Month: November 2018

Workers’ Wages Rise as Hiring Accelerates U.S. employers added 250,000 jobs in October and the unemployment rate held at a 49-year low of 3.7%, signs of a strengthening labor market that delivered U.S. workers the best pay raises in nearly a decade.

(…) wages increased 3.1% from a year earlier, the biggest year-over-year gain for average hourly earnings since 2009. (…)

The share of Americans in their prime working years, between 25 and 54, who are working or looking for work rose to the highest rate since 2010 last month, at 82.3%. (…)

With relatively few unemployed Americans looking for work, employers are being forced to bid up wages to poach workers or retain the ones they have. That has been happening for higher-skilled workers such as engineers and welders. It is also occurring for relatively lower-skilled jobs such as warehouse workers and home-care aides. (…)

Weekly wages for high-school dropouts have risen 23.4% since 2010, outpacing wage growth for college graduates, which has been 14.4% since 2010, not adjusted for inflation. (…)

The strength of hiring in October came as a surprise. Forecasters projected 188,000 jobs would be added last month. Many analysts have been expecting hiring to slow as workers become scarcer.

Employment gains were widespread, including large increases for manufacturing and construction. Manufacturing payrolls, for example, expanded 32,000 in October, the biggest monthly increase this year. (…)

• How Long Can the Great Jobs Picture Continue? The Fed Thinks Indefinitely Inflation dynamics have changed, Chairman Jerome Powell believes, meaning the expansion has life left

(…) Mr. Powell’s read of recent economic history leads him to believe this time will be different. After World War II, expansions usually ended with rising inflation and interest rates. Mr. Powell, though, regularly notes the last two didn’t: Unemployment dropped below 5% in the 1990s and again in the 2000s without dislodging core inflation (which excludes volatile food and energy prices) from around 2%. This proved inflation had become much less responsive to low unemployment in recent decades.

Rather than inflation, bursting asset bubbles brought those cycles to an end. So as long as financial imbalances don’t return, and some shock like a war doesn’t come along, Mr. Powell is confident unemployment can stay much lower than in the past without forcing the Fed to kill off the expansion with higher interest rates. (…)

So if inflation or some random shock doesn’t kill off this expansion, what will? Mr. Powell has been more open than his predecessors to raising interest rates to curb the sorts of financial excess that triggered the last two recessions. But in September, he told reporters he thought the risk of such excesses was only “moderate.” Behind that sanguine view is the fact that speculative mortgages no longer infest the housing market, one common culprit in financial meltdowns, and banks, another culprit, have plenty of loss-absorbing capital and liquidity. Corporate and commercial real-estate loans are largely not on bank balance sheets. House and stock prices are high but justifiably so given how low interest rates are.

Is this outlook too bullish? For all the evidence Mr. Powell marshals for his case, it adds up to saying the world “is different this time”—often called the most dangerous words in finance.

The last time unemployment was this low, in the 1960s, inflation erupted almost suddenly. As for financial excesses, the last crisis began outside the banks, and yet the U.S. is slowly scaling back the tools put in place to watch for such risks. (…)

“If we put no [probability] on overheating we wouldn’t raise rates at all.”

Fall numbers are often distorted by hurricanes. President Trump is right calling October numbers “incredible”; the reality is that employment growth has, at best stalled, as per the 3-month running total, or is slowing as per the 2-month running total:

  

What is actually incredible is the the acceleration in spending power (weekly payrolls: hours worked x hourly wages- blue line), pulling expenditures growth to the 5.5% range without any meaningful acceleration in inflation and core inflation. In fact, the payrolls index has been consistently strong in 2018: its 3-month rolling total has been rising 1.3-1.5% sequentially throughout the year, a 5.5% annualized rate when inflation stalls at 2.0%, providing a 3.5% growth rate in real spending power which is likely to carry well into Christmas, setting the stage for lean inventories at year-end and good production gains in Q1’19.

