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 (28 December 2016)

Last-minute spending surge lifts U.S. holiday shopping season A jump in consumer spending in the final stretch of December significantly offset a slow start to the U.S. holiday shopping season, and is likely to help many retailers beat sales forecasts, industry research groups said on Tuesday.

(…) Brick-and-mortar sales in the week ending Dec. 24 rose 6.5 percent year-over-year after having fallen for the rest of the month, according to data from analytics firm RetailNext.

Strong demand for furniture, home furnishings and men’s apparel from the start of November through Christmas Eve pushed U.S. retail sales up 4 percent, higher than the previously expected 3.8 percent, according to data from MasterCard’s holiday spending report, also released on Tuesday. The report, which tracks spending by combining sales activity in MasterCard’s payments network with estimates of cash and other payment forms, offers an early look into how the holiday season shaped up. (…)

Craig Johnson, president of consultancy Customer Growth Partners, told Reuters that he now estimates sales growth of 4.9 percent in November and December, up from his initial estimate of 4.1 percent. (…)

U.S. Home Prices Climbed Sharply in October The home-price index rose 5.6% in the 12 months ended in October, with the market showing no signs of slowing after setting a record a month earlier.

The S&P CoreLogic Case-Shiller Indices, which covers the entire nation, rose 5.6% in the 12 months ended in October, up from the 5.4% increase reported in September.

The 10-city index gained 4.3%, up from 4.2% in September. The 20-city index gained 5.1% year over year, up slightly from a 5% increase in September.

The hottest markets in the country remain concentrated in the Northwest, as many buyers priced out of the Silicon Valley area flee to secondary tech hubs. Seattle reported a 10.7% increase, Portland reported a 10.3% year-over-year gain, and Denver had an 8.3% increase in home prices. (…)

After seasonal adjustment, the national index rose 0.9% month over month. The 10-city index and the 20-city index each rose 0.6%.

After seasonal adjustment, all 20 cities saw prices rise in October.

  • Housing Gains Highlight Economic Divide The volatile housing market is widening the divide between pricey urban and coastal areas and more affordable inland regions, creating large swaths of winners and losers based largely on geography.

Housing Gains Highlight Economic Divide(…) A study by Weiss Analytics, a housing-data firm, found homes in ZIP Codes where the median value is $500,000 to $1 million are now worth 103% more than they were 16 years ago, before a boom in the mid-2000s was followed by the worst housing crash since the Great Depression. Home prices in those areas have shot up 39% since the bust. (…)

In ZIP Codes where the median home was worth $100,000 to $150,000, prices have risen 16% since the trough of the market and are now worth 24% more than they were in 2000. (…)

In more rural areas outside major cities, demand for housing has been flat, with little new supply and more people leaving for larger cities and coastal regions.

The demand for lower-priced homes was also weakened by the tightening of lending standards following the foreclosure crisis, which made it more difficult for buyers with imperfect credit scores or lower incomes to qualify for mortgages. (…)

  • House Flipping Makes Comeback as Home Prices Rise The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007, and about one-third of the deals were financed with debt, a percentage not seen in eight years.
  • Real-Estate Industry Braces for Tax Upheaval Many in the real-estate industry are expressing concern about the seismic changes in the tax code that could be ushered in by President-elect Trump for all businesses, including real estate.

(…) real-estate executives say a sweeping blueprint for overhauling most of U.S. tax law made in June by House Republicans appears to have a better chance with a Republican in the Oval Office. The plan appears to be gaining traction, according to real-estate industry lobbyists who have been having extensive behind-the-scenes discussions about what it would mean for real estate.

“The House is ready to roll,” said Jeffrey DeBoer, chief executive of the Real Estate Roundtable.

Among other things, the GOP blueprint calls for the elimination of the deduction for state and local property tax. Industry executives also worry the plan could severely cripple the mortgage interest deduction—long considered a sacred cow of U.S. tax policy.

