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: November 2017

THE DAILY EDGE (27 November 2017)

Airplane Travelling day.

U.S. FLASH COMPOSITE PMI REVEALS STRONG ORDER GROWTH

November data pointed to another solid increase in U.S. private sector output, supported by sustained growth in both manufacturing and services activity. At 54.6, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index was above the 50.0 no-change threshold, but eased from 55.2 in October. As a result, the latest reading signalled the slowest expansion of private sector output since July.

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Despite a softer upturn in business activity, survey respondents indicated a robust and accelerated rise in new order volumes during November. The rate of new business expansion was also comfortably above the average seen in the first half of 2017.

Signs of stronger demand helped to underpin another solid rise in payroll numbers across the private sector economy. Anecdotal evidence linked sustained job creation to improved sales volumes, greater efforts to boost operating capacity and long-term business development plans. Manufacturers are particularly confident about the year ahead growth outlook, with the degree of positive sentiment reaching its highest since January 2016.

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Meanwhile, latest data revealed that cost pressures intensified at private sector companies. This was driven by the second-fastest rise in manufacturing input price inflation since December 2012. A number of firms cited higher prices for chemicals and energy following supply chain disruption linked to hurricanes Harvey and Irma.

Strong input cost pressures resulted in the sharpest rise in prices charged by manufacturers for just over three years. Prices charged also picked up at a faster pace in the service sector.

The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index posted 54.7 in November, down from 55.3 in October, to signal the slowest expansion of service sector output since July. However, the latest rise in business activity remained stronger than seen in the first half of the year. Robust service sector growth was attributed to improving domestic economic conditions, alongside resilient business and consumer confidence.

The upturn in service sector output was supported by a marked increase in incoming new work and the fastest pace of job creation for three months in November. Service providers also remain optimistic overall about their growth prospects for the next 12 months, although the degree of confidence eased slightly since October. (…)

Chris Williamson, Chief Business Economist at IHS Markit:

“(…) Current PMI readings are broadly consistent with GDP growing at an annualised rate of just over 2%.

“There was also good news on hiring, with a slight uptick in employment growth meaning the surveys are indicating non-farm payroll growth of just over 200,000 in November.

“Both input costs and selling price inflation picked up, suggesting the upturn is feeding though to higher price pressures, though some of the manufacturing price hikes were attributable to the short-term effects of the hurricane-related supply chain disruptions.

“An upturn in new order inflows means we can expect a strong end to the year, though prospects for 2018 remain more mixed. Although expectations about the year ahead slipped lower in the service sector, future optimism hit a two-year high in manufacturing, suggesting the goods-producing sector may start to make a stronger contribution to the economy in coming months.”

TECHNICALITIES

With fresh new highs in equities, Lowry’s Research signals that “the S&P Large, Mid and Small Cap Adv-Dec Lines each matched the new highs in their corresponding price indexes. (…) given this week’s positive breadth across all three market segments, this bull market is still showing few signs of age and provides little basis for speculation about its imminent end.”
          “(…) the probabilities are the small rise in Selling Pressure over the past month has represented a short-term correction within an ongoing long-term downtrend dating from early Nov. 2016. In summary, for those looking for a major market top – keep looking.”

Michael Kahn in Barron’s:

Bring Out the Bulls: Stocks Gain More Tailwinds

(…) The Dow Jones Transportation Average bounced off its rising bull-market trendline drawn from early 2016. Bollinger Bands fans will notice the short-term momentum warning within the bands suggesting the bears lost control days earlier.

The Russell 2000 index of small stocks went from market laggard to leader and in the process also set fresh all-time highs.

Junk bonds rebounded quite sharply. This suggested optimism returned as investors were comfortable once again taking higher risks.

Big leading tech stocks such as Amazon.com (ticker: AMZN) and Apple (AAPL) are at or close to all-time highs with several showing upside breakouts from their own small corrections.

Even decimated retail stocks show signs of life suggesting optimism over the coming shopping season.

A few weeks ago, a good deal of the lagging energy sector broke out to the upside. While energy stocks and oil itself took a hit earlier this month, technical supports still remain intact.

All of these sector turnarounds were enough to send market breadth back to the bullish side as the NYSE advance-decline line touched a new high this week.

Investors had to face this fact before. While the market feels overextended and narrow, not to mention a geriatric among the bull runs of history, it is hard to make a convincing technical argument for the bearish side. (…)

MORE FUNDAMENTALLY

Bull and bear cases discussed at Gavekal: THIS IS (STILL) NOT A PEAK: IT ’S A GLOBAL BULL MARKET

Pointing up When this bull market dies it will not be killed, in my view, by recession, secular stagnation or liquidity tightening, but by inflation and excessive stimulus applied to economies already near full employment.

