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

Year: 2021

THE DAILY EDGE: 18 NOVEMBER 2021

U.S. Housing Starts Weaken in October

Housing starts eased 0.7% (+0.4% y/y) during October to 1.520 million (SAAR) from 1.530 in September, revised from 1.555 million. Starts have declined 11.9% from a high of 1.725 million in March. An October level of 1.580 million starts was expected in the Action Economics Forecast Survey.

The slip in starts overall in October was due to a 3.9% drop (-10.6% y/y) in single-family starts to 1.039 million. It was the fourth consecutive monthly decline and left single-family starts 21.0% below the December 2020 peak. Starts of multi-family homes improved 7.1% (36.6% y/y) to 481,000. Multi-family starts have risen 39.0% so far this year.

Building permits increased 4.0% (3.4% y/y) to 1.650 million from 1.586 million in September, revised from 1.589 million. Permits to build single-family homes gained 2.7% (-6.3% y/y) to 1.069 million following five declines in the prior six months. Permits to build multi-family homes rose 6.6% (28.0% y/y) in October to 581,000 following an 18.8% decline during September.

By region, housing starts fell 0.8% (+45.2% y/y) in the Northeast to 122,000 following a 25.9% September drop. Starts in the South were down 1.0% (-5.7% y/y) to 792,000 after falling 9.5% in September. Starts in the West fell 3.3% (-0.5% y/y) to 380,000 after a 20.2% increase in September. Partially offsetting these declines was a 5.6% (8.7% y/y) rise in starts in the Midwest to 226,000 following a 9.2% increase.

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Canada’s annual inflation rate hits 4.7% in October, fastest pace in nearly 19 years

The consumer price index (CPI) rose 4.7 per cent in October from a year earlier, Statistics Canada said Wednesday, up from 4.4 per cent in September. It was the seventh consecutive month that inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent and it marked the highest annual rate since February, 2003.

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(…) Excluding energy, inflation rose 3.3 per cent. The three “core” measures of inflation favoured by the Bank of Canada rose an average of 2.7 per cent in October, unchanged from the previous month. These measures are designed to exclude some of the more volatile parts of the CPI – such as the 60-per-cent increase in rental costs for passenger vehicles, tied to weaker auto production – and give the bank a better sense of underlying trends. (…)

Housing costs rose 4.8 per cent over the past year, with larger increases for home ownership (5.1 per cent) than rentals (1.9 per cent). (…)

Deere Workers Approve New Contract, Ending Strike Members of United Auto Workers will return to work with raises and bonuses after ratifying a third contract offer and ending a walkout that lasted more than a month.

The offer that prevailed grafted an increase in base production pay onto the general raises, bonuses and improvements in pension funding from an offer rejected Nov. 2. (…)

Deere workers returning to assembly plants and warehouses will get an immediate 10% raise, and each worker will receive an $8,500 bonus. Additional 5% pay raises will be provided in 2023 and 2025, and lump-sum bonuses amounting to 3% of workers’ annual pay will be awarded in the three other years.

The deal approved Wednesday also will increase the base pay level for Deere’s continuous-improvement program by about 4%, giving workers more weekly pay from the program if their productivity meets the company’s goals. About two-thirds of UAW-represented Deere workers receive production-based compensation on top of their regular wages, according to the company.

Deere workers said they encouraged union negotiators to push for changes in productivity pay after it was mostly untouched in the two contract proposals that failed in recent weeks.

High shipping costs to push up global inflation, UN warns Consumer prices likely to rise by an extra 1.5 per cent next year, with developing economies hit harder

China’s Alibaba misses quarterly revenue expectations

(…) Revenue rose 29% to 200.69 billion yuan ($31.44 billion) in the quarter ended Sept. 30. Analysts on an average had expected revenue of 204.93 billion yuan, according to Refinitiv data.

Last week, Alibaba recorded its slowest sales growth during its annual Singles’ Day shopping frenzy. read more

Europe Car Sales Hit Record Low for October in Likely Bottom

New-car registrations fell 29% during the month to 798,693 vehicles, the European Automobile Manufacturers’ Association said Thursday, leaving sales for the year only 2.7% higher than at this point in 2020. While deliveries fell for the fourth month in a row, companies are seeing signs the worst of the chip crunch is finally behind them. (…)

“Registrations could improve in November as supply constraints diminish,” Bloomberg Intelligence analyst Michael Dean said in a note. “Many manufacturers have partly assembled vehicles so they can be completed swiftly once semiconductor availability improves.” (…)

China Releasing Some Oil From Strategic Reserves After U.S. Invite China is releasing some oil from its strategic reserves days after the U.S. invited it to participate in a joint sale, suggesting the world’s two biggest oil consumers are willing to work together to keep a lid on energy costs.