The blueprint proposal released in June said it would preserve the mortgage interest deduction. But it also would nearly double the standard deduction that taxpayers could receive, thus eliminating most itemized deductions. Mr. Trump proposed an even larger standard deduction.

“Because of the other provisions included in the new tax system, far fewer taxpayers will choose to itemize deductions,” says the Better Way proposal released in June.

The upshot, real-estate industry leaders worry, would be that fewer people would be incentivized to purchase homes, which would weigh on demand and possibly the broader economy.

The House proposal also would eliminate for all businesses the current deduction for debt interest payments. Leverage has long played a major role in most acquisitions of office buildings, stores, hotels and other commercial property in part because interest payments are tax deductible.

Another sea change in commercial real estate would be in the way the House blueprint would affect depreciation. Tax law currently allows buyers of rental apartment buildings to depreciate the cost over 27.5 years and other commercial real estate over 39 years.

The House plan would eliminate depreciation for real-estate companies as well as other businesses. Instead, buyers of real estate would be able to treat the entire cost of buying a property—excluding land—as a business expense that could be used to reduce income. If a buyer didn’t have enough income in the year they bought the building, they could be able to carry the expense forward into future years as a net operating loss.

Real-estate industry officials describe those proposals as “radical.” They are concerned that, if not handled right, changes in tax law could warp the economics behind real estate, creating upheaval in the industry. (…)

Dollar’s Rise Threatens Manufacturing Recovery A strengthening dollar is re-emerging as a threat to U.S. manufacturers, endangering the profits of some companies and complicating Donald Trump’s drive to boost factory employment.

(…) Ben Herzon, senior economist at Macroeconomic Advisers, an independent economic forecasting firm, conducted a simulation for The Wall Street Journal to illustrate how a further 10% increase in the strength of the dollar would ripple through the U.S. economy.

Over the next three years, companies would gradually adjust, by among other things boosting capacity at foreign plants while reducing at home, changing their supply chain or increasing the use of automation.

If the dollar doesn’t strengthen further, inflation-adjusted gross domestic product would cumulatively rise by 6.3% over the next three years. If it strengthens by a further 10%, that growth would be 1.8 percentage points lower, or 4.5%, according to Macroeconomic Advisers’ simulation.

The pain of a further 10% dollar rise would be especially concentrated in U.S. factories. Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower.

Initially, U.S. consumers would stand to benefit by paying lower prices for imported goods.

“It’s good for consumers, as long as they’re still working,” said Mr. Herzon. As time goes on, this benefit will also be offset by the job loss in the manufacturing sector, he said.

Corporates lead surge to record $6.6tn debt issuance Borrowing levels beat 2006 mark but rising US rates set to cool demand

(…) Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.

Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction. (…)

THE DAILY EDGE (23 December 2016): Trade War?

Martini glass Plate Merry Christmas!  Messenger Gift with a bow

U.S. Economy Approaches Year’s End on Lackluster Note Measures of economic vitality including income growth, consumer spending and inflation weakened in November.

Household spending rose just 0.2% in November from the month before, a slowdown in growth from the previous two months, while incomes flatlined, the Commerce Department said Thursday. (…) But income growth has softened: Wage and salary income rose 3.5% in November from a year earlier, the slowest year-over-year gain since December 2013. (…)

Spending for October was revised up to a 0.4% gain from an initial estimate of up 0.3%. Incomes in October advanced 0.5% versus a previous reading of up 0.6%.

The personal-consumption expenditures price index, the Fed’s preferred inflation measure, was unchanged in November and up 1.4% from a year earlier. (…)So-called core prices, which exclude the volatile categories of food and energy, also held flat from the prior month and were up 1.6% from a year earlier. That was the weakest annual increase since July.

When adjusting for inflation, Thursday’s report showed consumer spending rose 0.1% in November from the prior month. Inflation-adjusted disposable personal income—income after taxes—was down 0.1%.

Americans saved a smaller share of their income last month. The personal saving rate fell to 5.5% from 5.7% the prior month.

