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

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Europe economy

THE DAILY EDGE: 4 APRIL 2019

U.S. Bid to Maintain Tariffs Snarls Trade Talks With China The Trump administration’s demand that punitive tariffs remain to ensure Beijing enacts genuine overhauls has emerged as one of the biggest sticking points as U.S. and Chinese trade negotiators opened new talks.

(…) China trade envoy Liu He’s priority is to persuade his U.S. counterparts to remove tariffs on $250 billion of Chinese goods immediately on signing a deal, Chinese officials said. In exchange, Beijing is ready to eliminate retaliatory tariffs on $110 billion of U.S. goods.

In a sign that Mr. Liu may be making progress, Mr. Trump is looking to announce on Thursday the date of a summit with Mr. Xi, said an administration official. That’s a big signal the two sides are on the cusp of a deal, trade experts say, and a resolution of the tariff issue. But the official cautioned that the situation is fluid, and plans could change. (…)

U.S. business leaders support China’s demand to completely lift tariffs. (…)

Although Mr. Trump has declared himself “a Tariff Man,” he has made conflicting statements on China levies. On March 20, he said tariffs would remain for “a substantial period of time” after a deal. Two days later, he suggested that may only apply to the first round of U.S. tariffs, which targeted $50 billion of Chinese imports. (…)

U.S. Said to Set 2025 Target for China to Fulfill Trade Pledges

The trade deal that the U.S. and China are crafting would give Beijing until 2025 to meet commitments on commodity purchases and allow American companies to wholly own enterprises in the Asian nation, according to three people familiar with the talks. (…)

Under the proposed agreement, China would commit by 2025 to buy more U.S. commodities, including soybeans and energy products, and allow 100 percent foreign ownership for U.S. companies operating in China as a binding pledge that can trigger retaliation from the U.S. if left unfulfilled, the people said on condition of anonymity because the talks are private. (…)

The White House is particularly focused on purchases commitments through the second quarter of 2020, in an effort to narrow the trade balance ahead of Trump’s re-election bid. People familiar with the talks said for that reason, the U.S. is pushing for China to front-load a big chunk of the commodities purchases in the first two years the agreement is in place. (…)

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Source: CreditSights via The Daily Shot

Now that political calculations are taking center stage, a “deal” is imminent with the buck passed on to the next President.

Meanwhile, China’s economy is showing a better pulse as Markit reveals:

Business conditions across the Chinese economy improved at the fastest rate for nine months during March, according to the latest Caixin PMI surveys, providing evidence to suggest that recent fiscal support measures are beginning to work. The Caixin China Composite PMI (which covers both manufacturing and services), compiled by IHS Markit, indicated the largest increase in output since mid-2014. The ‘all-sector’ output index rose to 52.9 in March from 50.7 in February.

The strongest growth in manufacturing output for seven months was accompanied by a surge in service sector business activity, its fastest gain in just over a year. Manufacturing conditions improved for the first time in four months, supported by firmer demand, including a slight rise in exports.

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This other “deal” is still not a deal:

Congress, White House on collision course over efforts to ratify U.S.-Mexico-Canada trade agreement

Democrats are demanding trade negotiations be reopened to change labour, environmental and pharmaceutical provisions, even as the Trump administration, Canada and Mexico say they will not revisit the terms of the pact.

Efforts to have Mr. Trump lift steel and aluminium tariffs on Canada and Mexico, meanwhile, are also stalled. Canada, Mexico and some members of Congress have said they will not ratify USMCA until the tariffs are gone, but the White House has refused to budge. (…)

At the same time, Canada faces a time crunch. Parliament will rise in June and not reconvene until after the October election, meaning ratification could be delayed by months if it does not happen soon. (…)

Deal making:

Few Winners, Many Losers From Trade Tariffs, IMF Finds A 25% tariff on all Chinese imports to U.S. would cut U.S. GDP by 0.3%–0.6% and global growth by 0.1%–0.2%

(…) China would be hit even harder, with its GDP declining 0.5% to 1.5%, the IMF study found, because China’s exports to the U.S. are a larger share of its economy than vice versa. But Mexico, Canada, Europe and other parts of Asia would actually benefit somewhat, in the short run, as trade is diverted through their economies to avoid the tariffs. (…)

For much of the world, trade bounces across borders more than ever before, and thus an increase in tariffs “would have a larger negative effect today than in 1995,” the IMF report said. (…)

Synchronized downshift:

Source: @biancoresearch

A clear loser in this:

Surprised smile Germany Suffers Double Blow on Factory Slump, Downgrade More bad news from Europe’s largest economy.

