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 (19 April 2018): Oil, Metals Spike!

Oil Rallies to More Than 3-Year High as Stocks Tighten Oil prices hit their highest level in more than three years, extending gains on tightening U.S. inventories. The rally comes ahead of an OPEC meeting where oil exporting countries are expected to renew their commitment to draining global inventories.

(…) The group’s output reduction is now 60 percent bigger than the planned cut of 1.2 million barrels a day as Venezuela’s deepening recession hits its oil infrastructure. Meanwhile, President Trump has vowed to abandon an agreement with Iran on the country’s nuclear activity, and potentially reimpose sanctions on the nation’s oil trade. (…)

Rather than filling the gap, though, the producers are maintaining strict discipline. They’re even trying to attract additional nations to participate in the cuts, United Arab Emirates Energy Minister Suhail Al Mazrouei said in an interview with Bloomberg television in Berlin on Wednesday.

“We need to focus on finishing the job,” Al Mazrouei said. (…)

Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel, three industry sources said, a sign Riyadh will seek no changes to an OPEC supply-cutting deal even though the agreement’s original target is within sight. (…)

“Look at the economic reforms and projects they want to do, and the war in Yemen. How are they going to pay for all that? They need higher prices.” (…)

(…) While production is expected to continue rising, the Permian’s stumbles could ripple out to the global oil market at a time when OPEC has curtailed output and many companies have cut back on megaprojects. That could become a source of volatility that propels oil prices elsewhere higher. (…)

Oil is starting to back up in West Texas and has recently sold at a $6 to $9 discount to crude prices elsewhere in the U.S. That is a warning sign that some oil might have to travel by more expensive ways like trucks to market and that producers could be forced to take drastic measures like halt drilling. (…)

A number of major Permian operators reduced their output forecasts last year, often citing weather-related issues—claims that some executives such as shale pioneer Mark Papa have questioned, suggesting that poor acreage, subpar drilling techniques and service constraints are a much more likely culprit. They argue that the bottlenecks could be more severe than some companies have acknowledged. (…)

Permian operators are likely to see their costs rise up to 15% in the area, an issue that could affect profit margins even as oil prices rise. (…)

Many analysts expect prices in the region could tumble further before new pipelines arrive in 2019. (…)

While this is happening, that is also happening:

More China bank reserve cuts on the cards as PBOC seeks to prevent slowdown

The reduction in reserve requirement ratios (RRR), announced by the People’s Bank of China late on Tuesday, may indicate that Beijing is worried that the Chinese economy showed signs of cooling in March and could lose further steam in coming months. (…)

The PBOC said that its move to cut reserve requirements should allow the banks to use the cash to repay relatively costly loans and boost lending for small firms. (…)

  • Are the official reports also overstating China’s retail sales? (Pantheon Macroeconomics via The Daily Shot)

Sad smile Triple whammy underway: weak retail sales in China, Europe and the USA, exacerbated by rising oil prices?

Emerging market growth ‘losing momentum’

(…) analysis by UBS suggests sequential emerging market growth began to slow in the fourth quarter of 2017, and that survey-based, but more timely, “soft” data weakened in the first three months of this year. This comes in the wake of recent research by Capital Economics, a consultancy, that suggests EM growth may have slipped as low as 4 per cent at the start of 2018, as well as data showing that a proprietary EM-wide growth momentum measure run by NN Investment Partners, a Dutch asset manager, has turned negative. (…)

A world slowdown would be untimely:

Since 1880, Global Government Debts Have Rarely Been So High

General government debt in advanced economies has been above 100% of gross domestic product for more than five years, levels that have only been seen one other time in the past century and a half—at the very end of World War II, according to new data from the International Monetary Fund’s Fiscal Monitor, released Wednesday, tracking the heath of government finances around the world. (…)

The U.S. is among the countries doing the least to reduce its debts. By the IMF’s tally, U.S. debts have risen more than 20 percentage points as a share of GDP and currently stand at 107.2%. Under current spending and taxation plans over the next five years, Washington’s general government gross debt will rise to 116.9% of GDP. According to the Congressional Budget Office, the combination of large spending increases along with tax cuts will lead to trillion-dollar deficits within two years. By 2023, under current projections, the U.S. will carry more debt than any major nation but Japan and Greece. (…)

Key charts from the IMF piece:

Weak Inflation Reinforces ECB Caution Over Stimulus Taper Eurozone consumer prices rose more slowly than first estimated in the 12 months through March, a fresh setback for the European Central Bank in its lengthening struggle to meet its inflation target.

