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: July 2018

THE DAILY EDGE (12 July 2018)

INFLATION WATCH
CPI for all items rises 0.1% in June as shelter, gasoline, food indexes increase In June, the Consumer Price Index for All Urban Consumers increased 0.1 percent seasonally adjusted; rising 2.9 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy rose 0.2 percent in June (SA); up 2.3 percent over the year (NSA).

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U.S. Producer Prices Rose in June Trucking freight prices helped drive overall costs higher

The producer-price index, a measure of the prices businesses receive for their goods and services, rose a seasonally adjusted 0.3% in June from a month earlier, the Labor Department said Wednesday. When excluding the often-volatile food and energy categories, prices were also up 0.3% in June from the prior month. Prices excluding food, energy and trade services increased 0.3% on the month, as well. (…)

From a year earlier, overall prices climbed 3.4% in June, the largest annual rise since November 2011. Prices excluding food and energy increased 2.8%. Prices excluding food, energy and trade services were up 2.7%. (…)

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See a trend?

image(Haver Analytics)

Average Gas Price Nears $3 a Gallon, Raising Worries for U.S. Economy The highest retail gasoline prices in years are the latest development to raise concerns about one of the longest-running U.S. economic expansions on record.

Slowdown in Home Sales Spreads to Brooklyn and Queens Brokers say weakness reflects buyer caution about the potential impact of federal tax laws

A slowdown in residential sales that began among superluxury Manhattan condos has spread to less expensive neighborhoods in Brooklyn, Queens and Westchester and other suburban New York counties.

The weakness reflects caution among buyers about the potential impact of federal tax laws that limit the benefits of home ownership, brokers said, as well as the rebellion of some buyers against high asking prices that built up over several years of stronger sales. (…)

TRADE
This Time Around, Chinese Consumer Products Would Face Tariffs The Trump administration is expanding the battlefield in its trade fight with China into consumer products for the first time, illustrating how dependent the vast U.S. consumer economy is on Chinese imports.

The $200 billion in products under consideration for a new 10% duty includes bicycles, sound systems, refrigerators, pocketbooks, vacuum cleaners, cosmetics, tools and seafood.

“They’re not only hitting consumers’ wallets, they’re literally hitting wallets,” said Jonathan Gold, vice president at the National Retail Federation, whose members rely heavily on low-cost Chinese products. He was referring to the inclusion on the tariff list of “travel goods,” a category that includes wallets as well as luggage. The American Apparel & Footwear Association estimates that over 80% of that $31 billion sector comes from China.

China’s Commerce Ministry said Wednesday the country “has no choice but to take necessary countermeasures.” China doesn’t import enough from the U.S. to match Washington dollar for dollar with tariffs as it has in previous rounds, so Beijing is reviewing plans to hit back in other ways, said Chinese officials familiar with the discussions.

Measures are likely to include holding up licenses for U.S. companies, delaying approval of mergers and acquisitions involving U.S. businesses and ramping up inspections of American products at China’s borders, the officials said. (…)

A senior administration official said in unveiling the list Tuesday night that “we did try to take into account the potential impact on consumers.” He added that the goal wasn’t to raise the price of imports but “to encourage China to change its behavior.” (…)

Those tariffs wouldn’t be imposed until after public hearings scheduled for late August.

Mr. Trump has said he is willing to impose tariffs on yet another $200 billion of Chinese imports if Beijing retaliates again—which would mean the vast majority of what the U.S. buys from China would be hit by duties. China sent $523.7 billion in products to the U.S. last year. (…)

Even under the new tariff list, the biggest categories of Chinese consumer-product imports have been spared. The list doesn’t mention smartphones such as iPhones or televisions. Finished shoes and clothing aren’t included—about 70% of the U.S. footwear market is made up of Chinese imports. Neither are pharmaceuticals or medical devices. (…)

(…) U.S. businesses will pay a price: Home furnishing retailers are expected to be hit particularly hard because China supplies 65 percent of U.S. furniture imports, according to analysts at Goldman Sachs Group Inc. Stocks of auto parts retailers, which would also be affected by the latest tariff threats the U.S. lobbed at China, fell more steeply than the broader market, reports Reuters. (…)

(…) For now, neither economy is in the danger zone, meaning the escalation of trade tensions will likely continue in the short-term.

The climate, though, is poised to change in both economies, whether or not Mr. Trump and Mr. Xi know it. Whichever country finds the temperature getting unbearable first, will likely be the first to crack in a trade war.

