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: December 2018

THE DAILY EDGE: 15 DECEMBER 2018

Holiday Season Retail Sales Heat Up Sales were up 4.2% from a year earlier, suggesting better footing than in 2017

Retail sales, a measure of purchases at stores, restaurants and online, increased a seasonally adjusted 0.2% in November from a month earlier to $513.5 billion, slightly exceeding economists’ expectations, according to a Commerce Department report Friday.

November sales were up 4.2% from a year earlier, signaling the holiday-shopping season began on stronger footing than last year. Excluding the volatile category of gasoline, sales climbed a solid 0.5% in November from a month earlier. (…)

Macroeconomic Advisers responded to the retail-sales report by boosting its forecast of fourth-quarter U.S. economic growth to a 2.5% annual rate from 2.1%. The firm nudged it higher later Friday, to 2.6%, after the Federal Reserve reported that U.S. industrial production surged in November due to rising utilities output. (…)

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Notably, Control Sales, nonauto sales excluding gasoline and building materials, the measure that feeds into GDP, surged 0.9% (5.2% y/y) after a 0.7% October gain, revised from 0.3%. This is exceptionally strong growth, 10.0% annualized, during key months, leading into Christmas with good employment, rising wages, slow inflation and declining gas prices.

Strong sales at the important year-end means low inventories entering Q1’19 which means a decent start of the year for manufacturers and importers, keeping the economic momentum up.

Some will argue that weak restaurant sales are an indication of consumers reigning in their discretionary spending. One, this is not showing at all in total sales, two, the restaurant industry is paying the price for allowing the gap between food-at-home and food-away-from-home to widen too much. last 4 years, food-at-home: –1.3%, away: +10.2%. (See UNAPPETIZING)

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U.S. Industrial Production Rebounds

Industrial production jumped a greater-than-expected 0.6% (3.9% year-on-year) during November following a downwardly revised 0.2% decline in October (was +0.1%). The 0.1% gain in September output was revised from 0.2%. The Action Economics Survey forecast 0.3% growth in November. Manufacturing activity was unchanged (1.9% y/y) during November, while the two prior months were revised lower. Utilities output generated 3.3% (4.4% y/y) while mining production fired up 1.7% (13.2% y/y). (…)

By market group, consumer goods output edged up 0.1% (1.5% y/y) in November. Meanwhile, business equipment declined 0.2% (+4.1% y/y) after strong gains in the previous three months. Construction supplies weakened 0.2% (+1.3% y/y), the third consecutive monthly decline. Production of materials jumped 1.2% (+6.1% y/y) as energy materials sizzled 2.3% (11.6% y/y).

In the special aggregate groupings, production of high technology products rebounded 1.6% (7.6% y/y) after two monthly declines. This was the result of strong gains in semiconductor & electronic components (2.1%; 10.1% y/y) and computer & office equipment (2.8%; 4.4 y/y). Factory sector production excluding the motor vehicle and high tech sectors edged down 0.1% (+1.6% y/y).

Capacity utilization increased to 78.5% in November, in line with the expectations from Action Economics Survey. Factory sector use edged down to 75.7%. Mining rebounded to 94.1%, near September’s business cycle high of 94.2%. Growth in capacity in the manufacturing sector continues to accelerate, up a cyclical high 1.3% y/y in November.

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U.S. Business Inventory Accumulation Picks Up

Total business inventories increased 0.6% (5.1% y/y) during October following two months of 0.5% gain. Total business sales rose a steady 0.3% (8.0% y/y). The inventory-to-sales ratio increased minimally to 1.35, but remained below its 1.43 peak early in 2016.

Retail inventories strengthened 0.8% (3.9% y/y) in October, following a 0.1% uptick. Auto inventories improved 1.1% (8.0% y/y) after a 0.5% rise. Non-auto retail inventories gained 0.7% (1.7% y/y) after two months of slight decline. (…)

Retail sales increased 1.2% (6.0% y/y) during October following little change in the prior two months. Non-auto sales rose 1.1% (5.8% y/y), also following two months of little-change. Wholesale sector sales fell 0.2% (+9.5% y/y) after a 0.1% uptick. Shipments from the factory sector eased 0.1% (+8.3% y/y) following two months of 0.7% gain.

