few large or very expensive companies or sectors. “Europe’s at peak valuations as much as everywhere else on an equal-weighted basis,” he says.

An alternative bet on Europe is that the economy is recovering faster as global growth picks up, and that a reformist in France’s Élysée Palace could make Germany more willing to help out (although Mr. Macron may have to work with a prime minister from another party, hampering his policy agenda). Again, the biggest winners from a faster expansion and a rise in interest rates should be the banks. If the economy doesn’t behave, the banks will be the big losers. European banks are cheap, and it isn’t hard to see why.

Clock Timing of Release of Donald Trump’s Tax Plan Is in Dispute President suggests next week, but his budget director, Mick Mulvaney, says it might not come until June
ETFs
How an ETF Gold Rush Rattled Mining Stocks Unruly trading in the shares of some small gold companies is rekindling investor concern about the pressure that fast-growing passive funds can exert on the stocks they are meant to track.

(…) In the past six months, waves of money rushed into a $20 billion complex of interlinked exchange-traded funds that invest in gold-mining companies. The flows prompted the ETFs to amass ever-larger stakes in dozens of small firms. Efforts to check the funds’ growth triggered price gyrations in gold stocks from Sydney to Toronto, at a time when the price of gold was largely flat.

The turmoil illustrates how the rise of index investing could rattle trading in the years ahead, especially as the $4.8 trillion ETF industry sprawls into smaller markets, investors said. (…)

Just this month, a flood of cash into a new Canadian ETF jolted trading in the nascent marijuana industry, and in September, the Bank of Japan curbed its purchases of ETFs pegged to the Nikkei 225 index after its stimulus efforts distorted prices. (…)

“There’s definitely the possibility for some issues to arise, but in the vast majority of cases we’re a long way off,” said Ben Johnson, head of ETF research at Morningstar, pointing out that ETFs in larger markets don’t come close to dominating trading the way the gold mining ETFs did recently.

The most recent example of an ETF knocking prices out of whack centers on the VanEck Vectors Junior Gold Miners ETF, which invests in small gold companies. The ETF has taken in $1.4 billion since September, forcing VanEck to hoover up mining shares.

Juicing its growth was the Direxion Daily Junior Gold Miners Index Bull 3X ETF, which uses the VanEck ETF to give investors a triple-leveraged bet. For each $1 dollar Direxion took in, it funneled $3 into the VanEck fund.

VanEck plowed that cash back into gold stocks, becoming the largest investor in two-thirds of the 54 companies the ETF owns shares in, according to FactSet. In some cases, VanEck owned 16% or more of the available shares of those companies, bringing it into the range of a Canadian securities law that requires firms that exceed a 20% stake to offer a buyout to the remaining shareholders. (…)

With more money coming in than it could invest in its roster of gold miners, the VanEck junior ETF directed some of the overflow into the VanEck Vectors Gold Miners ETF, which invests in larger firms. That ETF swelled to $12.5 billion amid the combined inflows from its smaller sibling and the Direxion Daily Gold Miners Index Bull 3X ETF, another leveraged copycat.

As the ETFs overran the market, more traders piled in. On April 12, Direxion received orders for $113 million in new shares of its leveraged junior ETF, the largest inflow in its history. The next day, Direxion closed the fund to new investors “until further notice.” The ETF’s share price rose higher than the value of its assets, reflecting the imbalance of demand over suddenly finite supply. (…)

Jack Ma Sees Decades of Pain as Internet Upends Old Economy