The data on Thursday showed orders fell 4.2 percent in February from January, and 8.4 percent from a year earlier — the most since 2009. The Economy Ministry added further gloom, saying that manufacturing momentum will “continue to be subdued in the coming months, particularly due to a lack of external demand.”

The big drag in February was exports, which fell 6 percent. Trade tensions and Brexit woes are two factors likely behind the slump, while there’s also weaker demand, particularly in China, for cars and other German products.

The bad news from the Economy Ministry was followed just hours later by new forecasts for 2019 that predicted the weakest growth in six years. The country’s five leading research institutes see expansion of 0.8 percent, just half the pace previously anticipated.

Factory orders are plunging amid a slowdown in global demand`

This is a one-year free fall that is accelerating!

Markit’s recent German PMI offers no hope for now:

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The deterioration in performance was underpinned by a sharp and accelerated decrease in new orders, which was in turn partly driven a further slump in export sales. Both total order books and new business from abroad fell at the fastest rate since April 2009. (…) Manufacturers’ backlogs of work fell for the seventh straight month and at the fastest rate since mid-2009. (…) Manufacturing output fell markedly and at the fastest rate since 2012, with the consumer goods sector joining intermediate and capital goods producers in contraction.

U.S. HOUSING

Homebuyers are taking advantage of the recent decline in mortgage rates. Loan applications for house purchase are the highest in years for this time of the year.  (The Daily Shot)

TECHNICALS WATCH

CMG Wealth’s trade signals are all flashing green:

Equity Trade Signals
  • Ned Davis Research CMG U.S. Large Cap Long/Flat Index: Buy Signal – 100% U.S. Large Cap Equity Exposure
  • Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Buy Signal – Bullish for Equities
  • Volume Demand (buyers) vs. Volume Supply (sellers): Buy Signal – Bullish for Equities
  • S&P 500 Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities
  • S&P 500 Index 50-day vs. 200-day Moving Average Cross: Buy Signal – Bullish for Equities
  • NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities
  • Don’t Fight the Tape or the Fed: Indicator Reading = +1 (Bullish Signal for Equities)

Just for fun, I went back to check the same signals at the end of January 2018 and in early October 2018. CMG Wealth was then only displaying the first 3 and the last above. In both periods, the first 3 indicators were green and the last was neutral. Just so you know…

BTW, the Rule of 20 P/E was 23.5 (17.5% overvalued) in January 2018 and 21.2 (6.2% overvalued) at the end of September. It is currently 19.7 (1.5% undervalued) after reaching 16.8 (19% undervalued) last December 26 during the recession scare.

Also know that investor sentiment gauges are currently generally positive. This is a contrarian indicator.

CMG Wealth also offers several recession indicators:

Economic Indicators
  • Global Recession: High Recession Risk (97% probability)
  • U.S. Recession: Low U.S. Recession Risk (Next Six Months)
  • Inflation Watch: Low Inflation Pressures
  • Global Recession Probability Indicator: High Recession Risk
  • The Economy Based on the Stock Market Indicator: High U.S. Recession Risk
  • Recession Probability Based on Employment Trends: Low U.S. Recession Risk
  • Credit Conditions – Recession Indicator: Low U.S. Recession Risk*
  • U.S. Economy vs. Yield Curve: Low U.S. Recession Risk

* Nearing change in signal

Ned Davis Research says that “The Economy Based on the Stock Market Indicator” has had correct signals 80% of the time since 1950. My own observations are that it had correct recession signals 60% of the time and correct expansion signals 53% of the time.

NDR also says its “Recession Probability Based on Employment Trends” has ben correct 100% of the times since 1980. Very true.

“The unequal sharing of blessings” vs. “the equal sharing of miseries.”

Democratic candidates seem to be leaning seriously left ahead of the next elections to the delight of the GOP. Including the “Don’t know for sure”, Sanders, Harris and Warren have pretty solid backing, exceeding 50% and even 60% when including the “Have some reservations”.

