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: June 2017

THE DAILY EDGE (20 June 2017)

Trade War Risks From ‘National Security’ Tariffs Donald Trump’s trade policy has so far been more bark than bite: dramatic rhetoric about shaking up the old order. That may change as soon as this week, when the president bares his “America First” teeth with more ferocity, advancing plans to curb steel imports in the name of “national security.”
China’s Workers are Saying Goodbye to Double-Digit Pay Raises

(…) The government classifies more than 400 million urban employees into one of three categories: non-private, private, and self-employed. The largest segment, non-private, includes almost 180 million workers at state companies, listed companies, and foreign firms. Their pace of pay gains last year was the slowest since 1997, rising 8.9 percent to 67,569 yuan ($10,166), according to the National Bureau of Statistics.

In the private category, which in practice means mainly smaller domestic employers, paychecks for 121 million employees rose 8.2 percent last year, less than the 8.8 percent gain in 2015. Similarly slowing is the pay of about 280 million rural migrant workers, who saw a 6.4 percent wage gain as of February, down from more than 20 percent in 2011. Those increases are still well above the current rate of inflation. (…)

Policy makers also have shied away from boosting pay in order to stay competitiveagainst cheaper southeast Asian nations. Just nine of 31 provinces and regions increased the minimum wage last year, the fewest in at least four years and about a third of the number in the prior year. Local governments also issued guidance for companies to slow the pace for raises. (…)

Speaking of wages:

Bank of England Governor Sees Weak Wage Growth Delaying Rate Rises Bank of England Gov. Mark Carney said that while rate setters’ tolerance for above-target inflation is coming to an end, it is too early to raise the key interest rate for the first time in a decade.

Not in the USA:

(…) Asked about a so-called flattening of yields in the bond market, which suggest investors are skeptical that this Fed policy-tightening cycle will last much longer, Dudley said pausing policy now could raise the risk of inflation surging and hurting the economy.

He said he did not read the market move as a negative signal for the U.S. economy, but rather one that reflects low overseas inflation and borrowing costs. (…)

Meanwhile:

BofA Sees Off-Lease ‘Tsunami’ Hitting U.S. Auto Market

U.S. auto sales peaked last year and are now likely in a “decisive downturn,” according to the Bank of America Merrill Lynch. A “tsunami” of returned leased vehicles will drive down prices of used cars and make new autos less affordable, analysts John Murphy and Aileen Smith wrote in a report dated June 15. The analysts predict new-vehicle sales will drop 2.5 percent in 2017 and fall each year before bottoming out at 13.1 million in 2021.

EARNINGS WATCH

Factset:

  • Overall, the estimated earnings growth rate for Q2 2017 of 6.5% today is below the estimated earnings growth rate of 8.7% at the start of the quarter (March 31). If the Energy sector is excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 3.6% [+3.7% last week] from 6.5%.
  • Downward revisions to earnings estimates in aggregate for the second quarter to date have been below recent averages. The Q2 bottom-up EPS estimate (which is an aggregation of the earnings estimates for all 500 companies in the index and can be used as a proxy for the earnings for the index) has fallen by 2.0% (to $31.49 from $32.13) since March 31. This decline in the EPS estimate for Q2 2017 is below the trailing 1-year (-3.0%) average, the trailing 5-year (-4.3%), and the trailing 10- year average (-5.9%) for the bottom-up EPS estimate for a quarter. (…)
  • The estimated revenue growth rate for Q2 2017 is 4.9%. If the Energy sector is excluded, the estimated revenue growth rate for the index would fall to 3.8% from 4.9%.
  • At this point in time, 113 companies in the index have issued EPS guidance for Q2 2017. Of these 113 companies, 76 have issued negative EPS guidance and 37 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (76 out of 113), which is below the 5-year average of 75%.
  • While the number of companies issuing negative EPS is slightly below the 5-year average (79), the number of companies issuing positive EPS guidance is well above the 5-year average (27).

