RETAILING

U.S. Retail Sales Rose Slightly in August American consumers reined in their spending in August, taking a breather after very strong sales growth in July.

Sales at retail stores and restaurants rose 0.1% from the prior month to a seasonally adjusted $509 billion in August, the Commerce Department said Friday.

That was well below the 0.4% increase economists surveyed by The Wall Street Journal had expected. Compared with August a year earlier, sales grew 6.6%.

Still, revised data showed retail sales rose 0.7% in July, up from an initially reported 0.5% increase. (…)

The overall weakness in August was largely due to a drop in auto sales. Sales at motor vehicle and parts dealers dropped 0.8% from the prior month.

Excluding motor vehicles, sales were up 0.3% in August, and excluding gasoline, sales dropped 0.1%. Excluding both categories, sales rose 0.2% last month. (…)

 

(Haver Analytics)

Out of Stock in Retail Stores This Holiday Season: Workers Retail job openings are outpacing hiring, and retailers are responding by starting the push for holiday workers earlier than ever, raising wages and offering extra perks such as paid time off.

There were 757,000 retail job openings across the country in July, about 100,000 more than the same time a year ago. The number of openings surpassed the number of hires from March through June for the first time in a decade, according to the Bureau of Labor Statistics. And some big cities, including New York, San Francisco and Seattle, are facing a shortage of workers with retail skills, according to data from LinkedIn.

Retailers are responding by starting the push for holiday workers earlier than ever, raising wages and offering extra perks such as profit-sharing and paid time off for part-time associates. They are also hosting recruiting marathons with the goal of hiring thousands of workers in a single day. (…)

Target Corp. said last week that it plans to hire 120,000 seasonal workers, a 20% increase from last year. The starting wage for those hired after Sept. 16 is $12 an hour, $1 extra than workers hired before that date. The increase is part of Target’s plan to raise its minimum hourly wage to $15 by 2020. In recent months, retailers from Walmart Inc. to CVS HealthCorp. have been raising starting hourly pay. (…)

World’s Richest Economies Enjoy Biggest Pay Raise in a Decade

(…) JPMorgan Chase & Co. reckons pay growth in advanced economies hit 2.5 percent in the second quarter, the most since the eve of 2009’s worldwide recession. The bank predicts wages will accelerate to near 3 percent next year. (…)

 

Industrial Production Rose in August U.S. industrial output rose for the third month in a row in August, largely because of strong utility and motor-vehicle production.

Industrial production, a measure of factory, mining and utility output, grew a seasonally adjusted 0.4% in August from the prior month, the Federal Reserve said Friday. (…) Overall industrial production in July was revised up to a 0.4% gain from a pervious estimate of up 0.1%.

Robust 1.2% production growth in the utilities sector helped push last month’s overall output gain, with electricity production increasing at a solid pace from a pullback seen earlier in the summer months.

Meanwhile, output at factories increased a modest 0.2%, but largely because of motor vehicle and parts production. If ones removes that from the measure, manufacturing output was unchanged in August. Mining production continued to increase steadily at 0.7%. Output in the category has grown each month since January.

In the longer term, industrial production rose 4.9% in August from the prior year. (…)

Capacity utilization, which reflects how much industries are producing compared with what they could potentially produce, increased by 0.2 percentage point to 78.1% in August.

(Haver Analytics)

Slowly making its way in the mainstream media (although this is from Barron’s):

The (Debt) Clock Is Ticking As the national debt climbs to once unheard-of levels, no one seems to care. Bold action is needed before time runs out.

(…) Debt held by the public, a conservative tally of what America owes, will swell from $15.7 trillion at the end of September, or 78% of gross domestic product, to $28.7 trillion in a decade, or 96% of GDP.

Those estimates, provided by the Congressional Budget Office, are based on reasonable assumptions about economic growth, inflation, employment, and interest rates, but they leave out some important things. They assume that the nation’s need for increased infrastructure investment, estimated by the American Society of Civil Engineers at $1.4 trillion through 2025, goes unmet. They don’t account for the possibility of another financial crisis, or war, or a rise in the frequency or severity of natural disasters, and they assume that some Trump tax cuts will expire in 2025. (…)

MacGuineas [president of the nonpartisan Committee for a Responsible Federal Budget] calls the debt “the most predictable crisis we’ve ever faced,” but says spotting the tipping point will be difficult, because much depends on other countries, and their appetite for our debt. “We can borrow a lot more if we’re still the best-looking horse in the glue factory,” she says. (…)

