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 (15 June 2018): Retail Sails

U.S. Retail Sales Strengthen

Total retail sales increased 0.8% (5.9% y/y) during May following a 0.4% April gain, revised from 0.3%. It was the strongest monthly increase since November. A 0.4% rise had been expected in the Action Economics Forecast Survey. Excluding motor vehicles and parts, retail sales rose 0.9% (6.4% y/y) after a 0.4% increase, revised from 0.3%. It also was the firmest gain in six months. A 0.5% rise had been expected. (…)

Non-auto less gasoline sales are booming. They are up 5.1% YoY but are up 6.6% annualized in the last 3 months and the gains are widespread. The Commerce Dept. estimates that real retail sales have increased at a 6.3% annualized rate in the last 3 months.

With that kind of demand, the Fed, and just about everybody, could have big surprises in coming months. Also, this won’t help the U.S. trade deficit.

Retail sales were strong in May, rising 0.8% from a month earlier, the Commerce Department reported Thursday.(…)  True, a 2% increase in gasoline-station sales—a consequence of higher fuel prices—were part of the sales strength. But exclude gasoline stations and sales were still up a robust 0.7%.

One thing that did stick out in the report, however, was a 2.4% gain in sales at building material and garden equipment and supplies dealers. The big home improvement chains have said  higher lumber prices, which hit record levels last month, have helped boost sales

The U.S. relies heavily on imported lumber, particularly from Canada, and the tariffs of around 20% that the White House levied on Canadian lumber last year haven’t changed that dynamic. So buyers have had to pay up. On Wednesday, the Labor Department reported that wholesale prices for softwood lumber rose 6.4% in May from April, and Thursday it reported that imported lumber prices rose 6%. (…)

(…) In January, Trump announced steep worldwide tariffs on washers (and solar panels, which got a lot more attention). (…)

(…) Those metal tariffs have left steel prices more than 50 percent higher in the United States than they are in China or Europe. This is bad news for U.S. companies that purchase steel — including to manufacture washing machines, which are essentially big steel boxes.

Perhaps worse, our furious trading partners are now striking back by placing new tariffs on U.S. goods. Among the products that both the European Union and Canada have targeted for retaliation?

You guessed it: U.S.-made washing machines.

Ohio factory workers thought they’d be big winners from Trump’s unorthodox trade approach. But when all’s said and done, it could be, at best, a wash.

Canadians Are Starting to Ease Up on Their Household Debt Binge

Canada’s debt to disposable income ratio declined by the most on record in the first quarter, boosting confidence the country’s households can handle higher borrowing costs.

The ratio fell to 168 percent in the first three months of 2018, from 169.7 percent in the prior period, Statistics Canada said Thursday in Ottawa. The 1.7 percentage point decline was the most in data back to 1990, and follows an almost continual run of increases to a record 170 percent in the third quarter of 2017.

Credit-market debt rose just 0.3 percent January to March, reflecting the lowest volume of mortgage borrowing in almost four years. Disposable income increased 1.3 percent. Meanwhile, a separate Statistics Canada report showed the country’s new housing price index was flat in April, and Toronto prices posted the first 12-month decline since 2009. (…)

U.S. Gives Green Light to Tariffs on Chinese Goods President Trump approved tariffs on about $50 billion of Chinese goods as the U.S. ratchets up its trade fight with Beijing

(…) It wasn’t clear when the tariffs would go into effect. Beijing has said that it intends to assess tariffs on a corresponding amount of U.S. goods. (…) The affected imports would face 25% tariffs (…)

(…) American tariffs are indeed low — the World Trade Organisation estimates that its weighted average tariff rate is 2.4 per cent. But at 3.1 per cent, average Canadian tariffs are only slightly higher, as are those of the EU (and therefore France, Germany, Italy and the UK). Japan’s tariffs are lower than the US. (…)

ECB to End Bond-Buying Program in December The European Central Bank is closing a chapter on one controversial policy, government bond purchases, while extending the life of another: negative interest rates.

The European Central Bank announced the end of its €2.5 trillion ($2.9 trillion) bond-purchase program Thursday, but investors reacted as if stimulus had just been extended.

Stocks rallied and the euro sank because just as the ECB declared an end to the so-called quantitative easing, it also pledged that interest rates would remain unchanged at least until summer of next year. That was the first time the ECB had made such a clear commitment, and it was the announcement investors were most interested in. (…)

Smart move given that the ECB has already bought most of what’s out there and it wants to keep the euro from rising.

Bank of Japan Bucks Global Trend of Monetary Tightening The Bank of Japan stuck to its ultra-easy monetary policy, resisting the global trend in large part because inflation in Japan isn’t getting close to the central bank’s 2% target.
IMF Sees U.S. Potential Growth at Half the Pace of White House Estimates

The International Monetary Fund warned that the economic boost from last year’s tax cuts in the U.S. will fade in 2019 and 2020, and the U.S. economy will then slow considerably.