Note this release is for October. Total business sales in October were up 8.0% with manufacturing up 8.3% YoY. Very strong numbers, actually in line with S&P 500 revenues in Q3. We now know that November sales were very strong, auguring well for Q4 results.

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$1 Billion a Month: The Cost of Trump’s Tariffs on Technology

U.S. companies paid $1 billion more in tariffs on technology products imported from China in October than a year earlier, as new duties imposed by the Trump administration took effect.

The tariff costs rose more than seven-fold to $1.3 billion, as the world’s two biggest economies became embroiled in a trade war, according to data provided by the Consumer Technology Association and analyzed by consulting firm The Trade Partnership. (…)

Dow’s Sharp Decline Puts Three Major Indexes in Correction All three major U.S. stock indexes are in correction territory for the first time since March 2016, with disappointing economic data from China and the eurozone sparking Friday’s nearly 500-point fall in the Dow.

  • Small-cap S&P 600 index confirms bear market As U.S. stocks have been rocked by trade tensions and monetary policy worries, shares of small-cap companies, by one measure, have now confirmed that they are in their first bear market in three years.

The Rule of 20 P/E is now 18.3, where it bottomed in January 2016.

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TECHNICALS WATCH

Lowry’s Research:

Clearly, the greatest weakness among market segments continues to be in the Small Cap Segment. As of Dec. 13th, nearly 73% of our Operating Companies Only (OCO) small cap stocks were down 20% or more from their 52-week highs. This contrasts with about 47% of mid caps and 32% of large caps down 20% or more. Weakness in small caps is not a recent development but has been ongoing for nearly 6 months.

Yet, Lowry’s still sees “signs of improving breadth and in the short-term balance of Supply/Demand appear most consistent with a market that is in the process of forming a sustainable bottom than with a market in the midst of a major downtrend.”

But its Selling Pressure Index remains above its Buying Power Index and is still rising…

Good thing earnings look ok, inflation is weakening, long-term rates have come down and the Fed seems to be concerned.

Fingers crossed Fingers crossed Fingers crossedspy

Companies Ramp Up Stock Buybacks as Market Swoon Continues

Facebook Inc., Mastercard Inc., Lowe’s Co s., AbbVie Inc., United Rentals Inc. and Pioneer Natural Resources Co. are among the companies that have unveiled bigger or resumed share buybacks this month as the S&P 500 heads toward its worst quarter since 2011. (…)

Companies in the S&P 500 spent a record amount on buybacks in the third quarter, with the total at roughly $200 billion, according to S&P Dow Jones Indices. (…)

Investors Abandon Bet Against Treasurys A recent Treasury rally has squeezed many investors

Speculators have trimmed their bets on falling U.S. government bond prices and higher yields. The size of the wager is down by nearly half from record levels reached at the end of September. Those investors held a net short position of 393,802 Treasury futures contracts as of Tuesday, according to the most recent data available from the Commodity Futures Trading Commission. That is down from a record net short position of 756,316 in late September. (…)

SENTIMENT WATCH

(…) After all, even if equities have predicted “nine of the last five recessions,” as the economist Paul Samuelson famously said, that’s a better record than a lot of humans. (…)

Island with a palm tree Note: I will be on vacation next week.

THE DAILY EDGE: 14 DECEMBER 2018

China Economy Flashes New Warning Signs Industrial production slows and retail sales growth falls to lowest level in more than 15 years

(…) Value-added industrial output in China rose 5.4% in November from a year earlier, slowing from a 5.9% on-year increase in October, the National Bureau of Statistics said. A median of forecasts from economists expected 5.9% growth for November. They thought industries would get a boost after the government scaled back wintertime production restrictions intended to ease pollution. (…)

Automobile production shrank 3.2% last month from a year earlier, extending a 0.7% contraction in October. Chemical materials and products rose 1.9%, decelerating from 4.4% growth. Retail sales rose 8.1% in November from a year earlier, slowing from an 8.6% year-over-year gain in October. (…)

Separately, central bank Governor Yi Gang told a forum on Thursday that China needs “relatively loose” monetary conditions to counter an economic downturn, though he said that could affect the yuan’s value, according to a transcript posted on Chinese news portal Sina.com. (…)

Government efforts to bolster growth and confidence did appear to show up in investments in factories, buildings and other fixed assets. Such investment outside Chinese rural households climbed 5.9% in the January-November period from a year earlier. It was faster than the 5.7% increase recorded in the January-October period and slightly exceeds economists’ expectations.

