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

NEW$ & VIEW$ (3 MAR. 2015): U.S. Consumer + and – ; U.S. Investors + and –

U.S. Personal Income Increase Continues to Outpace Spending

Personal income rose an expected 0.3% during January (4.6% y/y) following an unrevised 0.3% December increase. Wages & salaries strengthened 0.6% (4.9% y/y) following a 0.1% uptick. (…)

Personal consumption expenditures declined 0.2% (+3.6% y/y) following an unrevised 0.3% decline. Personal spending has fallen at a 0.1% annual rate during the last three months. 

The PCE chain price index fell 0.5% (+0.2% y/y) following two months of 0.2% decline. As a result, the y/y gain of 0.2% was the weakest since October 2009.

Real disposable income increased 0.9% (4.2% y/y) following two months of 0.5% rise. Real personal spending gained 0.3% (3.4% y/y) after a 0.1% slip.

The strength in income accompanied by the weakness in spending lifted the personal savings rate to 5.5%, the highest level since December 2012. Personal saving rose 18.0% during the last twelve months.

The 0.5% decline in the chain price index reflected a 10.4% drop (-21.2% y/y) in energy prices while food prices edged 0.2% lower (+2.7% y/y). Durable goods prices were off 0.3% (-2.8% y/y) and nondurable goods prices fell 2.3% (-3.7% y/y) with lower gasoline costs. Services prices ticked 0.1% higher (2.0% y/y) for the second straight month. The price index excluding food & energy edged up 0.1% m/m (1.3% y/y) following no change.

(WSJ)

Lots of interesting stuff in this report:

  • Nominal Personal income has risen at a 4.0% annualized rate in the last 3 months.
  • Wages & salaries have exploded at a 6.5% annualized rate.
  • After tax, nominal disposable income is up 4.0% annualized since November (+4.8% in January).
  • Declining prices (-3.6% annualized in last 3 months) are boosting all the above numbers in real terms.
  • Yet, Consumption expenditures have actually declined 0.1% in nominal terms in the last 3 months (+3.2% annualized in real terms).
  • All this stuff about the newly frugal consumer now saving most of the the oil windfall is exaggerated by many media:
    • Real expenditures on automobiles is up 10.6% YoY;
    • Real expenditures on Furnishings and Appliances is up 9.2% YoY;
    • Real expenditures on Recreational goods and vehicles is up 12.9% YoY;
    • Real expenditures on Restaurants and hotels is up 6.2% YoY, +9.0% annualized in last 2 months.

imageTo be sure, indebted Americans are using the windfall to catch up. Statistically, debt reduction is a rise in savings. The reality is that the oil dividend trickles in incrementally in small amounts. The large annualized saving is but a statistic, useful for economists, but largely immaterial for most people in the early months, until it has accumulated at the bank or has helped pay down credit card balances.

Another factor is that official national accounts stats are likely fooled by the significant cross-currents in inflation rates among various goods and fail to adequately catch the most recent trends.

The important data, in my view, is nominal Wages and salaries which reflect what is happening at work and which is more sustainable for the average American.

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Oups! There is also this minor thing pointed out by Ed Yardeni:

The latest data through January show that the percentage of current-dollar consumption for gasoline plunged from last year’s high of 3.2% to 2.1% in January. Consumers saved $133 billion (saar) on gasoline over this period.

On the other hand, the percentage of their outlays for health care goods and services rose from last year’s low of 20.0% during March to 20.6% during January.(…)Health care consumption includes spending paid for by both insurance and government programs, as well as out-of-pocket costs. Presumably and anecdotally, the latter have risen sharply. However, that wouldn’t necessarily bloat overall spending, though more out-of-pocket outlays would depress spending on other goods and services.

SENTIMENT WATCH
Why Stocks Aren’t Due for a Steep Near-Term Pullback Stocks are staging an impressive run with few immediate roadblocks poised to derail their course.

Yes, an increase in rates is looming. And yes, valuations remain elevated on a price-to-earnings basis. But an initial rise in short-term borrowing costs is expected to be minimal, and other valuation gauges – beyond price-to-earnings – aren’t worrisome for all of Wall Street.

“On Price to Free Cash Flow, Price to Normalized Earnings—a more predictive valuation metric—and EV/EBITDA, the S&P 500 still looks attractive,” wrote Bank of America Equity Strategist Savita Subramanian in a note titled “10 reasons to stay long the S&P 500.”

