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 (15 November 2017)

Increase in U.S. Retail Sales Last Month Signals Steady Demand

The broad-based advance in October sales and a stronger hand-off from an upwardly revised September show American consumers will continue to fuel the economy in the fourth quarter. Steady hiring, rising asset values and limited inflation are underpinning consumer spending. (…)

  • Excluding automobiles and gasoline, sales rose 0.3 percent after a 0.6 percent gain
  • Receipts at gasoline stations fell 1.2 percent
  • Sales rose 0.8 percent at clothing vendors, 0.7 percent at furniture stores and at electronics outlets, 0.8 percent at restaurants and 1.5 percent at merchants of sporting goods

U.S. Consumer Prices Edged Up in October U.S. consumer prices rose only slightly in October, showing stubbornly soft inflation is persisting.

The consumer-price index, measuring what Americans pay for everything from cakes to phone service, advanced 0.1% in October from a month earlier, the Labor Department said Wednesday. (…) Excluding volatile food and energy costs, so-called core prices increased 0.2%.

From a year earlier, consumer prices rose 2%, the first easing of year-over-year gains since June. When excluding food and energy, prices rose 1.8% from a year earlier. That was the strongest annual gain in core prices since April. (…)

Shelter prices advanced 0.3% in October, as did medical-care services. Prices for new cars and clothes declined in October. (…)

U.S. Producer Pricing Power Strengthens Yet Again

The headline Final Demand Producer Price Index using new methodology increased 0.4% during October, the same as in September. These remain the strongest gains since April and pulled the y/y rise to 2.8%, the strongest since February 2012. A 0.1% rise had been expected in the Action Economics Forecast Survey. The PPI excluding food & energy also improved 0.4% (2.4% y/y) for a second month, twice the gain expected. Using the old methodology for the Producer Price Index, prices increased 0.2% (2.9% y/y) following a 0.8% gain. Excluding food & energy, the index rose 0.3% (2.0% y/y) after a 0.2% rise.

An updated measure of core producer price inflation is the overall index excluding food, energy and trade services. It increased 0.2% (2.3% y/y) for a third straight month.

Final demand goods prices rose 0.3% (3.2% y/y), the weakest rise in three months. The price index excluding food & energy increased 0.3% for a second month. The 2.3% y/y gain was improved versus stability in 2015.

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There seems to be inflation in the pipeline. Even core goods prices are accelerating:

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U.S. Household Debt Reaches New Record Flows into delinquency have risen in recent years for credit-card and auto debt

The Federal Reserve Bank of New York said Tuesday that household debt totaled $12.955 trillion last quarter, up 0.9% from the spring for a 13th straight quarterly increase. That was the most on record, though the figure wasn’t adjusted for inflation or population growth.

As a share of U.S. economic output, household debt was about 66% last quarter versus a high of around 87% in early 2009. (…)

Some 4.9% of outstanding debt was delinquent as of Sept. 30, ticking up from three months earlier. Late-payment rates on the whole remain low, but flows into delinquency have risen in recent years for credit-card and auto debt. (…)

The sharp rise in delinquency for auto loans made to subprime borrowers by auto-finance companies, usually through auto makers or dealers. The New York Fed said the low overall delinquency figure masks significant deterioration in those loans over the past few years.

The smaller number of subprime auto loans made by banks and credit unions have fared better, “in part reflecting differences in underwriting standards,” said New York Fed economist Wilbert van der Klaauw.

(…) there are over 23 million consumers who hold subprime auto loans. (…)

Auto loans outstanding jumped by $23 billion to $1.213 trillion. Auto makers in September and October reported strong sales partly because Texans, Floridians and others had to replace vehicles damaged by late-summer hurricanes. (…)

Some fresher data through October courtesy of RBC:

  • Capital One: Card charge-offs increased from 4.39% in September to 4.70%, while delinquencies increased 19 bps to 4.13% from 3.94%. Auto charge-offs increased during the month, up 13 bps to 2.21%, with 30-day+ delinquencies increasing 30 bps to 6.01%. Card loans are up 3.14% YoY.

  • JP Morgan: Card charge-offs increased 3 bps to 2.35% in October, while 30-day+ delinquencies increased from 1.22% to 1.24%, 90-day+ delinquencies rose 2 bps to 0.60%.

