Edge and Odds

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Edge and Odds

Invest with smart knowledge and objective odds

Month: February 2017

THE DAILY EDGE (3 February 2017)

Eurozone composite PMI: job creation at nine-year high
  • The final Markit Eurozone PMI® Composite Output Index posted 54.4 in January, unchanged from December and a tick above the earlier flash estimate of 54.3.
  • Growth of manufacturing production and service sector business activity both steadied at the solid rates achieved at the end of last year.
  • imageOutput increased across the ‘big-four’ economies during January. Solid expansions were seen in Germany, Spain and France. Growth slowed slightly in Germany and Spain, however, to four- and three-month lows respectively.
  • The rate of job creation in the euro area was the fastest since February 2008. Employment rose at quicker rates in Germany (three-month high), France (19-month high) and Italy (six-month high), but slowed slightly in Spain and Ireland.
  • Growth of new business remained solid with the rate of increase accelerating to a 14-month high, leading to a further accumulation of backlogs of work. Moreover, the Future Output Index – which tracks companies’ expectations about levels of output in one year’s time – rose to its highest level since the series began in July 2012.
    Inflationary pressures intensified further in January.
  • Input costs increased at the fastest rate in over five-and-a-half years, reflecting higher global commodity prices, increased import costs due to the weak euro
    and supplier price hikes. Meanwhile, improved pricing power led to a further increase in average output charges. Selling prices rose at a rate matching December’s 65-month record.
  • The latest reading is comparable to GDP rising at a quarterly rate of 0.4%, indicating that the economy is starting 2017 on a solid footing. Meanwhile, faster growth of new business and an upturn in confidence about the year ahead to the highest since the region’s debt crisis bodes well for the robust pace of growth to be sustained in coming
    months.
  • At 53.7 in January, unchanged from December, the final Markit Eurozone PMI® Services Business Activity Index signalled an expansion of output for the forty-second successive month. The final reading was slightly above the earlier flash estimate of 53.6.
  • Eurozone services employment rose for the twenty-seventh successive month in January, with the rate of growth rising to a six-month high.

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China Manufacturing PMI: Operating conditions improve at slower pace in January
  • The seasonally adjusted Purchasing Managers’ Index™ (PMI™) posted 51.0 in January, down from December’s 47-month record of 51.9, consistent with only a marginal rate of improvement.
  • Manufacturers reported a further rise in client demand during January, as highlighted by a sustained increase in new orders. That said, the
    rate of expansion slowed since December’s recent peak and was moderate overall. This was despite a renewed upturn in new export
    business, which increased at a solid pace that was the fastest since September 2014.
  • Efforts to cut down on costs contributed to a further decline in overall manufacturing employment during January. The rate of job shedding
    quickened slightly to its strongest for three months, but remained moderate overall. A lack of personnel and higher new orders led to a
    further increase in the amount of backlogged work.
  • With production rising at a softer pace, growth in purchasing activity also slowed in January. However, vendor performance continued to
    deteriorate     amid reports of issues with transportation. Furthermore, average lead times increased at the quickest pace since February 2011.
  • Stocks of finished goods declined for the first time since June 2016.
  • Chinese manufacturers faced a further steep increase in input costs, with the rate of inflation easing only slightly from
    December’s recent peak. As a result, companies raised their prices charged for the eleventh successive month. Though solid, the rate of
    increase was the slowest seen in the past four months.
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U.S. Productivity Gain Moderates; Unit Labor Costs Pick Up

Growth in nonfarm output per hour during Q4’16 increased at a 1.3% rate (1.0% y/y) following a 3.5% rise in Q3, revised from 3.1%. These latest two increases followed three consecutive quarters of decline. During all of 2016, productivity increased 0.2%, the weakest rise since 2011. Output rose at a 2.2% rate (2.2% y/y) while hours-worked improved 0.9% (1.1% y/y).

The gain in productivity was accompanied by a 3.0% increase in compensation, which was weaker than the 3.7% gain during Q3. The 2.9% y/y increase left it roughly equal to the gains during all of 2015 and 2014. Adjusted for price inflation, compensation fell 0.4% (+1.1% y/y).

Unit labor costs increased 1.7% (1.9% y/y) following a 0.2% increase in Q3, revised from 0.7%. During all of last year, unit labor costs increased 2.6%, the strongest gain since 2007.

In the manufacturing sector, productivity increased 0.7% (0.4% y/y) following no change in Q3, revised from 0.4%. During all of last year, productivity increased 0.6% after a 0.3% rise in 2015. Factory output rose 0.8% (0.2% y/y) and hours-worked remained steady (-0.2% y/y). Compensation improved at a 4.1% rate (2.6% y/y) following a downwardly revised 3.4% increase. The gain in compensation lifted unit labor costs by a steady 3.3% (2.2% y/y). During all of last year, unit labor costs increased 2.6%, up from the 2.2% gain in 2015.

