Month: September 2016

Bearnobull is now “Edge and Odds”

Today Sept. 1, 2016, Bearnobull becomes Edge and Odds. The name change takes effect today and, barring unforeseen difficulties, everything else will easily follow with the possible exception of email delivery which should be effective soon after. For now this only involves a name change with little or no cosmetic changes although some will likely be made during September. You should be able to reach Edge and Odds at https://www.edgeandodds.com/ for a few more days. If not, try www.edgeandodds.com. Sorry for the inconvenience. The team (me, myself and I) is trying to make this as smooth as possible.

Why the change? The name Bearnobull was mainly a reflection of my personal character as an investor, being neither a permabear or a permabull, simply an investor seeking “the truth” and trying to be right most of the time without losing his shirt when he is wrong. I am also a grey-hair (or is it all white now?) investor who does not bear bull from the media and other “pundits”, especially when it impacts ordinary people’s hard earned savings. Finally, my reporting and analysis bear no bull, as far as I know…

But this blog is not really about me, rather about the two essential ingredients in investing: finding an edge and understand the odds.

The Edge comes from seeking and objectively analysing timely and pertinent information to get better insights. The Odds are the probabilistic relationship between risk and reward at any given moment in time. Combining a good edge with the right odds is the winning formula. This is what this blog and its predecessors since 2009, New$-To-Use and Bearnobull, are all about.

Edge and Odds will remain open and free.

So, please bear with me for a week or so as I complete the transition.

UK Manufacturing PMI climbs to ten-month high in August

August saw solid rebounds in the trends in UK manufacturing output and incoming new orders. Companies reported solid inflows of new work from both domestic and export sources, the latter aided by the sterling exchange rate. Employment rose for the first time in the year-to-date. (…)

The month-on-month increase in the level of the headline PMI (5.0 points) was the joint-greatest in the near 25-year survey history. The gains in the indices tracking output and new orders were similarly among the steepest on record. (…)

New business rose at one of the quickest rates in the year-so-far, as companies benefited from improved inflows of new work from both domestic and overseas clients. There were also reports of stronger demand, product launches and clients committing to new and previously postponed contracts.

Improved sales volumes to markets such as the USA, Europe, China, South-East Asia, the Middle- East and Norway led to a further increase in new export business during August. Moreover, the rate of growth accelerated to a 26-month high. The depreciation of the sterling currency was by far the main factor manufacturers cited as supporting the upswing in new export work.

The negative consequences of currency movements were felt in the form of rising input costs during August. Input price inflation surged to a five-year record, with almost 44% of firms reporting an increase in purchasing costs.

Output prices also rose at the fastest pace for five years in August. Moreover, the month-on-month increase in the index tracking charges was among the steepest in the series history. (…)

U.S. second-quarter labor costs revised sharply higher U.S. labor costs grew much faster than initially thought in the second quarter while worker productivity slumped, which could pressure corporate profits and business spending.

The Labor Department said on Thursday that unit labor costs, the price of labor per single unit of output, increased at a 4.3 percent annual rate as opposed to the 2.0 percent pace reported last month. Economists polled by Reuters had expected that unit labor costs would be revised up to a 2.1 percent rate.

Hourly compensation per hour jumped at a 3.7 percent rate in the second quarter instead of the previously reported 1.5 percent pace. The combination of weaker productivity and rising labor costs hurts corporate profits and could also fan inflationary pressures.

Unit labor costs rose 2.6 percent from a year ago. Productivity, which measures hourly output per worker, dropped at a 0.6 percent annual rate instead of the 0.5 percent pace of decline reported last month. It was the third consecutive quarterly drop. Productivity fell at a 0.6 percent rate in the first quarter.

Compared to the second quarter of 2015, productivity fell at an unrevised 0.4 percent rate, the fastest pace of decline in three years. Output per worker in the second quarter increased at a revised 1.1 percent rate instead of the 1.2 percent pace reported last month. (…)

CREDIT MANAGERS’ INDEX DETERIORATES

“Overall, it was fun while it lasted—the trends had been up and now they aren’t,” Kuehl noted. “The most vexing part of the change is that it is happening at the start of the season that many in the economy count on for growth.”