NBF:

(…) Auto debt rose faster than other debt categories, reaching a record in both absolute terms (US$1.2 trillion at the end of Q3) and relative terms (its share of household debt jumping to 9.4%). The rise of auto debt has been fueled in recent years by normal auto loans but also by sub-prime loans. While the word “subprime” tends to send shivers down the spine of many investors (particularly those who experienced the 2008/09 financial crisis), the auto variety doesn’t look all that threatening. True, sub-prime auto debt is now at a record US$282 billion, but it represents just 2% of household debt outstanding and only 23% of auto debt.

And crucially, as today’s Hot Charts show, auto finance companies (and not banks) are the most exposed to the sub-prime problem. Indeed, the banking sector accounts for just 26% of outstanding sub-prime auto debt or only US$74 billion. In other words, don’t expect rising auto delinquencies to single-handedly lead to a credit crunch and recession à la 2008/2009. That said, there may still be some mild negative consequences for the U.S. economy, such as damaged credit reports and difficulties for auto debt delinquents to borrow in the future.

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But the main point is that consumer debt is way up there and its impact is masked by Fed-induced low interest rates. But that is changing rapidly. Worries on the economic impact are much more significant than on financials at this point.

High-Yield Canary Isn’t Singing About Markets Doom The selloff, mainly confined to telecoms and lower-rated bonds, should be put into perspective, investors say

(…) Yet telecom makes up a meaningful chunk of high-yield indexes and exchange-traded funds and some analysts are concerned that retail investors, whose exposure to junk bonds tends to come through passive funds, may get spooked by the selloff. In a worst-case scenario, they could then dump other riskier assets like stocks, these analysts say. (…)

Auto But Tesla’s recent well oversubscribed $1.8B 5.3% bond offering is now trading at $94!

Fingers crossed China to Send Envoy to North Korea in Wake of Trump Visit
Amazon’s Cashierless Store Is Almost Ready for Prime Time

THE DAILY EDGE (14 November 2017)

SMALL BUSINESS OPTIMISM MAINTAINS LOFTY LEVEL NATIONAL FEDERATION OF INDEPENDENT BUSINESS (NFIB) OPTIMISM INDEX INCHES UP IN OCTOBER AS MORE OWNERS EXPECT BETTER SALES AND SAY IT’S A GOOD TIME TO EXPAND

The Index of Small Business Optimism gained 0.8 points to 103.8 in October, maintaining a streak of robust readings. Four of the 10 Index components posted a gain, 5 declined and one was unchanged. Labor market indicators point to continued good jobs reports, as reports of actual employment gains for October posted solid numbers and reports of job openings surged to record territory. Reports of increased compensation remained strong, and the incidence of reported price increases rose a bit, good news for the Federal Reserve, which wants more inflation.

Plans to spend on inventory and capital projects didn’t advance but held at solid levels. Owners became much more optimistic about the environment for expansion, which implies a more positive longer-run view. In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year. The net percent of owners reporting positive sales trends did not improve but did remain positive.

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High sales expectations remain unfulfilled. Actual sales remains cyclically low.image

Labor remains problematic while pricing power is missing.

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Yet, earnings are rising and cyclically reasonable. Productivity must be better than measured by econometrics and/or SG&A is well controlled.

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“It’s a good time to expand” is still mainly words.

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The reality for U.S. business people is that nobody really knows how Trumpism will impact the economy. Shuffling major blocks like trade agreements and tax reform while the Fed is tightening and the consumer has little savings left is no recipe for unbridled optimism.

Trump Declares Trade ‘Rules Have Changed’ as Asia Trip Concludes

Heard about CETA, the Canada-EU Comprehensive Economic and Trade Agreement that came into effect On Sept. 21st after 8 years of negotiations? Now 98% of EU tariff categories are at 0% for Canada from 25% before CETA.

German Economy Accelerates, Driven by Strong Exports German GDP grew 3.3% in the third quarter in annualized terms, underpinned by a pickup in global demand and higher corporate investment.

