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: September 2017

THE DAILY EDGE (26 September 2017):

Lenders Continue to Ease Mortgage Credit Standards

Facing constrained mortgage demand and a negative profit margin outlook, more lenders say they have eased rather than tightened home mortgage credit standards, according to Fannie Mae’s third quarter 2017 Mortgage Lender Sentiment Survey®. Across all loan types – GSE Eligible, Non-GSE Eligible, and Government – the net share of lenders who reported easing credit standards over the prior three months reached a new high since the survey’s inception in March 2014, after climbing each quarter since Q4 2016.

On net, lenders’ profit margin outlook has remained negative for four consecutive quarters. “Competition from other lenders” was again cited as the primary reason, reaching a new survey high for the third consecutive quarter. In addition, the net share of lenders reporting growth in purchase mortgage demand over the prior three months has fallen for all loan types year over year, reaching the lowest third-quarter reading in the past two years. However, the net share of lenders expecting an increase in mortgage demand over the next three months remains relatively stable for the same quarter year over year.  (…)

INFLATION AND CENTRAL BANKS

The Fed’s rift on rates and inflation is on full display. New York President William Dudley signaled the likelihood of one more hike this year, calling factors holding down prices temporary. Chicago’s Charles Evans demurred, saying tightening before seeing “clear signs” of wage and price pressure would be a mistake. Janet Yellen may give her take when she speaks Tuesday in Cleveland.

Chicago’s Evans said he’s “a little nervous” that some inflation weakness may be structural, given changes to technology and “the nature of competition.”

Mario Draghi emphasized that the euro area will get as much stimulus as needed, even as the ECB adjusts its 2.3 trillion-euro ($2.7 trillion) bond purchase program this year. Cautioning against “hasty moves,” the central bank chief cited uncertainties over inflation as continuing to require “a very substantial degree of monetary accommodation.” (BloombergBriefs)

Globalization is the most likely explanation for surprisingly low rates of inflation, suggesting that central banks should be patient in seeking to meet their targets and avoid providing too much stimulus, a senior official at the Bank for International Settlements said Friday. (…)

The BIS has advanced this view with increased confidence over recent years, citing a mounting body of evidence from its own research and that of other economists. Some leading central bankers are now giving it greater credence. In a speech Monday, Bank of England Gov. Mark Carney said globalization has weakened the link between spare capacity in national economies and their inflation rates.

Mr. Borio said the influence of globalization on inflation has implications for central-bank policy.

“To the extent that disinflationary pressures result from forces such as globalization or technology, they should be generally benign: They would reflect favorable supply side developments as opposed to damaging demand weakness,” he said. “At a minimum, this suggests lengthening the horizon over which it would be desirable to bring inflation back toward target.”

In the current context, that would mean providing less stimulus to the economy than many central banks are now offering. (…)

And this from the San Fran Fed:

(…) Population aging is a natural possible explanation for the declining trend in real interest rates because of its effects on household saving and consumption over peoples’ life cycles. (…)

Our model projections regarding the substantial effects of population aging suggest that future economic policy will have to adjust to operating in a low r-star world. In such an economic environment, interest rates would hover not too far above their lower bound. This implies that central banks could be more limited in their ability to further lower the policy rate to respond to recessionary shocks and stimulate the economy.

Nestlé Gives Loeb What He Wants: New Margin Targets, Faster Buybacks Nestlé set a new profit-margin target and said it would accelerate share buybacks amid pressure from activist investor Dan Loeb.

The announcement Tuesday, ahead of a much-awaited investor day in London, comes after Mr. Loeb’s Third Point LLC built a 1.3% stake in the Swiss consumer-goods giant and has pushed for a formal profit-margin target and other shareholder-friendly moves.