Fingers crossed China, U.S. Hint at Chance for Talks After Trump’s Tariff Threat

(…) After the U.S. unveiled a list of Chinese imports worth $200 billion that could face higher duties, China’s Vice Minister of Commerce Wang Shouwen said “when we have a trade problem, we should talk about it.” While that came amid fresh threats of retaliation from Beijing, it matches some willingness from the Trump team to resume talks at a high level, according to a person familiar with the administration’s thinking. (…)

“We should sit down and try to find a solution to this trade problem,” Wang said in an interview with Bloomberg in Geneva on Wednesday. (…)

White House spokeswoman Lindsay Walters said U.S. officials have had high-level talks with Chinese officials on “multiple occasions in the past few months” and have made clear U.S. concerns about the country’s trade practices. “The Trump Administration remains open to further discussions with China, but it is important that China finally address the longstanding concerns that have been repeatedly raised,” she said. (…)

“If one party does not honor its words, talks cannot succeed,” Wang said. For negotiations to succeed, “no party should point a gun at the other party,” he said.

Tensions within the Trump administration over trade are also complicating matters, according to two people familiar with the matter. As the de facto spokesman on economic matters within the cabinet, U.S. Treasury Secretary Steven Mnuchin took the lead early in the negotiations. But at different points in the talks, other more hawkish members of the administration have taken the helm, such as Commerce Secretary Wilbur Ross, which has confused the Chinese. (…)

BTW:

Chinese trade data may reveal a slowdown in exports in June, implying the U.S.-China trade skirmish may be starting to dent actual export demand. The sentiment measured by the Caixin Purchasing Managers’ Index of manufacturing new export orders had dropped below 50 for three months as of June. The historical relationship between the PMI sub-index for new export orders and actual export growth indicates the potential for a sharp slowdown from around 10% growth to no growth at all. A reading that shows exports remained resilient in June may be welcomed by investors. (Charles Schwab, Bloomberg data as of 7/8/2018)

Caixin China PMI vs China export growth
Ford Sales Plummet in China, and New Tariff Hit Is Yet to Come Ford Motor sales in China plunged 26% in the first half of 2018 compared with the same period last year, and there is little relief in sight as U.S.-China trade tensions worsen.

China’s auto market overall grew 5.6% in the first six months, with sales reaching 14.1 million vehicles, according to figures released Wednesday by the government-backed China Association of Automobile Manufacturers. (…)

Ford and GM build most of their cars for the Chinese market through joint ventures with domestic partners, thus avoiding tariffs. But Ford exported nearly 65,000 Lincolns to China last year, along with nearly 19,000 Ford models including Explorer sport-utility vehicles.

Ford has said it doesn’t plan to raise prices for now, sacrificing margins on imported Lincoln and Ford vehicles instead. (…)

Europe Sees Trade Tensions With U.S. Eating Into Economic Growth

Gross domestic product in the 19-member eurozone is set to grow 2.1% this year, the EU said in its quarterly report, cutting its 2.3% forecast from May. The rate is expected to ease to 2.0% in 2019, in line with previous expectations. (…)

Coupled with White House threats to tax European cars and Italy’s pledge to challenge eurozone rules, the currency bloc faces “significant downside risk” after last year’s 2.4% GDP growth—the fastest pace in a decade. (…)

Beijing Lets Yuan Weaken by Most in 18 Months China guided the yuan to its largest one-day drop against the U.S. dollar in a year and a half, with an intensifying trade conflict between the world’s two largest economies putting fresh pressure on the Chinese currency.
Pfizer to Roll Back Price Increases After Trump Criticism

(…) “The company will return these prices to their pre-July 1 levels as soon as technically possible,” Pfizer said in a statement. It said the restored levels will remain in effect until the president had a chance to put or the end of the year, whichever is earlier.

The statement quoted Mr. Read offering support for Mr. Trump. “Pfizer shares the President’s concern for patients and commitment to providing affordable access to the medicines they need,” he said. (…)

Confused smile Bank of Canada Raises Rates [25 bps to 1,5%], Keeps Hiking Path Amid Trade Row

  • Bank of Canada hikes interest rates; says trade hit likely to be bigger than earlier forecast

  • BlackRock Predicts One-and-Done Rate Hike for Bank of Canada
    • EARNINGS WATCH
    STOXX 600 EARNINGS

    From Thomson Reuters:

    • Second quarter earnings are expected to increase 8.1% from Q2 2017. Excluding the Energy sector, earnings are expected to increase 2.9%.
    • Second quarter revenue is expected to increase 5.9% from Q2 2017. Excluding the Energy sector, revenues are expected to increase 1.1%.