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IT and Financials are expected to grow EPS 7.7% in Q2 [+8.2% last week], down from 9.5% expected on March 31. The 6 consumer-centric sectors are expected tp show EPS growth of only 0.6% [unchanged], down from +2.4% on March 31.

Ex It and HC, guidance is 47 negative [46 last week] and 10 positive [unchanged]; the 82% negative ratio compares with 85% at the same time in Q1’17 and 80% at the same time in Q2’16, so essentially in line with recent experience.

A Shift Away From Tax Reform to Cuts in the U.S.?

Between Feb. 28 and May 28, President Trump explicitly mentioned “tax reform” along with tax cuts in five of six of his tweets found by BI Economics discussing his tax plan. For example, on April 22 President Trump tweeted, “Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday.”

Since then, through June 16, the president has two tax related tweets, neither of which mentions reform. The most recent tweet came on June 6: “Big meeting today with Republican leadership concerning Tax Cuts and Healthcare. We are all pushing hard — must get it right!” On May 28, when the president last used “tax reform” in a tweet, he indicated the plan was coming along “ahead of schedule”; this was followed by a tweet two days later that read, “The U.S. Senateshould switch to 51 votes, immediately, and get Healthcare and TAX CUTS approved, fast and easy. Dems would do it, no doubt!” This may indicate the plan was beginning to hit some roadblocks.

While the president’s tweets are far from being a clear indicator of where he stands on tax policy, they may provide some subtle clues to his own expectations, especially if he continues to avoid the phrase “tax reform.”

BI Economics recently significantly downgraded the medium-term outlook for U.S. economic growth. This was not due to a reassessment of economic fundamentals — in fact, underlying momentum is very much intact.

Instead, it reflects the sharply reduced odds that any of the main pillars of Trumponomics will be successfully implemented, including comprehensive tax reform. (Bloomberg Briefs)

How did Argentina pull off a 100-year bond sale? Despite past defaults, the Latin American country has sold debt maturing in a century

(…) Argentina sold $2.75bn of the debt with a coupon of 7.125 per cent, equating to an annual yield of 7.9 per cent, according to a statement from the Argentine finance ministry late on Monday. The bond attracted $9.75bn in orders from investors. (…)

THE DAILY EDGE (19 June 2017): THE U.S. ECONOMY: OK OR NOT?

THE U.S. ECONOMY: OK OR NOT?

The Fed says the economy is ok, at least ok enough to keep tightening even though inflation has slowed down considerably in 2017. The Atlanta Fed GDPNow has slipped to +2.9% for Q2 while the NY Fed Nowcast signals +1.9%, both significantly less buoyant than in March.

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  • The Fed says the economy is performing about in line with its forecast, but everybody else is totally surprised by its weakness. (Charts below from Ed Yardeni)

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  • If the U.S. is the engine of the world, commodity prices are not suggesting the world is strong.
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  • The U.S. petroleum usage is declining:

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  • The ECRI weekly index has rolled over:

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  • The U.S. electricity consumption is peaking  again:
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  • Truck tonnage and intermodal volume are not showing any signs of strengthening final demand:
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  • Fortunately, consumer labor income remains solid, sustaining consumption and retail sales.
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  • Problem is, an ever larger part of the consumer budget goes to healthcare, education and lodging as these charts from Evergreen Gavekal demonstrate:

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  • Americans tend to focus on the ISM surveys for short term economic trends and these have been rather encouraging lately. However, IHS Markit’s PMIs have proven  to be smarter short term economic forecasters in recent years:
Weak US PMI signals confirmed by official data

Official data showed US manufacturing output missing expectations in May, adding to a flow of recent data that point to a renewed bout of industrial weakness.

PMI survey data not only accurately predicted the downturn in industrial growth, but also revealed the underlying factors behind the slowing, notably a waning of both capex and consumer spending. The numbers therefore suggest there are downside risks to the near-term outlook for the US economy.

Commerce Department data indicated that factory production fell 0.4% in May. The decline was the second in the past three months, and suggests that industry is once again starting to struggle after a strong start to the year.