The Vevey-based company said it would strive for a trading operating profit-margin target of 17.5% to 18.5% by 2020 on an underlying basis, or stripping out restructuring, impairment and other one-time charges. In July, Nestlé reported an underlying trading operating-profit margin of 15.8% for the half year, flat from a year earlier on a reported basis and up 10 basis points at constant currency. (…)

GOP’s New Effort to Repeal Health Bill on Verge of Collapse The Republicans’ latest effort to repeal large parts of the Affordable Care Act this year suffered a likely death blow when Sen. Susan Collins’s declared opposition left it without enough votes to pass.
Republican’s Latest Tax Plan Has Little Room to Maneuver Republicans face a daunting challenge as their tax plan comes into sharper focus: They are trying to fit more than $5 trillion of cuts inside a $1.5 trillion box.

(…) The 2016 House GOP blueprint called for a 20% corporate tax rate, a 25% tax rate on pass-throughs and a 33% top individual rate. In April the White House proposed a 35% top rate for individuals. President Donald Trump has said he might not cut taxes for the wealthiest Americans, and recently Republicans have talked a lot less about the importance of reducing the 39.6% top tax rate on ordinary income. In the end that rate might not come down much and some deductions could go away.

With GOP senators agreeing to, at most, $1.5 trillion in tax cuts over the next decade, there is a limited amount to go around. Republicans are focused on cutting business taxes and offering a larger standard deduction for middle-income households. (…)

Keeping the top tax rate on wages near 39.6% would be a way for Mr. Trump to defend his argument that he isn’t prioritizing tax cuts for the rich, even if other pieces of the tax plan favor wealthy business owners, investors or heirs of large estates. (…)

The proposed lower pass-through rate wouldn’t help the large share of business owners who don’t generate significant high income, because their top rates are below the 25% proposed rate in the House plan. The biggest winners are high earners who can classify their earnings as business income. (…)

FYI from The Daily Shot:

Apple (and to some extent the US stock market) remains dependent on the iPhone revenues. Will the public pay nearly $1,000 for the latest product?

THAT LOUSY TRUMP BULL

In over 40 years in the business, the only technical analysis service I have been willing to pay for is Lowry’s Research for its simple, sensible, down-to-earth, yet smart analysis. During the last year, as valuations got less appealing, Lowry’s analysis remained positive. However, their last piece was surprisingly upbeat (my emphasis):

(…) as of Sept. 22nd, the spread, or distance, between the forces of Demand and Supply was only 10 points, the lowest reading in over a year. This narrowing spread between the Indexes serves as continuing evidence that the primary trend of the market is actually growing increasingly positive. And, based on the long history of the Lowry Analysis, a crossing of the Buying Power and Selling Pressure Indexes, with Buying Power rising to the dominant position, would qualify as a major buy signal in line with the terms of Buying Control No. 2 and would provide important confirmation of a robust bull market that is actually showing signs of strengthening. (…)

At present, though, both the S&P Mid and Small Cap Adv-Dec Lines have reached new bull market highs and are leading gains in their respective price indexes. Historically, new highs across the spectrum of small, mid and large cap Adv-Dec Lines have been a sign of ongoing market strength.

Heck! It’s like we are about to embark on a new, stronger bull market.

I dug into these Buying Power and Selling Pressure Indexes and found these rather interesting factoids presented in chronological order since 2007 to help you appreciate their usefulness:

  • Lowry’s Selling Pressure Index (SPI) was high and well above its Buying Power Index (BPI) through most of 2007. The gap widened in the fall of 2007 and throughout 2008 to reach nearly 800 points in November 2008.
  • The gap began to narrow in mid-2009 as the SPI started to decline against a flattening BPI through January 2010.
  • In December 2010, the BPI crossed over the SPI.
  • They re-crossed in August 2011 as demand waned rapidly until December 2012.
  • In 2013, demand firmed up while the SPI dropped rapidly and crossed below the BPI in May. It remained so until July 2015 when the SPI firmed up while the BPI dropped rapidly and relentlessly until November 8, 2016.
  • During the first 4 weeks following Nov. 8, both selling and buying trend lines converged to narrow the gap from about 175 to 100 points by early December.
  • Since then, that is over the last 10 months, the continued narrowing of the gap to its present 10 points has only been due to a relentless decline in selling pressures while buying power remained unchanged.

