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

ism/markit

THE DAILY EDGE: 4 JUNE 2019

U.S. Light Vehicle Sales Rebound

The Autodata Corporation reported that sales of light vehicles during May increased 6.2% (1.2% y/y) to 17.40 million units (SAAR) and reversed April’s 6.1% decline.(…) Light-truck sales increased 8.0% (6.7% y/y) last month to a 12.38 million unit rate and reversed the 6.5% April decline. (…) Auto sales improved 1.6% (-10.2% y/y) to a 5.02 million annual unit pace following a 4.8% April decline. (…)

Trucks’ share of the U.S. vehicle market rose to a record high of 71.1%. The share rose from 68.2% last year and a low of 47.3% in 2009.

Imports share of the U.S. vehicle market eased last month to 22.5% but has been trending upward since 2015. Imports’ share of the passenger car market surged to 30.1%, nearly a six-year high. Imports share of the light truck market eased to 19.5%., but remained up from the 11.8% low in April 2014.

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Still trending weak. Americans don’t seem to be rushing out to buy cars ahead of potential import tariffs.

U.S. Construction Spending Unchanged in April

“Unchanged” but only because public construction jumped 4.8% (+15.1% YoY!). Private construction declined 1.7% (-6.0%).

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USA: Manufacturing PMI drops to lowest since September 2009 

May survey data signalled only a marginal improvement in the health of the U.S. manufacturing sector. The headline PMI fell to its lowest level since September 2009 as output growth eased and new orders fell for the first time since August 2009. Weak demand conditions and ongoing trade tensions led firms to express the joint-lowest degree of confidence regarding future output growth since data on the outlook were first collected in mid-2012. At the same time, employment rose at the slowest rate since March 2017 and backlogs of work were unchanged. Meanwhile, inflationary pressures eased further, with both input costs and output prices increasing at softer rates.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.5 in May [flash PMI was 50.9), down from 52.6 in April. The latest headline figure signalled only a slight improvement in operating conditions, with the latest reading the lowest since September 2009. The data for the second quarter so far have indicated a distinct slowdown in the manufacturing sector compared to the first three months of 2019.

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A key factor weighing on the headline reading was the softest expansion of output since June 2016. May data signalled only a marginal rise in production that was often linked to clearing backlogs of previously-placed orders. At the same time, manufacturers signalled the first decline in new orders since August 2009. Though only fractional, survey respondents stated that weak client demand drove the fall. Some firms also noted that customers were postponing orders due to growing uncertainty about the outlook. Similarly, new business from abroad contracted for the first time since July 2018, albeit at a marginal rate.

Consequently, manufacturers exhibited a lower degree of confidence towards output over the coming year. Expectations for growth dipped to their joint-lowest since the series began in July 2012, as firms highlighted concerns surrounding ongoing trade tensions and a growing trend of customers postponing new orders, especially among large clients.

On the price front, cost burdens increased at only a modest rate in May. The rise was the slowest since July 2017, with reports of tariffs driving costs higher being countered by increased competition among suppliers. Subsequently, firms increased their factory gate charges only marginally amid efforts to remain competitive.

Meanwhile, firms signalled a further increase in employment in May. The upturn was commonly linked to the replacement of voluntary leavers and retirees. Nonetheless, the expansion was the slowest since March 2017 amid tight labour market conditions.

Finally, purchasing activity was broadly unchanged in May as firms indicated greater efforts to use current inventories for production and increased efforts to readjust stock levels in light of softer demand conditions.

Chris Williamson, Chief Business Economist at IHS Markit:

While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lacklustre demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result. (…)

While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten-year history

In Canada, the U.S. main trading partner:

Canada’s manufacturing sector saw operating conditions worsen again in May. Production continued to contract amid the sharpest drop in new orders since December 2015. (…)

The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index® (PMI®) dropped from 49.7 in April to 49.1 in May, signalling a second successive monthly deterioration in business conditions. The latest PMI reading was the lowest in nearly three-and-a-half years, albeit still indicating only a slight downturn.