It’s not just output that is falling. Official statistics also showed a drop in both factory orders and the narrower gauge of durable goods orders in April, the latest month for which data are available. Meanwhile, manufacturing payrolls numbers slipped back into decline in May, dropping for the first time since last October.

By contrast, output, orders and employment had all been growing at encouragingly solid rates earlier in the year.

Production was just 0.3% higher in the three months to May compared to the prior three months period, which is the worst performance since November. This compares with a two-and-a-half year high of 0.8% in February.

Similarly, manufacturing payroll numbers has increased by some 52,000 in the three months to February – the largest gain for over two years. That rate of job creation has since more than halved. Just 21,000 jobs were added in the three months to May. (…)

An analysis of the detailed sector data behind the PMI numbers provides further insight into the current state of demand. The data reveal that new orders for investment goods, such as plant and machinery, and consumer goods have risen at considerably reduced rates in recent months, with the latter slowing especially sharply.

While the slowing in growth of new orders for investment goods hints at a cooling of capital spending by businesses, the downturn in the new orders index for consumer goods signals a deteriorating trend in household spending. (…)

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This moderation of retail sales growth corresponds with a decline in the PMI’s consumer goods new orders index from a peak of 58.2 in the three months to January to a 17-month low of 53.2 in the three months to May.

The above chart uses the PMI new orders index from US producers of consumer goods tracked against the 3m/3m per cent change in retail sales. Actual retail sales will include imported goods, so the correlation will naturally not be perfect. However, the chart highlights how it is very unusual for the PMI series to send a misleading advance signal as to turning points in sales growth. Note also that the PMI data are available two weeks prior to the official retail sales data. (…)

Whereas the survey indices had been trending higher late last year, in recent months they have been trending down. These latest disappointing May numbers are therefore unlikely to be spurious readings, but are instead a reflection of a renewed struggle of US manufacturers in the face of waning demand.

This next chart plots the ISM (black) and IHS Markit (red) PMIs since December. The hope is that the good ISM-adjusted readings of the June Philly and NY Fed PMIs are confirmed by the national PMIs…

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We thus have a situation where the Fed is raising short term rates while long term rates, inflation and most major economic gauges are weakening. Based on the experience so far this century, the better bet has to be away from the Fed…

U.S. Import Prices Slow as Petroleum Falls, Other Prices Flat

(…) Nonpetroleum import prices were unchanged after April’s 0.3% increase, revised from 0.4%; their y/y increase was +1.0%. Among end-use categories, industrial supplies & materials prices excluding petroleum also decreased, down 0.5% (+5.8% y/y), breaking a strong six-month advance. Categories with increases included foods, feeds and beverages, which rose 1.2% (4.1% y/y) and motor vehicle & parts, up by 0.1% (0.1% y/y). Capital goods prices were flat overall (-0.4% y/y) and excluding computers, they eased 0.1% (-0.5% y/y). Consumer goods prices excluding autos were also unchanged in the month, and they were down 0.2% y/y. (…)

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SENTIMENT WATCH
Investors pour $30bn into global ETFs US equity funds reap benefits of continued market rally

Investors poured $31.6bn into ETFs globally in the week ending on Wednesday, beating a previous high for the year of $26.5bn during the week to April 26. (…)

Record level of investors fear corporate bonds are overvalued

(…) Eighty-four per cent of investors polled in the second quarter said corporate bonds are overvalued, according to a survey by the CFA Society. This is the fifth consecutive quarter of increase and the highest since the industry body began asking about valuations in 2012.

The majority of investors, 82 per cent, also think government bonds are overpriced, an increase of 4 per cent from the last two quarters. (…)

Adding to the sense of pessimism are investor concerns over developed-market equities. Sixty-nine per cent of respondents said they were overvalued, up from 40 per cent in the first quarter of 2016. Only emerging market stocks were perceived to be fairly valued, with 41 per cent of respondents saying they were undervalued and 34 per cent saying they were correctly priced.

The findings tally with a separate survey from Bank of America Merrill Lynch, which also found a record number believe stocks are overvalued. (…)

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