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

RETAILING

THE DAILY EDGE: 12 MARCH 2019

CONSUMER PRICE INDEX – FEBRUARY 2019

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in February on a seasonally adjusted basis after being unchanged in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.

The food index rose 0.4 percent, its largest monthly increase since May 2014, as both the food at home and food away from home indexes increased. The gasoline index rose 1.5 percent in February, following three consecutive monthly declines, resulting in the energy index rising 0.4 percent despite declines in the electricity and natural gas indexes.

The index for all items less food and energy increased 0.1 percent in February after rising 0.2 percent in January. The index for all items less food and energy rose 2.1 percent over the last 12 months, a slightly smaller figure than the 2.2-percent increase for the period ending January. The food index rose 2.0 percent over the past year, its largest 12-month increase since the period ending April 2015. In contrast, the energy index declined 5.0 percent over the last 12 months.

Retail Sales Rose in January, but Didn’t Make Up for Lost December Spending Consumer spending recovered only modestly, but data signal decline may not be sustained

Retail sales, a gauge of spending at restaurants, bricks-and-mortar establishments, and online stores, rose a seasonally adjusted 0.2% in January from a month earlier to $504.4 billion, the Commerce Department said Monday. (…) December’s spending report initially showed consumers unexpectedly pulled back spending in almost every category, which rattled markets. Monday’s report showed December sales were revised even lower to a 1.6% drop, from an initially published 1.2% decline. Though January’s sales gain didn’t make up for December’s loss, the data signal that the consumer-spending decline may not be sustained. (…)

Many were expecting December’s very weak –1.2% drop to be revised. It sure was…to –1.6%! The worst month (a December!) on a MoM basis since the end of the Great Financial Crisis.

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So many ways to skin a cat:

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The “control group” which excludes food services, autos, building materials, and gasoline is what goes into GDP:

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Many continue to doubt December data. I have a kind of monetarist approach with North American consumers: money in the pocket is money to be spent. The blue line below is aggregate weekly payrolls of private employees (employment x hours x wages). The red line is nominal expenditures and the black line retail sales. If all these numbers are good, Americans have boosted their savings in recent months. They better spend again soon because the U.S., and the world economy sure needs them shopping. Last 3 months U.S. retail sales annualized: –5.7%!!!! And yet, business people are not complaining of a consumer strike even after such a weak Christmas.

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Not complaining but not cheerful:

Optimism Stabilizes Among Small Business Owners
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GLOBAL COPPER USERS PMI NEAR 10-YEAR LOW

The seasonally adjusted Global Copper Users Purchasing Managers Index™ (PMI) – a composite indicator designed to give an accurate overview of operating conditions at manufacturers identified as heavy users of copper – fell from 47.9 in January to 47.0 in February, to signal a solid deterioration in business conditions. In addition, the rate of decline was the sharpest since May 2009.

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Output at global copper users declined sharply in February, with the rate of decrease accelerating from January to the fastest in nearly ten years. As has been the case in recent months, Asian users saw the most marked downturn in activity, while European users reported a solid drop. Meanwhile, US users saw output growth improve since the start of the year.

Contributing to the downturn worldwide was a fall in new orders for the third month in a row. Moreover, the latest decline was the sharpest since April 2009. Similarly, new export orders dropped at the quickest rate in over six years. Panellists that reported lower sales related this to weaker global economic activity, particularly in China. European copper users noted a lack of demand from the automotive industry and uncertainty over the Brexit negotiations.

As demand fell, global copper users reduced purchases of inputs at a sharp rate in February. This marked the third successive fall in input buying and the strongest since September 2012. Stock levels also declined, albeit moderately. (…)

Business conditions at copper users worldwide are deteriorating at a rate not seen since the financial crisis. For any industry, that is worrying news, but copper has a historical trend of correlating impressively with global output. Subsequently, current PMI figures point to a marked weakening of GDP growth in the first quarter of 2019.