(…) Output contracted at the most marked rate since the end of 2015. Panellists linked this to falling new orders and subdued global trade conditions. (…)

Tariffs from the US also inflated cost burdens, which firms then passed on to customers through a solid uptick in output charges. (…) Ontario registered the sharpest downturn in manufacturing performance during May, partly reflecting a survey-record decline in new export sales. (…)

In Mexico, the other North American trading partner:

Mexico’s manufacturing industry continued to stutter in May, with the headline PMI showing no change in the health of the sector following a fractional improvement in April. Output growth was reinstated amid a renewed rise in exports and back-to-back increases in total sales, but in all three cases respective rates of expansion were lackluster. Challenges in securing meaningful volumes of new work in recent months translated into further job shedding and another cutback to input purchasing, with the contractions the fastest registered since the survey started in April 2011 as some companies faced cashflow issues and focused on cost reduction measures.

Also testing factories’ financial resources was a further increase in cost burdens parallel to limited pricing power amid demand weakness. (…)

Let’s recap the status of the manufacturing industry in North America:

  • USA: “new orders fell for the first time since August 2009” on “weak client demand” and “postponed orders due to growing uncertainty about the outlook”. “New export business contracted for the first time since July 2018”. “Tariffs are driving costs higher” but “firms increased their factory gate charges only marginally amid efforts to remain competitive”.
  • CANADA: “the sharpest drop in new orders since December 2015. (…) Output contracted at the most marked rate since the end of 2015” on “falling new orders and subdued global trade conditions. Tariffs from the US also inflated cost burdens”. Ontario saw a survey-record decline in new export sales.”
  • MEXICO: “rates of expansion were lackluster” and new work so weak that corporate demand contracted at “the fastest rate registered since the survey started in April 2011” limiting “pricing power amid demand weakness”.

In fewer words: new manufacturing orders, domestic and foreign, are falling throughout North America amid generalized weak demand and uncertainty. This weak overall demand fuels increasing competition, limiting pricing power, preventing passing on cost increases and therefore squeezing margins.

This is a worldwide trend as the J.P. Morgan Global Manufacturing PMI reveals:

imageGlobal PMI surveys signalled that manufacturing downshifted into contraction during May. Business conditions deteriorated to the greatest extent in over six-and-a-half years, as
production volumes stagnated and new orders declined at the fastest pace since October 2012.

The trend in international trade continued to weigh on the sector, with new export business contracting for the ninth month running. Business optimism fell for the second month in a row and to its lowest level since future activity data were first collected in July 2012. (…)

The downshift in growth in the US was the main driver of the slowdown in global manufacturing, as the US PMI slipped to its lowest level in almost a decade (September 2009). (…)

Efforts to maintain competitiveness led to the weakest rise in selling prices since September 2016 (…)

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Most American media and commentators report on the ISM manufacturing survey. The ISM PMI declined 0.7 to 52.1 in May but remains well into expansion territory while Markit’s PMI flirts with contraction readings. Markit compared its survey results with others last month:

Charting the data highlights how the ISM and the aggregated regional surveys correlate closely, but that both overstated actual manufacturing growth for much of late 2016- to late 2018, an overstatement which is not observed in the IHS Markit data. (…)

The outperformance of the IHS Markit data relative to the ISM is likely a consequence of ISM only surveying large companies while the IHS Markit survey covers small, medium and large companies in the correct proportions, as defined by the official data.

The IHS Markit survey is also the only survey to incorporate a national weighting system for its survey responses based on company size and sector contribution to total manufacturing output, ensuring each company’s response contributes appropriately to the survey index each month.

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Trade Risks Prompt Growing Predictions for Fed Rate Cuts Economists are projecting that uncertainty created by the Trump administration’s actions on tariffs will prompt the Fed to cut rates later this year.

(…) If trade tensions persist, “we could end up in a recession in three quarters,” said Morgan Stanley chief economist Chetan Ahya in a report Sunday. Recent conversations with investors “have reinforced the sense that markets are underestimating the impact of trade tensions.” (…)

“It feels as if the market is internalizing the fact that President Trump may not be solely focused on the health of financial markets,” said Roberto Perli, an analyst at Cornerstone Macro, in a report Monday.

Mr. Perli said Friday’s market expectations of the Fed’s future interest rate path over the following eight months posted the largest one-day drop since June 2016, when British voters approved a referendum to leave the European Union. The move was larger than all but 19 other such declines since 2008, with all of those declines occurring during the financial crisis in 2008.