(…) The administration has been lobbying Asian nations including China, India, Japan and South Korea to release reserves after OPEC+ rebuffed pressure from Biden to pump more crude. (…)

China tapped its national stockpiles this year in an effort to bring domestic crude oil prices down. In September, the reserve bureau held its inaugural public auction where it offered 7.4 million barrels, or the equivalent of less than a day’s worth of China’s imports. The country also made a private sale from its reserves prior to the auction. 

“We will release more details on the volume of oil and date of its sale on our website in due time, just like we did in the first public auction”, said the reserve bureau’s spokeswoman. The news was first reported by Reuters.

AN APPLE A DAY…

Apple’s big ongoing buyback; Sanford Bernstein asks if it could last for 15 more years? Bernstein equity research: “Over the last 8 years, all of Apple’s EPS growth has been catalyzed by share buybacks and a lower tax rate – each of these have added 400-600 bps and 200 bps per year to EPS, respectively. How much longer can this persist?

Bottom line is, much longer. Apple is likely to be able to continue repurchasing ~3-4% of its shares per year until the end of 2026 while growing its dividend per share by 10% annually without taking on net debt on its balance sheet – at which point, Apple will have likely repurchased ~15% of its current shares outstanding.

If we assume they take on debt and lever up to ~2x gross debt/EBITDA, Apple could continue on this path to drive similar EPS growth and buy back 35% of current shares outstanding by 2035″ (Sanford Bernstein via The Market Ear).

COVID-19

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(CalculatedRisk)

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(Data: N.Y. Times; Cartogram: Kavya Beheraj/Axios)

THE DAILY EDGE: 17 NOVEMBER 2021: Early Christmas

Shoppers Boosted Spending Last Month, Taking on Higher Prices U.S. retail sales rose by 1.7% in October, a sign that consumers are willing to spend more headed into the holidays despite rising inflation.

(…) Spending rose sharply, by 4%, at online retailers, along with big gains at electronics, appliance and hardware stores. Grocery-store sales rose by 1.1% while restaurant and bar sales were flat. Other gains occurred at gas stations, where sales rose 3.9%, and auto dealerships, with a 1.8% gain. (…)

Core retail sales, a measurement that excludes spending on autos, gasoline, building materials and food services, were up 1.6%, showing that consumers increased discretionary spending in addition to taking on higher prices for necessary goods. Spending at sporting goods, hobby, musical instrument and book stores was up 1.5% and rose by 2.2% at department stores. Pharmacies and clothing stores both saw modest declines from the previous month. (…)

Two charts of interest:

  • retail sales (blue) were flattening, even weakening a little, during the summer, but strongly recovered in the last 3 months: up 16.1% annualized. Weekly payrolls (black) rose 12.5% a.r. in the same period while core goods inflation accelerated 6.1% a.r..

fredgraph - 2021-11-16T114221.329

  • Control sales (ex the volatile autos, gasoline and building materials) are now 23.3% above their pre-pandemic levels and substantially above trend while restaurant and bar sales are 9.4% above their pre-pandemic levels and right on trend.

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My belief is that the recent acceleration in sales is inflation related: prices are rising amid widespread shortages and consumers are listening to retailers telling them “if you see it, buy it.” Early Christmas!

Comparable sales, those from U.S. stores and digital channels operating for at least 12 months, increased 9.2% in the quarter ended Oct. 29 compared with the same period last year. U.S. e-commerce sales rose 8% from a year ago, when shoppers flooded online because of the pandemic. (…)

U.S. inventory rose 11.5% in the quarter as “preparation for an expected strong holiday season,” the company said. (…)

“The company is hedged well in an inflationary environment,” said Mr. McMillon on a call with analysts. “In this case our cost inflation is higher than our retail inflation, but we have lots of flexibility,” to move prices around for some products while holding prices steady on others, he said. (…)

Gross profits fell due to higher supply-chain costs, Walmart said, partially offset by fewer discounts and added revenue from the retailer’s growing advertising business. Operating cost rose due to higher wages, offset by strong sales and lower Covid-19 related costs. (…)

“When the stimulus dollars started to go away, the hiring situation changed,” said Mr. McMillon. “We saw people come back in a matter of weeks. We were back to being staffed.” Walmart, the country’s largest private employer with around 1.6 million U.S. workers, added about 200,000 workers in the last quarter, the company said Tuesday. Walmart’s minimum wage for hourly workers is $12 per hour.

During the quarter, “the customers had money,” said Mr. McMillon. “At some point, that’s going to come to an end. Hopefully, that’s a gradual process.”

BTW, WMT’s management anticipates Q4 U.S. comps up ~5%. That’s after +9.2% in October….

BTW #2: WMT’s Q3 net sales rose 4.1%, gross profit +2.3% and Operating Income +0.2%.