One factor is the decline of the automotive sector, a key purchaser of copper end-use goods. New emissions standards have kick-started a transition process in the industry, which so far has curtailed production levels. This could continue during 2019 as car-makers reassess their businesses and prepare for further regulation changes.

Same trend for aluminum users:

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Speaking of autos, Markit has this:

Autos & parts sector posts series-record drop in output in February

Global output of automobiles & auto parts fell for the fifth month running in February. Moreover, the rate of contraction was the strongest since global sector PMI data were first available in October 2009. New orders in the sector fell at the fastest pace in over six years.

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It sure looks like we should not expect green shoots anytime soon from China nor autos.

Momentum Slips for Auto Import Tariffs President Trump’s threat to impose tariffs on car imports is facing headwinds amid congressional opposition, legal challenges and the prospect of consumer opposition.

Three weeks after the Commerce Department submitted a report on possible auto tariffs, the administration has yet to address the issue publicly—an uncharacteristically quiet approach that has trade experts concluding the White House isn’t eager to launch another grueling trade battle that could rattle markets as the 2020 election campaign gets under way. (…)

“They don’t engage too much” on the issue, one European official said. A second said the White House has signaled it plans to take no action on auto tariffs in the near term. (…)

Sen. Chuck Grassley, the influential Republican chairman of the Finance Committee, said last week he will work with Democrats and Republicans “to find a bill that we can get massive amount of support, so if we have to [we can] override the veto” expected from Mr. Trump. (…)

More broadly, lawmakers are questioning the Trump administration’s use of national-security arguments to set economic policy. (…)

China asks private sector to beef up investment in basic science

(…) “China will invest more in basic research,” said Science and Technology Minister Wang Zhigang during the ongoing National People’s Congress in Beijing on Monday, adding that his ministry will seek to motivate local governments, enterprises and industries to boost their investment in this area.

Regarded by Wang as “the source of all technological innovation” and currently a “weakness of China’s science and technology sector”, basic research has now become a priority as the nation seeks to catch up as a technology leader. Basic research aims to improve scientific theories — which can then be used to improve applied technologies and techniques. (…)

The China percentage translates into a sum of 1.96 trillion yuan (US$291.6 billion) on research and development in 2018 – a large number given the sheer size of the country’s economy. However, only about 5 per cent of China’s overall research and development spending goes on basic research, lagging a figure of 15 per cent in the US. (…)

U.S. Warns Germany to Drop Huawei or Lose Intel Access

(…) In a letter to the country’s economics minister, U.S. Ambassador to Germany Richard A. Grenell wrote allowing the participation of Huawei or other Chinese equipment vendors in the 5G project would mean the U.S. won’t be able to maintain the same level of cooperation with German security agencies. (…)

Among other things, European security agencies have relied heavily on U.S. intelligence in the fight against terrorism. U.S. officials declined to say whether other countries have received or would receive similar warnings. (…)

Here’s the rub from the WSJ:

Huawei, and its crosstown rival ZTE Corp. ZTCOY 1.97% , have put forth vastly more proposals—and are among the biggest owners of key patents—underpinning the coming wave of 5G technology. That is in contrast to Western firms, which played a comparatively smaller role in the blueprint and design of 5G than in previous generations of wireless technology.

Huawei’s clout in the design of 5G stems from its massive research and development budget, and from its aggressive contributions to the round-the-world meetings where engineers cobbled together the underlying architecture of 5G.

As a result, the Chinese tech juggernaut as of early February owned 1,529 “standard-essential” 5G patents, the most of any company. Together with patents owned by ZTE, the state-owned China Academy of Telecommunications Technology, and Guangdong Oppo Mobile Telecommunications Corp., companies from China own 36% of all 5G standard-essential patents, more than double their share of comparable 4G patents, according to data-analytics firm IPlytics.

The Chinese 5G patents cover technology associated with everything from 5G handset componentry to base stations and driverless-car technology. And telecom companies around the world—including those operating in places where Huawei gear might be off-limits—will have to pay royalties to Huawei to license that technology when it comes time to put 5G networks on the ground, experts say.