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    Delta cuts 2018 forecast on higher fuel costs, profit beats estimates Delta Air Lines Inc slashed its full-year earnings forecast on Thursday as fuel costs in the second quarter surged 38.8 percent and the company said it expected $2 billion spike in its fuel bill in 2018.

    Source: WSJ.com, h/t Paul Menestrier; Read full article

    SENTIMENT WATCH
    Dark turn in ETF flows shows second half could be wild ride

    FYI:

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    https://twitter.com/Where_is_Puff/status/1016112164418015232

    THE DAILY EDGE (10 July 2018)

    Small Business Optimism Remains Historically High as Sales and Profits Maintain Strength

    The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May. Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983.

    “Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits,” said NFIB President and CEO Juanita Duggan. “The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”

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    Trade uncertainties are curbing the enthusiasm:

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    Lower tax rates more than compensate for margin squeeze from labor:

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    Actual and planned capex not paced with profit trends:

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    U.S. Consumer Credit Usage Strengthens

    Consumer credit outstanding rose $24.56 billion during May following a $10.27 billion April increase, revised from $9.26 billion. The $8.80 billion March increase was sharply lower than reported last month. The May gain was the strongest monthly increase in six months. During the past ten years, there has been a 50% correlation between the y/y gain in consumer credit and y/y growth in personal consumption expenditures.

    Nonrevolving credit usage strengthened $14.81 billion (4.6% y/y) during May after a $9.19 billion April rise. (…)

    Revolving consumer credit balances increased $9.76 billion in May (5.2% y/y) following a $1.10 billion rise in April. (…)

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    It looks like Americans have recently aligned their borrowings with the trend in their payrolls, both growing in the 5% range after years of credit outgrowing income.

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    Hence the importance of this:

    Conference Board’s Employment Trends Increased in June

    The index grew to 108.94 in June from 107.72 in May. The June reading was 5.2% higher than it was a year earlier.

    “The labor market will continue to tighten in the coming months, with strong employment growth outpacing the number of people entering the labor force,” said Gad Levanon, North America chief economist at the Conference Board, in prepared remarks.

    June’s results were driven by positive contributions from all eight components, according to the report. (…)

    Hmmm…

    Source: Scotiabank Economics (via The Daily Shot)

    FIBER: Industrial Commodity Prices Continue to Fall

    The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) declined 2.1% during the last month, but rose 9.8% in the last year. It has fallen for three straight weeks. Despite the recent shortfall, the index has risen by roughly two-thirds since the January 2016 low. (…)

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    Chart of Century Gives Powell Gloomy Glimpse of Trade-War World

    Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged. (…)

    Just as globalization has been a headwind holding back inflation, its unraveling could end up being a tailwind in the years ahead, pushing costs higher as countries and companies retreat from the international marketplace. That would be on top of the one-time effect that Trump’s tariffs will have on prices of selected imports, putting pressure on the Fed to raise interest rates at a faster pace than the gradual path it has currently mapped out. (…)

    TRADE
    Trade Dispute Threatens Exports of American-Made Cars BMW and Daimler have contributed to the U.S.’s emergence as an auto exporter, but the Trump administration’s trade battle with China could blunt their efforts.

    (…) Big auto [and parts] makers have built global manufacturing and supply networks that depend on the free flow of goods across borders. These are now threatened by the trade dispute, which could force companies to cut back manufacturing for export and make more vehicles and components in the markets where they are sold.

    “The strategy is going to continue to be global, but execution is going to be more and more local,” said Carlos Ghosn, chief executive of the global Renault-Nissan-Mitsubishi alliance, which is vying to overtake Volkswagen AG as the world’s biggest car maker by sales.

    ‘Very Serious’ Global Synchronized Growth Downturn Seen, ECRI Says

    Achuthan also says the economy is “not vulnerable to a recessionary shock at the moment. That can change, but right now, no recession risk.”

    Chinese Auto Sales Run Into a Lending Roadblock Beijing’s crackdown on shadow banking has made it harder for car buyers to get the loans they need. That could hit domestic auto-maker shares.

    (…) About 10% of all P2P loans in China were made to car buyers last year, often to young people: That translated into roughly 9% of total industry sales, according to Bernstein.