Now that wage growth has passed over 3.0% and business costs and prices are anecdotally rising faster, we should expect official inflation stats to turn upwards in coming months. Mr. Powell will be watching if this time is really different. The law of supply and demand can sometimes require patience, but it has yet to be proven obsolete.

(NBF)

These are trying times for investors as inflation and wage trends can vary greatly by industry. When inflation impacting top line growth trends very differently from wages, profit margins can swing importantly. A case in point is the restaurant industry where wages are accelerating while inflation on sales is slowing. Margins can be spared for a little while if input prices decline. But food prices are much more volatile than wages.

Canadian Job Growth Slowed in October Gain of 11,500 jobs falls short of expectations; unemployment rate dips as fewer people look for work

Canada’s labor-force survey indicated the economy added a net 11,200 jobs in October, Statistics Canada said Friday. That fell just short of market expectations for a 15,000 gain, according to economists at Royal Bank of Canada. In the previous month, Canadian employment rose 63,300.

October’s employment report also said the unemployment rate fell to 5.8%, or a 40-year low, from 5.9% in the previous month. Since late 2017, Canada’s jobless rate has ranged from 5.8% to 6%. When calculated using U.S. Labor Department methodology, Canada’s jobless rate was 4.7% in October. (…)

Average hourly wages rose 2.2% on a one-year basis in October, according to the data agency, or the slowest advance in over a year. Wage growth peaked in May with a 3.9% advance. (…)

With the October data, job growth in Canada has averaged 17,200 over the last 12 months, and 16,900 over the last half-year. The bulk of the employment gain in the last year, or roughly 84%, has been concentrated in full-time work. (…)

Curiously, in the U.S. fifty-first state, wage growth tumbled from nearly 4.0% YoY early this year to a slow 1.9% in October. No overheating there.

U.S. Goods Imports and Trade Deficit With China Hit New Records Foreign-trade gap in goods and services increased 1.3% from the prior month

(…) A surge in products purchased from abroad helped widen the gap, with the value of imported goods ballooning to $218 billion, the highest level on record. Meantime, imports from China picked up, pushing the trade gap to $40.2 billion, another record high.

(…) in the first nine months of 2018, the overall trade deficit increased 10% in September when compared with the same period in 2017.

Trump says ‘I think we’ll make a deal with China’ on trade

“China very much wants to make a deal,” Trump told reporters in Washington just hours after his top economic adviser expressed caution about talk of a possible U.S.-China trade agreement.

“We’ve had a very good discussions with China, we’re getting much closer to doing something,” Trump said before departing the White House for a campaign event. (…)

“I think we’ll make a deal with China, and I think it will be a very fair deal for everybody, but it will be a good deal for the United States.” (…)

• Xi’s Swipes at Trump Show China Standing Its Ground in Trade War

Xi hit back against President Donald Trump’s “America First” policies Monday with some of his most pointed language yet, denouncing “law of the jungle” and “beggar-thy-neighbor” trade practices. At the same time, he didn’t outline any new proposals that would suggest he was prepared to meet Trump’s demands, such as halting forced technology transfers or rolling back support for state-owned enterprises. Stocks declined across Asia.

“All countries should strive to improve their business environment and solve their own problems,” Xi told the inaugural China International Import Expo, which featured more than 3,600 companies from 172 countries, regions and organizations. “They shouldn’t always whitewash themselves and blame others, or act like a flashlight that only exposes others, but not themselves.”

(…) he stepped up warnings that protectionism would harm global growth while pledging to boost domestic consumption, strengthen intellectual property protection and advance trade talks with Europe, Japan and South Korea. (…)

  

The way the global PMI is going implies global GDP growing less than 2.5%. Not good, especially with rising interest rates and a strong USD.

Chinese business activity expands at weakest rate for 28 months

The latest Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled only a marginal increase in overall Chinese business activity at the start of the fourth quarter of 2018. Furthermore, the Composite Output Index fell from 52.1 in September to a 28-month low of 50.5.