BTW, excerpts from a good Ned Davis Research piece (click on headline for full article and charts):

ARE WE RUNNING OUT OF LOW-SKILLED LABOR?
  • In our analysis of last Friday’s employment report, we noted that the official unemployment rate, otherwise known as U3, was getting very close to a 4.0% print. The rate plunged from 4.220% to 4.065%, falling deeper into bearish territory for bonds.
  • Based on our analysis of the unemployment gap, we have long argued that, at a minimum, we need to see a sub-4.0% unemployment rate before inflationary pressures would begin to pick up. The rate is getting awfully close to that level.
  • Conventional wisdom says that there is too much supply of unskilled or semiskilled labor and not enough of skilled labor. Although the unemployment rate climbs steadily higher as the educational level declines, we were surprised that the unemployment rate for those without a high school diploma fell to a record low last month.
  • Here’s another shocker. Although we continue to hear from politicians and the press about how many Americans are still struggling to make ends meet, the data doesn’t support that, as the percentage of multiple job holders has fallen to a record low.
  • In sum, the labor markets might be tighter than many pundits believe, particularly for low-skilled labor. So what does it mean for markets? Our Labor Market Tightness Index dropped to its lowest level since 1969, a negative condition for bonds and one reason why we remain cautious and slightly under benchmark duration.

Also from NDR: Bearish Case Easy to Make. Is it Valid?

EARNINGS WATCH

From Thomson Reuters/IBES:

Through November 24, 489 companies in the S&P 500 Index have reported earnings for Q3 2017. Of these companies, 72.2% reported earnings above analyst expectations and 19.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 72% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 4.8% above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and in-line with the 4.8% surprise factor recorded over the past four quarters.

The estimated earnings growth rate for the S&P 500 for Q3 2017 is 8.3%. If the Energy sector is excluded, the growth rate declines to 6.0%.

The estimated revenue growth rate for the S&P 500 for Q3 2017 is 5.4%. If the Energy sector is excluded, the growth rate declines to 4.4%.

The financials sector has the lowest growth rate (-7.3%) of any sector. Five of the 12 sub-industries in the sector are anticipated to see earnings decreases compared to Q3 2016, led by the reinsurance (-351.6%) and multi-line Insurance (-151.5%) sub-industries. If these sub-industries are removed, the growth rate improves to -0.4%.

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 11.5%. If the Energy sector is excluded, the growth rate declines to 9.3%.

Earnings revisions are pretty upbeat:

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This is helping:

In the S&P 500, there have been 63 negative EPS preannouncements issued by corporations for Q4 2017 compared to 37 positive EPS preannouncements. By dividing 63 by 37 one arrives at an N/P ratio of 1.7 for the S&P 500 Index. This 1.7 ratio is below the N/P ratio at the same point in time in Q4 2016 (1.9), and below the ong-term aggregate (since 1995) N/P ratio for the S&P 500 (2.8).

Trailing 12-m EPS per TR are now $128.21.

The debate on whether this bull market is fundamentally driven or not continues. Looking at the trends in the blue (S&P 500 Index) and yellow lines (Rule of 20 Fair Value) below provides the right answers: yes, from a trend viewpoint, less so from a valuation viewpoint as equities are outpacing the trend in Fair Value (EPS and inflation), reflected in the Rule of 20 P/E (black line) trending up into the “rising risk” area.

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Earnings are looking good for another quarter, at least. Inflation? Confused smile

This guy has been pretty good at his predictions:

Ray Kurzweil’s Most Exciting Predictions About the Future of Humanity

THE DAILY EDGE (24 November 2017): Euroflation?

U.S. Durable Goods Orders Decline as Aircraft Orders Fall

Activity in the factory sector weakened last month. New orders for durable goods declined 1.2% during October (+1.0% y/y) following an unrevised 2.2% September increase. A 0.5% increase in orders had been expected in the Action Economics Forecast Survey.

The decline in orders reflected a 4.3% fall (-10.1% y/y) in transportation sector bookings which reversed a 4.4% increase. Nondefense aircraft & parts orders weakened 18.6% (-48.9% y/y), but motor vehicle & parts orders gained 1.7% (4.8% y/y). Excluding the transportation sector durable goods orders improved 0.4% (7.4% y/y), up at a 9.8% annual rate during the last three months.

Nondefense capital goods orders weakened 4.5% (-7.5% y/y) due to the decline in civilian aircraft orders.

Pointing up Orders excluding aircraft slipped 0.5% (+8.1% y/y) following three consecutive months of strong increase.

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Pointing up Pointing up This is perhaps the most important info today, found in none of the mainstream media this a.m.:

Eurozone growth kicks higher in November, hiring at 17-year peak

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The eurozone economy is showing signs of picking up momentum in the fourth quarter, with multi-year highs seen for all main indicators of output, demand, employment and inflation in November. Business activity and prices rose at the steepest rates for over six years, while the largest accumulation of uncompleted work for over a decade encouraged firms to take on staff at a rate not seen for 17 years.

