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

Month: March 2015

Bearnobull’s Weekender

FactSet StreetAccount Summary

– US Weekly Recap: Dow (1.52%), S&P (1.58%), Nasdaq (0.73%), Russell 2000 (1.29%)

Farfetch valuation and the weekly roundup in tech and retail by Leah Grace

(…) In a follow-up to my post about self-driving cars, consulting firm McKinsey & Co. just released a study on self driving cars, claiming that self-driving cars could save thousands of lives and could boost Internet revenue by billions.

Mario Draghi’s Yield of Dreams QE has been better on the promise than it might be in execution.

The European Central Bank begins its much-anticipated purchases of sovereign bonds on Monday, and ECB President Mario Draghi says the program known as quantitative easing is working before it has even begun. He’s right about that, as strange as it sounds, and therein lies the paradox of Europe’s dive into QE: It may already have had the most effect it is going to have through Mr. Draghi’s salesmanship and Europe’s will to believe. (…)

As a result of Mr. Draghi’s open-mouth operations to talk down the euro—coupled with an expectation that interest rates might rise soon in the U.S.—the euro has declined steadily against the dollar and other currencies. On Thursday it hit an 11-year low of $1.10, compared to about $1.40 last summer. (…)

But the great unanswerable is whether QE will provide a further boost now that it is finally being implemented, especially to the smaller companies that create most of Europe’s jobs. Loan demand remains weak, and surveys of business sentiment have detected no surge in confidence. While Mr. Draghi is trying to boost lending to households and businesses with QE, banks face growing pressure from regulators—including the ECB—to reduce their risks to avoid another financial crisis.

The problem is that Europe’s companies have too-little reason to invest in growth when doing so subjects them to complex and expensive labor laws, regulations and high taxes. Mr. Draghi recognizes this and peppers his public speeches with pleas to enact supply-side economic reforms.

Europe’s political class doesn’t want to do that heavy lifting, so it relies instead on Mr. Draghi’s monetary policies to spur growth. The more aggressive he is, the more the politicians conclude they can do less. (…)

Expectations have a place in economic policy, but Mr. Draghi has spent the months since August helping markets convince themselves that the ECB is the growth engine of last resort. Perhaps everyone’s right and QE will save the day. If it doesn’t, pro-growth reform will be the only policy Europe hasn’t tried.

In reality, the Eurozone is showing signs of renewed life as shown by Markit’s PMI and recent retail sales data:

Lord Rothschild Warns Investors: “Geopolitical Situation Most Dangerous Since WWII”

Our policy has been clearly expressed over the years. Simply put, it is to deliver long-term capital growth while preserving shareholders’ capital; the realisation of this policy comes at a time of heightened risk, complexity and uncertainty. The economic and geopolitical environment therefore becomes increasingly difficult to predict.

The world economy grew at a disappointing and uneven rate in 2014 after six years of monetary stimulus and extraordinarily low interest rates.

Stock market valuations however, are near an all-time high with equities benefiting from quantitative easing.

Not surprisingly, the value of paper money has been debased as countries have sought to compete and generate growth by lowering the value of their currencies – the Euro and the Yen depreciated by over 12% against the US Dollar during the course of the year and Sterling by 5.9%.

In addition to this difficult economic background, we are confronted by a geopolitical situation perhaps as dangerous as any we have faced since World War II: chaos and extremism in the Middle East, Russian aggression and expansion, and a weakened Europe threatened by horrendous unemployment, in no small measure caused by a failure to tackle structural reforms in many of the countries which form part of the European Union.

Timely:

The World According to Kissinger

NEW$ & VIEW$ (6 MAR. 2015): Jobs, Oil, Earnings and Buybacks

Jobs Report: U.S. Adds 295,500 Jobs; Unemployment Falls to 5.5%

In February, average hourly earnings rose 0.1 percent, month-to-month, or 3 cents to $24.78. Year-over-year, that’s a rise of 2.0. The average length of the workweek remains unchanged at 34.6 hours. (Chart from CalculatedRisk)

ECB Raises Eurozone Forecasts

The ECB boosted its eurozone forecasts from three months ago, saying it now expects 1.5% growth this year, 1.9% in 2016, and 2.1% in 2017. It previously had predicted the currency bloc’s economy would grow 1% in 2015 and 1.5% in 2016.

OIL
Thumbs down Latest Oil Dilemma: Where to Put It As oil-storage tanks near capacity, some analysts predict the spillover will send crude prices even lower.

U.S. crude-oil supplies are at their highest level in more than 80 years, according to data from the Energy Information Administration, equal to nearly 70% of the nation’s storage capacity. A U.S. storage hub in Cushing, Okla., is expected to hit maximum capacity this spring. While estimates are rough, Citigroup Inc. believes European commercial crude storage could be more than 90% full, and inventories in South Korea, South Africa and Japan could be at more than 80% of capacity. (…)

Still, relief may eventually be in sight. More storage tanks are being built across the U.S., and some large tanker ships are being leased to house the oil. (…)

Among industrialized nations, commercial oil and petroleum-product stockpiles could hit an all-time high of 2.83 billion barrels by midyear, the International Energy Agency warned last month. The last time they were at that level, in August 1998, oil prices averaged $13.38 a barrel, equivalent to $19.18 a barrel today.

Thumbs up Oil climbs toward $61 on Middle East supply concerns Brent crude oil rose toward $61 a barrel on Friday as fighting in Libya and Iraq stoked output worries, while traders kept a close eye on Iran nuclear talks that could eventually bring more supply to world markets. | Video
EARNINGS WATCH

Nothing new for Bearnobull readers but now going mainstream:

US corporates face quarterly profit fall Analysts trim forecasts as stronger dollar takes toll on earnings

(…) Analysts are forecasting a decline of 4.6 per cent in first-quarter S&P 500 earnings compared with the same period a year ago, with those for the second quarter seen falling 1.5 per cent according to FactSet. That would represent the first back-to-back quarterly decline since the second and third quarters of 2009.

“While energy is a big part of the story, a number of other major S&P sectors are also expected to see declines in their first-quarter earnings,” said John Butters, analyst at FactSet. Utilities, materials, telecom services, consumer staples and information technology are forecast to record negative year-over-year earnings growth for the first quarter according to FactSet.

Mr Butters said analysts have cut their bottom-up earnings-per-share estimate for the first quarter by 8 per cent since the start of January. The decline in estimates over the first two months of the quarter represents the largest revision since the first quarter of 2009 and worries some, who point out that such changes in the past have foreshadowed recessions.

Chris Watling, chief market strategist at LongView Economics, said: “Since the early nineties, the only times that earnings per share have fallen in the US have been at the onset of recessions, in 2000 to 2002 and 2007 to 2009.”

Here’s the Yardeni chart showing how sector estimates have been trimmed lately:

Meanwhile, from Birinyi Associates via FT Alphaville:

There were $118 billion of buyback authorizations in February, a 48% increase versus February of 2014 ($80 bln).

February was the strongest month ever and 2015 was the strongest start to the year ever with $152 billion of authorizations recorded year-to-date. We recorded 139 authorizations, which was virtually even with the same period in 2014 (141).

Based on the data recorded YTD, we are at a run -rate to total $914 bln of announced buybacks in 2015, which would be the largest of all-time (2007 = $863 bln, 2013 = $755 bln, 2006 = $657 bln).