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 November 2017)

Increase in U.S. Retail Sales Last Month Signals Steady Demand

The broad-based advance in October sales and a stronger hand-off from an upwardly revised September show American consumers will continue to fuel the economy in the fourth quarter. Steady hiring, rising asset values and limited inflation are underpinning consumer spending. (…)

  • Excluding automobiles and gasoline, sales rose 0.3 percent after a 0.6 percent gain
  • Receipts at gasoline stations fell 1.2 percent
  • Sales rose 0.8 percent at clothing vendors, 0.7 percent at furniture stores and at electronics outlets, 0.8 percent at restaurants and 1.5 percent at merchants of sporting goods

U.S. Consumer Prices Edged Up in October U.S. consumer prices rose only slightly in October, showing stubbornly soft inflation is persisting.

The consumer-price index, measuring what Americans pay for everything from cakes to phone service, advanced 0.1% in October from a month earlier, the Labor Department said Wednesday. (…) Excluding volatile food and energy costs, so-called core prices increased 0.2%.

From a year earlier, consumer prices rose 2%, the first easing of year-over-year gains since June. When excluding food and energy, prices rose 1.8% from a year earlier. That was the strongest annual gain in core prices since April. (…)

Shelter prices advanced 0.3% in October, as did medical-care services. Prices for new cars and clothes declined in October. (…)

U.S. Producer Pricing Power Strengthens Yet Again

The headline Final Demand Producer Price Index using new methodology increased 0.4% during October, the same as in September. These remain the strongest gains since April and pulled the y/y rise to 2.8%, the strongest since February 2012. A 0.1% rise had been expected in the Action Economics Forecast Survey. The PPI excluding food & energy also improved 0.4% (2.4% y/y) for a second month, twice the gain expected. Using the old methodology for the Producer Price Index, prices increased 0.2% (2.9% y/y) following a 0.8% gain. Excluding food & energy, the index rose 0.3% (2.0% y/y) after a 0.2% rise.

An updated measure of core producer price inflation is the overall index excluding food, energy and trade services. It increased 0.2% (2.3% y/y) for a third straight month.

Final demand goods prices rose 0.3% (3.2% y/y), the weakest rise in three months. The price index excluding food & energy increased 0.3% for a second month. The 2.3% y/y gain was improved versus stability in 2015.

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There seems to be inflation in the pipeline. Even core goods prices are accelerating:

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U.S. Household Debt Reaches New Record Flows into delinquency have risen in recent years for credit-card and auto debt

The Federal Reserve Bank of New York said Tuesday that household debt totaled $12.955 trillion last quarter, up 0.9% from the spring for a 13th straight quarterly increase. That was the most on record, though the figure wasn’t adjusted for inflation or population growth.

As a share of U.S. economic output, household debt was about 66% last quarter versus a high of around 87% in early 2009. (…)

Some 4.9% of outstanding debt was delinquent as of Sept. 30, ticking up from three months earlier. Late-payment rates on the whole remain low, but flows into delinquency have risen in recent years for credit-card and auto debt. (…)

The sharp rise in delinquency for auto loans made to subprime borrowers by auto-finance companies, usually through auto makers or dealers. The New York Fed said the low overall delinquency figure masks significant deterioration in those loans over the past few years.

The smaller number of subprime auto loans made by banks and credit unions have fared better, “in part reflecting differences in underwriting standards,” said New York Fed economist Wilbert van der Klaauw.

(…) there are over 23 million consumers who hold subprime auto loans. (…)

Auto loans outstanding jumped by $23 billion to $1.213 trillion. Auto makers in September and October reported strong sales partly because Texans, Floridians and others had to replace vehicles damaged by late-summer hurricanes. (…)

Some fresher data through October courtesy of RBC:

  • Capital One: Card charge-offs increased from 4.39% in September to 4.70%, while delinquencies increased 19 bps to 4.13% from 3.94%. Auto charge-offs increased during the month, up 13 bps to 2.21%, with 30-day+ delinquencies increasing 30 bps to 6.01%. Card loans are up 3.14% YoY.