Mr. Ding of Standard Chartered said November’s data points to slower economic growth in the fourth quarter of this year, of about 6.4%, a tick down from 6.5% growth in the third quarter, with full-year growth likely at 6.6%.

  
  
Seaborne Exports Plummet at Southern California Ports Retaliatory tariffs from China likely cut into demand after exporters pulled forward outbound shipments in earlier months

Outbound container volume at the neighboring ports of Los Angeles and Long Beach fell 11.8% in November from the same month last year, the first decline since the spring after seven straight months of export growth.

Much of the goods trade between the U.S. and China flows through the Southern California ports and this year’s trade dispute between the two nations has played out at port terminals and on roads and railways in this region—often hitting earlier and more directly than at other seaports around the country. (…)

Exports at California’s Port of Oakland were flat in November, while Georgia’s Port of Savannah, the East Coast’s second-largest gateway, reported a 4.4% annual decline.

Source: @acemaxx, @PictetWM (via The Daily Shot)

White House to Officially Delay China Tariff Hike to March 1, Sources Say
China says to halt additional tariffs on U.S.-made cars from Jan. 1
U.S. confirms soybean sale to China, but size disappoints

The U.S. Department of Agriculture (USDA) announced private sales of 1.13 million tonnes of U.S. soybeans to China, confirming sales Reuters reported a day earlier. (…)

“Having a million, million-and-a-half tonnes is great, it’s wonderful, it’s a great step,” USDA Deputy Secretary Steve Censky said at an Iowa Soybean Association annual meeting on Thursday. “But there needs to be a lot more as well, especially if you consider it in a normal, typical year, we’ll be selling 30 to 35 million metric tonnes to China.” (…)

U.S. Import Prices Weaken As Petroleum Prices Fall; Export Prices Also Decline

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The implications of tighter conditions (BlackRock)

The recent correction in risk asset markets has caused a noticeable tightening in financial conditions. This means financial conditions are providing less of a boost to economic growth – and could potentially cause the Federal Reserve to alter its policy decision making, we believe. (…)

Tighter financial conditions suggest that growth in the US and Europe will likely decelerate in the coming twelve months. The sell-off in financial markets since the summer and ongoing Fed policy tightening would be consistent with US GDP growth slowing to just under 2.5% next year from almost 3% now. The market sell-off since September has
alone caused a tightening in financial conditions equivalent to a 35 basis point decline in the US Growth GPS. (…)

We believe monetary policy tightening – beyond that priced by the market – would only be required by the Fed to engineer a “soft landing” if other factors do not bring growth down to around 2%. Growth at 2% is the level that we and the Fed believe to be sustainable because it is in line with the pace of growth of potential output.

In the eurozone, our FCI suggests a slowdown in GDP growth to substantially less than 1.5% next year – financial conditions are already tight enough for growth to moderate to a level close to potential. We believe this implies that the ECB may decide to keep interest rates at record lows for most of 2019. But fiscal stimulus among member states could also support eurozone growth, changing the picture for the ECB. (…)

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Economic Outlook from Freight’s Perspective

(…) The current level of volume and pricing growth is suggesting that, while it’s still growing, the U.S. economy is simply not growing at the rate it was and that it may have reached its short-term expansion limit. The 0.6% YoY increase in the November Cass Shipments is a deceleration from the 6.2% achieved last month and is an even more marked deceleration from the low double-digit levels achieved in the first five months of 2018.(…) many modes are continuing to report “limited amounts of capacity” or even “no capacity” at any price shippers are willing to pay. (…)

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ECB Cuts Growth Forecasts as It Ends Bond-Buying Program The European Central Bank cut its economic growth forecasts Thursday, highlighting the risks confronting Europe’s economy even as it ended its massive four-year stimulus program.

