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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NFIB

THE DAILY EDGE (14 September 2016)

OUTLOOK FOR BUSINESS CONDITIONS DROPS SHARPLY, PUSHING INDEX LOWER IN AUGUST

The Index of Small Business Optimism declined two-tenths of a point in August to 94.4, with owners refusing to expand; expecting worse business conditions; and unable to fill open positions, according to the National Federation of Independent Business (NFIB).

nfib-optimism-graph

According to the survey, 15 percent said that finding qualified workers was their biggest problem.  Thirty percent said they had job openings that they couldn’t fill.  That’s the highest level since the recovery.

“There’s a very disturbing picture emerging in the economy,” said Duggan.  “A growing number of small business owners are paralyzed by the political climate. They’re especially reluctant to hire.  On the other hand, there’s another group of  small business owners who want to hire, but can’t find qualified workers to fill positions.”

 optimism-components-nfib-201605 optimism-components-nfib-201605

Weak sales:image

Wages rising faster than sales inflation compress margins:image

Hence:image

From Bespoke Investment:nfib-091316-problem-cost-of-labor

Household Incomes Leapt 5.2% in 2015; Poverty Rate Drops U.S. household incomes jumped in 2015, delivering the first increase in eight years, with the largest gains in the bottom fifth of earners. The overall 5.2% jump was the largest since the Census Bureau began releasing the data nearly 50 years ago.

(…) Median household incomes stood 1.6% shy of the 2007 level, before the last recession took its toll, and 2.4% below the all-time high reached in 1999.

The figures show how several years of robust employment growth, including 2.4 million people who gained full-time work last year, helped regain ground lost after an especially wrenching downturn, particularly for lower-income households. Longer hours, higher wages and lower inflation also have contributed to the improvement.

(…) even with the gains reported Tuesday, the typical male full-time worker earned around $150 less last year than in 1998, after adjusting for inflation. (…)

The Census Bureau found 29 million people, or 9.1% of Americans, lacked health insurance in 2015. That is down from 33 million people, or 10.4% of the population, in 2014. The uninsured rate has dropped significantly since 2008, when millions more Americans lacked coverage. (…)

The largest increases in incomes last year were for the bottom fifth of all earners, which could reflect rising state and local minimum wages. As a result, the ratio between incomes at the 90th and the 10th percentiles narrowed.

Meanwhile, the figures showed incomes at the 60th, 80th, 90th and 95th percentiles reached new records after adjusting for inflation. Incomes for households at the 10th and 20th percentiles still stood 9.9% and 7.6% below their peaks set at the end of the 1990s, respectively. (…)

From the NYT:income

Punch Save more for retirement or plan for less income, BoC official says

(…) Wilkins said economists estimate the interest rate needed to balance savings and investment when the economy is operating at potential has fallen in Canada to 1.25 per cent, from three per cent in the early 2000s.

She noted that while the Bank of Canada’s key interest rate target is set at 0.5 per cent, it is less stimulative that it would have been a decade ago at that level when the so-called neutral rate was higher.

“At the same time, as population aging continues, the neutral rate could fall further, unless productivity growth picks up or global savings fall,” Wilkins said.

“And the longer weak investment persists, the more important this risk becomes.” (…)

Some related JPM charts:

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The US Consumer Taps Out: BofA Internal Credit Card Data Shows Retail Spending Tumbles

(…) We already saw a weakening in July retail sales based on both the BAC aggregated card data and Census Bureau figures. Based on the BAC aggregated card data, retail sales ex-autos fell 0.1% mom SA in August, a payback from 2Q strength.”