The slowdown was broad-based by sector, with both services and manufacturing noting weaker performances compared to the previous month. Notably, manufacturing production stagnated, following increases in each of the preceding 27 months. Service sector activity meanwhile rose only marginally, with the seasonally adjusted Caixin China General Services Business Activity Index falling from 53.1 in September to a 13-month low of 50.8.

The softer increase in services activity coincided with the first stagnation of new business for nearly ten years in October. A number of service providers commented on relatively subdued demand conditions at the start of the fourth quarter. At the same time, new orders placed with goods producers rose only slightly, following broadly no change in the previous month. As a result, composite new work increased at a marginal pace that was the weakest in 32 months. (…)

Services companies registered a slower, but still solid, rise in operating expenses during October. According to panellists, higher fuel and staff costs underpinned the latest increase input prices. Average cost burdens faced by manufacturers meanwhile rose at a sharp and accelerated rate in October. Overall, input prices at the composite level rose at a solid pace that was unchanged from September.

After broadly stagnating in September, prices charged by services companies rose slightly during October. Some monitored firms mentioned raising their prices to reflect higher input costs. Factory gate prices also increased in the latest survey period, albeit at a modest rate that was little-changed from the previous month. As a result, output charges rose modestly when measured across both sectors. (…)

Concerns over subdued demand conditions and the impact of the ongoing China-US trade dispute were key factors weighing on sentiment at the start of the fourth quarter.

EARNINGS WATCH

Factset’s summary:

Overall, 74% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 78% have reported actual EPS above the mean EPS estimate, 8% have reported actual EPS equal to the mean EPS estimate, and 14% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (77%) average and above the 5-year (71%) average.

In aggregate, companies are reporting earnings that are 6.8% above expectations. This surprise percentage is above the 1-year (+5.4%) average and above the 5-year (+4.6%) average.

In terms of revenues, 61% of companies have reported actual sales above estimated sales and 39% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is below the 1- year average (73%) but above the 5-year average (59%).

In aggregate, companies are reporting sales that are 1.0% above expectations. This surprise percentage is below the 1-year (+1.3%) average but above the 5-year (+0.7%) average.

The blended (year-over-year) earnings growth rate for Q3 2018 is 24.9%. If 24.9% is the final growth rate for the quarter, it will mark the second highest earnings growth reported by the index since Q3 2010, trailing only the previous quarter (25.2%). It will also mark the third straight quarter of earnings growth above 20%. All eleven sectors are reporting year-over-year growth in earnings. Nine sectors are reporting double-digit earnings growth for the quarter, led by the Energy, Financials, Communication Services, and Materials sectors.

The blended (year-over-year) revenue growth rate for Q3 2018 is 8.5%. If 8.5% is the final growth rate for the quarter, it will mark the third highest revenue growth reported by the index since Q3 2011, trailing only the previous two quarters.

Margins are up in all sectors but Real Estate:

Refinitiv’s compilation of Q4 preannouncements shows a deteriorating trend. More companies have negatively preannounced in both absolute and relative numbers than at the same time in Q4’17 and Q3’18.

Yet, analysts remain generally upbeat on S&P 500 companies…

• Smaller Cuts Than Average to S&P 500 EPS Estimates for Q4 To Date

Smaller companies had 56% upward revisions in the most recent week after 49% and 44% in the two weeks previous:

Trailing EPS declined last Friday to $156.17, or $158.65 pro forma the tax reform for the full 12 months. I have been assuming a 7% accretion from lower tax rates. This table from S&P’s Howard Silverblatt‏ @hsilverb supports that number:

Full year 2018 EPS are seen reaching $162 assuming 18.5% growth in Q4, down from +20.1% on Oct.1 per IBES data from Refinitiv. That puts the Rule of 20 P/E at 19.0

Companies Face the Tariff Squeeze Large U.S. companies adjust to the trade standoff with China with price increases or changes to their supply chains, but they say the situation could deteriorate in 2019.

