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

DEMOGRAPHICS

NEW$ & VIEW$ (24 APR. 2015): Housing; Commodity investing; Earnings; Aging; Churning.

 

Sales of New Homes Fell 11.4% in March

Sales of newly built homes declined by 11.4% in March from their red-hot pace in February, which itself registered as the strongest month for sales in seven years, to a seasonally adjusted annual rate of 481,000, according to Commerce Department figures released Thursday.

However, the March tally represents a 19.4% increase from the sales pace of March 2014. Even more broadly, the 129,000 newly built homes sold in this year’s first quarter represent a 21.7% gain from the same period of 2014. (…)

A sustained recovery in the new-home market could influence the broader economy, given that home construction typically accounts for 5% of U.S. gross domestic product but has languished at roughly 3.1% in recent quarters as the industry struggled through a slow, fitful recovery. (…)

The median price of a newly built home declined in March for the fourth consecutive month to $277,400, according to the Commerce Department. (…)

CalculatedRisk has this table from housing economist Tom Lawler who notes that combined net orders were up 0.4% YoY in Q1’14.

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Here’s the long-term chart courtesy of Doug Short:

Click to View

Will that gap eventually close?

Global Glut Challenges Policy Makers The global economy is awash in commodities, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand.

(…) The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. (…)

Examples of oversupply abound. (…) Not all commodities are in excess. China’s strong appetite for materials such as copper, gasoline and coffee will keep supplies tight in these markets. (…)

Funny how things change:

Here’s a longer term relationship also broken:

Punch The reality is that commodities (and commodity-sensitive equities) do not correlate well with equities and are the worst long term investment one can make: high risk, no reward.

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Higher Prices Fail to Salvage Profits American companies are struggling to offset the damage from a strong dollar without hurting their sales.

(…) Consumer-goods giant Procter & Gamble Co. said Thursday that price increases to offset currency issues in developing countries had contributed to a 2% drop in sales volume in the quarter ended in March.

Mead Johnson Nutrition Co., maker of Enfamil formula, said declines in Latin American currencies outpaced the company’s price increases, contributing to a 2% drop in overall sales from a year ago.

For McDonald’s Corp., a 2% price increase in both the U.S. and in Europe outside Russia wasn’t enough to keep the dollar’s rise from cutting revenue by $700 million and earnings by 9 cents a share in the first quarter. Executives forecast more pain from the currency fluctuations for the rest of the year.

The stronger dollar reduces the value of sales earned in foreign currencies such as the euro or the Brazilian real when those revenues are converted back into dollars. (…)

P&G said sales in the first three months were down 8% from a year earlier. If it hadn’t been for currency issues, they would have been flat. At Coca-Cola Co., a 7% rise in sales shrank to a 1% gain after the impact of the stronger dollar was accounted for. 3M Co. lowered its earnings forecast for the year after a stronger dollar reduced first-quarter sales by 6.5%, leaving them down 3.2% overall.

The dollar’s impact comes amid improving earnings and sales for big companies that aren’t in the oil-and-gas business. With about a third of the S&P 500 reporting results, earnings are forecast to rise 6.9% excluding energy companies, according to Thomson Reuters. Revenues, meanwhile, are forecast to rise 2.5% on that basis.

For some companies, currency effects meant the difference between sales growing and shrinking: 5% growth became a 4% decline at Kimberly-Clark Corp., thanks to currency. At United Technologies, 3% sales growth became a 1% decline. And Mead Johnson saw a 3% sales increase become a 2% drop once currency fluctuation was taken into account.

Google Inc. said the dollar’s strength reduced the quarter’s revenue growth to 12% year-over-year from 17% without currency effects. Facebook, which generates more than half its revenues overseas, said the stronger dollar reduced revenue by nearly $200 million, and Microsoft Corp. predicted the strong dollar would continue to slow its revenue growth.

And other companies also expect currency to remain a significant drag through the year. Pharmaceutical maker Baxter International Inc. said second-quarter sales are likely to grow 1% excluding currency effects—but decline 9% to 10% including them, even without further strengthening of the dollar. United Technologies expects foreign-exchange pressure to weigh on its sales and profit from regions such as Europe for the rest of the year.

Companies have other levers to pull as the dollar value of their overseas earnings falls. P&G is planning more cost cuts, including slashing its spending on marketing agencies. (…) PepsiCo, meantime, said it is seeking to cut costs as well as to move more production costs to overseas markets as currency effects are poised to reduce profit in Europe. The company says it generally tries to recover 75% of currency effects through price increases and make up the rest with cost cuts.

“The challenge is to balance volume and revenue,” said Pepsi CEO Indra Nooyi. So far, executives say, demand is largely withstanding the price changes Pepsi has imposed in some markets, including Russia. Pepsi warned currency weakness could hit its profit by 11 percentage points this year. Revenue fell 3.2% in the first quarter, while profit was flat.