“A change this big did not happen even at the time of the 2015-16 China scare, during which many investors thought the economy was definitely headed for recession,” Mr. Perli said. (…)

St. Louis Fed President James Bullard said the inverted yield curve and a perceived shift in the Trump administration’s prospects to achieve near-term trade agreements warranted the move.

“The narrative on global trade has darkened,” Mr. Bullard told reporters after a speech in Chicago on Monday.

“Monetary policy looks too restrictive in this environment,” Mr. Bullard said, referencing the inverted yield curve. “That’s usually been a bad sign for U.S. economic prospects.” (…)

Fed Chairman Jerome Powell is set to speak at a research conference in Chicago on Tuesday morning. (…)

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Consumer prices rose 1.2% in May, dropping back to the lowest in more than a year, from an Easter-boosted 1.7% pace in April. The core inflation rate fell to 0.8%, with both figures coming in below the median estimates of economists. (…)

Euro-area inflation eased more than expected in May

Yuan Watchers Say 7 Is No Longer a Sticking Point for China

(…) In the four days since ex-governor Zhou Xiaochuan dismissed the importance of 7, at least six analysts published reports laying out why the People’s Bank of China is likely to tolerate a weaker yuan. They say policy makers are more likely to prioritize supporting economic growth amid a worsening standoff with the U.S. over trade. (…)

China Warns Citizens Against U.S. Travel, Citing ‘Frequent’ Shootings “Recently, U.S. law enforcement agencies have repeatedly harassed Chinese citizens visiting the U.S.,” a report said.

SENTIMENT WATCH
Druckenmiller Piled Into Treasuries on Trump’s China Tweet

(…) “When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries,” Druckenmiller said Monday evening, referring to the May 5 tweet from President Donald Trump threatening an increase in tariffs on China. “Not because I’m trying to make money, I just don’t want to play in this environment.” (…)

“So I think if you’re confident in your long-term view and ability to make money, this is not a great environment to be going and betting the ranch. Not short, not long,” Druckenmiller said.

Liz Ann Sonders shows a NDR Research chart that I am not allowed to display here but can be seen on her post linked above.

(…) The table above shows the contrarian nature of sentiment at extremes, with market returns being weakest when investors are most optimistic. The contrary has an interesting wrinkle though. Also seen in the table above, the best zone for stocks is not while sentiment remains in the “extreme pessimism” zone, but when it has clawed its way out of that zone and moves up into the neutral zone. In other words, we may have to experience more market downside to trigger a better reading on this model.

Much of what is shown above represents attitudinal measures of sentiment; but there are also behavioral measures. A couple of them are captured in the CSP—the put/call ratio and Rydex flows—but there are others that I track as well.

One that is a perennial favorite among readers is ST’s “Smart Money” and “Dumb Money” Confidence readings (see their definitions in the footnote below the chart shown below). As of May 1, Dumb Money Confidence hit a high rarely seen in history; yet shortly thereafter—in keeping with the rollover in stocks—the spread between Dumb Money and Smart Money started to converge. The market’s decline since late-April was enough to finally push Smart Money above Dumb Money as the two groups are changing their mentality from hedging to covering (the Smart Money); and from being extremely long to reducing their exposure (the Dumb Money).

Smart Money Crosses Above Dumb Money

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Source: Charles Schwab, SentimenTrader, as of May 31, 2019.

The cross seen above marked the first occurrence in four months. That’s one of the longer streaks over the past 20 years according to ST. The longest streaks historically were typically during the starts of bull markets however—not typically this long into an existing bull market. 

With one major exception, these crosses were mostly good signals for stocks, although continued weakness tended to be concentrated in the subsequent month. The exception was in 2000, when it triggered right at that cycle’s peak, leading to more than a 30% loss over the next year. The sooner we see Dumb Money retreat closer to 30%, the less likely further major losses will occur according to historical precedent (although past performance is no guarantee of future results).

Finally, there are two other behavioral measures of investor sentiment—fund flows and households’ positioning in equities. On the former, the latest data from the Investment Company Institute (ICI) shows that equity mutual funds suffered an outflow of more than $42 billion in April alone—one of the largest losses ever for a single month. What’s especially notable according to ST is that while investors were yanking those funds out of stocks, stocks were still rising at the time and the S&P 500 was firmly above its 12-month moving average.