  • JP Morgan: Card charge-offs increased 3 bps to 2.35% in October, while 30-day+ delinquencies increased from 1.22% to 1.24%, 90-day+ delinquencies rose 2 bps to 0.60%.

NBF:

(…) Auto debt rose faster than other debt categories, reaching a record in both absolute terms (US$1.2 trillion at the end of Q3) and relative terms (its share of household debt jumping to 9.4%). The rise of auto debt has been fueled in recent years by normal auto loans but also by sub-prime loans. While the word “subprime” tends to send shivers down the spine of many investors (particularly those who experienced the 2008/09 financial crisis), the auto variety doesn’t look all that threatening. True, sub-prime auto debt is now at a record US$282 billion, but it represents just 2% of household debt outstanding and only 23% of auto debt.

And crucially, as today’s Hot Charts show, auto finance companies (and not banks) are the most exposed to the sub-prime problem. Indeed, the banking sector accounts for just 26% of outstanding sub-prime auto debt or only US$74 billion. In other words, don’t expect rising auto delinquencies to single-handedly lead to a credit crunch and recession à la 2008/2009. That said, there may still be some mild negative consequences for the U.S. economy, such as damaged credit reports and difficulties for auto debt delinquents to borrow in the future.

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But the main point is that consumer debt is way up there and its impact is masked by Fed-induced low interest rates. But that is changing rapidly. Worries on the economic impact are much more significant than on financials at this point.

High-Yield Canary Isn’t Singing About Markets Doom The selloff, mainly confined to telecoms and lower-rated bonds, should be put into perspective, investors say

(…) Yet telecom makes up a meaningful chunk of high-yield indexes and exchange-traded funds and some analysts are concerned that retail investors, whose exposure to junk bonds tends to come through passive funds, may get spooked by the selloff. In a worst-case scenario, they could then dump other riskier assets like stocks, these analysts say. (…)

Auto But Tesla’s recent well oversubscribed $1.8B 5.3% bond offering is now trading at $94!

Fingers crossed China to Send Envoy to North Korea in Wake of Trump Visit
Amazon’s Cashierless Store Is Almost Ready for Prime Time

THE TRAVELLING EDGE (16 October 2017)

Note: writing from Japan, I am 13 hours ahead of N.A. so the date above may not match your date.

U.S. Retail Sales Strengthen

Total retail sales and spending at restaurants increased 1.6% (4.1% y/y) during September. That followed a 0.1% August dip and a 0.5% July rise, both of which were revised up slightly versus last month’s report. Leading last month’s strength was a 3.6% increase (4.1% y/y) in motor vehicle & parts sales. That compared to a 15.0% rise (4.8% y/y) in unit motor vehicle sales. Retail sales excluding autos improved 1.0% (4.0% y/y) following a 0.5% rise, revised from 0.2%.

Spending on nonauto discretionary items was mixed last month. Gasoline service station sales jumped 5.8% (10.7% y/y) with higher prices. With rebuilding following Hurricane Harvey, building materials and garden equipment store increased 2.1% (7.7% y/y) following a 0.6% rise. Purchases at apparel stores gained 0.4% (1.5% y/y) after a 0.6% drop.

Sales at nonstore retailers increased 0.5% (5.8% y/y) following declines in two of the prior three months. General merchandise store sales improved 0.3% (4.7% y/y) following a 0.4% rise. To the downside were electronics & appliance store sales which fell 1.1% (-5.3% y/y), the fifth consecutive month of decline. Sales at furniture & home furnishings stores were off 0.4% (+1.4% y/y), the second decline in three months. Sporting goods & hobby shop store sales slipped 0.2% (-4.1% y/y), down for the sixth month in the last seven.

In the nondiscretionary sector, food & beverage store sales rose 0.8% (3.4% y/y) following two months of 0.5% increase. Health & personal care store sales declined 0.4% (-0.6% y/y) after a 0.5% rise.

Restaurant sales improved 0.8% (3.3% y/y) following a 0.2% increase.

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After revisions, Non-Auto less Gasoline sales growth rate in the Jul-Aug period doubled from +0.4% originally reported to +0.8%, or from a +2.4% annualized rate to +4.8%! Add September’s +0.6% and a very buoyant consumer pops up, spending at a 5.6% annualized rate at retail in Q3. Wow! Very different picture, unless September gets seriously revised downward next month…

Even more impressive given that, as seen below, core goods prices keep deflating.

