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: December 2016

THE DAILY EDGE (9 December 2016)

Economists See Fed Moving Faster on Rate Increases

(…) Some expect inflation to pick up on its own. Some say President-elect Donald Trump’s tax and spending plans could boost price pressures. Others see Mr. Trump’s Fed nominees advocating a more hawkish path for interest rates.

The economists’ predictions for the benchmark federal-funds rate averaged 1.26% by December 2017, which implies four rate increases of 0.25 percentage point each between now and the end of next year. The economists overwhelmingly said the Fed will raise rates at its Dec. 13-14 meeting, which suggests they expect three moves in 2017.

In the November survey, the economists’ estimates averaged 1.17%.

Fed officials, in their September economic projections, penciled in one quarter-percentage-point rate increase this year and two in 2017. (…)

Other economists surveyed see inflation picking up steam in the coming years, which would could lead to more Fed rate increases than currently anticipated. (…)

Why Odds May Be Fading for a Near-Term U.S. Recession

(…) the odds are gradually declining, having dropped to 17% in The Wall Street Journal’s latest monthly survey. That’s still about one-in-six odds over the next year, which is somewhat higher than we’ve seen in recent years. But it’s accurate to say that many economists are slowly lowering their warning flags.

(…) economists are now forecasting higher rates and inflation than they were before the election. But many share the assessment that inflation, in particular, has been too low in recent years, and that somewhat higher inflation would be a welcome development. (…)

Typically, the wealth effect of rising stock prices provides some lift to consumption and should provide some pep for the economy. (…)

CEOs and CFOs See Greater 2017 Risks Than Other Executives

(…) Nearly three quarters of 735 executives surveyed, or 72%, said developments around the world had created a riskier business environment than in previous years.Of those surveyed, 78 were CEOs and 100 were CFOs. (…)

Protiviti and the university surveyed executives and board members in a variety of industries globally this fall, before the U.S. presidential election. (…)

Respondents cited economic conditions most frequently as constituting a risk for 2017—with 72% of executives saying they expected conditions to have a “significant impact” on their businesses in the new year. (…)

In last year’s survey, by contrast, executives most frequently cited regulatory changes as a risk that they would face in 2016.

This year, regulatory changes are the second most frequently cited risk: 66% of the executives cited such changes as likely to have a “significant impact”  on their businesses in 2017.(…)

OECD LEIs Tick Ever So Slightly Higher as the OECD Trumpets Gaining Momentum

The OECD itself reports the following analytical assessment of its release this month:
* Signs of growth gaining momentum have emerged in the CLIs for the United States, Canada, Germany, and France. In the United Kingdom, there are also signs of improvement in the short term, although uncertainty persists about the nature of the agreement the U.K. will eventually conclude with the EU.
* Growth is expected to gain momentum in China and India, in particular, and also in Brazil and Russia, albeit from low levels.
* In the OECD area as a whole, Japan, and the euro area as a whole, the CLIs point to stable growth momentum.
* In Italy, the CLI show signs of easing growth.

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High five But Haver Analytics’ Robert Brusca is less enthused:

On balance, the OECD CLI indicators can be construed to be showing some improvement or gain in momentum as the OECD has chosen to do, but when placed of a scale of truth the real story is how meager and nascent this improvement is and that weak the growth continues to be in train. In the case of the U.S., the CLI has ticked up by a net of 0.2 points in the course of two months after being stuck at a reading of 99.1. The ratio of the current U.S. CLI to its value of six months ago is higher by just 0.1 and that is a very sour note on which to hang a song of improvement.

The OECD is a membership organization. I very much get the impression that members are trying to put the best spin possible on the interpretation of these readings. I do not find the OECD report encouraging in the least and find the ‘improvements’ posted this month as in the range of normal variation and unconvincing as yet as to the ongoing nature of improvement.

Household Net Worth Hit Record $90.2 Trillion

Stockholdings—both directly and through retirement accounts like 401(k)s—climbed by $494 billion last quarter while real estate, which is primarily people’s homes, rose in value by $554 billion, according to a Federal Reserve report released Thursday.