The near-term results for stocks after prior occurrences like this were mixed; with a couple of notable times when investors’ contrary sense paid off: in July 2011, and more recently in January 2018. Both times, stocks struggled immediately and continued to suffer hefty pullbacks. But those were the exceptions; and looking at the subsequent one-year returns for the S&P 500 after 19 prior signals since the mid-1980s, 95% of the time, returns were higher. (…)

In sum, we are beginning to see signs of a ramping of pessimism tied to the latest market weakness and concerns about recession. It may not be enough yet to suggest a contrarian case for a near-term bottom, but it may not take much additional weakness to get there given the heightened sensitivity toward even mild pullbacks. Longer-term though, an objective look at households’ exposure to equities suggests the likelihood of the next 10 years looking as good as the past 10 years is fairly low.

The Big Challenge for Policy Makers: Policing American Tech Giants  Amazon, Apple, Facebook and Google don’t fit neatly into old monopolistic formulas that would signal harm to consumers

(…) On the surface, Google and Facebook—as well as Amazon.com Inc. and Apple Inc. —have traits that would traditionally raise concerns about stifled competition squelching choices for consumers. They all have dominant market shares in their sectors—from search to social media, e-commerce, online advertising and smartphone apps—and are protected by practices and conditions that make it hard for new rivals to challenge them.

And yet they don’t fit neatly into the old formulas that signal harm from such power: higher prices and less choice for consumers. On the contrary, these companies offer many of their core products to customers for no charge. And they have vastly expanded the ability of consumers to search, compare and buy a newly broad range of products from all over the world with a quick click, search, or download. (…)

Many economists say consumers do pay for all of these services, not with cash but by providing the tech companies with valuable information about their personal lives as well as shopping and search habits. Those companies in turn convert that data into big profits by selling it to advertisers and other users. These economists say that in a more competitive market, the real free-market price could be lower than it is. Consumers, they suggest, might be paid for that data. (…)

The report also suggests that data-privacy concerns—a nonmonetary “cost” borne by consumers using digital platforms—might be better addressed with more competition, if different companies tried to lure customers by offering tighter protections.

The huge share of the digital advertising market controlled by Google and Facebook also means they can charge more for those ads than they could in a more competitive market—costs that may be passed on to consumers with higher prices for the goods they buy online, the reports say. They add that the prominent placement of ads associated with those platforms also degrades the quality of the user experience for consumers. (…)

The Chicago report says that, with digital platforms, the “competition in the market” shaping most industries is replaced by “competition for the market,” meaning that once a firm has won the battle to control a sector, it faces little challenge from other rivals. (…)

The reports all recommend tougher antitrust policies toward the big digital platforms. That could include more active investigations of practices used to curb competition, as well as a more aggressive stance in blocking any future acquisitions by those firms of potential competitors, like Facebook’s purchase of Instagram and WhatsApp.

But the studies also say there are limits to what antitrust authorities, like the Justice Department, can do about Google or the other big tech firms given that technology leads to single-firm dominance and moves so quickly.

Both the Chicago and U.K. studies conclude that governments will need new powers to foster more competition.

Druckenmiller:

(…) the future of an economic war with China will be fought with artificial intelligence and the U.S. should be helping, not hurting related companies.

He said China started easing up on its private sector last autumn and has been highly supportive of its own tech sector. “What are we doing? Oh, we’re saving, steel, coal, aluminum. What are we doing with our leading tech companies? We’re throwing sand in the gears and making their life miserable.” (WSJ)

An Ethanol Sop to Farmers The EPA allows E15 blends in the summer to offset tariff damage.

Americans will pay for President Trump’s tariffs in many ways, and on Friday we learned one more. The Environmental Protection Agency released a final rule allowing gasoline to be blended with up to 15% ethanol year-round. The result will be smoggier air and costlier road trips.

The EPA has long restricted E15 sales in the summer. The concern is—or at least was—that the combination of sun, heat and the organic compounds released by ethanol blends would result in much more smog. The Clean Air Act allows the EPA to issue a waiver and allow sales of 10% ethanol blends between June 1 and Sept. 15, but the law includes no such carve-out for E15.