U.S. CPI Gain Led by Higher Energy Prices; Core Prices Tick Higher

The Consumer Price index increased 0.5% (2.2% y/y) during September following a 0.4% August gain. It was the strongest increase since January and compared to expectations for a 0.6% rise in the Action Economics Forecast Survey. The CPI excluding food & energy ticked 0.1% higher (1.7% y/y) following a 0.2% rise. A 0.2% gain had been expected. (…)

Services prices rose by a diminished 0.2% (+2.6% y/y), after a 0.4% gain. The rise reflected a lessened 0.3% increase (3.2% y/y) in shelter costs as the cost of lodging away from home rose an easier 1.5% (0.9% y/y). Rents of primary residences increased a lessened 0.2% (3.8% y/y) and the owners’ equivalent rent of primary residences gained 0.2% (3.2% y/y) after three months of 0.3% increase. (…) medical care prices ticked just 0.1% higher (1.7% y/y), the weakest rise in four months.

Food prices ticked 0.1% higher (1.2% y/y) for a second month. (…)

Prices for goods excluding food & energy slipped 0.2% (-1.0% y/y), down for the eighth straight month. (…)

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Core services prices are not accelerating, rising about in line with overall wages growth rates.

Looking at the Cleveland Fed data, core CPI is stuck at +0.1% per month, just above 1.0% annualized. 

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Meanwhile, core finished goods PPI decelerated from +1.8% YoY in August to +1.6% in September.

If consumer spending is as strong as the retail trade data suggest, the Fed will be torn between an OK economy but little inflation to speak of.

But disposable income remains tight nonetheless which leads to more difficult credit conditions:

Big Banks’ Credit Card Woes Spell Trouble for Smaller Issuers J.P. Morgan Chase and Citigroup see continued deterioration in credit card loans

(…) At J.P. Morgan, card charge-offs rose to 2.87% of total loans from 2.51% a year earlier. The bank stressed that this increase is well within its expectations, and, indeed, the ratio of losses remains low by historical standards.

Citigroup, however, says losses are increasing slightly faster than it had expected. Cards carrying its brand, which generally target less-risky borrowers, saw net charge-offs rise to 2.84% of total loans from 2.25% a year earlier. For its store-branded private-label cards, though, the ratio jumped to 4.7% from 3.9%. For next year, Citigroup says it expects charge-off rates of about 2.95% for its branded cards and 5% for its private-label cards. (…)

GM to Idle Detroit Car Factory Amid Slow Demand General Motors plans to close a Detroit factory through the end of the year and deepen production cuts to slow-selling cars the plant manufactures, idling some workers and letting go others in response to weak sales.

GM’s Detroit-Hamtramck assembly plant will shut down for about six weeks starting in mid-November, said people familiar with the plan. Roughly 1,500 workers who help build four passenger-car models at the plant will be laid off.

When operations resume, production will be scaled back 20%, costing about 200 workers their jobs, the people said. (…)

The nation’s largest auto maker already laid off several hundred employees at the Detroit-Hamtramck factory by eliminating the evening work shift earlier this year.

Say Goodbye to $30 Oil as Supply Glut Is Mostly Gone, Says Platts

(…) But prices could break out of that range and trade between $70 and $80 in the next five years, Mr. Ross said. Demand is still growing and there hasn’t been enough investment in new oil projects amid languishing prices, rising U.S. shale output and worries that electric vehicles will eat into gasoline demand (something the Platts analysts don’t expect to happen for years).

“Electric vehicles and shale are the two sentiment killers– why is anyone going to invest? They’re not,” Mr. Ross said. “It sets the stage for surprises,” he added. (…)

Mr. Ross said he expects the group to agree to an extension when it meets Nov. 30, but cautioned that OPEC might end up cutting too much. OPEC Secretary Mohammed Barkindo said earlier this week that stockpiles in the OECD were 170 million barrels above their five year average level in August—down from a 340 million barrel overhang at the beginning of the year.