Source: @WSJ; Read full article

The “comfies”, the “Don’t know for sure” and people with “some reservations” should all read Howard Marks’ latest memo before settling their views: GROWING THE PIE

THE DAILY EDGE: 25 MARCH 2019

SENTIMENT WATCH

Wherever you look in developed markets, sovereign bond yields are at their lowest levels in years as traders ratchet up bets that major central banks will be easing. (…)

Money markets are pricing around a 90 percent chance that the Federal Reserve will cut rates by 25 basis points by December, followed by another reduction in September 2020. This comes after the central bank projected no hikes this year at its policy meeting last week. (…)

(…) But there’s an alternative prognosis: that we’re witnessing a reinstatement of the friendly low-rate environment that sent equities to records in the first place. (…)

In the past 35 years, such a signal [curve inversion] has preceded the three U.S. recessions by an average lead time of more than 15 months, while producing one false positive, according to data compiled by Bloomberg. (…)

  • Positive German data tempers equity selloff, lifts bond yields

World stocks hit a 12-day trough on Monday as fears for economic growth sent investors dashing for safe-haven assets, but the selloff lost some momentum after better-than-expected data from Germany.

The Ifo Institute’s March business climate index unexpectedly rose, soothing nerves after Friday’s dismal German manufacturing data, which helped spark a global selloff that hammered stock markets and pushed key benchmark bond yields below zero. (…)

  • Former Fed chair Yellen says yield curve may signal need to cut rates, not a recession

Pointing up Freaking Out Over Inverted Yield Curve In this video podcast, Ed Yardeni discusses why the stock market is freaking out over the inversion of the yield curve.

As far as the U.S. is concerned, the real income side of the consumer is pretty strong.

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U.S. CEOs don’t seem overly concerned, just yet anyway:

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European manufacturing is clearly in bad shape:

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But Services are not distressed as in 2012-13:

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So the composite PMI has not cratered Fingers crossed:

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(Markit)

  • Fathom Consulting: Fathom’s aggregate euro area Economic Sentiment Indicator (ESI) ― which distils the information from numerous business and consumer surveys into a single composite indicator ― ticked up to 0.5% in February, after having declined by 0.9 percentage points in 2018.

Fathom’s view is that growth is likely to remain close to its current pace of 0.2% per quarter, with the economy likely to expand by 1.2% over the year as a whole. While this rate may not immediately appear impressive compared to historical norms, it remains slightly above Fathom’s central estimate of the currency bloc’s post-crisis trend rate of growth. (…)

Today:

Germany’s leading indicator, the Ifo index, increased in March, finally providing some evidence of a rebound. The Ifo index now stands at 99.6, up from 98.5 in February – the highest level this year. Both the expectations and the current assessment component increased. Particularly, the sharp improvement in the expectations component to 95.6, from 93.8, provides moderate optimism. (ING)

U.S. Existing Home Sales Jumped 11.8% in February

That was the second-strongest monthly gain in home sales ever.

Nonetheless, sales volume was 1.8% below where it was one year ago, indicating the market is recovering but to a lower level than 2017 and early 2018. Other continued signs of softness include higher inventory levels and an increase in the days homes are spending on the market. (…)

The region seeing biggest increase in February home sales was the West, where volume rose 16% from January. The increase was 14.9% in the South and 9.5% in the Midwest. Sales were flat in the Northeast.

The National Association of Realtors said there were 1.63 million existing homes available for sale at the end of February, up 3.2% from a year earlier and representing a 3.5-month supply at the current sales pace.

Some jump! Right back at the 2017 average.

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Everywhere in the U.S. except the Northeast. (?)

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February is a very slow month in housing and seasonal adjustments can be tricky. Non seasonally adjusted sales were down 2.2% YoY. Let’s see March/April numbers before concluding anything.

U.S. Budget Deficit Grew 39% in First Five Months of Fiscal 2019 Tax revenues little changed so far in fiscal 2019

The government ran a $544 billion deficit from October through February, the Treasury Department said Friday, compared with $391 billion during the same period a year earlier. Federal outlays rose 9%, to $1.8 trillion, while revenues declined less than 1%, to $1.28 trillion.