What really happened November 8 is a one month burst in the BPI to the 150 level where it has remained ever since. Meanwhile, the Selling Pressure Index, which had hovered around 275 since mid-2015 declined almost continually as 2017 progressed to reach its current 160 level, prompting the above upbeat comments from Lowry’s Research analysts.

The truth is that the last 400 points (12%) rise in the S&P 500 Index were mainly the result of diminishing supply against stable but rather low demand. In other words, equities were too expensive to generate increased demand but investors stopped selling right after the elections.

Why? Because the promised new tax plan, reducing the number of tax brackets from seven to three and repealing the alternative minimum tax, would reduce the capital gains tax by 15-20% by some estimates.

Add these other biz-friendly promises…

  • A $1 trillion infrastructure plan.
  • For every new federal regulation, two existing regulations must be eliminated
  • Cut red tape at the FDA to speed approval of new drugs
  • Lower the business tax rate from 35% to 15%
  • Allow trillions of dollars of American corporate money overseas to be brought back at a 10% tax rate

…to rising corporate profits, an ok economy, slow inflation and a reasonably quiet Fed and you get all the reasons to defer selling and booking your eight-year bull market capital gains, especially since TINA (there is no alternative) remains in everybody’s mind. The closer to the end of the year, the fewer taxable people willing to sell. So Lowry’s could well get its major buy signal for reasons that would have little to do with renewed buying enthusiasm.

In reality, this has been a Trump bull all along. The initial, short-lived buying enthusiasm based on a potential economic revival has been replaced by equity hoarding by self-centered investors, starving the prowling bear but continuously enfeebling the bull. There was no such thing as “buying the dips” rallies”, rather “stop selling the dips” upturns. This is an ailing, lousy, weak bull, so focused on making it to year-end, he is totally oblivious to what’s happening in this crazy political world. He even totally disregards companies reporting better than expected earnings.

As we get into 2018, unless something magically boosts the economy, we know that one of two things will happen:

  1. Nothing significant happens fiscally and investors get disillusioned and/or fed up. The hold outs sell while nothing happens to trigger new marginal buying. 
  2. Trump gets his tax plan approved, effective in 2018. The hold outs sell while nothing happens to trigger new marginal buying.

All along, the bears have been growling about repugnant equities. But there was nobody to feed the poor beasts. The survivors are so weak now, nobody hears their whine. But some will remain and, in a few months, they may get fed again. Strengthening bears against weak bulls. In fact, the bulls are so weak, they could get dizzy and suddenly feed the bears, who knows?

Who wants to wager on that lousy bull?

This is why I don’t buy Lowry’s analysis that

a crossing of the Buying Power and Selling Pressure Indexes, with Buying Power rising to the dominant position, would qualify as a major buy signal (…) and would provide important confirmation of a robust bull market that is actually showing signs of strengthening.

Yes, the crossing of the Buying Power and Selling Pressure Indexes may be happening, but really only because the selling has dried up so much that it is crawling itself under the Buying Power Index. There is no real demand here. We will see in a few months which of the starved bear or that lousy Trump bull can rise to the dominant position.

Meanwhile, this guy has announced his wager:

(…) The founder and chief executive officer of the world’s biggest social media company expects to sell 35 million to 75 million shares, Menlo Park, California-based Facebook said Friday in a regulatory filing. The stock ended the week at $170.54, valuing 75 million shares at $12.8 billion. (…)

Facebook scrapped plans to create a new class of shares that would have allowed Zuckerberg to sell almost all of his stock without losing voting control of the company, a move that aggrieved some shareholders.

As to the rest of Trump’s promises still keeping investors hoping while fearing TINA:

You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on. (D. Trump, “The Art of the Deal”)

And they will eventually cash in.

Contact: edgeandodds [at] gmail.com