U.S. firms, by contrast, including Qualcomm Inc. QCOM 1.53% and Intel Corp. INTC 1.66% , hold just 14% of critical 5G patents, according to IPlytics. Huawei’s clout in 5G sets it apart from previous generations of wireless networks, which saw significantly fewer contributions from Chinese mobile companies compared with U.S. and European firms. (…)

Huawei’s prowess in next-generation technology stems partly from the fact that it now regularly outspends its rivals in research and development, a fact that has alarmed some policy makers in Washington. In 2017, the company spent $13 billion on R&D, more than any other Chinese tech company, and more than its chief rivals, Ericsson ERIC 1.41% and Nokia Corp. NOK 1.15% , combined. (…)

Some of Huawei’s proposals are now fundamental building blocks of 5G. They include one highly prized technique called “polar coding,” a method for correcting errors in data transmission. Huawei poured resources into developing it, and polar coding became a rallying cry for Huawei and its Chinese peers at standards meetings. After it was partially adopted as an official 5G standard at a critical meeting in 2016, Huawei founder Ren Zhengfei threw an opulent ceremony at the company’s Shenzhen headquarters to celebrate. (…)

THE DAILY EDGE: 7 MARCH 2019

Fed’s Beige Book: Shutdown Slowed Economic Activity in Some Areas Ten of the Fed’s 12 regional districts reported economic output expanded at a ‘slight-to-moderate’ pace in recent weeks

The report was based on information collected through February 25. The Philadelphia and St. Louis districts reported flat economic conditions.

About half of districts noted that the partial government shutdown in December 2018 and January 2019 held back growth in a variety of sectors, including auto sales, tourism, and retail. (…)

Still, more broadly, businesses in most districts reported employment increased at a modest to moderate pace. (…)

The beige book showed wage offerings continued to increase for both high- and low-skilled openings, with a majority of districts reporting moderately higher wages overall. In addition, about half of the Fed’s districts reported rising costs for benefits, such as bonuses, vacation time and relocation assistance.

The Fed said some Cleveland-area construction firms were granting large, “retention-focused merit increases” to some employees, while another business in the area said it “now offers raises every six months instead of every 18 months,” according to the report.

Meanwhile, businesses reported prices continued to rise at a modest-to-moderate pace. (…)

I was particularly interested in how the various Fed districts would characterize retail sales in their respective regions. Sales were pretty soft, on balance, across the USA with many districts referring to bad weather and the shutdown. But the consumer sector is not falling apart, just yet anyway.

  • Boston: Retailers reported moderate increases in sales, and restaurant sales were also up. Retailers contacted for this round reported that on a year-over-year basis, comparable-store sales were up by mid-single-digit percentages.
  • New York: Retail sales were mixed but sluggish, on balance. A major retail chain noted that sales were well below plan in January and down from a year earlier before rebounding modestly in early February; the weakness was partly attributed to adverse weather and the government shutdown. Reports from retailers in upstate New York were more upbeat, characterizing sales activity as solid.
  • Philadelphia: nonauto retailers reported slight gains in the new year.
  • Cleveland: Retailers reported slightly softer demand following the strong holiday season.
  • Richmond: Fifth District retailers reported mixed conditions in recent weeks. Many retailers saw a drop in business, which resulted from bad weather, while others struggled with continued cost increases due, in part, to tariffs.
  • Atlanta: District retailers reported flat sales growth since the previous report.
  • Chicago: Consumer spending fell modestly over the reporting period. Nonauto retail sales decreased modestly, with declines in the furniture, appliances, apparel, and home improvement sectors outweighing increases in the hardware, lawn and garden, and personal services categories. Numerous contacts attributed slower sales to the harsh winter weather that occurred over the reporting period.
  • St. Louis: Reports from general retailers, auto dealers, and hoteliers indicate mixed consumer activity since the previous report. January real sales tax collections increased in Kentucky, decreased in Missouri, and were flat in Arkansas and Tennessee relative to a year ago. Retailers in West Tennessee reported mixed activity, and contacts in Missouri indicated that poor weather negatively impacted sales.
  • Minneapolis: Consumer spending was mixed since the last report.
  • Kansas City: Retail sales increased slightly in late January and February and were moderately above year-ago levels.
  • Dallas: Reports on retail spending were mixed, though overall, sales expanded modestly. Some retailers noted a slight uptick in sales activity following the end of the government shutdown. By contrast, others said unfavorable weather conditions and a higher cost of credit slowed sales.
  • San Francisco: Sales of retail goods expanded modestly.