The details, as per BofA, reveal that “the BAC aggregated card data showed that retail sales ex-autos declined 0.1% mom SA in August. This follows the 0.3% mom decline in July and pushes the 3-month average down to -0.2% mom.” The number would have been even worse if BofA had not decided to adjust out data from the recently bankrupt Sports Authority. As BofA writes, “there is a special factor to account for — we adjusted our data to control for the bankruptcy of Sports Authority, which officially shut stores this month. We expect the Census Bureau will do the same.” In other words, if one did not “adjust” the data for this factor, it would have been an outright disaster. (…)

Cartier Parent Richemont Warns on Profit After Sales Slip The maker of Cartier jewelry and watches issued a profit warning as it posted a tumble in sales, reflecting the challenges luxury-goods companies face from weaker demand in Asia and a decline in tourism in Europe.

(…) Geneva-based Richemont said sales fell 14% for the five months through August from the previous year at actual exchange rates. At constant exchange rates, sales declined 13%. It also said it expects operating profit for the six months through September to fall around 45% from the previous year.

“We are of the view that the current negative environment as a whole is unlikely to reverse in the short term,” the company said. (…)

The results came weeks after Swatch Group AG reported a 52% plunge in first-half profit. Net sales at the company, known for its cheap plastic watches but also the owner of expensive brands such as Omega, Blancpain and Breguet, fell 11%. (…)

Richemont said sales were down in much of Europe, “particularly in France, due to a significantly lower level of tourist activity.”

In Asia, sales growth in mainland China and Korea “was more than offset by the continuing weakness of the Hong Kong and Macau markets,” where the company is buying back inventory, Richemont said. Sales in Japan declined sharply, in part due to the strong yen that hurt tourism. (…)

Sales also fell in the Americas, but at a slower rate than in other regions. (…)

China new Rmb loans bounce back and beyond expectations

New renminbi-denominated bank loans in August rose to Rmb948.7bn, up 17.1 per cent year on year after falling almost 69 per cent in July to Rmb463.6bn, according to new figures released by the People’s Bank of China.

That was markedly higher than a median estimate from economists of Rmb750bn. New monthly household loans in August came to Rmb675.5bn, accounting for 71 per cent of the total. (…)

Total social financing (TSF), Beijing’s favoured gauge of overall liquidity encompassing most major forms of financing, rocketed to Rmb1.47tn, exceeding by more than half a median estimate of Rmb900bn. The figures came in nearly Rmb1tn higher than July’s Rmb487.9bn. (…)

China economist Julian Evans-Pritchard at Capital Economics suggested the pickup in credit growth was likely to add to optimism among investors in the near-term and strengthened the case against more easing from the People’s Bank of China this year. But he also noted that August’s figures still left broad credit growth below the recent peak from April to June for this year, adding that “with the PBOC now signalling that it is keen to rein in credit risks, we still expect a further slowdown in the coming quarters.”

Luxury-Home Sales in Vancouver Plunge on Foreign-Buyer Surcharge
Toronto sees spike in house sales as Vancouver market cools
Japan opens door to temporary foreign workers  Trend is a little-noticed effect of Abenomics stimulus

(…) Since Prime Minister Shinzo Abe came to power at the end of 2012, the number of foreigners living in Japan is up almost 10 per cent to 2.2m, with the number of “technical interns” rising 27 per cent and the number of foreign students up 36 per cent.

While permanent immigration is rigidly controlled, the figures highlight one of the safety valves that Japanese companies use to control wage inflation, with worker inflows equivalent to 10-15 per cent of total job creation under Abenomics. (…)

One of the main areas of migration is “technical interns”, a visa category that is supposed to allow workers from developing countries to train for up to three years at high-tech companies. Numbers are up by 41,178 to 192,655 since Abenomics began.

“Some are real trainees but some are disguised imports of cheap labour,” says Mr Fukao. Almost half of the technical interns are from China but numbers from Vietnam have exploded, rising threefold to 57,581 since 2012, reflecting Japan’s industrial ties with the fast-growing economy.