The all-important American consumer is difficult to read this year. November was very weak across all income and spending measures following a strong summer and early fall. October was a strong month income-wise but real spending rose only 0.1%. Last month, income growth turned down. Q4 so far is showing real consumer expenditures up at a dismal 1.2% annual rate. (Table from Haver Analytics)

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Gift with a bow Retailers Make Final Push to Lure Last-Minute Shoppers

(…) In October, the National Retail Federation forecast that Americans would spend $655.8 billion in November and December, or a 3.6% increase from a year ago. However, in dollar terms, retail sales slowed slightly versus last year in the weeks between Thanksgiving and Christmas, according to data from NPD Group, a market research firm.

“This year’s trend clearly demonstrates how extreme promotions, now most noticeable in toys and electronics, are steering retail off the path of growth,” said Marshal Cohen, NPD’s chief industry analyst. “Even though we are lagging behind so far, don’t be surprised if that last week pulls in a lot of business,” for brick-and-mortar retailers. (…)

The level of promotional activity, especially among apparel retailers, ticked up the weekend before Christmas, according to Simeon Siegel, a Nomura Instinet analyst. Of the 21 retailers he follows, nine offered deeper discounts compared with the same weekend, known as “Super Saturday,” a year ago. (…)

The Christmas Tree Indicator: Consumers Are Joyful

Sales of Christmas trees have jumped 10% from a year ago, the largest increase on record, according to Oscar Sloterbeck, head of company surveys at Evercore ISI, which has tracked this data since 2003. (…)

Christmas tree sales growth in states that went for Mr. Trump was 3 percentage points stronger than in states won by Hillary Clinton. That is similar to what took place in 2008 when Barack Obama was elected, except in favor of the Democrat.

US student loan defaults hit a new high.

Source: @delislealleges, @Tmp_Research via The Daily Shot

Durable-Goods Orders Fall 4.6%

Orders for durable goods—products designed to last longer than three years, such as trucks or computers—declined 4.6% from a month earlier to a seasonally adjusted $228.17 billion, the Commerce Department said Thursday. (…)

When excluding orders tied to transportation, new orders increased 0.5%. When excluding defense, another choppy category, orders slid 6.6%. (…)

Core capital goods orders (nondefense capital goods orders excluding aircraft) rose 0.9% in November, the fifth increase in the last 6 months. New trend? (Table from Haver Analytics)

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U.S. Leading Economic Indicators Hold Steady

The Conference Board’s Composite Index of Leading Economic Indicators remained unchanged during November (0.7% y/y) following an unrevised 0.1% October uptick. A 0.2% rise had been expected in the Action Economics Forecast Survey. The six-month change in the index improved to 2.0% (AR)

Contributing positively to the index last month were initial unemployment insurance claims, a steeper interest rate yield curve, nondefense capital goods orders, factory orders for consumer goods, stock prices, consumer expectations for business/economic conditions, stock prices and the leading credit index. Contributing negatively were the average workweek, building permits, a lower ISM new orders diffusion index and more initial claims for unemployment insurance.

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Hmmm…

Trump team floats a 10% tariff on imports

President-elect Donald Trump’s transition team is discussing a proposal to impose tariffs as high as 10% on imports, according to multiple sources.

A senior Trump transition official said Thursday the team is mulling up to a 10% tariff aimed at spurring US manufacturing, which could be implemented via executive action or as part of a sweeping tax reform package they would push through Congress. (…)

The senior transition official said the transition team is beginning to find “common ground” with House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady, pointing in particular to the border adjustment tax measure included in House Republicans’ “Better Way” tax reform proposal, which would disincentivize imports through tax policy.

Aides to Ryan and Brady declined to say they had “common ground” with Trump, but acknowledged they are in deep discussions with transition staffers on the issue. (…)

At least one business community organization is worried enough about the prospect of the tariff it already has prepared talking points, obtained by CNN Wednesday night.

“This $100 billion tax on American consumers and industry would impose heavy costs on the US economy, particularly for the manufacturing sector and American workers, with highly negative political repercussions,” according to the talking points. “Rather than using a trade policy sledgehammer that would inflict serious collateral damage, the Trump administration should use the scalpel of US trade remedy law to achieve its goals.”