Despite dubious legal authority, the Trump Administration has now granted E15 this pass to pollute during peak smog season. (…)

Compared to pure gasoline, ethanol has about 33% less energy content, so drivers get fewer miles per gallon. Unless an engine is specially built to accommodate high-ethanol blends, anything over 10% is corrosive. (…)

The EPA uses credits called “renewable identification numbers,” or RINs, to enforce these ethanol quotas. The credits are created when ethanol and gasoline are mixed, but independent refiners usually aren’t blenders. They can’t create RINs, so they’re forced to buy them.

Big oil and corn producers and speculators have cornered the market for the credits, driving up prices. When the East Coast’s biggest refinery, Philadelphia Energy Solutions, filed for Chapter 11 bankruptcy in 2018, it blamed RINs. By 2017 the credits had cost twice as much as the company’s payroll.

The new regulations do little to prevent manipulation of the RINs market. Gone are earlier proposals that would have barred hoarding the credits and required speculators to sell promptly. The new rule does mandate more transparency, but that doesn’t change the basic incentives in this artificial market. Mark it down as another example that one bad economic policy leads to many more.

THE DAILY EDGE (4 December 2017)

U.S. Light Vehicle Sales Weaken

Total sales of light vehicles declined 3.4% during November (-1.3% y/y) to 17.48 million units (SAAR) from 18.09 million in October, according to the Autodata Corporation. Sales have fallen 5.9% from the September high.

Light truck sales declined 3.9% (+4.1 % y/y) to 11.08 million after a 2.0% October drop. Domestically-made light trucks fell 4.7% (+2.1% y/y) to 9.05 million units following a 2.1% decline. Imported light truck sales eased 0.3% (+13.6% y/y) to 2.03 million units, remaining near the record high.

Trucks’ share of the U.S. vehicle market was little-changed m/m at 63.4% in November, but was higher than 51.2% ten years earlier.

The passenger car market also weakened as sales fell 2.5% (-9.4% y/y) to 6.39 million units, the lowest level in three months. Domestically-produced passenger car sales were off 1.1% last month (-8.3% y/y) to 4.70 million units after a 4.1% decline. Sales of imported passenger cars dropped 6.0% (-12.3% y/y) to 1.70 million units on the heels of a 2.6% decline.

Imports share of the U.S. vehicle market held steady m/m at 21.3%, but was up from 19.9% during all of 2015. Imports share of the passenger car market fell to 26.5%, and recently has been little-changed. Imports share of the light truck market strengthened m/m to 18.4%, up from 12.7% in 2014.

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U.S. November PMI signals robust manufacturing growth

November survey data indicated improved operating conditions across the US manufacturing sector. The upturn was supported by solid, albeit slightly weaker, increases in output and new orders. Staffing levels meanwhile rose at a robust pace, despite the rate of job creation softening since October. However, signs of capacity pressures persisted, with backlogs of work rising again. Output charges rose at the fastest pace since December 2013. Input prices also rose at a quicker rate that was steep overall. Business confidence was robust, and reached its highest since January 2016.

The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.9 in November, down from 54.6 in October. The latest index reading signalled robust, albeit slower, overall growth in the manufacturing sector. The latest upturn was in line with the long-run series average.

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Goods producers increased their output at a rate only slightly below that seen in October. Anecdotal evidence suggested that the rise was due to greater order volumes and robust client demand.

New orders received by manufacturers rose at the second-fastest pace since March in November. Panellists linked the latest upturn to more favourable demand conditions, and noted more orders from domestic and foreign clients. Furthermore, export sales rose at a rate that, though moderate, was the second-fastest in 15 months.

imageThe level of outstanding business at manufacturing firms increased at an accelerated pace that was the most marked since April. Employment levels, meanwhile, grew at the second-strongest rate seen since June 2015 in November.

Average prices charged by manufacturers rose further in November, with the pace of inflation accelerating to the fastest in almost four years. Anecdotal evidence suggested the increase was due to greater cost burdens which were largely passed on to clients. Input price inflation also quickened since October and was steep overall. Survey respondents commonly stated that components costs rose due to logistical delays.

Buying activity at goods producers grew at the strongest pace since February as firms adapted to larger new order volumes. Pre-production inventories also increased amid reports of stockpiling.

Output expectations among goods producers remained robust in November, with positive sentiment improving to its highest since January 2016. A number of panel members linked greater optimism to larger client bases and planned expansion into new markets.