Tariffs have slowed U.S. timber and grain exports, raised the cost of imported clothes hangers and heavy-equipment materials, and compressed profit margins for computer chip and tool makers, among other effects, according to an analysis of results and comments from the roughly 75% of S&P 500 companies that have reported third-quarter earnings.

“The negative impact is pretty widespread across the S&P 500,” said Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank. Still, he said, the overall effect so far is mostly modest. (…)

Looking ahead, analysts and economists note that global growth has slowed, particularly in Europe and China. “Probably some of it is due to the tariffs and the trade war,” Mr. Chadha said. “But some of it would pretty clearly happen anyway.” (…)

If tariffs jump to 25% on the $200 billion of Chinese imports that currently face a 10% levy, as the Trump administration has threatened, earnings growth for the S&P 500 could be reduced 2 to 3 percentage points, said David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management’s chief investment office. He projects that would cut earnings growth to about 4%—a deceleration likely too small to derail the economic expansion on its own. (…)

Four percent is pretty close to zero and offers little margin of safety for the stock market’s most critical fuel: earnings growth. The WSJ article cites many companies talking about a gradual margin squeeze already hurting Q3 and Q4 profits and warn of the impact of higher tariffs on Jan. 1st.. They also talk about offsets but say that raising prices is not always easy and quick and altering supply chains takes time and money. Also, keep in mind that corporate executives are trying not to spook investors. Often, they also don’t know how things will really pan out.

Currently, S&P 500 earnings are expected to grow 9.2% in 2019 but excluding Energy, the average sector is growing only 6.5%. Subtract the potential tariff impact, add a factor for uncertainty and you get a pretty uninspiring year earnings wise. Suddenly, the U.S. equity market, absent the effect of the tax reform,  resembles most other world equity markets and becomes much more sensitive to the numerous world events currently occupying investors’ minds.

This is why we must all pay heed to this important change in technicals: the 200-day moving average has turned down. The equity sailboat is now facing a downwind, requiring strong and sustained power to fight the down draft and keep its forward course in choppy waters. Safety vests are strongly suggested.

TECHNICALS WATCH

Hmmm…

The 93-year old Lowry’s Research begins its weekly letter with

There’s a saying in the U.S. Air Force that ‘there are old pilots and bold pilots but no old, bold pilots.’ Fortunately, the same maxim does not apply to the stock market where a degree of boldness is an important contributor to long-term investment success. Frequently this boldness is manifest in a willingness to buy when others are selling. And, an oversold market condition that results from heavy, sustained selling can present an opportunity to be bold.

I’m always willing to be bold as contrarians need to be. Being also kind of old, I often keep a hold on bold when the story is not totally whole.

So when Lowry says that it sees conditions resembling the significant market lows of the past year and that “these oversold readings have been augmented by signs selling has been growing more selective”, I think of the housing market where prices have risen because of diminishing supply. Interesting, but tell me more about demand, the more solid and dependable side of the price equation.

Buying Power crossed back above Selling Pressure on Nov. 1st (…). However, the lack of strong Demand behind the rebound rally, thus far, likely increases whipsaw risk.

Also old Ned Davis Research has its own Demand/Supply chart shown here courtesy of Steve Blumenthal. Although Volume Demand still exceeds Volume Supply, the trends are not friends to the old and less bold:

And this also dependable indicator suggests this may not be the best time to be bold. No bear signal just yet but the trend does not incite to boldness. Getting old made me more patient. “The stock market is a device for transferring money from the impatient to the patient” – Warren Buffett

Chaikin Analytics has a Power Bar system combining fundamental and technical data. Current data is uninspiring:

Taleb Says World Is More Fragile Today Than in 2007

Alibaba Cuts Revenue Forecast, Citing Uncertain Economy Chinese consumers are pulling back on spending amid trade dispute with U.S.