CEOs tell Trump they are hiring more Americans without college degrees Chief executives of major companies said at a White House forum on Wednesday that they are hiring more Americans without college degrees as they search to find increasingly scarce applicants for open jobs.
U.S. Trade Deficit in Goods Hits Record

The deficit in goods grew 10% last year to $891.3 billion, the widest on record, according to Commerce Department data released Wednesday. U.S. trade gaps with China and Mexico, already the nation’s largest, reached new records.

The picture looked less dire when services including tourism, higher education and banking are counted, though this deficit still deteriorated markedly. With services included, the trade gap grew 12% last year to $621 billion, the widest since 2008.

Fast economic growth, driven in part by fiscal stimulus, led to a 7.5% increase in imports last year, marked by increased spending on consumer goods, industrial supplies and capital goods. Exports grew too, but by 6.3% and from a lower overall level. (…)

The deficit widened by $44 billion to $419 billion in 2018. (…) The gap widened by $18 billion with the EU and by $11 billion with Mexico. China, the EU and Mexico account for about 54% of U.S. goods imports but made up 86% of the increased deficit. (…)

The overall monthly trade gap in December was the widest since 2008, jumping 19% from the prior month to a seasonally adjusted $59.8 billion. (…)

Bank of Canada sees longer, deeper economic slump, casts doubts on future rate hikes

RISK MANAGEMENT
Why Wall Street bulls are becoming endangered Investors build up cash levels amid fears that near-record US expansion may end soon

The FT reports on the Bank of America’s latest investor survey which reveals that fund managers are the gloomiest since 2008. They have trimmed their exposure to US stocks to the lowest point in 9 months and let cash reach its highest portfolio weight since the depths of the financial crisis in January 2009. Over a third think that the S&P 500 has already seen its peak and are thus not preparing to put their cash to work anytime soon.

The most interesting part of the FT article was about how fund managers tend to manage their own personal risk while managing client portfolios. “(…) being bearish and wrong is often seen as more acceptable than being bullish and wrong. The former are often portrayed as merely conservative and cautious investors, while the latter are cast as feckless idiots.”

This chart from CMG Wealth suggests it is time to put cash to work:

13/34–Week EMA Trend Chart: Buy Signal – Bullish for Stocks

FYI, in reference to the blue arrows:

  • in the spring of 2003, the Rule of 20 P/E was 20.0, earnings were rising and inflation declining. The Rule of 20 Strategy went from 100% cash to 90% equity in February 2003 but pared it down to 50% in June. It raised it to 90% in July 2004.
  • in mid-2009, the Rule of 20 P/E was 16.3. earnings were totally confusing but stabilizing and inflation was declining. The Rule of 20 Strategy went to 100% equity in November 2008 and kept it there until May 2016.
  • in early 2012, the Rule of 20 P/E was 16.0, earnings were rising and inflation declining.
  • in the spring of 2016, the Rule of 20 P/E was 20.0, earnings were declining and inflation stable.
  • currently, the Rule of 20 P/E is 19.5, earnings are rising and inflation is stable. The Rule of 20 Strategy is 100% equity since December 26.

Understand that this is not meant to be investment advice. I am just laying out some facts for your consideration. (This is my own risk management part Winking smile.)