The report shows that U.S. households, in aggregate, had tremendous assets at their disposal, about $105 trillion against about $15 trillion of debt. That wealth has likely grown since the report was released because the stock market has rallied dramatically over the past month. (…)

OPEC’s Historic Deal Won’t Be Enough to Drain Oil Stockpiles

(…) Bloomberg News calculations based on OPEC data show that across the whole of 2017 there will be little overall reduction in record oil inventories — even if the group convinces non-members to join supply curbs at a meeting on Saturday.

“Even with 100 percent compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017,” said Tamas Varga, analyst at brokerage PVM Oil Associates Ltd. in London. “That should keep oil prices in check.” (…)

OPEC’s track record shows the group only delivers 80 percent of promised cuts. While Russia has pledged to come to the party and lower output by 300,000 barrels a day in the first half of 2017, other non-OPEC producers, such as Mexico, Azerbaijan and Colombia, are likely to dress up involuntary production declines, already factored in by traders, as cuts. That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus Del Pino and his colleagues are targeting. (…)

The Dream Stock Market

It’s the season when Wall Street strategists dust off their crystal balls and predict what markets will do for the year ahead, while conveniently forgetting what they said 12 months ago. (…)

History suggests investors should ignore these year-ahead guesses. The average strategist hasn’t started a year predicting a stock-market drop in any of the surveys carried out by Bloomberg since 2000, while shares fell one year in three. (…) Strong gains were forecast in 2008, when the market had its worst year in generations. Strategists then became cautious, making their lowest forecast in 2009 since the survey began, only for the market to rebound 23%. (…)

Insiders Send Wrong Signal on Bank Stocks The rally in bank shares has coincided with insider selling that is on pace to set a record.

Bank and industrial stocks have been among the biggest winners in the postelection stock rally, but some are swimming against the tide.

Corporate insiders in these industries have been selling into the rally at an unusually strong pace, according to research firm InsiderScore. At first glance, it is easy to view this as bearish. If high-ranking executives are unloading stock, perhaps investors should consider doing the same. (…)

High five But insiders might choose to sell their stock for reasons that don’t necessarily match the incentives of the typical individual investor.

Some insiders could be locking in profits or exercising options that are close to expiration. Many banking executives in particular have held underwater options in the years following the financial crisis. Bank of America Corp. and Morgan Stanley, for example, have rallied back to mid-2008 levels. If this postelection rally was the first chance to sell, it is hard to argue against doing so no matter how they feel about the future. (…)

The recent banking rally might be overdone for a number of reasons. Insider selling isn’t one of them.

If you missed the Dec. 5 Edge and Odds, you missed this:

(…) A total of 3,500 insiders at Russell 3000 companies have unloaded their own stock in the last three weeks, while 467 purchased shares, according to data from The Washington Service, a Bethesda, Maryland-based provider of insider trading data and news. The number of sellers was higher than the monthly average of 1,832 sellers this year through October. Sellers have also increased from the comparable year-ago period, and buyers have decreased. (…)

Insider buying and selling doesn’t necessarily presage gains or declines in a given firm’s shares, of course. But Wall Street watches the data because insiders are understood to have the best information about their companies’ prospects, and are also typically veterans of their industries with longer-term horizons.

While they have historically tended to sell more than buy, their behavior since the election diverges from investors, who have exhibited a rapid shift in sentiment and poured money into equities. (…)

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“The big increase in insider selling makes sense because we’ve been making all-time market highs,” said Aaron Jett, the Los Angeles-based vice president of global equity research at Bel Air Investment Advisors, which oversees about $8 billion. “A huge portion of their wealth could be tied up with that one stock so they could want to sell to diversify.”

It is normal for executives to sell into market strength, according to Mr. Jett. That said, a prolonged period of outsize selling by insiders would be concerning, he noted.

(…) in the last month, 891 insiders of U.S. financial companies sold shares, compared with 425 executives who added, data from The Washington Service show.

Both Mr. Clissold and Mr. Jett said it is more valuable to pay attention to a pickup in executive buying rather than selling, since sales can occur for personal, idiosyncratic reasons, while stock purchases tend to indicate confidence in the company. (…)

Punch Where the big increase in insider selling makes much less sense is that it is occurring at the end of 2016:

  1. why not wait just a few weeks to defer tax payments by 12 months to April 2018?
  2. why not wait just a few weeks to potentially avoid the 3.8% Obamacare’s net investment income tax which the Trump camp wants to eliminate?
  3. why not wait just a few weeks to potentially benefit from lower capital gains tax rates promised by Republicans?