But Mr. Ross said OPEC’s figures don’t account for higher levels of inventories needed now, so the real overhang is much smaller—closer to 50 million barrels.

“There’s a real chance they will overshoot—they will keep their cuts going longer than they should,” Mr. Ross said.

EARNINGS WATCH

From Thomson Reuters:

Through October 13, 32 companies in the S&P 500 Index have reported earnings for Q3 2017. Of these companies, 84.4% reported earnings above analyst expectations and 9.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 72% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 5.4% above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and above the 4.8% surprise factor recorded over the past four quarters.

81.3% reported revenues above analyst expectations and 21.7% reported revenues below analyst expectations. In aggregate, companies are reporting revenues that are 1.1% above estimates.

The estimated earnings growth rate for the S&P 500 for Q3 2017 is 4.4%. If the Energy sector is excluded, the growth rate declines to 2.3%.

The estimated revenue growth rate for the S&P 500 for Q3 2017 is 4.4%.. If the Energy sector is excluded, the growth rate declines to 3.6%.

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 12.3%. If the Energy sector is excluded, the growth rate declines to 10.6%.

The earnings season is off to another good start in spite of the hurricanes. While it is early, TR numbers point to a decline in margins ex-Energy in Q3. According to Factset, 13 of the 28 companies that held conference calls so far mentioned the hurricanes as a negative factor in Q3.

Even Bulls Are Getting Left in the Dust by the S&P 500 Rally

(…) At 2,553, the benchmark gauge now sits 53 points above the most optimistic of the 18 predictions that Bloomberg compiled at the start of 2017. (…) On Friday, two lifted their year-end target by at least 200 points: Tom Lee at Fundstrat Global Advisors and Weeden & Co.’s Michael Purves. (…)

The World Turned Upside Down

John Mauldin’s Thoughts From The Frontline this week deals with complacency:

(…) The VIX is simply a way to measure the future expectations of investors regarding the volatility of market prices. And lately, investors have been rewarded for shorting the VIX. It is almost like the experiments you see where rats learn that if they punch a button that they get a grape. Investors have learned that if they short the VIX they make a profit.

Except that now there are so many people on that side of the boat that when the boat starts to turn over, the rush to get the other side is going to rock that boat hard, possibly to the point of swamping it. Doug warns that a 2% or 3% move down in the markets could cause short covering in the VIX that could quickly spiral out of control. Not unlike the “portfolio protection” trade that brought about the 1987 crash. (…)

The University of Michigan’s Surveys of Consumers have been tracking consumers and their expectations about the direction of the stock market over the next year. We are now at an all-time high in the expectation that the stock market will go up. (…)

BTW, I still vividly remember the morning of October 19, 1987, standing in the trading room at 9:30 watching the opening bids come in 10-20% lower than the previous Friday’s closes. Eerily scary!

Winking smile Mauldin ends his piece saying that he is on his way to San Francisco “to visit the Buck Institute, which is the premier aging research center in the world.” I beg to differ. I am currently visiting the premier aging center of the world, Japan.

Speaking of Japan, the country is changing slowly but surely as Premier Abe is gradually implementing measures to boost the economy and alleviate the effects of its aging population. Japan has loosened visa requirements for many countries including Russia and many Eastern European countries. Foreign visitors were up 16.4% in the first half to 13.3 million, the highest ever for half year. The number of Russian visitor shot up 37.9% to 38,000.

Importantly, the number of foreign residents in Japan increased 3.7% from the end of December 2016 to 2.47 million.Foreign residents with highly professional and engineering skills are up 50%.

TECHNICALS

Lowry’s Research remains positive seeing that “gains remain orderly with few if any signs of the excesses typically associated with a runaway market rally. (…) Typically, runaway rallies result from surging Demand, as panicked buyers rush indiscriminately into stocks fearing they will miss the next big move up in prices. Contrast this manic activity with the current market, which shows an orderly expansion in Demand and contraction in Supply, reflected by the steady, long term uptrend in our Buying Power Index and matching downtrend in our Selling Pressure Index.”

I use moving averages to monitor basic market trends and manage risk. Steve Blumenthal wrote a good piece about this:

Risk Management for All Markets