  • Target Posts Strong Sales, Bolsters Holiday Inventory The retail chain said sales rose in the most recent quarter as holiday sales kicked off early and that it has been able to stock up ahead of Black Friday, joining other retail giants that have sidestepped supply-chain snarls.

Comparable sales, those from stores or digital channels operating at least 12 months, rose 12.7% for the quarter ended Oct. 30. E-commerce sales rose 29% in the quarter. (…) Adjusted earnings per share rose to $3.03 from $2.79 last year. (…)

The company has pulled forward some shipments of goods and chartered its own vessels to counteract transportation disruptions heading into the holiday season when most retailers earn a significant portion of annual revenue.

Inventory for the quarter rose 17.6% compared with the same period last year, the company said. It has focused on keeping prices lower than competitors, as prices rise generally for a host of goods, said Mr. Cornell. “We think value is going to be a critically important battle,” he said. (…)

The retailer raised its sales guidance for the final quarter of the year. It now expects high single-digit to low double-digit percentage growth in comparable sales, compared with a previous estimate of high single-digit sales growth. Target continues to expect that its full-year operating income margin rate will be 8% or higher.

BTW, TGT’s Q3 total sales rose 13.3%, gross profit +3.8% and Operating Income +3.9%.

With inventories so high, sales better be there in November and December. Chase’s control sales tracker through Nov. 7 is strong:

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Powell’s Five Inflation Benchmarks Are Starting to Flash Amber In a speech to the Fed’s annual Jackson Hole conference, held virtually in late August, Powell sketched out five ways of assessing the outlook for inflation and argued that each of them suggested there was no cause for alarm.
  • 1. Are inflation pressures broad-based? In August, Powell said the spike in inflation up until that point was largely the result of price rises in a narrow group of goods and services directly affected by the pandemic. That’s no longer the case.
  • 2. Are price rises moderating in those goods and services that have experienced the biggest run-ups? While there were some signs that was happening a few months ago, it’s no longer so clear-cut. Yes, used-car price inflation has come down a lot from its 45.2% high in June, though it is still running in excess of 25%.
  • 3. What is happening to wages?

Wages and salaries jump by record last quarter, ECI also posts record jump

  • 4. What is happening to longer-term inflation expectations?

U.S. households expect prices to increase at faster pace

  • 5. Are longer-term global forces still pushing down inflation?

U.S. import prices are climbing at the fastest pace in 10 years

(…) Lawrence Summers said in a Nov. 15 tweet. “Today, all five pillars are wobbly at best.”

Data released Wednesday showed that items representing nearly 30% of the shopping basket used to calculate the cost of living saw annual price gains of 5% or more in October, according to analysis by Bloomberg. That’s up from around 20% in September, and represents a warning sign for Bank of England policy makers who are hoping the current bout of inflation won’t become generalized.

More worryingly, the hotspots are seen across the economy and not confined to high-profile areas. All 12 of the broader categories in the basket have at least one element where inflation is running above 5%, with restaurants and hotels and transport making up the biggest proportions.

The report from the Office for National Statistics showed the annual rate of inflation was at a decade-high of 4.2% in October, and the BOE expects the headline rate to hit 5% in the spring. That’s prompted speculation officials will raise rates for the first time since the pandemic at their December meeting.

Bloomberg’s Joe Weisenthal adds:

Core inflation is at its highest in almost a decade. Meanwhile, another measure of prices, the Retail Price Index just saw its fastest gains since 1991. What’s interesting too is that the U.K. didn’t have that extra boost of stimulus that the U.S. did. And BoE communication has been significantly more hawkish than the Fed’s. And yet…

The Electric Vehicle Invasion Is Already Here The adoption curve is getting steeper than anyone thought.

(…) Drivers around the world will buy about 5.6 million electric passenger vehicles this year, according to a new report from BloombergNEF released in concert with the COP26 United Nations Climate Change Conference. That’s almost double the number purchased last year and, more importantly, it represents almost 8% of all vehicle sales. (…)

BloombergNEF expects commercial buyers to purchase 150,000 electric vehicles this year, also nearly double last year’s tally. Stretching how far these machines can travel between charges plus predictable drive cycles and relatively low maintenance costs increasingly tilt the economics in favor of things like electric mail trucks and battery-powered flower delivery vans. (…)

John Authers: Covid Fear Shows Signs of Returning to the Stock Market The leisure sector is turning down again as infections rise. This could scramble many calculations.

relates to Covid Fear Shows Signs of Returning to the Stock Marketrelates to Covid Fear Shows Signs of Returning to the Stock MarketWhat this chart appears to illustrate is the waning efficacy of the vaccine over time. As we enter the winter months, the pressure is going to be on once more to launch a vaccination campaign. (…)

Globally, hotel and leisure stocks are lagging the market once more