Part of the increase in the deficit was attributable to a shift in the timing of certain payments, which made the deficit appear larger. If not for those timing shifts, the deficit would have risen 25% from the same period in fiscal year 2018. (…)

On a 12-month basis, revenues declined 0.7% and outlays rose 5%. For the 12 months ended February, the deficit totaled $932.2 billion, or 4.5% as a share of gross domestic product, the highest since May 2013.

EARNINGS WATCH

The Q4’18 earnings season is now essentially over (497 companies in). Earnings growth was 16.8% thanks to a +3.4% surprise factor. The big disappointment was from Financials: earnings rose 15.6% but the beat rate was only 64% and the surprise factor a low +0.3%. Ex-Energy, earnings grew 14.2%.

Analyst revisions improved a little last week:

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Here’s the quarterly trend seen by IBES:

  • Doubts increase that first quarter will be earnings low point

As Wall Street braces for what may be the first U.S. profit decline since 2016, investors say the first quarter may not mark the low point for 2019 earnings.

(…) Since the start of the year, the forecast for second-quarter profit growth has fallen to 3.0 percent from 6.4 percent, while estimated growth for the third quarter has dropped to 2.7 percent from 4.9 percent, based on Refinitiv’s data. The fourth-quarter growth estimate has come down as well, though it is still relatively strong, at 9.1 percent.

Those numbers could keep falling, while the first-quarter forecast is likely to improve from here. Since 1994, earnings have surprised to the upside on average by 3.2 percent, according to Refinitiv data, which suggests S&P 500 companies will post an earnings gain for the first quarter. (…)

Joe Zidle, BlackRock’s CHIEF INVESTMENT STRATEGIST:

Not all profits recessions are bad There have been 14 earnings recessions since World War II, i.e., two consecutive quarters of negative earnings growth. Six of those earning recessions can be characterized as mid-cycle, meaning they did not coincide with an economic recession.4 In the eight earnings downturns that coincided with broader economic slowdowns, stock performance 12 months later was negative with an average return of -0.4%.5 Conversely, the market was up nearly 12% on average a year after earnings recessions that did not overlap with an economic recession. For reference, the broader market has returned an annualized 7.3% since 1945.

Next Twelve Months Stock Performance (1945-2018)

Next Twelve Months Stock Performance (1945-2018)

IHS Markit US PMI signals greatest pressure on corporate earnings since 2016

The surveys indicate that growth has moderated since the robust gains seen this time a year ago, especially in the goods-producing sector. The ‘composite’ index, which pulls together the data from the manufacturing and service sector PMIs and acts as an accurate ‘nowcast’ tool for GDP, correctly indicated that the pace of economic growth slowed in the fourth quarter (our model from the survey indicated 2.5% growth against an initial official estimate of 2.6%). The index has since shown no re-acceleration in the first quarter (see fig 1).

Businesses in fact reported that output growth eased to the second-lowest seen over the last year, according to the flash PMI results for March. Although the headline PMI remains encouragingly resilient, indicative of the economy growing at an annualised rate in excess of 2% (suggesting some potential upside to many current growth forecasts), signs of the business environment becoming tougher have intensified in recent months, especially in manufacturing, where the survey is consistent with falling factory output and order books (see fig 2).Growth is also likely to cool further, according to the survey’s sub-indices, and companies may soon seek to reduce capacity. Whereas new orders were growing at a faster rate than companies could boost output throughout much of last year, the surveys are now showing signs that demand is insufficient to sustain current output levels. Similarly, in manufacturing, the forward-looking new orders to inventory ratio hit a 18-month low in March and suppliers’ delivery delays (a key indicator of capacity utilisation) indicated the fewest delays for 16 months in March.

At the same time, business optimism about the outlook has also cooled to the lowest since mid-2016 amid worries over the impact of tariffs, trade wars, higher prices and rising interest rates.

The headwinds to business indicated by the surveys bode ill for corporate earnings growth, a deeper insight into which can be gleaned from analysis of other survey sub-indices against historical earnings growth. In this respect, the surveys indicate that earnings have been under their greatest pressure for three years in recent months.