    But P2P car loans are down 18% this year, and this is feeding into fewer auto sales. As lending dwindles, the volume of auto insurance sold for new cars—a proxy for end-user demand—dropped year-over-year for the third month in a row in May, according to Bernstein. (…)

    Things are getting dicey in China:

    Last week, the FT reported that

    AC Milan, one of European football’s most successful clubs, is close to being taken over by the Elliott Management, after its Chinese owner failed to repay debt owed to the US-based hedge fund. Li Yonghong, who acquired the Italian club last year, has failed to make a €32m payment which was due to paid to Elliott this week, according to people close to AC Milan’s leadership. The Chinese entrepreneur acquired the club for €740m from Silvio Berlusconi, the media mogul and former Italian prime minister last year. But Mr Li also required high-interest loans worth more than €300m from the hedge fund founded by billionaire Paul Singer in order to fund the acquisition.

    Grant’s Interest Rate Observer observes that

    China’s banking assets exceed full-year 2017 GDP by more than 300% (for comparison, U.S. banking assets are less than 100% of GDP), Li’s money troubles serve as a reminder of the thin margin for error that accompanies high leverage. According to data from the People’s Bank of China, there have been at least 20 bond defaults through May, nearly matching 2017’s full-year total of 22.

    Grant’s adds that

    Yesterday, the FT reported that an executive from the China Development Bank told listeners to a recent teleconference that the CDB was tightening loan approvals for its “slum redevelopment” policy, a program which has provided some $1 trillion to homebuyers since 2016. For context, total Chinese GDP last year was $12.2 trillion, according to the World Bank.

    and notes that the Shanghai Composite Property Index is down 20% year-to-date.

    The health of China’s housing sector is crucial given its weight on the Chinese economy, the debt pile supporting it and the necessity to keep confidence in housing high given the overcapacity in that sector.

    Hence the Bank of China’s juggling with the need to slowly reign in indebtedness while keeping the economy humming amid the trade war with the U.S.. Tough act.

    Supply Crunch Lifts Oil Close to 3½-Year High
    SENTIMENT WATCH
    • NED DAVIS RESEARCH: Downgrading Equities to Marketweight

    US economy losing momentum, strategist says. Tim Hayes, chief global investment strategist at Ned Davis Research, discusses weakness in the U.S. economy.

    But the talking heads would have none of that. Watch an excerpt http://spr.ly/6013DoIcN

    NDR’s cautiousness comes right when bearish David Rosenberg is having second thoughts

    For the first time since just prior to the 2007-2009 recession, premiums on the lowest-rated tranche of investment-grade U.S. corporate bonds have risen to 2 percent after being below that level, according to data compiled by the Minneapolis-based research group. The analysis looks at the gap in yields between corporate debt rated Baa by Moody’s Investors Service and those on 10-year Treasuries.

    “We are not sure why a 2 percent credit spread has been so prescient in predicting recessions since 1970,” Jim Paulsen, Leuthold’s chief investment strategist, wrote in a note to clients Monday. That happened either during or prior to six of the past seven recessions, he said. (…)

    In last Friday’s Daily Edge:

    OMINOUS SIGNS?

    The spread between High Yield and Investment Grade bonds has been at its historical low for over a year, showing no signs of widening like prior to previous recessions, high yield investors seeing no need to ask more yield for the lesser protection:

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    In both 2001 and 2007, yields diverged prior to the economic downturn:

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    More recently, however, High Yield rates have spiked without reaction from IGs. Somebody sniffing something from trade issues, labor tightness, rising inflation

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    EARNINGS WATCH

    The Q2 earnings season will get in overdrive in the next 2 weeks. So far, so good:

    Source: @biancoresearch (via The Daily Shot)

    • Stronger fundamentals have been driving the latest improvements in earnings revisions.

    Source: Credit Suisse (via The Daily Shot)

    FYI:

    New Yorker Magazine to Recognize Newly Formed Union

    When is the last time we heard about a new union?

    Meanwhile, socialism is gaining ground, especially among younger voters who know nothing about history other than that capitalism has failed them.

    SAD CHART:

    Opioid use vs. labor force participation by state:

    Source: Deutsche Bank, @RobinWigg

    HAPPY ENDING
    Red heart Thai cave rescue ends in triumph as final four boys, soccer coach are freed The dangerous three-day mission to rescue 12 young soccer players and their coach from a flooded cave in northern Thailand has ended, officials said.