The IMF’s forecasts, released Thursday in Washington as part of its annual review of the U.S. economy, provide a sharp contrast to the economic outlook of the White House, which sees growth accelerating to a sustained 3% annual growth rate within five years. The IMF sees the U.S. growing at about half that pace once the tax cuts’ impact fades. (…)

The growth will drop as low as 1.4% in 2023, the IMF said, a more pessimistic outlook than that of the Federal Reserve, which released forecasts Wednesday calling for 1.8% growth in the longer run, and the Congressional Budget Office, which foresees 1.6% growth by 2023.

In each case, the forecasts aren’t an estimate of exactly what the economy will look like so many years out; rather they are estimates of the economy’s underlying potential. In recent decades, such forecasts have often missed the mark, generally by being too optimistic. (…)

THE DAILY EDGE (16 May 2018): Oil’s Tricky Pony.

Climbing Gas Prices Didn’t Keep Consumers From Spring Spending

Retail sales—a measure of spending at stores, online-shopping websites and restaurants—rose a seasonally adjusted 0.3% in April from the prior month, the Commerce Department said Tuesday. That growth was largely broad-based, and held up even when excluding gasoline and autos. (…)

But when excluding gasoline and autos, spending still rose 0.3% from March, suggesting modest wage gains and larger paychecks from the Trump administration’s late-2017 tax reform helped push consumers to make more purchases. (…)

Compared with a year earlier, overall retail sales were up 4.7% in April. Spending continued to outpace inflation, with the Labor Department’s consumer-price index rising 2.5% in April from a year earlier. (…)

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Control sales that feed into GDP had 2 good months after 3 soft ones. On a 3m/3m basis, growth remains timid.

Source: Capital Economics (Via The Daily Shot)

Why the Credit-Card Boom May Have Just Peaked One of the most profitable consumer-lending categories in recent years may become more of a middling player, as rising loan losses and increased rewards expenses put pressure on card lenders’ returns.

(…) Card-balance growth in March was up 4.8% from a year earlier, compared with a 6.1% increase in March 2017 from the year-earlier period. (…)

Credit-card losses have been mostly rising over the past two years after hovering around near-record lows. The average net charge-off rate—the share of outstanding debt that issuers wrote off as a loss—for eight of the largest credit-card issuers reached a nearly five-year high of 3.46% in the first quarter, according to Fitch Ratings. (…)

Another pain point for card issuers is the cost they incur from so-called gamers, who search for the highest rewards on their cards. These consumers sign up for credit cards with rich sign-up bonus offerings and then stop using the card once they have tapped out the early rewards.

U.S. credit-card attrition rates, a measure of how many cards consumers and card issuers close, reached 15% in 2017, up from less than 10% a year earlier, according to Mercator. (…)

A record 516 million personal loan solicitations were mailed out in the first quarter, up 46% from a year ago, according to estimates from market research firm Competiscan. This marked the fifth-consecutive record-breaking quarter.

Trump’s Goal for Nafta Rewrite Looks Unattainable in 2018 President Donald Trump’s plans to rewrite the North American Free Trade Agreement looked out of reach after negotiators appeared too far apart to strike a deal.
OIL
  • Global Oil Stocks Fall to Three-Year Low Commercial oil stocks in industrialized economies have fallen to their lowest level in three years, the International Energy Agency said, in the latest sign that the global supply glut has been mopped up and the market rebalanced.
  • Some key charts on oil:

1. Despite OPEC’s successful efforts to cut production, total oil supply has increased since mid-2017.

2. The U.S. has provided all of the increase in non-OPEC production.

Source: @aeberman12 (via The Daily Shot)

3. All of the recent increase in U.S. production has come from the Permian shale basin. Production from other shale fields has been flat for a while in spite of rising prices.

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4. “If the Permian was part of OPEC, it would be the fourth-largest OPEC member, right behind Saudi Arabia, Iran and Iraq,” Thummel said. “By the end of the year, the Permian probably overtakes Iran.”

5. Mark Papa could be the most credible expert on shale oil.

  • Last January:

In a January speech, Mr. Papa told executives and investors that most of the best drilling locations in North Dakota and South Texas have already been tapped. He has lately called out rivals for being too optimistic about their prospects. And he points to recent operational challenges as a harbinger, including shortages of sand used to hydraulically fracture shale wells. Companies have said they face the shortages in the Permian Basin in West Texas and New Mexico, the hottest U.S. drilling region.