Student numbers are also up sharply, by 65,760 to 246,679, and the visa status allows some part-time work. (…)

The subject remains controversial. Mr Abe has flirted with a few schemes to allow inhighly skilled workers, but only a few thousand have arrived to date, and there is little political will to do more. But as labour shortages bite, especially in areas such as nursing care, that may change. (…)

With Federal Reserve policymakers warning of still subdued inflation in the US, the threat from higher consumer prices — which could burn holders of US Treasury bonds — also fell to 15 per cent in September.

Markets addicted to central banks’ backstop, Citi warns Central bank efforts to soften the blow to markets from weakening fundamentals are losing their impact and are leaving a system vulnerable to shocks, analysts at Citi said.
BOJ to make negative rates centerpiece of future easing: sources The Bank of Japan will consider making negative interest rates the centerpiece of future monetary easing by shifting its prime policy target to interest rates from base money at its review next week, sources familiar with its thinking say.

Meanwhile,

Libor’s Reaching Point of Pain for Companies With High Debt

A benchmark for near-term borrowing, the three-month U.S. dollar London interbank offered rate, has risen above 0.75 percentage point. That’s a key threshold for junk-rated companies with about $230 billion of loans outstanding according to data compiled by Bloomberg — with Libor above that level, the borrowers will have to pay more interest over time. The increase so far could amount to about an extra $230 million of total interest expense annually for the companies. (…)

Record level of fund managers say bonds and equities overvalued Monetary stimulus causes a record 54% of money managers to say valuations are too high

Powered by record amounts of monetary stimulus from the world’s central banks, 54 per cent of investors surveyed by Bank of America Merrill Lynch said a combined measure of bonds and equities was now overvalued — an all-time record for the survey which has been running since the start of the century.

Fears of overvaluation drove some money managers to retreat to the safety of cash at the start of the month, with investors increasing their cash holdings to 5.5 per cent in September, up from 5.4 per cent in August. (…)

Despite the relative despondency about valuations in financial markets, more than a quarter of money managers expected higher global growth over the next year — a nine-month high for the survey.

“Macroeconomic optimism is firmly at pre-Brexit levels, with economic growth expectations at their strongest since June,” said Manish Kabra at BofA. (…) (Charts via The Daily Shot)

“HIGH DIVIDENDS”, REALLY?

This chart from Greg Merrill shows the ratio of dividends from the “high-dividend” portfolio (SDY) to that from the S&P500 (SPY). SDY dividend payout is now less than 20% higher than SPY. (The Daily Shot)

NEW$ & VIEW$ (10 August 2016): NFIB; Productivity Uncertainty

U.S. Small Business Optimism Strengthens

The National Federation of Independent Business reported that its Small Business Optimism Index increased 0.1% during July to 94.6 following an unrevised 0.7% June rise. Despite the gain, optimism remained down 1.1% versus last July.

nfib-optimism-graph

An improved -5% of firms were expecting the economy to improve, the best reading in twelve months. A lessened 1% were expecting higher real sales in six months. A reduced 25% were planning to raise capital expenditures. A steady eight percent reported that now was a good time to expand the business, but that was down from 15% in December 2014.

Employment prospects were mixed. Twelve percent of firms expected to increase employment, up slightly m/m. A lessened 46% of respondents found few or no qualified candidates to fill job openings while a reduced 26% of firms had positions they were not able to fill right now, equaling the most of the economic expansion. Twenty-four percent of firms raised worker compensation over the last three months, steady with the first half, while 15% were expecting to raise it in the next three months, steady with Q1.

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From the survey:

This…image

…with that…image

…results in that:image

U.S. Wholesale Inventories Increase; Sales Strengthen
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U.S. Productivity Fell for Third Straight Quarter The longest slide in worker productivity since the late 1970s is haunting the U.S. economy’s long-term prospects, a force that could prompt Fed officials to keep interest rates low for years.

Nonfarm business productivity—the goods and services produced each hour by American workers—decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output, the Labor Department said Tuesday.