Gross domestic product—the broadest measure of goods and services produced in an economy—grew at an annualized rate of 3.3%, compared with 2.6% in the second quarter, the Federal Statistical Office, Destatis, said Tuesday. The outcome beat forecasts of 2.4% growth.

In addition, Destatis significantly lifted its GDP growth estimate for the first quarter to an annualized rate of 3.6% from an earlier estimate of 2.9%. (…)

Destatis said that third-quarter growth was led by improvement in foreign trade amid rising demand for high-end tools and machinery. (…)

China’s Indicators Point to Slowing Economy Growth in factory output, fixed-asset investment and retail sales all decelerated in October

(…) Industrial output, a rough proxy for economic growth, expanded by 6.2% in October compared with a 6.6% increase the month before, according to data released by the National Bureau of Statistics on Tuesday. (…)

Fixed-asset investment climbed 7.3% in the January-October period from a year earlier, slowing from a 7.5% increase in the first nine months and hitting the slowest pace since December 1999. Slower property investment was the main factor dragging down total investment, economists say. (…)

Housing sales by value dropped 3.4% from a year earlier in October, compared with a 2.4% decrease in September.

Property investment expanded at 7.8% in the January-October period, though Mr. Liu expects it to be below total investment growth next year and expects slower home sales will mean demand for furniture, home appliances and construction materials will shrink accordingly.

China’s retail sales grew 10.0% in October from a year earlier, down from a 10.3% increase in September. The reading was the slowest in eight months and below market expectations. (…)

Meanwhile, the squeeze continues:

Also in the U.S.! Real 2yr yields now almost positive.

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Yield curve flattening:

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BOJ’s Kuroda Says Easy-Money Policies to Persist to Ensure Higher Inflation

Japan’s output gap has closed. Will the nation see higher inflation as a result? (The Daily Shot)

Source: CIBC, h/t Paul Menestrier

Oil-Price Recovery Threatened by Weak Demand, Says IEAThe International Energy Agency has lowered its global oil demand forecasts for this year and next, in contrast to OPEC, which has just raised them.

In its closely watched monthly oil report, the IEA cut its crude demand growth outlook by 100,000 barrels a day for 2017 and 2018. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.

The IEA’s findings stand in contrast to that of the Organization of the Petroleum Exporting Countries, which released its monthly oil report Monday. OPEC raised its forecasts for global oil demand for this year and next, touting increased market rebalancing and stability. (…)

The IEA on Tuesday said that global oil supply had risen in October by 100,000 barrels a day to 97.5 million barrels a day, driven by non-OPEC production in the North Sea and Mexico.

However, OPEC output fell by 80,000 barrels a day in October to 32.53 million barrels a day, as a result of lower production in Iraq, Algeria and Nigeria—the lowest level since May, according to the IEA. The figure was roughly in line with OPEC’s own estimate of 32.59 million barrels a day.

Commercial petroleum stocks in the Organization for Economic Cooperation and Development—a group of industrialized, oil-consuming nations, including the U. S.—fell below 3 billion barrels in September, for the first time in two years, the IEA said.

The agency this week also released its annual World Energy Outlook, in which it said global oil demand would not peak before 2040, although demand growth should slow “considerably” after 2025 amid greater fuel efficiency and electrification. (…)

Growth in US oil output until 2025 will be the strongest seen by any country in the history of crude markets, making it the “undisputed” leader among global producers, the International Energy Agency said on Tuesday. Technological advances that have enabled production from US shale oilfields to thrive will lead to growth of 8m barrels a day between 2010 and 2025, surpassing expansion rates enjoyed by any other nation. (…)

SENTIMENT WATCH

In todays Globe & Mail:

Relax, the stock market’s end isn’t nigh. (You’ve got a year or so). Analysts don’t see a significant pullback just yet

Tech’s dirty little secret: it’s a cyclical sector

Richard Bernstein, Chief Executive and Chief Investment Officer at Richard Bernstein Advisors has been rightly bullish in the 18 months.

Our portfolios have had significant exposure to the Technology sector since the first quarter of 2016. Tech remains one of our biggest sector exposures both on an absolute and relative basis. Our substantial overweight in Technology surprises some of our investors because RBA generally does not make a habit of investing in overvalued or hyped sectors.

