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

BONDS

THE DAILY EDGE (17 January 2018)

Companies Tout Tax Benefits as Earnings Season Begins Some of the biggest U.S. companies are promising significant annual savings, bigger pension contributions, higher dividend payments and more extensive stock buybacks as executives start to discuss the impact of the federal tax overhaul.

(…) “The macro environment is as positive as we’ve seen in many years,” Citigroup Inc. Chief Executive Michael Corbat told investors Tuesday morning. “Tax reform could change the sentiment among those making investment decisions from optimism to confidence and become the boost the U.S. economy needs to drive growth higher.” (…)

Executives at bank holding company Comerica Inc. said Tuesday that lending could slow for a time as the tax overhaul leaves customers with more cash. (…)

“I can’t say for sure that the fact that companies are going to have more cash, they’re going to spend more on marketing dollars,” CEO Michael Roth of advertising giant Interpublic Group of Co s. Inc. said in a conference presentation last week.

“A lot of these companies were not capital-constrained nor were they cash-constrained, right?” Mr. Roth said. “It’s not clear that all of it is going to end up to increase employment and investment in assets or increased marketing dollars—I think we have to wait and see.” (…)

Last week AbbVie executives said they plan to improve employee benefits, contribute more to the company’s pension plans and make bigger charitable contributions. (…) Still, the company expects to generate far more cash than it can use productively in the business, he added, calling it fair for investors to expect AbbVie will increase the pace at which it pays dividends and buys back shares.

Capacity utilisation remains very low. We’ll have to wait and see. Meanwhile, surplus cash will reduce borrowings, increase employee comps and pension plans,dividends and buybacks.

image

This is the hope although my red line suggests this is as good as it gets (chart from RBC):

image

The above chart is for S&P 500 companies. Small cap companies are also not prone to capex spending…

image

…partly because their finances are stretched out:

image

That’s also the problem for most large caps other than a few heavy weights with large cash holdings:

image

January’s US SMI survey is mixed. Prices charged are charging up.

Source: World Economics (via The Daily Shot)

Fed’s Kaplan Sees 3 Rate Rises This Year, but Says More May Be Needed Dallas Fed President Robert Kaplan said he expects the U.S. central bank will need to raise interest rates three times this year and perhaps even more to prevent a robust economy from overheating.
image

How about long-term rates, given the coming supply?

Source: Deutsche Bank, @fxmacro (via The Daily Shot)

Let’s hope the Fed does not start shedding assets.

And foreigners!

And U.S. corps:

(…) The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends. (…)

OUPS!

  

EARNINGS WATCH

We now have 30 S&P 500 company reports for Q4. Per Thomson Reuters/IBES, the beat rate is 77% and the surprise factor is +3.1%. Trailing EPS are now $131.76.

Analysts are gradually updating their 2018 estimates taking into account company guidance on tax reform. Q1’18 EPS are now seen up !5.3% from +12.2% on Jan. 1. Full year EPS: +14.9% to $150.37 from +12.0%.

Markets are already discounting a lot of growth (RBC):

image

image

Angel How Michael Wolff Got Into the White House for His Tell-All Book Devil

THE DAILY EDGE (15 November 2016): The Bond Massacre

THE BOND MASSACRE

The Trump bond massacre since election night:

  • US 30Y yield: from 2.5% to 3.0%
  • US 5Y: 1.2% to 1.7%
  • CDA 10Y: 1.0% to 1.55%
  • Mexico 10Y: 5.8% to 7.4%
  • Brazil 10Y: from 11.1% to 12.3%
  • UK 30Y: 1.8% to 2.1%
  • Poland 10Y: 2.6% to 3.5%

Etc. including Europe and Asia. (The Daily Shot)

Heard on the Street: Trump Trade Won’t Break Emerging Markets

(…) What is different this time is the possibility of the Trump administration’s protectionist policies. These worries are real, but global trade has already stagnated for several years, a situation to which emerging economies have grown accustomed. Demand in emerging markets is increasingly domestic and reliant on trade with other emerging markets. Any improvement in U.S. growth will be a tailwind. (…)

A wild card is China. Its currency has weakened 12% since the end of 2014, and hit its weakest level since 2008 Tuesday. Other emerging markets will guide currencies lower where they can, to stay competitive. (…)

  • EM currencies are experiencing one of the fastest corrections in years. Here is the JPMorgan Emerging Markets Currency Index. (The Daily Shot)

  • EM equities have been selling off broadly. Are these declines overdone? Below is the Philippine stock market index.