The headline IHS Markit Eurozone PMI rose to 57.5 in November, according to the ‘flash’ estimate (based on approximately 85% of final replies), up from 56.0 in October and its highest since April 2011. The latest reading puts the economy on course for its best quarter since the start of 2011.

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The upturn was again led by manufacturing, where the headline PMI rose to a level beaten only once –April 2000 – since the survey began in June 1997. Faster manufacturing output growth was accompanied by improved services growth, which rose to the highest since May, registering one of the largest expansions seen over the past six-and-a-half years.

Inflows of new orders showed the largest gain since February 2011. The biggest increase in factory new orders since April 2000 helped offset a slight moderation in the service sector. Goods exports increased at a survey record pace.

Despite the slowing in growth of service sector new work, both sectors saw backlogs of work accumulate at higher rates, with a record increase in manufacturing joined by the largest rise in the service sector since May 2011. The resultant overall build-up in backlogs of work was the largest since July 2006.

The shortfall of capacity relative to order book inflows signalled by the increase in outstanding work prompted growing numbers of firms to take on more staff. Employment showed the strongest rise since October 2000, with a record gain in factory jobs accompanied by the steepest rise in service sector payrolls for a decade.

Further signs of capacity being stretched were seen in a lengthening of manufacturing suppliers’ delivery times, which signalled the highest incidence of delays for over 17 years. Longer deliveries reflected higher demand for inputs from manufacturers, where inventories over the past two months have risen to a degree rarely seen in the survey’s history.

The faster pace of growth signalled by the surveys was accompanied by price pressures hitting the highest since mid-2011. Average input costs were pushed higher by the combination of rising global prices for key commodities, such as oil, as well as greater pricing power amid improved demand conditions.

Input prices showed the largest monthly jump since May 2011 while average selling prices for goods and services rose to the greatest extent since June 2011.

Expectations about the next 12 months cooled slightly in both sectors in November, indicating one of the lowest degrees of optimism seen over the past year, but nonetheless remained elevated by historical standards.

Looking at the data by country, growth surged in France to the highest since May 2011, outpacing Germany for only the fourth time in over five years, despite the latter seeing growth also accelerate to a rate just shy of a six-and-a-half year high. While Germany’s expansion was again led by manufacturing, where the headline PMI rose to the second-highest on record, France’s upturn was led by services, albeit with manufacturing also gaining momentum.

Chris Williamson, Chief Business Economist at IHS Markit:

“The message from the latest Eurozone PMI is clear: business is booming. Growth kicked higher in November to put the region on course for its best quarter since the start of 2011. The PMI is so far running at a level signalling a 0.8% increase in GDP in the final quarter of 2017, which would round-off the best year for a decade.

A manufacturing-led rise in the composite PMI for Germany puts the euro area’s largest member state on course for GDP growth of possibly as much as 0.9% in the fourth quarter, up from an already-spritely 0.8% pace in the third quarter.

In France, a marked improvement in the PMI, fuelled by an increasingly buoyant service sector and improved manufacturing growth, is consistent with GDP rising at a strong 0.7% rate in the fourth quarter.

“Jobs are being created at the fastest rate since the dot-com boom, yet despite this increase in operating capacity firms are struggling to meet demand. Backlogs of uncompleted work are growing at the fastest rate for over a decade, often resulting in a sellers’ market as customers struggle to source goods and services. Prices are
consequently rising at an increased rate.

“Manufacturing is leading the upturn, with business conditions improving at a rate only beaten once in the survey’s two-decade history amid record export and jobs growth. The service sector is reporting relatively slower but still strong growth, as witnessed by hiring reaching a ten-year high.

“There are signs that political uncertainty appears to have subdued business optimism a little, but the broad-based nature of the upturn, and the rate at which rising demand is feeding through to the labour market, suggests the eurozone will see a strong end to 2017 and enter 2018 on a firm footing.”

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This is the key chart for Draghi et al., including all of us:

Russia-OPEC Agree on Framework to Extend Oil Cuts
Firms Cut Down on Buybacks as Stocks Become Expensive Companies in the S&P 500 are on pace to spend the least on buybacks since 2012

Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016. (…)

Buyback activity among top-rated nonfinancial debt issuers, many of which have regularly borrowed money to finance share repurchases, declined for the third straight quarter in the July-to-September period, according to Bank of America Merrill Lynch. Meanwhile, mergers and acquisitions among that group of companies had their biggest quarter of the year, analysts at the bank said. (…)

Dividend payments by S&P 500 companies are poised to set a sixth consecutive record in 2017, according to S&P Dow Jones Indices.

The GOP Tax Plan Is Entering Its Make-or-Break Week

Also a possible “break”:

The signs are that Michael Flynn, Donald Trump’s former security adviser, is to co-operate with an investigation into Russia’s alleged meddling in the presidential election. Mr Flynn’s lawyers have reportedly told the president’s legal team that they will no longer share information on the case, suggesting they are looking to do a deal with Robert Mueller, the special counsel looking into the matter. (The Economist)

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