Insiders’ use of the trading window following quarterly earnings reports has been rising as the year progressed. Sellers steadily increased while buyers became fewer and fewer. Note that the November data on the chart only includes trades after the election.

THE DAILY EDGE (8 December 2016)

U.S. JOLTS: U.S. Labor Market Activity Holds Steady

The total job openings rate stood at 3.7% during October, unchanged from September. It remained down from the record high of 3.9% in July. The private-sector job openings rate fell, however, to 3.9% from 4.0%, but was up slightly from last year’s 3.8% low. In the government sector, the job openings rate held at 2.3% for the third straight month. (…)

The actual number of job openings declined 1.7% (+2.1% y/y) to 5.534 million, and has moved erratically sideways for over a year. Private-sector openings declined 1.8% (+1.7% y/y) to 5.022 million to the lowest level this year. Construction job openings more than doubled y/y, while the number in education & health services rose 12.4% y/y. Factory sector openings gained 3.5% y/y. On the weak side, professional & business services openings declined 19.4% y/y, while leisure & hospitality openings fell 5.0% y/y. Education & health services openings were off 1.6% y/y. Government sector job openings declined 1.3% y/y.

The total hires rate held at 3.5%, down from February’s high of 3.8%. The private-sector hiring rate was stable m/m at 3.9%, and remained below the high of 4.2% reached in February. (…)

The number of hires eased 0.4% (-2.2% y/y) to 5.099 million in October. It was the lowest level since May. Private-sector hiring was little changed (-2.1% y/y) as jobs in leisure & hospitality increased 5.9% (-2.8% y/y). Construction employment rebounded 4.5% (4.5% y/y) following a sharp September decline, but factory sector hiring declined 2.9% (+2.7% y/y). The number of professional & business services jobs declined 5.6% (-3.6% y/y) and jobs in retail trade experienced a 3.5% decrease (-0.8% y/y). Government sector hiring declined 4.9% (-2.5% y/y). (…)

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  • More U.S. Factory Workers Are Saying ‘I Quit’ The number of U.S. workers quitting a manufacturing job rose to the highest level in more than eight years in October.
  • The report continues to show strength in the overall labor market, with voluntary quits remaining elevated while layoffs hit new lows.

Poll: U.S. economic outlook unmoved so far after Trump win Donald Trump’s shock White House win has not altered U.S. economic forecasts much, with economists in a Reuters poll expecting three rate rises by the end of next year based on little follow-through on most of the soon-to-be president’s protectionist campaign promises.

(…) The expected burst of government spending has, however, not brightened prospects for growth, which is likely to meander between an annualized pace of 2.1 to 2.3 percent in each quarter next year, after notching 2.2 percent in the current quarter.

Analysts such as those at FT Advisors, for example, who have historically held some of the most bullish views, expect growth to peak at only 3.0 percent in the second quarter. (…)

Obviously, these 120 economists polled by Reuters were not part of the polls we showed yesterday:

Jim Clifton is Chairman and CEO at Gallup:

(…) Conventional wisdom — as reported in many major newspapers and media — tells us the U.S. economy is “recovering.” Well-meaning economists, academics and government officials use the term “recovery” when discussing the economy, implying that growth is getting stronger.

The study, released today, finds there is no recovery. Since 2007, U.S. GDP per capita growth has been 1%.

The Great Recession may be over, but America is dangerously running on empty.

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Think of our country as a company, America Inc., which has more than 100 million full-time employees, with about $18 trillion in sales and $20 trillion of debt. The most serious problem facing it is no growth. In addition, America Inc. has three soaring expenses threatening to bankrupt the company and its shareholder-citizens: healthcare, housing and education.

As this report notes, in 1980, these three sectors accounted for 25% of total national spending — today, they account for more than 36%. They also account for most of the total measured inflation over the same period. And without inflation in these sectors, real annual productivity — defined as GDP per capita growth — would have been an estimated 3.9% instead of 1.7%.