The talking points also claim the tariffs would lead to American job loss and result in a tax to consumers, both of which would harm the US economy. (…)

Trade hawks to rule the roost in Trump’s White House Appointments suggest economic relations, particularly with China, are set for shake-up

(…) With the naming on Wednesday of Mr Navarro, a longtime critic of US-China policy, to lead a new National Trade Council in the White House, the president-elect sent a signal that he intends to deliver on some of his most bombastic economic promises on trade.

Together with Wilbur Ross, the billionaire investor Mr Trump has chosen to lead the commerce department and act as his point person on trade, Mr Navarro co-authored a much-scrutinised white paper in September that helped flesh out the Republican candidate’s economic policy. It put reducing the trade deficit and fighting back against “cheating” by US trading partners such as China at the core, arguing that US workers had for too long suffered from what it viewed as bad trade policy. (…)

Maybe this is not a coincidence:

President Xi Open to Growth in China Falling Below 6.5%

President Xi Jinping is open to China’s economic growth slowing below the government’s 6.5 percent target due to rising debt and concern about an uncertain global environment after Donald Trump’s election win in the U.S., according to a person familiar with the situation.

Xi told a meeting of the Communist Party’s financial and economic leading group this week that China doesn’t need to meet the objective if doing so creates too much risk, said the person, who asked not to be named because the discussions were private. (…)

The shift signals that leaders see systemic risk as great enough to warrant re-evaluating key goals and may be less inclined to add to fiscal and monetary stimulus. (…)

Some meeting participants sounded the alarm about unsustainable debt, noting that other nations have experienced crises after borrowing climbed to around 300 percent of GDP, the person said. China’s debt-to-GDP ratio rose to about 270 percent this year, the person said. (…)

At another meeting last week, Xi and his top economic policy lieutenants pledged to make preventing and controlling financial risk to avoid asset bubbles a top priority for 2017. They also said they plan prudent and neutral monetary policy and proactive fiscal policy next year, according to a statement after the three-day Central Economic Work Conference. (…)

World Trade Falls to 2014 Level, just in Time for a “Trade War”

(…) “But maybe if you’re going to do it,” Icahn said about the looming trade war with China, “you should get it over with, right?” (…)

Loonie Tumbles After Canadian Economy Unexpectedly Crashes Back Into Contraction

After 4 straight quarters of MoM growth in GDP, the Canadian economy plunged 0.3% in Q4 (considerably worse than the 0.0% expectations) despite a resugenece in crude prices. The Loonie is tumbling, back at 5-week lows, as manufacturing shrank a shocking 2.0% YoY – most since 2013.

  • Goods-producing sector fell 1.3% m/m in Oct.
  • Service-producing sector rose 0.1% m/m in Oct.
  • Largest upside contributor was real estate, +0.05 ppts
  • Largest downside contributor was manufacturing, -0.20 ppts
  • Manufacturing output falls 2.0% m/m, biggest decline since December 2013
 
Punk Credit Suisse agrees $5.3 billion U.S. mortgage settlement
The most addictive drug: Facebook

The social-media giant has defied even optimists’ projections of how big the 12-year-old firm could become. Today the company’s flagship social network claims 1.8bn active monthly users. Facebook has attracted these hordes by engineering features that are highly addictive and relevant to their lives, so people keep coming back for more hits. Throw in the other apps it owns, such as WhatsApp, Instagram and Facebook Messenger, and Facebook accounts for 30% of Americans’ mobile browsing time, compared with 11% for Google and YouTube combined. Collecting data on users has helped Facebook become the world’s second-largest advertising company on mobile devices. But Mark Zuckerberg wants to turn it into an even bigger part of the mobile ecosystem—hence the plans to develop Messenger and other messaging services into portals through which people can order taxis, communicate with businesses and so on. Being as useful as it is addictive could win Facebook even more friends. (The Economist)

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