  • Last March:

“There are good geological spots in shale plays and weaker geological spots, and a lot of the good geological spots have already been drilled,” he said during the panel.

“My theory is that you’ve got basically resource exhaustion that is beginning to take place. It’s no secret that you’ve only got three shale oil plays in the U.S. of any consequence,” Papa said. “The rest of them don’t amount to a hill of beans.” (…)

Drillers in the Eagle Ford and the Bakken will soon have to start plumbing lower-quality acreage, in Papa’s view. That will leave the burden of meeting growing global demand on the Permian.

While the prospects there are much better, said Papa, recent earnings have shown some companies missing targets. Papa believes Permian production will not be able to satisfy the world’s growing appetite for oil, and he warns the underinvestment in new oil projects could lead to undersupply.

This is coming at a time when shareholders are demanding financial discipline and a better return on investment from shale drillers, another development that Papa believes will hold back production growth. (…) (CNBC)

If this is a one trick pony, the pony better keep delivering.

EMERGING SUBMERGING
In Emerging Turmoil, What Links Argentina and Turkey? Who’s next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it.

(…) Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations. (…)

A further rise in the dollar and U.S. Treasury yields—with the 10-year yield now decisively above 3%—will put more pressure on emerging markets in general. For now, though, Turkey and Argentina are being singled out because they are different from other emerging-market nations. Investors are right to be nervous that these are the first cracks in a broader crisis, but contagion may only be an issue for those with pre-existing conditions.

Ninja Rising risk. Will discuss in more details in coming days.

EARNINGS WATCH
FLAKE NEWS

David Rosenberg, who I consider among the best economists out there, succumbed again to the need to twist the facts towards his views. In his widely read daily piece yesterday, he wrote

  • that the analysts have not raised their Q2 estimates , “which is very interesting and speaks to the lack of a multiplier impact on the fiscal stimulus.” David and his staff no doubt, like me, read Factset’s weekly earnings recap and thus know that EPS estimates typically fall about 2.0% in the first month of a quarter. The fact that they have not declined so far is thus positive;
  • that he finds it “intriguing that there is very little mention anywhere that of the 86 companies thus far that have provided any guidance, 50 were negative.” Rosenberg omitted the next sentence in Factset’s piece which reads:

At this point in time, 86 companies in the index have issued EPS guidance for Q2 2018. Of these 86 companies, 50 have issued negative EPS guidance and 36 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 58% (50 out of 86), which is well below the 5-year average of 72%.

We now have 457 earnings reports in and the beat rate is holding at 79% with a +6.8% surprise factor (+1.1% on revenues).

Thomson Reuters IBES’ own compilation of earnings pre-announcements shows 44 negative guidance out of 85, which does not look good …until you also consider that it compares with 51 at the same time during Q1’18 and 62 at the same time during Q2’17.

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European Companies Report Slower Earnings Growth Unfavorable currency swings, rising commodity prices squeeze profits at European companies

As of Monday, 58% of the 363 companies in the Stoxx Europe 600 that have reported quarterly results beat analysts’ earnings expectations, according to JPMorgan ChaseJPM -0.76% & Co.

A year ago, 66% of all companies listed on the index exceeded forecasts. Earnings per share are up 10% year-over-year, also a smaller advance than in the first quarter of 2017 when earnings per share rose 25%, according to JPMorgan. (…)

From Thomson Reuters yesterday:

  • First quarter earnings are expected to increase 3.7% from Q1 2017. Excluding the Energy sector, earnings are expected to increase 2.8%.
  • First quarter revenue is expected to decrease 0.8% from Q1 2017. Excluding the Energy sector, revenues are expected to decrease 2.8%.
  • 253 companies in the STOXX 600 have reported earnings to date for Q1 2018. Of these, 49.0% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
  • 291 companies in the STOXX 600 have reported revenue to date for Q1 2018. Of these, 47.1% reported revenue exceeding analyst estimates. In a typical quarter 54% beat analyst revenue estimates.

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U.S. Bond Yields Jump to Fresh Highs

The yield on the 10-year Treasury note, used as a reference rate for everything from mortgages to auto loans to corporate debt, settled Tuesday at 3.082%, compared with 2.995% Monday, marking its biggest one-day advance since March 2017. (…)

  • The U.S. dollar surged after strong retail-sales data boosted expectations for continued economic growth.
The Kochs Helped Slash State Taxes. Now Teachers Are in the Streets The wave of strikes in the past three months is just the latest sign that Tea Party-style austerity is losing favor.

(…) The walkout states are among 12 in which per-pupil formula funding, the primary form of spending on education, is still below the level of a decade ago, adjusted for inflation, according to the Center on Budget and Policy Priorities. (…)

So far, all the walkouts have ended with concessions to teachers. (…)