My own opinion is that America Inc. is too big to “turn around” like one would a company or any other organization. There is no quick fix to something this huge and complex. But there is a long-term fix, which is to get GDP increasing to 3% and higher while slowing the increasing costs of healthcare, housing and education.

When real growth returns, productivity will increase, and America Inc.’s empty tank will refill.

(…) Mr. Trump’s pressure tactics won’t take away Mexico’s comparative advantage in labor-intensive manufacturing. In fact, it’s become 10% cheaperto manufacture in Mexico thanks to the plunge in the peso that followed his election. His tactics will, however, encourage other companies to seek special arrangements, even at the expense of consumers and taxpayers.

Past protectionism was usually aimed at foreign companies, not domestic ones. Still, it’s a useful guide to what awaits Mr. Trump. In 1977, President Jimmy Carter slapped restrictions on imported Japanese televisions to protect American producers. The result? As Japanese sales went down, South Korea’s and Taiwan’s went up. When those imports were restricted, imports from Mexico and Singapore went up. Japanese and Taiwanese companies began assembling televisions in the U.S. using imported subassemblies, which weren’t restricted.

When Mr. Carter imposed limits on imports of shoes from Taiwan and South Korea, those countries raised the quality and thus value of the shoes they did sell. In industry after industry, the hoped-for job revival never happened; in some sectors, jobs went down. (…)

(…) On a visit to London, the supply-side guru claims the president-elect’s policies will generate a much improved economic outlook through tax cuts. He adds that Mr Trump will moderate his tendencies towards protectionism and calls on the Federal Reserve chair, Janet Yellen, to “keep her monkey paws off my economy”.

Mr Laffer, a member of Ronald Reagan’s economic policy advisory board throughout his presidency, also says Mr Trump should welcome a strong dollar and not worry about a growing trade deficit. (…)

Meanwhile:

Global economy on course for best quarter of the year

China Exports Snap Seven-Month Losing Streak as Imports Surge
  • Exports to the U.S., China’s largest trading partner, rose 8.1 percent 
  • In yuan terms, exports rose 5.9 percent and imports jumped 13 percent
  • Copper imports climb, ore purchases surge to record
  • Coal imports surge to most since 2014, crude imports rise
  • Steel exports set to contract for first year since 2009

China’s statistics chief admits some economic data are false Acknowledgement of ‘fraud and deception’ follows suspicions about stable GDP figures

(…) “Currently, some local statistics are falsified, and fraud and deception happen from time to time, in violation of statistics laws and regulations,” Ning Jizhe, director of the National Bureau of Statistics, wrote in a column for Communist party mouthpiece the People’s Daily on Thursday. (…)

Ninja China’s Banks Are Hiding More Than $2 Trillion in Loans Rampant use of an accounting sleight of hand means Chinese banks don’t have to set aside capital to cover potential losses, sowing fears of a crisis.

In 2014, the Chinese city of Haimen on the mouth of the Yangtze River set out to build a large apartment complex and turned to Bank of Nanjing Co. for about $29 million in financing.

The bank was happy to oblige but it didn’t call the money a loan, according to people familiar with the matter. It was added to Bank of Nanjing’s balance sheet as an “investment receivable,” a loosely regulated category of assets that allows bank officials to set aside little or nothing for potential losses.

Bank officials aren’t shy about the accounting sleight of hand, which is rampant across China. The bank had about $39 billion in investment receivables in the third quarter, nearly as big as its loan portfolio, and profits have climbed by more than 20% a year.

As of June, 32 publicly traded Chinese banks had a total of $2 trillion in investment receivables as of June, up from $334 billion at the end of 2011, according to a tally by The Wall Street Journal of the latest available information from data provider Wind Information Co.

The investments are equivalent to 20% of the same banks’ total loans in dollar terms, up from 6% at the end of 2011. The 32 banks have about 70% of all the banking assets in China. (…)

If Chinese banks were required to count their investment receivables as loans, the banks would need to raise as much as $212 billion in capital, estimates UBS analyst Jason Bedford. That is not far short of the $262 billion raised by all Chinese banks in 2015. (…)