The European Union’s statistics agency Wednesday said prices were 1.3% higher than a year earlier, a pickup in the annual rate of inflation from the 1.1% rate recorded in February. But that was lower than Eurostat’s initial estimate of 1.4%, which had itself been surprisingly low.

But the core rate of inflation was unchanged at 1.0% in March. (…)

What the WSJ article fails to mention is that core inflation jumped 1.4% MoM in March after +0.4% in February, itself following a 1.7% drop in January. Such volatility is bizarre, to say the least. In any case, Q1’18 core inflation ends up at +0.4% annualized, following +1.2% in Q4’17 and +0.4% in Q3’17.

It will be interesting to see the April number.

  • The euro area’s capacity utilization has risen significantly in recent years. Will tighter industrial capacity generate inflation? (The Daily Shot)

Source: Credit Suisse

German unions have reached an inflation-busting pay hike deal for more than 2 million public sector workers that could push up prices and boost a consumer-led upswing in Europe’s biggest economy. (…)

The complex wage agreement gives public sector workers a 3.2 percent pay raise backdated to March 1, followed by a 3.1 percent increase from April 2019. In a third stage, wages will rise by a further 1 percent from March 2020. (…)

It comes in the wake of an unusually high pay hike reached in February for 3.9 million workers in the industrial sector, amounting to a roughly 4 percent annual rise for 2018 and 2019. (…)

  • Rapidly slowing growth in the eurozone and other developed economies presents a real threat of recession for Europe in the next twelve months. Read more here: http://bit.ly/2qKre0S
EARNINGS WATCH

We have 52 Q1 reports in and the beat rate is a high 79% and the surprise factor a high 5.4% (+1.7% on revenues). Blended EPS are now seen up 19.4% by Thomson Reuters, up from +18.5% on April 1st.

Trailing EPS are $138.31 but would be about $145 after Q1’18 after adjusting for the tax reform impact during the last 9 months of 2017.

With this adjustment, the Rule of 20 P/E is 20.7, slightly overvalued. It drops to 19.2 if incorporating analysts’ estimates for the full year 2018 of $158.

The earnings momentum is very strong and conf. calls are not negative other than the frequent mentions of the trade war risks.

Investors are not impressed however. Even though the S&P 500 Index is back to its 100-day m.a., the recent 157 points rise (+6.2%) has been on sharply declining volume:

spy

This lack of enthusiasm is noticed by Lowry’s Research which says that yesterday’s attempt at a rally was the weakest of the past 3 days. Banks have been particularly weak, never a good sign:

Interestingly, the weakening volume did not prevent news highs in breadth:

NDR stock-only A/D lines hit new highs among large-caps, mid-caps and small-caps. LC & MC are records (starts in 1980). SC best since 1998. Good breadth, BUT A/D lines hit new highs in March before early April retest. Still looking for breadth thrust confirmation @NDR_Research

Along with the 200-d m.a., I am watching the 13/34–Week EMA Trend Chart:

FYI:

China’s Big Bang Thatcher’s 1979 financial reforms transformed Britain. Is the People’s Republic about to undergo the same?

THE DAILY EDGE (17 April 2018)

Travelling week.

We got the U.S. retail sales stats for March yesterday. Pick your analysis:

From Haver Analytics:

Total retail sales increased 0.6% (4.5% y/y) during March following an unrevised 0.1% slip in February. The gain was the first in four months. A 0.4% increase had been expected in the Action Economics Forecast Survey. Excluding motor vehicles and parts, retail sales improved an expected 0.2% (4.5% y/y) following an unrevised 0.2% rise.

From the WSJ:

(…) Overall retail sales edged up 0.2% in the first quarter from the fourth quarter. In the fourth quarter, a holiday-sales period, they rose a more robust 2.5% from the prior quarter.

Car sales were up in March but only because the Easter weekend fell in March (with Easter Monday as a bonus) this year. Non-auto ex-gas is +0.3% in Q1, that’s +1.2% annualized, in nominal terms.

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This won’t help going into the summer: from the FT:

US consumer finances hit by higher fuel prices American households expected to spend on average $400 more this year on petrol

(…) By contrast, middle-income US households will on average gain $930 each from the tax cut bill passed at the end of last year, according to the Urban-Brookings Tax Policy Center. Fuel accounted for 4 per cent of total household spending for middle-income Americans, but only 2.6 per cent for the highest earning fifth. (…)

Yesterday I posted this from Randall Forsyth in Barron’s:

BofA ML had anticipated that a third of the respondents to its “Word From Main Street” survey would spend the cash from the tax cuts. Instead, just 16% of respondents said they’d use the money for big-ticket purchases or day-to-day expenses, while 22% said they’d save the tax cuts, and 20% said they’d pay down debt. In other words, close to half of those polled plan to use the tax savings to shore up their personal balance sheets, although the bank suggested that people might be more responsible in surveys than in reality. (Some 20% said they didn’t get a tax cut, although the bank hypothesized that there might have been delays in getting the reductions or that the respondents didn’t notice them.)