It was the third consecutive quarter of falling productivity, the longest streak since 1979. Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years. That was a further step down from already tepid average annual productivity growth of 1.3% in 2007 through 2015, itself just half the pace seen in 2000 through 2007, and the trend shows little sign of reversing. (…)

The economy’s potential future growth will be slower than previously expected unless productivity recovers, and their economic projections suggest Fed officials “see current policy as less accommodative, the labor market as less tight and inflationary pressures as more limited,” former Fed Chairman Ben Bernanke said Monday on his blog.

The policy implications, Mr. Bernanke said, “are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.” (…)

Fed Chairwoman Janet Yellen in June described the outlook for productivity growth as a “key uncertainty for the U.S. economy” and a “very difficult question” that has divided the economics profession.

“Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars,” she said. “Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.”

Ms. Yellen described herself as “cautiously optimistic” but said it “would be helpful to adopt public policies designed to boost productivity,” such as promoting investment. (…)

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Another uncertainty for Mrs. Yellen. As an economist, she is right. More investment would likely boost productivity. Business people look at this other chart and ask why they should be investing any more in physical capacity? That is the last thing they need. What they need is revenues. More on this in CETERIS NON PARIBUS.

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BTW, this is not just an American phenomenon as RBC Capital illustrates:

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Meanwhile, unit labor costs are creeping up: +1.7% YoY in manufacturing and +2.1% in total in Q2 (charts from Haver Analytics)

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In recovering housing market, the starter home remains elusive

(…) Nationwide, the inventory of homes costing $250,000 or less fell more than 12 percent between June 2015 and June 2016, according to the National Association of Realtors.

The shortage stems from higher labor, land and building permit costs that have caused construction companies to focus on higher-end homes that bring more profit. In addition, institutional investors are snapping up affordable homes by the thousands in select markets nationwide and converting them to rentals.

For a graphic showing the declining number of starter homes for sale in key markets, see:tmsnrt.rs/2aZWkJ8 (…)

Over the past four years, the number of entry-level homes for sale – defined as those priced in the lower third of a local market – has fallen by 34 percent, according to a Reuters analysis of data compiled by listings firm Trulia. (…)

Corporations or companies now own nearly one fifth of all homes priced under $300,000 that are not occupied by their owners, according to property data firm ATTOM Data Solutions, though investor purchases have slowed since peaking in 2013. (…)

Young adults aged 18 to 34 earn $2,000 less per year today than they did in 1980, after adjusting for inflation, according to the Census Bureau, and they have amassed record levels of student debt.

Outstanding student loan debt totaled $1.2 trillion in the fourth quarter of 2015 – trailing only mortgage debt among all consumer debt categories, according to the New York Fed. The average student loan monthly payment has jumped 50 percent in constant dollars, to $351, over the last 10 years. (…)

Average residential land values are up about 79 percent over the last four years, to a level last seen when the housing market peaked in 2007 and 2008, according to the Lincoln Institute for Land Policy.

The cost of building a new home, including permit fees, labor and materials, meanwhile, has jumped to 61.8 percent of the cost of an average single-family home, compared with 48.1 percent in 2007. (…)

U.K. Retail Sales Defy Brexit Vote Rise in July sales counters earlier surveys signaling a slowdown in consumer activity

(…) The British Retail Consortium said Tuesday that like-for-like sales—stripping out stores that have opened or closed—rose 1.1% in the four-week period from July 3 to July 30, compared with the same period a year earlier. In July 2015, sales increased 1.2%. The July sales rebounded from a fall in June, when like-for-like sales dropped 0.5%.

The BRC, which conducted the survey with accountancy firm KMPG, said sales were boosted by promotional activity and warm weather. Sales for all stores rose 1.9% compared with a 2.2% gain in July 2015 and a 0.2% increase in June. (…)

In its own survey of consumer spending Tuesday, analysts at Barclays had a cloudier view. It found spending rose 2.6% year-on-year in July, a softer rate than the 3.6% in June and May. The bank’s so-called underlying spending growth index—which targets categories less affected by weather, the timing of holidays and geopolitical events—fell 5.3% in July, its lowest level since June 2014.