To estimate the trend in earnings growth we have compiled an indicator based on five components, all derived from IHS Markit’s US PMI surveys, which provide insights into sales growth, pricing power and profitability:

  • Total order book situation: a blended index of the composite new orders and backlogs of orders questions providing an overall indication of sales growth (weight 1.3)
  • Output prices: based on the composite PMI average prices charged index, providing an indication of pricing power among goods producers and service providers (weight 0.7)
  • Backlogs of work: the composite survey index covering work received but not yet completed, which helps indicate the extent to which demand is running ahead of capacity and therefore acts as a further guide to both sales and pricing power (weight 0.7).
  • Productivity: the ratio between composite PMI output and employment indicators which provides an insight into labour productivity, itself a key determinant of profitability (weight 0.2)
  • Suppliers’ delivery times: a key gauge of capacity constraints and pricing power (weight 0.3)

The above components are calculated by first comparing the current month’s value to the trailing six-month average. The components are charted here against earnings growth (note that in these charts we use three-month averages to illustrate the trends). We compare the components against the reported earnings per share in S&P500 companies over the prior 12 months, as measured by Case Shiller, and specifically the current month’s EPS value against the prior six-month trailing average.

Individual components are then weighted together to form a composite earnings momentum gauge (see fig 3). The resulting index exhibits a correlation of 75% against this measure of earnings growth with an advanced lead of four months, which rises to 83% if a moving average is used to reduce some of the indicator’s volatility.The average earnings growth momentum signalled by the indicator in the first quarter is the lowest recorded since the first quarter of 2016, a time when earnings were falling at an annual rate of 12.9%.

Friday’s setback brought the S&P 500 Index back to the 2800 resistance level and 1.4% above the rising 200-day m.a.:

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THE MOTHER OF ALL DISGUSTING CORPORATE BEHAVIOR

Philip Morris says Canadian unit RBH granted creditor protection

Philip Morris International Inc on Friday said its Canadian unit, Rothmans, Benson & Hedges Inc (RBH), was granted creditor protection, following a tobacco class action ruling in Quebec this month.

The company said it would deconsolidate RBH from its financial statements, and it cut its full-year 2019 diluted earnings per share forecast to at least $4.90 at prevailing exchange rates, from at least $5.28 in the forecast it made on March 4, shortly after the ruling in Quebec.

The Court of Appeal of Quebec upheld the bulk of a 2015 decision that awarded about C$15 billion ($11.19 billion) to smokers in the Canadian province, a blow to several big tobacco companies, including RBH.

Some observers criticized the creditor protection calling it an attempt to avoid making payments. (…)

The creditor protection process, granted by the Ontario Superior Court of Justice, will allow RBH to carry on its business in the ordinary course, Philip Morris added.

U.S. Vessels Sail Through Taiwan Strait, Defying China The Pentagon sent two vessels through the Taiwan Strait on Sunday, a show of U.S. support for Taiwan likely to fuel concerns in Beijing that Washington is aligning increasingly with Taipei.
China Warns the U.S. After Navy Sails Through Taiwan Strait

(…) The U.S. has over the past year increased its naval transits through the 180-kilometer (110 mile) wide strait that separates Taiwan from the Chinese mainland. Sail-bys in January and February also drew protests from China, which considers the island a province.

On Monday, China urged the U.S. to avoid undermining ties between the world’s two biggest economies and support peace and stability in the strait, Geng said. (…)

EU to drop threat of Huawei ban but wants 5G risks monitored – sources

The European Commission will next week urge EU countries to share more data to tackle cybersecurity risks related to 5G networks but will ignore U.S. calls to ban Huawei Technologies, four people familiar with the matter said on Friday. (…)

Ansip will tell EU countries to use tools set out under the EU directive on security of network and information systems, or NIS directive, adopted in 2016 and the recently approved Cybersecurity Act, the people said. (…)

Nearly 95% of all reported trading in bitcoin is artificially created by unregulated exchanges, a new study concludes, raising fresh doubts about the nascent market following a steep decline in prices over the past

(…) Bitwise Asset Management said its analysis of trading activity at 81 exchanges over four days in March indicates that the actual market for bitcoin is far smaller than previously thought. (…) Last week, research firm Crypto Integrity said it concluded that 88% of all trading in February had been inflated. The TIE, another cryptocurrency researcher, on Monday estimated that 75% of exchanges had some form of suspicious activity occurring on them. (…)

Bitwise suggests that the unregulated exchanges are inflating trading volume to get a higher ranking on data services like CoinMarketCap and leverage that ranking to attract listing fees.

Contact: edgeandodds [at] gmail.com