  • Even India’s market took a hit on Monday.

  • And this, equivalent to a 25bps Fed tightening:

Yuan Slides to Lowest Level in Nearly Eight Years The People’s Bank of China has allowed the yuan to weaken for the last eight consecutive trading days, with the pace picking up since the dollar’s global surge following Donald Trump’s election victory.

The yuan devaluation exceeds 10% since August 2015. Which way for China now?

  

Global business optimism at post-crisis low amid political worries

Despite global growth lifting higher at the start of Q4, the October Markit Global Business Outlook survey, which looks at expectations for the year ahead across 12,000 PMI-survey companies, recorded the joint-weakest level of optimism since data collection started seven years ago. The mood was darkened by reduced optimism among US and UK companies, mainly reflecting worries about how the US election and Brexit may affect business conditions in the coming year. However, optimism improved in Japan, Eurozone, China, Russia, India and Brazil.

Global investment and employment intentions remain close to survey lows. Global profits were also under pressure as firms generally reported an inability to pass expected higher costs on to customers.

The Wave of Millennial Home Buyers is Coming

Hmmm…maybe not just yet:

Confused smile Loan Originator Perspective

Bonds continued their epic selloff today, as rates rose again.  In 4 business days we’ve now lost close to 160 bps, a staggering amount, which translates to a rate increase of .75% or more on most loans.  Since 2000, I’ve seen this epic scale of “face-melters” twice, in 2004 and the “taper tantrum” of 2013.  We’re past the point of hoping to regain last week’s pricing, it’s not going to happen, time to look forward, instead of back.  LOCK…..LOCK, and, oh yes, LOCK.  –Ted Rood, Senior Originator

Way too much selling, way too fast. Bond markets have priced in a future that includes 2-3 years of a Trump administration successfully transitioning our entire economy.  This is way oversold, I am patiently waiting for the markets to come back to reality. It may take some time, but it’s inevitable. I’m floating for now, but closet monitoring the markets.   –Gus Floropoulos, VP, The Federal Savings Bank

Euro Area IP Falls in September; Year-on-Year Gain Slows

While manufacturing PMIs have stabilized and showed some growth in the EMU, the industrial production index is lower in September and has fallen in two of the last three months. IP is up on balance over 12 months, but the last 12 monthly changes in manufacturing IP are split evenly between showing gains and declines month-to-month. (…)

On balance, the EMU sees a great deal of variability in recent momentum as well as in ongoing performance among members. While Germany has strong ongoing performance, there is nothing in its recent momentum that stands out. The Netherlands, Portugal, Finland and Italy each has stronger 12-month gains in output than Germany and Germany is one of only four countries in the table with output declining over three months on balance. As the usual strong economy of Europe, Germany is not pointing to any breakout although growth is still in gear. Europe appears to continue to muddle ahead without a clear sector or country leading it.

 
Goldman Sees the Possibility of Stagflation Under Trump Presidency
A badly designed US stimulus will only hurt the working class Not even US presidents with political mandates can repeal the laws of economics (Lawrence Summers)

(…)  the [infrastructure] plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting of public resources.

Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program.

(…) the Trump tax reform proposals are too expensive. Many, like the proposed abolition of the estate tax, will only benefit the high-saving wealthy. (…)

The Mexican peso has depreciated about 10 per cent relative to the dollar over fears of new protectionist policies, and many other emerging market currencies have also fallen sharply. The impact of this change is to raise the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US.

It will also make Mexico and other emerging markets much cheaper relative to the US for global companies. So US workers, particularly in manufacturing, will see increased pressure. (…)

Contact: edgeandodds [at] gmail.com