(…) The Institute for Supply Management on Friday said its manufacturing index fell to 58.2 in November, but remained solidly in a growth mode. (…)

The easing of the sector’s expansion last month was driven by a decrease in inventories and a slower rate of growth in deliveries from suppliers and export orders. Employment growth cooled just slightly.

But other components of the index show continued strength for manufacturing. Overall new orders are rising at faster rate, and production also sped up. (…)

Of the 18 manufacturing industries tracked, 14 grew last month, the report said. The machinery sector was particularly strong. Just two contracted; wood products and petroleum and coal products. (…)

IHS Markit’s manufacturing PMI output index exhibits an 89% correlation with the Fed’s official measure of production but is available almost a month ahead of the official numbers.

Global manufacturing growth accelerates to 80-month high

November saw the upturn in the global manufacturing sector strengthen, with rates of expansion in output, new orders and employment all hitting multi-year highs. Price pressures remained elevated, however, with input costs and output charges rising at accelerated and above long run average rates.

The J.P.Morgan Global Manufacturing PMIâ„¢ posted 54.0 in November, up from 53.5 in October and its highest reading since March 2011. The headline PMI has signalled expansion for 21 consecutive months.

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Business conditions improved across the consumer, intermediate and investment goods sectors. The strongest expansion was signalled at intermediate goods producers and the slowest in the consumer goods category.

Growth remained sharper (on average) in developed nations compared to emerging markets. The euro area was a bright spot, with its PMI rising to a near-record high. Rates of increase also strengthened in Japan (44-month high), the UK (51-month high), Australia (8-month high) and Canada (2-month high). Growth slowed slightly in the US, but remained solid overall.

In the main emerging nations, growth eased to a five month low in China, but accelerated in India (fastest in over a year), Brazil (81-month high) and Russia. Mexico returned to expansion after contracting in October.

Global manufacturing production expanded at the quickest pace since February 2011, supported by a similarly rapid increase in new order intakes. There was also a bounce in international trade flows, as growth of new export business hit a near seven-year high.

Strong demand tested capacity, leading to a further solid increase in employment. The pace of job creation was the steepest in six-and-a-half years, with higher staffing levels registered in almost all of the nations covered by the survey. Notable exceptions were job losses in China, South Korea and Russia.

Price pressures remained elevated in November. The rates of inflation in input costs and output charges were the sharpest registered since May 2011. Both price measures were higher (on average) in developed nations compared to emerging markets.

Prices Begin to Rise in Deflation-Wracked Japan Here is one sign of how robust the world economy is getting: Even in deflation-wracked Japan, some companies believe conditions are strong enough to raise prices.

(…) Data released Friday showed that core consumer prices rose 0.8% in October compared with the same month a year earlier, a faster pace than September’s 0.7%. The figure was negative as recently as last December. (…)

Since the working-age population is shrinking, the overseas demand is driving a severe labor crunch for employers. In October, there were 155 jobs available for every 100 job seekers, according to data released Friday, the strongest showing in more than 43 years.

“Upward pressure on prices stemming from the rise in wage costs has been mounting,” said Bank of Japan Gov. Haruhiko Kuroda in November. (…)

Part-time pay grew by 2.3% in September from a year earlier, outpacing the overall rise in wages of less than 1%. Even with an influx of foreign workers, competition to secure workers for fast-food restaurants and construction sites is fierce. Some companies are finding that they need to promise more job security and career options to workers, especially women, who were previously considered disposable “irregular” workers. (…)

Canadian Economic Growth Slows in Third Quarter

imageCanada’s gross domestic product, or the broadest measure of goods and services produced in an economy, rose at a 1.7% annualized rate in the third quarter to 1.85 trillion Canadian dollars ($1.44 trillion), Statistics Canada said Friday. (…)

That marks a moderation in expansion from the second quarter, after GDP increased 4.3% versus an earlier estimate of 4.5%.

A moderation in growth was widely expected. Canadian exports fell 2.7% in the July-to-September period on a nonannualized basis, due mostly to disruptions at automobile factories as companies performed maintenance work or retooled production lines to accommodate new models; and a labor strike at General Motors Co.’s factory in Ingersoll, Ont. (…)

Offsetting the steep drop in exports were consumer spending, which rose 1% as households increased their outlays on both services and goods, and a pickup in business inventories, to C$17.16 billion in the third quarter from C$12.14 billion in the previous three-month period. (…)

Friday’s Canadian data also indicated GDP in September advanced 0.2% from the previous month, versus the consensus 0.1% call. The energy sector rebounded after declines in three straight months, climbing 1.1% from the previous month. Industrial production rose 0.4%.