Barclays measures spending on U.K.-issued Barclaycard credit and debit cards, which include retail sales but also other purchases like travel and entertainment, both at home and abroad. (…)

UK government bonds turn negative in historic rally Gilt prices surge on Bank of England pledge over asset purchases
French Tourism Tumbles 10% On Average Following Terrorist Attacks
Saudi Oil Output Sets Record Despite Global Glut OPEC says the kingdom’s July output rose to nearly 11 million barrels as it focused on market share over prices, which are in the midst of a two-year slump.

Top oil exporter Saudi Arabia told OPEC that its July crude production hit a record of 10.67 million barrels as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices.

According to figures submitted by the kingdom to the Organization of the Petroleum Exporting Countries, its previous production high was 10.56 million barrels a day in June 2015.

The group’s kingpin saw its production rise in July by 30,100 barrels a day to 10.48 million barrels a day, based on OPEC’s secondary sources such as shippers, analysts and industry executives. The figures were released in the OPEC’s monthly report Wednesday. (…)

OPEC, which controls more than a third of the world’s oil supply, said its July crude production inched up 46,000 barrels a day to 33.11 million barrels a day on higher output from Iraq and Saudi Arabia. The cartel now has 14 members since Gabon was added in June.

The organization said in its report that it raised oil demand growth in 2016 to 1.22 million barrels a day, some 30,000 barrels a day higher than last month. For 2017, world oil demand is forecast to grow by 1.15 million barrels a day, unchanged from last month’s report. (…)

Non-OPEC oil supply is expected to contract by 79,000 barrels a day this year, an upward revision of 90,000 barrels a day on higher-than-expected output in the second quarter from the U.S. and U.K. In 2017, non-OPEC supply is expected to decline by 150,000 barrels a day, following a downward revision of 40,000 barrels from last month.

OPEC said demand for its crude this year is still expected to reach 31.9 million barrels a day. For 2017, Demand for OPEC crude is forecast at 33 million barrels a day.

SENTIMENT WATCH

A rather compelling indicator that should make equity investors cautious is in the next chart. It shows speculative accounts’ net VIX exposure. Shorting VIX has become a massive (and very profitable) carry trade, indicating heightened risk appetite. (The Daily Shot)

CETERIS NON PARIBUS

(…) The Iiwa — or intelligent industrial work assistant — is produced by Kuka, one of Germany’s most innovative engineering companies. But it will not be entirely German for long. Less than a month after the fair, a Chinese appliance-maker called Midea offered to buy Kuka for €4.5bn, in the largest ever Chinese takeover of a German company. (…)

(…) Transactions with a total value of $10.8bn were announced in the first half of this year, according to EY, the professional services firm — more than all previous years combined. Chinese investors acquired 37 German companies in that period, EY says — compared with 39 in the whole of 2015. (…)

The range of targets has been wide. Last month, Osram, one of the most venerable names in German business, sold its lamp unit to a consortium led by Chinese LED specialist MLS for more than €400m. In February, Beijing Enterprises bought EEW, the German waste management company, for €1.44bn. Also this year, ChemChinaagreed a €925m deal to buy German machinery maker KraussMaffei Group. (…)

German technology firms are a key focus, but the Chinese net has widened to include everything from pharma and biotech companies to clinics and care homes. (…)

BTW: remember this?

Renminbi shock a distant memory for currency markets

UNINTENDED CONSEQUENCES

UK corporate pensions’ deficit continues to rise as interest rates collapse. (The Daily Shot)

With the above as the backdrop, something unusual happened. The Bank of England’s QE ran into trouble trying to purchase bonds because institutional investors (including corporate pensions and insurance firms) have nothing to replace these securities with – even if they make a significant profit. These organizations need a yield that covers their liabilities and cash is not going to get them there.

Source: @FT

Contact: edgeandodds [at] gmail.com