The decision to raise prices can be complicated, requiring an assessment of what customers can bear and what rivals will do.

Laboratory equipment maker Thermo Fisher Scientific Inc. said it sought to offset currency losses by increasing prices in targeted markets, including Japan, where it has few domestic competitors that are insulated from currency effects.

DuPont Co. said price increases for its agricultural products increased the segment’s revenue by 3%, in part to offset weakening currencies in Europe and Asia. But currency fluctuations overwhelmed those price increases, contributing to a 10% overall decline in revenue for the segment.

In a Tuesday earnings call with analysts, CEO Ellen Kullman said DuPont employees are reanalyzing pricing strategy based on currency movements, recognizing that it is typically harder to raise prices when facing off against a local competitor as opposed to other foreign producers that also deal with currency challenges. (…)

EARNINGS WATCH

Midway into earnings season, the EPS numbers look better and better while revenues are coming in weak.

  • 189 companies (48.4% of the S&P 500’s market cap) have reported. Earnings are beating by 5.5% (5.3% yesterday) while revenues have missed by -0.7% (-0.6%).
  • Expectations are for a decline in revenue, earnings, and EPS of -3.4%, -2.1%, and -0.5%. Excluding Energy, growth would be 2.4%, 6.0%, and 7.9% (7.1% yesterday), respectively. This excludes the likelihood of beats.

The bigger surprises are coming from Financials (+5.8%) and Consumer Staples (+13.0%). Best YoY EPS growth: Financials (+12.2%), Health Care (+8.8%). Every other sector is below 5%.

Is the Nasdaq in Another Bubble? The Nasdaq Composite Index cruised to a record closing high Thursday, surpassing a 15-year milestone last reached at the height of the dot-com era.

(…) In 2000, the Nasdaq traded at 175 times its companies’ profits for the previous 12 months, according to Birinyi Associates. Today, it is 30 times, which is high but not astronomical. (…)

AMERICA’S SHADES OF GREY

The average annual increase in the number of Americans aged 16 to 64 years is expected to plunge from the 2.0 million of 1965 through 2007 to just 570,000 during the next 10 years. Reinforcing a dramatic shift toward a grayer America, the average annual increase in the number aged 65 years and older is projected to soar from the 450,000 of 1965- 2007 to 1.74 million during the next 10 years.

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As inferred from the expected 0.5% average annual rise in the number of 16- to 64-year old Americans, and assuming average annual productivity growth of 1.5% to 2%, real GDP’s average annual growth rate should be in a range of 2% to 2.5% for the 10-years-ended 2025. In stark contrast, real GDP expanded by 3.4% annualized, on average, during the 25-years-ended 2000.

Productivity growth can compensate for a deceleration by labor force growth. However, the 10-year average annualized rate of labor productivity growth has sagged considerably from the 2.8% of the span-ended 2004 to the 1.5% of the span-ended 2014. The reasons for this deceleration probably extend well beyond tax and regulatory issues.

But, gloom need not predominate. Though impossible to pinpoint, history shows that productivity growth has invariably received an unexpected boost from the introduction of new products that effectively utilize labor more efficiently. (Moody’s)

Money Entire Treasury Department Competing For Same Goldman Sachs Job Opening

Goldman Sachs human resources manager David Browning reported Thursday that a high-level position with the investment bank had attracted applications from every official in the United States Treasury Department. “Within just minutes of listing the open position on our jobs page, the flood of applications from treasury.gov email addresses started rolling in, and it hasn’t slowed down since,” said Browning, adding that most of the Treasury regulators who applied for the job highlighted their previous experience working closely with Wall Street financial firms and included a letter of recommendation from former Treasury Secretary Henry Paulson. (…) Browning added that the new hire was needed to take over the responsibilities of a former Goldman Sachs executive who had recently left for a high-ranking position in the Securities and Exchange Commission. Confused smile

NEW$ & VIEW$ (31 DEC. 2014): 2015 equities: here’s all you need to know

Dollar’s Rise Fuels Foreign Debt Fears Companies that issued bonds in U.S. dollars instead of the local currency face higher costs on debt payments. Some financially strapped firms might default on their bonds, analysts warn.

For 2014, the dollar is on track to gain more than 7% compared with a group of emerging-market currencies tracked by the Federal Reserve Bank of St. Louis. (…) The dollar’s rise means it costs more to make regular bond payments and pay off outstanding bonds as they mature. (…)

The Indonesian rupiah, Chilean peso, Brazilian real and Turkish lira are near multiyear lows. Mexico’s central bank bought pesos earlier this month to keep the depreciating currency from pushing the economy into a funk. (…) Fears are swirling about Russia, where the ruble has swung sharply as the economy struggles under the weight of Western sanctions and lower oil prices. (…) Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd., or Petronas, said in its third-quarter results that the dollar’s rise against the ringgit was partly to blame for lower quarterly revenues. About 70% of the company’s debt is in U.S. dollars, and its bond yields spiked as the ringgit fell nearly 9% in the past six months.