“There’s no low-hanging fruit, politically,” says Concord Coalition’s Bixby. “It’s the entitlement programs, and the baby boomers have already begun to collect.” The boomers are sometimes described as a metaphorical pig in a python, but Bixby points out that while Social Security’s deteriorating fiscal condition could stabilize after the boomers retire, it will not reverse, and that Medicare’s challenges will keep growing. “It’s more like a telephone pole in a python,” he says. (…)

In a recent analysis, economists at J.P. Morgan studied historical debt defaults, bailouts and inflation spikes since World War II in countries that resemble the U.S. economically. They found that the probability of these things occurring within any five-year period was less than 6%. Statistically, the link between debt levels and crises is surprisingly weak. That is, crises have occurred in countries with lower debt/GDP than the U.S. has now, and some countries with higher debt/GDP have avoided crises. Many crises corresponded with specific currency problems that, for the U.S., seem less relevant.

The economists’ takeaway is that it’s “too early to worry about a U.S. sovereign debt crisis,” but also that “we should not ignore lessons from history on the fragility created by debt.” (…)

In the same Barron’s, for the “record”

Stephanie Kelton, an economics professor at Stony Brook University on Long Island in New York [and an advisor to Sen. Bernie Sanders’ presidential campaign], has a radical new way for thinking about the economy: Governments that print and borrow their own currency can’t go bankrupt, she says, and the current U.S. budget deficit is, if anything, too small.

That kind of thinking is part of a school of economic thought known as modern monetary theory, or MMT, which Kelton has helped develop. (…)

Government debt is just the money the government spent into the economy and didn’t tax back. That’s all the national debt is. It’s a historical record of all of the times that they made a net deposit, spent more than they taxed out, and the bonds are the difference between those. One of the greatest cons ever perpetrated on the American people is this notion that the national debt belongs to us, that we are responsible in our individual capacity for a share of it.

Good grief! Trillions of debt are just a “historical record”. Are we in Zimbabwe?

China’s Home Prices Rose at Fastest Pace in Almost Two Years

New-home prices gained 1.49 percent from the previous month, according to Bloomberg calculations based on data for 70 cities released by the National Bureau of Statistics on Saturday. That compared with a 1.2 percent increase in July. It was the sixth straight monthly acceleration. (…)

Despite this year’s price gains, China’s developers are the gloomiest in eight years, weighed down by a squeeze on financing, a looming property tax and home-purchase curbs, according to a sentiment index compiled by Standard Chartered Plc. Some builders are offering free luxury cars and hefty discounts to speed sales. (…)

For JPMorgan’s Zhu, the biggest worry in the housing sector is the diminished role of market forces in pricing and sales, as the government’s “temporary” administrative restrictions become permanent. Tightening measures including purchase and resale curbs, increased down payments and price caps have been rolled out in 114 cities, according to brokerage CLSA Ltd. Most were imposed after March 2017, a CLSA presentation showed.

• China’s Stocks Drop to Lowest Level in Nearly Four Years The Shanghai Composite Index erased the last traces of its recovery from a boom that turned into a $5 trillion bust.

India curbs imports to cut current account deficit Finance minister announces restrictions after quarterly shortfall widens to $15.8bn

(…) India newspapers on Saturday morning reported that the items likely to be targeted were gold, watches, high-end electronic items and luxury cars. Any move by New Delhi to further impede access to its domestic market is likely to upset its key trading partners, who already complain of India’s high import tariffs, compared with other countries, and persistent non-tariff barriers. (…)

China paper warns it won’t play defense on trade as Trump lauds tariffs

EARNINGS WATCH

This is the quiet period before we get into the Q3 earnings season in one month. Nothing new on the pre-announcements side. Bottom up estimates have been reduced somewhat in the past 2 weeks from +22.4% in S&P 500 EPS (+19.3% ex-Energy) to +21.7% (+18.8%).

Trailing EPS$148.58 which I estimate is $153 pro forma the tax reform for 12 months assuming a 7% average accretion. The Rule of 20 Fair Value is thus 2723 and the Rule of 20 P/E now at 21.2, thanks to the recent easing in the inflation rate.

TECHNICALS WATCH

Lowry’s Research: “(…) while September offers little cheer for investors, the weight of evidence suggests September 2018 will not be known as the end of the longest-ever bull market.”

Seth Klarman: These Are The 20 Forgotten Lessons From The 2008 Crisis

From one of the best, one of the few who take risk management seriously:

Twenty Investment Lessons of 2008

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically  created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
16. Financial stocks are particularly risky. Banking, in particular, is a highly lever- aged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
18. When a government official says a problem has been “contained,” pay no attention.
19. The government – the ultimate short- term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Via Steve Blumenthal’s recent post:

“For when the One Great Scorer comes to mark against your name,
He writes–not that you won or lost–but how you played the Game.”

– Grantland Rice