Our significant overweight in Tech stocks has been based on one fact: Technology has historically been the best performing sector when overall corporate profits accelerate. Right in step with history, Technology has been the best performing sector since the US profits cycle troughed in 4Q15 and the global profits cycle troughed in 2Q16. The Tech sector’s recent outperformance is not atypical relative to other periods during which profits accelerated.

The historical performance of the Tech sector is the sector’s dirty little secret: the Tech sector is actually a deep cyclical sector and, over multiple cycles, investors seem to habitually confuse that deep cyclicality for stable growth. They appear to be doing it again during this cycle. (…)

As we head to the latter stages of this cycle, the risk of boom seems larger to us than the risk of recession. With that history in mind and remembering that outperformance
often drives optimism, investors should be skeptical of the notion that today’s technology companies are somehow changing the world. The stock market doesn’t care about “changing the world”. The stock market cares only about profits, and it is a reasonable assumption that technology profits will be as cyclical as they historically have been, and
that the stocks will underperform when that cyclicality reappears.

Past cycles show that the sector is clearly a cyclical sector (see Chart 3). Technology was the epicenter for 2000’s bear market, and the sector fell about 80%. 2008’s bear market had little to do with the Tech sector (it was a credit-induced bear market and recession), but the Tech sector still fell more than 50%. Earlier cycles show similar performance characteristics. (…)

Our continued overweight of the Tech sector seems justified because the US and global profits cycles continue to accelerate. It simply makes sense to own cyclicals during a cyclical upturn.

It is likely that investors will get carried away with the sector’s performance and earnings growth, and will extrapolate trend while believing that this cycle is somehow different.
Investors seem primed to get burned yet again in Technology shares, but it is still probably too early to worry.

Deal Reached to Ease Post-Crisis Bank Rules Dozens of banks received the biggest signal yet that they may soon be freed from some of the most onerous rules put in place after the financial crisis, as lawmakers from both parties agreed to a plan that would enact sweeping changes to current law.

(…) In what would be the biggest step to ease the financial rule book since Republicans took control of Washington, the proposal could cut to 12 from 38 the number of banks subject to heightened Federal Reserve oversight by raising a key regulatory threshold to $250 billion in assets from $50 billion. The legislation also would ease red tape affecting credit unions and community banks, allowing them to lend more, supporters said. (…)

For stress tests alone, building a system to meet the Fed’s expectations could cost firms tens of millions of dollars or more. Liquidity rules governing banks’ cash holdings are another expensive regulatory exercise that the legislation could allow the Fed to ease. (…)

Presumably, banks that are no longer subject to stress-testing and other rules would be able to slash their costs, but Evercore ISI analyst John Pancari said he wasn’t sure if looser regulation would actually materialize into cost savings. “A lot of the banks view much of the cost that they’ve spent on that as sunk costs,” Mr. Pancari said. “So, for example, if they spent money on the robust monitoring of their risks, they are probably going to keep up what they built.”

The effect on each bank would depend on how close it is to the $250 billion threshold, Mr. Pancari said. (…)

  • RBC’s take:
    • While the deal is far from a sweeping overhaul of the Dodd-Frank Act and larger SIFIs largely do not significantly benefit from the announced provisions, we view the deal as a clear positive for regional players, particularly those with less than $250 billion in assets. (…)
    • We expect that a change in the SIFI designation (to greater than $250 billion in assets) would help increase the merger and acquisition activity among the regional banks.
    • The amount of capital returned to shareholders could accelerate for banks that do not have to go through the public CCAR process.
    • Lower regulatory costs could be re-directed toward revenue-producing lines of business, boosting
      profitability.

BTW, FYI:

Consider that 29 Republicans will not be running in the midterms next year (vs 9 Dems). Democrats need to take 24 seats to retake the House.

Source: PredictIt (via The Daily Shot)

This is also highly consequential:

New Accusation Escalates Moore’s Fight With Republican Leaders
Ninja Exclusive: Kremlin tells companies to deliver good news The Russian leadership has told major companies to supply it with news stories that put its stewardship of the country in a positive light, according to documents seen by Reuters.

www.ft.com

“Now, now Vlad, I bet you can do the same for me.”