A surprisingly strong report on Friday showed more Canadians found new jobs than in any month since April, 2012 – driving the unemployment rate to its lowest mark since before the financial crisis rocked the economy last decade.

The Canadian dollar rose by more than a cent against its U.S. counterpart as Statistics Canada released its November labour-force survey results, revealing an unemployment rate of 5.9 per cent, down from 6.3 per cent in October. That’s the lowest since February, 2008, thanks to 79,500 new jobs added last month. Meanwhile, Canada added 390,000 jobs over the 12 months through November – the biggest year-over-year gain since November, 2007.

That growth, up 2.1 per cent, is entirely attributable to 441,400 new full-time jobs, the statistics agency said. For the month of November, it was a rise of 49,900 part-time jobs that drove the stellar gains, though the survey’s month-to-month data tend to be volatile. (…)

Really surprising and suspect.

“If the employment data are to be viewed as believable, productivity must be taking a real negative hit here,” Mr. Rosenberg wrote. He also warned that November’s month-over-month 1.1-per-cent fall in average hours worked weekly would have the same effect as losing 130,000 jobs – offsetting November’s official gains “by a country mile.”

French-Canadian media La Presse reported last week that a food processor had to terminate production of 55,000 fresh meals per week for Québec grocery stores because the plant, located some 40 miles West of Montreal, could not find workers. The company posted 120 openings. It received ZERO applications.

If this is the Canadian reality, the BOC will follow the Fed on the interest rate path. Especially given that trend:

Source: Matthieu Arseneau, National Bank of Canada (via The Daily Shot)

EARNINGS WATCH

Facstet’s weekly:

At this point in time, 107 companies in the index have issued EPS guidance for Q4 2017. Of these 107 companies, 71 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 66% (71 out of 107), which is below the 5-year average of 74%.

During the first two months of the quarter, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) dropped by 0.7% (to $34.74 from $35.00) during this period. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.3%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.3%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 4.3%.

In fact, the fourth quarter of 2017 marked the smallest decline in the bottom-up EPS estimate for the first two months of a quarter since Q2 2011 (+1.5%).

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The estimated earnings growth rate for the fourth quarter is 10.5% this week, which is slightly higher than the estimated earnings growth rate of 10.4% last week. If the Energy sector were excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 8.3% from 10.5%.

The estimated (year-over-year) revenue growth rate for Q4 2017 is 6.4%. If the Energy sector were excluded, the estimated revenue growth rate for the index would fall to 5.6% from 6.4%.

From Thomson Reuters/IBES:

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TECHNICALS

Lowry’s Research is not worried by last week’s “tech wreck”, noting that Demand keeps rising broadly while Supply is waning. Such conditions have “historically provided the optimal period for new buying.”

Gavekal’s Anatole Kaletsky provides some fundamental support:

What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run. There are at least four reasons for such optimism.

First and foremost, the world economy is firing on all cylinders, with the U.S., Europe, and China simultaneously experiencing robust economic growth for the first time since 2008. Eventually, these simultaneous expansions will face the challenge of inflation and higher interest rates. But, given high unemployment in Europe and spare capacity in China, plus the persistent deflationary pressures from technology and global competition, the dangers of overheating are years away. (…)

A second reason for confidence is that the financial impact of zero interest rates and the vast expansion of central-bank money, known as quantitative easing (QE), are much better understood than when they were introduced following the 2008 crisis. (…) The policy has produced positive results. (…)

The Fed’s experimentation points to a third reason for optimism. By demonstrating the success of monetary stimulus, the U.S. provided a road map for other countries to follow, but with long and variable lags. (…) While the Fed is raising rates, Europe and Japan are planning to keep theirs near zero, at least until the end of the decade. That will moderate the negative effects of U.S. tightening on asset markets around the world, while European unemployment and Asian overcapacity will delay upward pressure on prices normally created by a coordinated global expansion.