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Factory Skills Gap Could Spell Trouble for Trump’s Jobs Plan

(…) The firm [ADP] surveyed 400-plus global HR executives and found that companies expect to hire extensively in the coming year to address anticipated growth — 41 percent will add workers, compared to 32 percent who did so last year. But an even greater number see the skills gap impacting their businesses in the future. (…)

Four-fifths of executives surveyed said that a shortage of sufficiently skilled workers will affect their companies in the next 12 months. The most-represented sector in the survey is manufacturing, which the Trump White House calls the “backbone of our economy.”

Complaints of hard-to-fill factory jobs are backed up by Bureau of Labor Statistics data: 324,000 manufacturing spots were open in November, up from 238,000 a year earlier. (…)

Demand vs Supply: what happens next?

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EARNINGS WATCH
  • 268 companies (70.4% of the S&P 500’s market cap) have reported. Earnings are beating by 3.3% (2.8% ex-Financials) while revenues are surprising by 0.1%.
  • Expectations are for revenue, earnings, and EPS growth of 4.1%, 5.8%, and 7.9%, respectively (5.7% ex-Financials).
  • EPS is on pace for 8.9%, assuming the current beat rate for the remainder of the season. This would be 7.4% excluding the benefit of easy comps at AIG and GS.
Jason Furman slideshow: Border adjustment as tax policy and as macroeconomic policy.
How Trump’s immigration ban threatens health care, in 3 charts
Peter L Bernstein on Risk

Click on the link for 13 minutes about risk from the master.

Computer outbluffs world’s top poker players Texas Hold ’em tournament set men against AI program

(…) An artificial intelligence system developed at Carnegie Mellon University has just racked up $1,766,250 worth of chips against four of the world’s top professional players after a marathon 20-day poker binge.

Among the claimed breakthroughs was the computer’s success in outbluffing its human opponents — a new milestone in the ongoing contest between man and machine. (…)

“This is not just about poker. The algorithms we have developed . . . can take any imperfect information situation and output a good strategy for that setting,” said Mr Sandholm, who developed the system with Noam Brown, a PhD student.

The technology could be used to compete against humans in business negotiations, military strategy, and the high-frequency trading systems used by the biggest banks, he said. (…)

“Half-way through the challenge even, we really thought we were going to win,” said Daniel McAulay, one of the professional players. “We really got a beat-down.”

The CMU team used a supercomputer each night to analyse the day’s games and improve the software. Rather than try to study its opponents’ winning tactics, the system examined the weaknesses in its own game and patched up the three most obvious failures each day.

That eventually enabled it to outflank most of its opponents’ tactics, which Mr Sandholm called “the most psychologically devastating” aspect of the system for the humans playing against it. (…)

“We tried everything we could, it was just too strong,” said Jason Les, another of the poker professionals. “It became very demoralising showing up every day and losing this hard. I thought it would be a lot closer.”

The technology behind Libratus will almost certainly be spun off into a new start-up company and developed for commercial use, said Mr Sandholm, who has studied negotiating strategy for 27 years. One of his earlier programmes is used by two-thirds of US transplant centres to decide which patients should receive new kidneys.

THE DAILY EDGE (2 February 2017)

Strongest U.S. manufacturing production growth for almost two years
  • At 55.0 in January, up from 54.3 in December, the seasonally adjusted Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) signalled a robust and accelerated improvement in overall business conditions across the manufacturing sector. The latest reading was little changed from the earlier ‘flash’ reading of 55.1 and pointed to the fastest upturn in manufacturing performance since March 2015.
  • Survey respondents noted that greater production volumes had been underpinned by improved client demand and efforts to boost inventory levels at the start of 2017. Reflecting this, latest data signalled the fastest accumulation of post-production stocks for almost ten years.
  • New business growth picked up again in January, thereby signalling a sustained turnaround from the soft patch seen during the third quarter of 2016. Anecdotal evidence indicated that stronger order books reflected an improved economic backdrop and a corresponding rise in clients’ willingness to spend. However, export sales growth remained only marginal at the start of 2017, suggesting a continued drag on external demand from the strong dollar.
  • The latest upturn in purchasing activity was the fastest since March 2015, which was in line with the trends seen for output and new business intakes. The latest survey also pointed to another rise in stocks of purchases and a solid expansion of workforce numbers.
  • Meanwhile, manufacturers indicated that cost pressures intensified in January, driven by higher prices for a range of raw materials (particularly oil and metals). The overall rate of input cost inflation was the fastest for almost two-and-a-half years, but manufacturers’ factory gate charges increased only moderately at the start of 2017.

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Hopefully, this is not just post-elections hope (“efforts to boost inventory levels”). The Manufacturing PMI has been rising for over 6 months and yet, manufacturing output has remained flat since 2014.

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Capex have been dismal:image

Inventory risk: case in point:

U.S. Light Vehicle Sales decrease to 17.5 million annual rate in January

Based on a preliminary estimate from WardsAuto, light vehicle sales were at a 17.47 million SAAR in January. That is down about 2% from January 2016, and down 4.5% from the 18.29 million annual sales rate last month.