“It’s a climate of great uncertainty,” ECB President Mario Draghi said at a press conference, citing trade tensions, vulnerabilities in emerging markets and volatility in financial markets. He spoke after the ECB confirmed it would keep its key interest rates—which include a minus 0.4% rate on bank deposits held at the central bank—unchanged at least through the summer of 2019. (…)

The ECB lowered its 2018 forecast for gross domestic product growth in the eurozone by 0.1 percentage point to 1.9% and shaved its 2020 forecast by a similar amount to 1.7%. (…)

The ECB softened its decision on QE by pledging to hold its €2.6 trillion stock of bonds for “an extended period of time” after its first interest-rate rise, which investors have penciled in for late 2019. (…)

U.S. Budget Deficit Widened in First Two Months of Fiscal 2019 Tariff revenue rose 86% in October, November from same period a year ago

The government ran a $305 billion deficit in October and November, compared with $202 billion during the same period a year earlier, the Treasury Department said Thursday.

Federal outlays climbed 18% the first two months of fiscal 2019, which began Oct. 1, and total receipts rose 3%.

Much of the increase in the deficit was attributable to a shift in the timing of certain payments, the Treasury said. The first day of December fell on a Saturday this year, so payments that would have been made then were moved up to Nov. 30, boosting spending for the period.

If not for the timing shift, outlays would have risen 4% from a year earlier, and the deficit would have been $20 billion higher.

Revenue in October and November was bolstered by a significant boost in customs duties, which rose 86% to $11.8 billion due to an increase in tariffs. (…)

The budget deficit rose to $882.6 billion for the 12 months ended November, or 4.3% of gross domestic product. The last time the 12-month deficit exceeded 4.3% of GDP was in May 2013.

On a 12-month basis, revenues were up just 0.2% from a year earlier, while outlays were up 5.1%.

The federal budget deficit is projected to hit $1 trillion in the current fiscal year, up from $779 billion in the previous fiscal year, the White House and Congressional Budget Office have said. (…)

Net interest costs on the debt rose 7% in October and November, reflecting a gradual rise in interest rates since last fall. (…)

BUBBLE WATCH

The biggest bubble this cycle is in the fixed income market, particularly in leveraged loans. Something just pricked the bubble:

Consider that, as Grant’s explains, “the well-informed leveraged-loan market usually does not move without reason. (…) Leveraged-loan borrowers report monthly – and those monthly reports, addressed to the creditors alone, are rich in detail, including internal financial projections. (…) More likely, then, we judge, the recent softness in loan prices is an augury of something not bullish.”

We’ve been there before as this ETF illustrates. The recent drop may again be a reaction to lower oil prices but it sure bears watching.

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There are no signs of significant deterioration in overall corporate earnings for Q4 2018. Analysts estimates for Q4 S&P 500 earnings were reduced in the last week but still point to a 16.4% growth rate. As well, corporate preannouncements are also not signalling distress half way into the last month of the quarter.

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But everybody’s pretty nervous.

U.S. Stock Market Exodus Is Second-Biggest on Record, BofA Says Investors flee equity funds in the second-biggest weekly exit, in a rush for havens.

U.S. stock funds bled $27.6 billion in the days through Dec. 12, which includes last Friday’s plunge in the S&P 500 Index that capped the worst week for the gauge since March, according to BofA’s note, which cited EPFR Global data. This is the second-biggest redemption since February’s spike in the VIX volatility measure, according to Jefferies Financial Group Inc.

Instead of U.S. equities, market players flocked to Japanese and emerging-market equity funds, as well as government bonds as global equity funds saw a record weekly outflow of $39 billion, according to BofA. Investment-grade bond funds also set a historical precedent with an $8.4 billion redemption, the data show.

These charts from Steve Blumenthal are as of Dec. 12:

Volume Demand vs. Volume Supply (NDR)

13/34–Week EMA Trend Chart

Island with a palm tree Note: I will be on vacation next week.