Millennials (ages 22 to 37) said they’d be more likely to save the tax-cut money than Gen Xers (ages 38 to 53). Millennials also were less likely to use the windfall for daily spending and more likely to invest or pay down debt, most likely student loans. All of which suggests a “greater sense of responsibility than is often credited to this cohort,” the bank commented.

Really amazing:

Empire State Manufacturing Survey

The index for current  “general business conditions” in April dropped slightly. But the index for future conditions cratered to 40.3%, its lowest level since February 2016. The 25.8-point plunge from March to April was the steepest monthly plunge in the history of the survey. Trade issues?

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China Fends Off Trade Trouble With 6.8% Growth China’s economy expanded at a faster-than-expected 6.8% in the first quarter, though flagging exports and factory output may prove a drag in the coming months.

(…) Retail sales held up particularly well, rising 9.8% in the quarter from the year-earlier period. (…) Meanwhile, industrial production grew just 6% in March, compared with 7.2% in the first two months of the year, and 6.8% overall for the quarter. Investment in buildings, factories and other fixed assets grew 7.5% in the first quarter, below the 7.7% expected by economists polled by The Wall Street Journal. (…)

The Daily Shot has some good charts in China:

  • Quarter to quarter:

  • IP is not strong:

  • And this chart suggests that we will see slower growth going forward due to tighter credit conditions.

Source: IIF

  • Already happening according to this RSM sales index for China:

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The Chinese government is trying to solve its debt problem. The FT writes that “in the first quarter of this year, growth of fixed-asset investment by private companies was the fastest in over two years at 8.9 per cent and outpaced investment by state groups for the first time in almost three years.”

JC Capital argues that reduced availability of capital is hurting GDP growth:

Numbers published Friday showed that financing in March was more restrained than expected, coming in at ¥1.3 trn, with bank loans accounting for ¥1.15 trn of that amount. This data show that nearly all the new financing came fromthe official banks, fitting with the regulators’ (new)view that shadow banks are simply parasites on the body of the state. China’s credit “impulse,” or total bank assets, has fallen as a percentage of GDP every month since February 2017 and is now growing more slowly than nominal GDP for the first time since 2011. The growth of new credit—10.5% YoY—decelerated month on month.

Housing needs to be monitored closely. There is tremendous housing overcapacity in China. If demand wanes, the whole economy will suffer, not best when over-indebted.

Putting aside the indicated appreciation of property values, sales transactions tend to be a good indicator of demand, and transactions are significantly down in March and April. The amount of property sold in the top 10 markets, according to Wind, was down 37% in March and 16% in the first two weeks of April. Prices were uneven, some up and some down, but the reports of publicly listed developers suggested weak pricing. Every major developer except for Poly and Evergrande reported a decline in sales in the first quarter, with the drop in value steeper than the drop in floor space sold. In other words, developers were discounting and still could not sell as much as they did last year.

China Targets American Farmers With Sorghum Surcharges

The ministry said Tuesday that it would require importers to pay deposits worth 178.6% of  the value of U.S. sorghum shipments, following an investigation that initially found the grain was being dumped at prices that hurt domestic producers. (…)

China launched the anti-dumping investigation into U.S. sorghum in February, after Washington placed tariffs on imports of Chinese-made solar panels and washing machines. American sorghum, which is used in animal feed and in China to make liquor, is also on a separate target list of tariffs on goods worth $50 billion.

U.S. sorghum exports to China peaked at $2 billion in 2015 and have averaged nearly a $1 billion a year over the past two years, according to official U.S. data. That makes it a sizeable export—though well below soybeans, more than $12 billion of which were sent to China last year.

China Boosts Its U.S. Treasuries Holdings by Most in Six Months
EARNINGS WATCH

We now have 34 S&P company reports in. The beat rate is 74% and the EPS surprise factor is +4.4% (revenues +1.4%).

Chris Whalen writes what you probably will not ready elsewhere on banks:

U.S. Executives Boost Appetite for Deals Following Tax Reform

(…) 54% of U.S. executives plan to pursue a merger or acquisition transaction within the next 12 months, up from 42% in the prior report six months ago. EY surveyed more than 500 U.S. executives as part of a wider panel of 2,500 respondents from 43 countries interviewed in March and April.