This suggests a fourth reason why the global bull market will continue. While U.S. corporate profits, which have been rising for seven years, have probably hit a ceiling, the cyclical upswing in profits outside the U.S. has only recently started and will create new investment opportunities. So, even if U.S. conditions become less favorable, Europe, Japan, and many emerging markets are entering the sweet spot: Profits are rising strongly, but interest rates remain very low.

(…) When this optimistic shift goes too far, asset valuations rise exponentially and the bull market reaches a dangerous climax. Some speculative assets, such as cybercurrencies, have reached this point, and shares in even the best companies may experience temporary setbacks if they run up too fast. But for stock markets generally, valuations aren’t yet excessive, and investors are far from euphoric. So long as such cautiousness continues, asset prices are more likely to rise than fall.

imageBTW, you should be aware of the following facts regarding profits in Europe, courtesy of Thomson Reuters/IBES:

  • Third quarter earnings are expected to increase 1.7% from Q3 2016. Excluding the Energy sector, earnings are expected to decrease 2.2%.
  • 271 companies in the STOXX 600 have reported earnings to date for Q3 2017. Of these, 46.5% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
  • In aggregate, companies are reporting earnings that are 4.3% below estimates, which is below the 4% long term (since 2011) average surprise factor.

Eurozone profits are just not “rising strongly”, just yet anyway…even though the economy is in better shape.

Also be aware that we have entered the twilight zone valuation wise. Equities can get even more expensive, as they have before, but the upside gets gradually less rewarding compared with the downside risk from a valuation standpoint:

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A reminder:

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Another reminder: you can now park your cash at nearly 2.0% for 2 years. One year at 1.6%. We went from TINA to TIAA (There Is An Alternative) in 2017:

It looks like the “120 Yield Spread” is also warning us more loudly (A Powerful Combo: the Rule of 20 and the “120 Yield Spread”):

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You may also want to consider these charts which suggest that marginal demand for equities is unlikely to get any better. In fact, sensible people, especially the aging baby boomers, should consider reducing their exposure to equities.

image(Source: Ned Davis Research via Steve Blumenthal)

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Bob Farrell’s wisdom:

1. Markets tend to return to the mean over time When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras — excesses are never permanent Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. 

5. The public buys the most at the top and the least at the bottom That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

6. Fear and greed are stronger than long-term resolve Investors can be their own worst enemy, particularly when emotions take hold.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (“Nifty 50” stocks).

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree — something else is going to happen As Stovall, the S&P; investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Tax Bill & Shrinkage Tantrum

(…) We expect that the cumulative effect of these tax bill changes will take the deficit to 100% of the GDP of the nation in the “out years.” Which year that happens is irrelevant! It is the trend that counts. And that trend is up and will be accelerating after the tax bill passes and starts to be phased in. (…)

There will be a final tax bill. There will be a rising deficit that will eventually pressure interest rates higher. The Fed balance sheet shrinkage exacerbates this transition.

Lastly, a “shrinkage tantrum” probably lies ahead. When, and how serious a tantrum it will be, we cannot yet know.

On his way to New York for three fundraisers, Trump told reporters that the corporate tax rate in the GOP plan might end up rising to 22 percent from 20 percent.

Flynn Plea Escalates Russia Probe Former national security adviser Mike Flynn is cooperating with the probe of Russian election meddling, admitting to lying about calls with Moscow’s ambassador before Trump’s inauguration, contacts that prosecutors said were coordinated with top transition officials including Jared Kushner.

(…) The statement of offense filed Friday suggests Mr. Flynn’s cooperation may have already produced valuable information. The document says that Mr. Flynn was directed by “a very senior member of the Presidential Transition Team” to call the Russians and other foreign governments to try to persuade them to delay their vote on or defeat the U.N. resolution. (…)

A house in south London, a vineyard and a “fully vegan” tattoo parlor are among a rush of businesses offering to accept bitcoin. But so far, few are buying, in a dearth that may have been made worse by the currency’s recent surge and could hamper its development as a regular currency.

(…) “Venezuela will create a cryptocurrency,” backed by oil, gas, gold and diamond reserves, Maduro said in his regular Sunday televised broadcast, a five-hour showcase of Christmas songs and dancing. (…)

Ironically, Venezuela’s currency controls in recent years have spurred a bitcoin fad among tech-savvy Venezuelans looking to bypass controls to obtain dollars or make internet purchases. (…)

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