According to the bank’s data going back nearly three decades, price-to-free cash flow is 22% below its mean, and trailing normalized price-to-earnings is 2% below its average. Enterprise value-to-EBITDA, which accounts for healthy corporate balance sheets and high margins that S&P 500 companies are basking in, is on par with where the ratio has spent the past nearly 30 years. (…)

High five Wait, wait! Zerohedge won’t let you sleep well:

US Macro Weakest Since July 2011 As Goldman Affirms Global Economy In Contraction

Goldman’s Global Leading Indicator (GLI) final print for February affirms the global economy has entered a contraction with accelerating negative growth. Just six months after “expansion”, the Goldman Swirlogram has collapsed into “contraction” with monthly revisions notably ugly and 9 out of 10 components declining in February. Some have suggested, given US equity’s strong February (buyback-driven) performance, that the US economy will decouple from the world… or even drive it.. but that is 100% incorrect. US Macro data has fallen at its fastest pace in 3 years and is at its weakest level since July 2011 as 42 of 48 data items have missed since the start of February.

With 9 of 10 components negative in February, Goldman’s Swirlogram has collapsed from expansion to contraction within just 6 months…

First negative print since 2012 – indicating global industrial production is set to contract…

What is the GLI: The Global Leading Indicator (GLI) is a Goldman Sachs proprietary indicator that is meant to provide an early signal of
the global industrial cycle on a monthly basis. There is an Advanced reading for each month, released mid-month, followed by the Final reading, released on the first business day of the following month.

(…) The Bloomberg US Macro Surprise Index just dropped – after today’s dismal data showing – to its lowest absolute level since July 2011. The last 3 months have seen it fall at the fastest pace sinceJuly 2012. Notice the lower peaks and lower troughs on each cycle since 2012…

Note: this index tracks not just miss/beat but absolute positive or negative data items – key to the cyclical aspect is the over-optimism and over-pessimism of economist’s forecasts. The last 3 years (lower peaks and lower troughs) suggest economists are strongly biased to over-optimistic forecasts and normally this kind of drop would have stopped but economists continue to look for hockey-sticks which, perhaps, in this case will be absent (and have been for a month).

But of course that doesn’t matter…

(…)

U.S. MARKIT MANUFACTURING PMI JUMPS TO 55.1

Growth in the U.S. manufacturing sector gathered momentum in February, with output and new orders both rising at sharper rates than seen at the start of the year. Input costs decreased marginally for the second month running, but firms continued to raise their output prices. Meanwhile, delays in the delivery of items contributed to an accumulation of backlogs of work and a record increase in finished goods stocks.

The final seasonally adjusted Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) rose to 55.1 in February from 53.9 in the previous month. The reading signalled the most marked improvement in business conditions in the sector since October 2014.

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Manufacturing production growth quickened to the sharpest in four months during February, with firms linking higher output to increases in new business. This was highlighted by a marked rise in total new orders. As with production, the rate of growth in new business was the fastest since last October. Meanwhile, new export orders continued to rise, albeit only modestly.

Higher new orders was one factor leading to an accumulation of backlogs of work in February, while supplier delivery delays had also contributed to rising outstanding business. Delivery times lengthened to the greatest extent since February 2014, with firms reporting adverse weather conditions in some parts of the country. Meanwhile, stocks of finished goods increased at the sharpest pace since the series began.

Manufacturers raised employment, as has been the case in each month since July 2013. That said, the rate of job creation eased to the slowest in seven months. Higher levels of new work and the replacement of leavers contributed to the latest expansion of staff numbers.

Input prices at manufacturing firms decreased for the second successive month, albeit only marginally. The latest fall in costs was partly linked to reduced prices for steel and other commodities.

Although input costs declined, firms continued to raise their output prices in February. The rate of inflation remained modest, but picked up to a three-month high. Charges have been raised in each month since September 2012.

A solid increase in purchasing activity was recorded amid reports of greater production requirements. That said, the rate of expansion eased to the slowest since January 2014.

Strong improvements in business conditions were seen across small, medium and large companies during February. Meanwhile, SMEs posted a faster rate of job creation than large companies. The medium sizeband was the only one to see a fall in input prices during the month.

Rates of improvement were broadly consistent across market groups, with the greatest strengthening of operating conditions at investment goods firms. Data suggested that the overall fall in input prices was centred on intermediate goods producers.