U.S. Pending Home Sales Index Rose 1.3% in July A measure of homes under contract for sale rose in July, a sign of steady demand amid low interest rates and rising employment.

The National Association of Realtors’ pending home sales index, which tracks contract signings for purchases of previously owned homes, increased a seasonally adjusted 1.3% to 111.3 in July, the trade group said Wednesday. Sales then typically close within a month or two of signings.

Economists surveyed by The Wall Street Journal had expected a 0.7% rise.

The index had registered at a downwardly revised 109.9 in June. It reached a post-housing bust peak of 115.0 in April and now sits at the second-highest level of 2016.

July’s reading was 1.4% above its year-ago level. (…)

Pending sales were up in July across most of the country. In the Northeast the index rose 0.8% to 96.8, in the South it was up 0.8% to 123.9 and in the West it jumped 7.3% to 108.7.

Pending sales fell in the Midwest. The index for the region decreased 2.9% to 105.8 in July.

(Haver Analytics)

…but don’t look so hot on a year-over-year basis. (The Daily Shot)

CANADA

Canada’s GDP contracted sharply, although the decline was largely expected. At least some of the decline was driven by a significant contraction in non-oil exports. (The Daily Shot)

China Engages in ‘Backdoor’ Easing, Analysts Say

(…) Chinese authorities have embarked on a bumper monetary-easing program that boosts Beijing’s fiscal firepower to both juice the economy and redress bad debts that are clogging the financial system and depressing private-sector investment.

In a research report published on Monday, equity analysts at Jefferies, led by Sean Darby, say markets have overlooked one key monetary development: the PBOC has essentially launched QE through the backdoor in recent months, thanks to the expansion of lending facilities aimed at controlling the domestic monetary base.

The analysts say the PBOC has increased lending to state-owned banks, with the latter subsequently snapping up Chinese government bonds aided, in part, by the central bank’s liquidity infusions. (…)

Falling bond yields save taxpayers $500bn Countries rein in budget deficits and continue projects that would have been shelved

(…) Central banks have cut interest rates more than 670 times since Lehman Brothers filed for bankruptcy in 2008, or roughly one reduction every three trading days of the year, according to JPMorgan. The Bank of Japan and the European Central Bank have both cut interest rates into negative territory. (…)

Some sovereign borrowers have raced to lock in lower borrowing costs, with both France and Spain issuing 50-year debt. (…)

CETERIS NON PARIBUS

• Apple Squeezes Suppliers to Protect Margins As Apple grapples with falling iPhone sales, it has told its suppliers to accept price cuts on parts destined for the next-generation iPhone while cutting forecasts for order volume.

SENTIMENT WATCH

• Barron’s: Could a Correction Be Around the Corner? Three market ratios that help assess risk-taking are looking weaker. A few weeks ago, all three were solidly bullish.

(…) The bottom line is that these three ratios present a mixed picture, with small-caps still bullish, emerging markets somewhat bearish, and junk bonds waiting for direction. Only a few weeks ago, all three were solidly bullish. (…)

• FT: US stocks: a market that needs everything to go right A sixth straight quarter of declining US corporate profits may prove one more headwind

A return to profit growth in corporate America is proving elusive.

Investors have patiently bid up US stocks to new highs at least partly on the hope that a multi-quarter trend of shrinking earnings rivalling the period around the financial crisis will soon end. The turn in the cycle, though, has been pushed out multiple times. Now, expectations that profits would return in the third quarter have fizzled. (…)

Since June 30, Wall Street estimates for the current quarter, which ends on September 30, have gone from slight year-on year growth in earnings per share of 0.4 per cent to a decline of 2.1 per cent. If those expectations prove true, it would mark the sixth straight quarter of declines. (…)

• Consumers Are Driving Up Stocks. Why That’s Nothing to Worry About As the S&P 500 reached new highs in August, the only sector to do so was consumer stocks. Such a narrow rally usually signals dangerous frothiness. This time, though, it may simply reflect a change in the forces driving the market.