Chinese e-commerce giant Alibaba Group Holding BABA -2.42% Ltd. cut its full-year revenue forecast by 4% to 6%, citing growing doubts about the economy as China’s expansion recently slowed to its weakest pace in nearly a decade.

Amid a trade row with the U.S., consumers are tightening their purse strings for some purchases. The slowdown is most likely to hit sales of consumer durable goods and Alibaba has already seen slower growth in consumer electronics, especially cellphones, said Vice Chairman Joe Tsai. (…)

For the three months ended Sept. 30, Hangzhou-based Alibaba’s revenue rose 54% from the year-earlier period to 85.1 billion yuan, driven by solid demand from Chinese consumers online. But that was still below analyst estimates—analysts polled by FactSet expected the company to post 86.7 billion yuan. A year earlier, the company posted 55.1 billion yuan in revenue.

Its fiscal second-quarter net income increased 13% to 20.0 billion yuan, nearly double the 10.6 billion yuan that analysts had expected. A year earlier, it posted 17.7 billion yuan.

Revenue from Alibaba’s core commerce unit—which runs Taobao and Tmall—rose 56% to 72.5 billion yuan. (…)

Berkshire Hathaway Repurchases $928 Million of Stock Berkshire Hathaway repurchased $928 million of its stock in the third quarter, a rare move that indicates Chairman Warren Buffett sees a dearth of appealing investment options for his company’s large cash pile.

The Next Six Months Might Be the Best Time to Invest From the standpoint of the calendar, U.S. equities are entering what historically has been their most profitable period.

(…) According to data compiled by Yardeni Research, the S&P 500 has been up in the 12 months following every midterm election since the middle of the last century, with gains from 1.1% in the post-1986 vote stretch (which included the Oct. 19, 1987, crash) to 33.2% in the year after the 1954 election.

That positive pattern appears to relate more to the four-year presidential cycle, however. The span from the fourth quarter of the second year of an administration through the first and second quarters of year three has been the best nine-month period for the Dow Jones Industrial Average in presidential cycles dating back to 1896, according to a report by John Lynch, LPL Financial’s chief investment strategist, and Jeffery Buchbinder, LPL’s equity strategist.

The final quarter of year two of a presidential term, the one we’re in, averaged a 4% return for the Dow. That was followed by gains of 5.2% and 3.6% in the two subsequent quarters. They ascribe this pattern to tendencies of presidents to boost the economy with pro-growth policies ahead of the elections in the fourth year.

As for the party in control of the executive and legislative branches, history also is on the side of the bulls. The combination of a Republican president and a split Congress—the most likely outcome from Tuesday’s elections, with the Democrats widely predicted to win the House of Representatives, and the Republicans favored to retain control of the Senate—resulted in an average annual return of 15.7% for the S&P 500 since 1950, the second-best among the permutations, according to the LPL note. The best mix for stocks is a Democratic president and a GOP Congress. That has produced an 18.3% annual return, a record heavily aided by the 1990s dot-com bubble. In either case, those outcomes support the conventional wisdom that Wall Street likes gridlock. (…)

Looking back to 1950, the Stock Trader’s Almanac found that if you had invested $10,000 in the Dow only during the six-month periods from Nov. 1 to April 30, and sat out the other six months, you’d have amassed $1,008,721 through 2017, a 7.5% average return. If you had done the opposite and been invested in the Dow from May 1 through Oct. 31 and out of the market the other (profitable) six months, your $10,000 would have grown to just $11,031, or a mere 0.6% average return. (…)

Midterms Could Result in a Mixed Verdict for Trump  The 2018 midterms, widely viewed as a referendum on the Trump presidency, have party strategists preparing for a split decision, with polls indicating Democrats on track to gain a House majority while Republicans keep control of the Senate.

North Korea Threatens to Resume Nuclear Program, Slams Sanctions Comments come a week before Pompeo is set to discuss potential summit between Trump and Kim.

Elon Musk: The Recode interview