Still looks like a cyclical peak:From the WSJ:

U.S. auto makers have caught the inventory bug. The Big Three auto makers posted sales declines in January but still moved more goods to dealer lots, providing a robust if risky show of confidence in future demand, the WSJ’s Mike Colias and Anne Steele report. RBC Capital Markets estimates the industry now has 90 days’ worth of supply, up from 62 days’ in December and 77 days’ in January 2015. Dealers typically build up backlogs for sales in the warmer months, but RBC says this year’s inventory surge is about 12% ahead of the typical January. The auto industry seems to be following bigger trends that have seen businesses loosen their reins on inventory growth over the past two years. But the high value and carrying costs of automobiles also carry outsize risks, and high inventories traditionally have triggered discounting and layoffs.

High five But RBC says it’s not that bad:

January always has higher days inventory. We understand that whenever the market sees high
inventory amid a “plateau” demand environment, the sentiment skew on production direction tends
to lean towards looming cuts. We wouldn’t be so quick to assume that. The math never helps January days inventory as the formula is calculated on current month sales (and January is always a low absolute number) while the inventory is meant for demand over the coming months. So Ford’s
(adjusted) 96 days is in line with its 10-year January average while GM’s 108 days are a little above
its 96-day, 10-year January average.

Spring sales better be good…More on January auto sales:

(…) So overall car sales are not down because automakers “cut back” on fleet sales. They’re in a deep funk for several reasons:

1. American consumers have gravitated toward light trucks;

2. Retail sales of cars are getting squeezed by a flood of off-lease vehicles that customers turn in at the end of the lease, and that are sold via auctions to dealers on whose lots these cars compete with new cars, but at a much lower price point;

3. And rental car companies, are trimming back their orders for reasons of their own, under pressure from a variety of directions, including rideshare companies, whose drivers own their own cars and buy them via retail sales not fleet sales. For automakers, the arrival of the rideshare industry means a welcome shift from fleet sales to retail sales. But it’s still not enough to stop the decline in car sales.

 
US Workers Report Strong Hiring Situation

Gallup’s Job Creation Index, a measure of U.S. workers’ perceptions of the job climate where they work, remained strong in January. The January JCI score of +34 is similar to the +33 figures found most months since last May, and indicates that many more workers believe their employer is bringing on new employees than letting people go.

Chart 1

Fed Stands Pat, Offers No Hint on Next Rate Move The Federal Reserve held its benchmark rate steady and said it remains on track to gradually raise short-term rates this year. It gave no hint about when the next increase might come.

Decisions made by the Fed years ago mean that the maturity of its $4 trillion-plus bond portfolio declines every day, a process that Fed Chairwoman Janet Yellen said in January has the same impact on benchmark bond yields as two short-term rate increases over the course of 2017. (…)

But the status quo alone means reduced stimulus, because as the portfolio gets closer to maturity, the Fed’s ownership of long-term debt decreases, pushing rates higher. The Fed is simultaneously thinking about actively trimming the size of its portfolio, a move that analysts say could put even more upward pressure on long-term rates (…)

In recent years, the amount of maturing debt had been small, partly due to the Fed’s decision in 2011 to sell short-term debt to buy long-term bonds aimed at keeping long-term interest rates low to stimulate the economy. The policy is known as Operation Twist.

But the amount of maturing Treasury debt is expected to rise to $195 billion this year and $422.6 billion in 2018, compared with $3.5 billion in 2015, according to Mark Cabana, head of U.S. short-rates strategy at Bank of America Merrill Lynch.

Francesco Garzarelli, interest-rate strategist at Goldman Sachs Group Inc, said that once the Fed announces its intention to downsize the balance sheet, investors may look ahead to the issue of demand from other sources to fill the void from the Fed. The impact from this, he said, could lead to a rise of 0.5 to 0.75 percentage point on the 10-year Treasury yield. The yield Wednesday afternoon was 2.466%. (…)

Many analysts say the Fed is likely to concentrate its efforts first on its portfolio of mortgage-backed securities, given its stated intention of returning to an all-Treasury portfolio. That could have a more direct impact on lifting borrowing costs in the housing market, analysts say. Morgan Stanley economists forecast that ending the reinvestment of maturing MBS would be the equivalent financial tightening of two rate increases.

Few expect a rash decision from the Fed, which, if anything, is thought to be biased toward keeping market conditions docile. Analysts say the process of ending reinvestment isn’t expected to commence until next year and is likely to be approached cautiously.

“Would the Fed gamble that it can get away with reducing its balance sheet in 2017 and not cause a crisis? I don’t think so,” said Jonathan Lewis, chief investment officer at Fiera Capital Inc. (…)

INFLATION WATCH
Inflation Surprise Index Shows Unexpected Global Turn

The global Citi Inflation Surprise Index, which measures price surprises relative to market expectations, is at the highest in more than five years. The reading turned positive in December — meaning inflation data were higher than expected — for the first time since 2012.

EARNINGS WATCH
  • 234 companies (63.2% of the S&P 500’s market cap) have reported. Earnings are beating by 3.1% (2.6% ex-Financials) while revenues are surprising by 0.3%.
  • Expectations are for revenue, earnings, and EPS growth of 4.2%, 5.5%, and 7.6% (5.4% ex-Financials), respectively.
  • EPS is on pace for 8.7%, assuming the current beat rate for the remainder of the season. This would be 7.2% excluding the benefit of easy comps at AIG and GS.

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