The financial hit was bad for Malaysia’s government, which collects major revenue from oil and gas sales.

In 2014, companies in emerging markets issued a record-high $276 billion of dollar-denominated bonds as of Tuesday, according to Dealogic. (…)

Countries also have flocked to dollar-denominated bonds, saddling those governments with higher debt-service costs as the dollar rises. Analysts say many countries generally are in a stronger position to withstand the dollar’s pain because their reserves are larger than in previous crises.

Overall, companies and sovereign-debt issuers have $6.04 trillion in outstanding bonds, up nearly fourfold since the 2008 financial crisis, according to Dealogic, a financial-data provider.

More than two-thirds of the outstanding corporate bonds in emerging markets are considered high-quality by major rating firms, meaning they carry a low default risk. (…)

Top officials at the International Monetary Fund and the Bank for International Settlements, two of the world’s leading financial institutions, have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. Some analysts expect the IMF to lower its five-year growth forecast for emerging markets.

Moscow moves to prop up Gazprombank Latest intervention by Russian government to stabilise banking sector
Singapore’s Economic Growth Slowed to 2.8% in 2014, Lee Says Singapore’s economic growth cooled in 2014 and the nation will experience slower expansion than it’s used to, Prime Minister Lee Hsien Loong said.

So, now that emerging markets are front page stuff, we may be near “Buy Low” territory as this Short Side of Long chart suggests:

Oil workers to pay for near 50% price fall Big producer groups target North Sea in savings push

(…) In a sign of how the oil majors are scrambling to make savings, BP, Royal Dutch Shell, Total and Chevron have all ordered sharp cuts in the rates paid to skilled contractors on projects in the UK North Sea.

The groups are cutting up to 15 per cent of the pay of thousands of self-employed oil and gas workers in the region. US-based Chevron told employment agencies that it would reduce rates from January 1 “to better align with industry benchmarks and manage cost pressures”, while BP has decided to cut the wages of 450 workers by up to 15 per cent from the new year. It said it remained “firmly committed” to the North Sea, but added that “costs have been rising and we must respond to these toughening market conditions”.

Another oil major is cutting UK contractor rates by 10 per cent. Shell has reduced rates in recent weeks, and oil services company Wood Group has announced pay cuts for 1,300 contractors.

A senior oil executive said that the drop in crude was “an opportunity” to lower exploration costs globally by renegotiating contracts with providers such as drilling companies. “Exploration is the easiest activity to reduce,” he said. (…)

The U.S. Population Will Hit a Record 320,090,857 for the New Year. The Growth Rate? Stalled.

The U.S. population has climbed past 320 million and, according to new Census Bureau estimates, will stand at a record 320,090,857 on Jan 1, 2015. As of Jan. 1, the population will be about 2.3 million people larger than a year earlier. That’s a modest uptick from population growth of  2.2 million in 2013.

In percentage terms, population growth slowed during the recession to the lowest pace in more than half a century and has yet to rebound. So while 320,090,857 will be the largest U.S. population ever, the growth rate has slowed–in part due to the economy–and has yet to kick back into gear.

Tough for an economy to grow rapidly with slow population growth and slowing productivity…(chart below from Andrew Smithers)

2015 equities: here’s all you need to know:
Bulls Hope History Repeats Itself in 2015 If stocks have history on their side, 2015 should be a good for a gain. Next year falls into three separate buckets all of which have averaged double-digits returns for the Dow Jones Industrial Average going back more than a century.

(…) When it comes to pre-election years, or the third year of a presidential term, the Dow has not booked a loss in a whopping 76 years. In the years since the blue-chip index’s last slide, which came during a pre-election year in 1939, the Dow and the S&P 500 have each averaged gains of 16% during the third year of a presidential term.

On top of that, the Dow has averaged an annual gain of 13% during the seventh year of a presidential cycle since 1901. Including President Barack Obama, seven presidents served two terms — or in the case of FDR more — since then.

“Typically each administration usually does everything in its power to juice up the economy so that voters are in a positive mood at election time,” the almanac highlights. (…)

History shows January’s performance may give investors an indication on how 2015 will shake out. That’s because 14 of the past 16 pre-election years followed January’s direction. That is, if stocks rose in January, the S&P booked an annual gain nearly 90% of the time over the past 16 periods. Furthermore, in 12 of the past 16 pre-election years, the Dow moved in tandem – higher or lower – with the performance of the first five trading sessions of the year.

To complete the trifecta of historical upside trends working in 2015′s favor, the fifth year typically produces the strongest returns. Years ending in “5” have only suffered one loss in the past 13 decades. Since 1885, the Dow has rallied an average 28% during the fifth year. The S&P 500 has gained an average 25% during the period since 1935, and the Nasdaq has increased an average 25% since 1975 in the fifth year.

Contact: edgeandodds [at] gmail.com