The sole sector to hit a new top has been consumer discretionary, made of up companies such as McDonald’s Corp., Amazon.com Inc. and Starbucks Corp. that consumers can live without. (…)

However, the lack of other sector records in August may be explained by another phenomenon driving the U.S. market: the rotation back into out-of-favor stocks that tend to do well when the economy is stronger. The absence of repercussions from the U.K. vote to leave the European Union in June and two strong U.S. jobs reports helped these cyclical sectors to rebound, after being shunned earlier in the year in favor of safer bondlike stocks. The last time the consumer-discretionary segment was the only sector helping the market to a high was in May 2015; the S&P 500 didn’t return to that level until two months ago. (…)

Since 1995, new highs in the S&P have been accompanied by only one sector setting a record just three times previously—last May and, before that, two months when the market was led higher by health care amid the biotechnology boom and pharmaceutical mergers. Even the dot-com bubble’s excesses of March 2000 were accompanied by the industrial sector hitting a high, helped by the internet appeal of General Electric, the largest industrial stock. (…)

• Why September Could Be Huge for Markets All Around the World

The first debate of the U.S. presidential campaign. A Group of 20 (G20) central bank interest rate announcement nearly every other trading day. And a key meeting among commodity nations around the world.

With a jam-packed calendar in September, no asset class is immune from potential event risk. (…)

• Cash Keeps Pouring Out of European Stocks Money has flowed out of European equity funds every week for more than six months, a stretch that is now longer than the previous record set during the financial crisis.

The Stoxx Europe 600 index is down 6.1% this year, compared with a gain of 6.2% for the S&P 500. (…)

The $86 billion in outflows from Europe recorded so far in 2016 have reversed more than two-thirds of last year’s inflows, which ran to $123 billion.

Earnings expectations for European companies remain low.

Forward earnings per share, a continually updating measure of analyst expectations for the 12 months ahead, have diverged in Europe and the U.S. over the past five years. Forward earnings per share is now up 17% for the S&P 500 and down 30% in dollar terms for the Stoxx Europe 600. (…)

From Edge and Odds’ marketing dept.:

• Feb. 9, 2015: Don’t Be A Jerk!

If you live in a relative world and manage other people’s money, you may be able to find some justification in selling the U.S. and buying Europe. Maybe you will be lucky enough and Draghi’s latest gambit will have finally worked, Greece will have paid its debt, the banks will be back on their feet, the Euro will be 1.50, France will be a strong harmonious country and Merkel will have been re-elected with her strongest majority ever.

Being a contrarian does not necessitate being a jerk. Being a contrarian on Europe is investing in “something” nobody really knows what it is, what it should be, how it can be and how it will be. It is like buy a company with too many CEOs thinking differently and all managing in different directions. You may think you are a contrarian investing in it, but you are just being “a contrarian jerk”.

• June 17, 2015: CHEERLEADERS IN FULL SWING
• May 31, 2016: Watching the Monitoring

(…) Here we go again on the cheap Europe theme, last promoted by GMO’s Ben Inker in Ditch the Good, Buy the Bad and the Ugly on early 2015 to which I replied in Don’t Be A Jerk! European markets have since lost 13% while U.S. equities have been flat. In fact, Euro-ex-UK equities have significantly underperformed U.S. equities over 1,3,5 and 10 years (last 10 years: +6.9% USA vs +2.7% Euro-ex=UK in US$, +3.0% in euro).

Yes, European companies have a lower price-to-book ratio. But they also have a lower return on book (ROE). EU GDP has grown 0.7% annually over the last 5 and 10 years compared with +2.2% and +1.6% for the U.S. respectively. (…)

So what would anybody with reason bet that this dysfunctional entity will outperform the USA. You not only need to be a mad contrarian with a very high risk tolerance (i.e. have a lot of money or manage other people’s money), you also need to get pretty lucky in coming years in order to overcome all the EU problems. Inker advised “If You’re Going To Be a Jerk, at Least Be a Contrarian Jerk”. My advice is the same: don’t be a jerk!