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 (23 March 2017)

Home Sales Slide on Tight Supply, Higher Prices Sales of previously owned U.S. homes fell 3.7% in February from the prior month to a seasonally adjusted annual rate of 5.48 million, the National Association of Realtors said.

Purchases of previously owned homes, which account for the vast majority of U.S. sales, decreased 3.7% from January to a seasonally adjusted annual rate of 5.48 million last month, the National Association of Realtors said Wednesday.

The decline followed a strong performance in January, when sales rose 3.3%. February’s sale pace was 5.4% above the same month a year earlier. (…)

Inventory increased 4.2% at the end of February from a month earlier, after December’s reading was the lowest since the Realtors association began tracking all types of supply in 1999. Inventory in February was still down 6.4% from a year earlier.(…)

The median sale price rose 7.7% in February from a year earlier, to $228,400. (…)

Rates for a 30-year mortgage rose to 4.3% last week, the highest level this year, according to mortgage company Freddie Mac. (…)

BTW, existing sales are reported at closing. So the Feb numbers provide the first reactions to the increase in mortgage rates post the elections.

Here’s the national trend:

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And here are the regional trends, the sum of which resulting in the national trend from which the NAR and other economists derive their reasoning that tight supply is restricting demand (charts from Haver Analytics). Is supply so much better in the south? 

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As I have written before, “limited supply” is a false problem created by realtors. Supply is limited only when compared with the bubble and post-bubble years.

Nerd smile Two of the key reasons inventory is low:

1) A large number of single family home and condos were converted to rental units. In 2015, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers.

2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.

Here’s a real supply problem via The Daily Shot:image

  • US output continues to climb.
Defaults in China’s Interbank Market Raise Stakes for PBOC The People’s Bank of China’s multiple mandates—keeping risk in check, the government’s top economic priority, and steadying the yuan without triggering a cash crunch and stifling growth—are becoming harder to juggle.

The People’s Bank of China has tightened its hold on credit in recent weeks, part of government efforts to rein in financial risks. The shift has pushed up short-term borrowing costs; this week the closely watched three-month interest rates at which banks lend to each other climbed to levels not seen in nearly two years.

“The rising rates have made it much more expensive for small banks to borrow,” said one trader. “There were people begging for liquidity.”

On Monday, some small, rural banks failed to make good on short-term funds borrowed from other lenders, according to traders and banking executives. Late Tuesday, the PBOC injected an estimated 300 billion yuan ($43.6 billion) into the financial system via short-term funding facilities, the people said, in an apparent effort to prevent the defaults from evolving into a full-blown credit crunch. (…)

  

  • Short and medium term rates are up 20% in the last 6 months. Such rapid rises seldom end nicely. (chart from topdowncharts.com via The Daily Shot)
GOP Lawmakers Struggle to Unite on Health Bill The GOP plan to replace the Affordable Care Act remained in jeopardy after a day of negotiations among Republicans that showed signs of rallying conservatives behind the bill while driving away more centrist lawmakers.

(…) A deal that was emerging on Wednesday night had the potential to win support for the bill from wavering conservatives, many of whom have said the bill doesn’t go far enough in wiping away the 2010 health law championed by Democrats. (…)

“We’re encouraged tonight at the real willingness of not only the White House but our leadership to make this bill better,” said Rep. Mark Meadows (R., N.C.), who leads a group of 30 to 40 conservatives called the House Freedom Caucus, many of whom have withheld support, even though they believe in the party’s goal of repealing the ACA.

It was the most optimistic assessment from Mr. Meadows in recent days. But he cautioned: “We’re not there yet.’’ (…)

Republicans are using a procedural shortcut that would enable them to pass the bill in the Senate with only GOP votes, requiring a simple majority, rather than the 60 votes that most legislation needs in the Senate. Republicans hold 52 seats in the chamber. (…)

But by the evening, House GOP leaders said they received new advice from Senate Republicans: While the change might not survive in the Senate, it wouldn’t enable Democrats to block the whole bill, a GOP leadership aide said. (…)

Senate Democrats said Wednesday night that Republicans wouldn’t be able to retain the provision eliminating those benefits if the bill made it to the Senate.

“It will require 60 votes to repeal these protections, and the votes just aren’t there in the Senate,” said Matt House, spokesman for Senate Minority Leader Chuck Schumer (D., N.Y.). (…)

However, some conservative interest groups remained strongly opposed to GOP bill. Organizations backed by billionaire industrialists Charles and David Koch said late Wednesday that they would spend millions of dollars to defeat the health-care bill, the Associated Press reported.

The retail apocalypse has officially descended on America

(…) More than 3,500 stores are expected to close in the next couple of months. (…)

The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next two countries with the most retail space per capita, according to a Morningstar report from October.

Visits to shopping malls have been declining for years with the rise of e-commerce and titanic shifts in how shoppers spend their money. Visits declined by 50% between 2010 and 2013, according to the real-estate research firm Cushman & Wakefield. (…)

As stores close, many shopping malls will be forced to shut down as well. (…)

Not only do the malls lose the income and shopper traffic from that store’s business, but the closure often triggers “co-tenancy clauses” that allow the other mall tenants to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the anchor space. (…)

That means that nearly a third of shopping malls are at risk of dying off as a result of store closures.

Bridewater’s Dalio on populism. Including this:

Ninja Trump won’t allow you to use iPads or laptops on certain airlines. Here’s why. Hint: It may not have much to do with airplane security.

THE DAILY EDGE (16 March 2017)

U.S. Retail Sales Moderate as Non-Auto Spending Tapers

Total retail sales and spending at restaurants rose 0.1% (5.7% y/y) in February following a 0.6% increase in January, which was revised up from 0.4%. The February result was in line with the 0.1% increase expected in the Action Economics Forecast Survey.

Sales at motor vehicles & parts dealers decreased again in February, by 0.2% (5.6% y/y), following January’s 1.3% decline. (…) Excluding autos, retail sales rose 0.2% (5.7% y/y) after January’s 1.2% gain (…). Retail sales excluding both auto dealers & gas stations were up 0.2% (4.2% y/y) in February following a 1.0% January rise. (Chart from CalculatedRisk)

U.S. INFLATION ACCELERATES

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.5% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.2% annualized rate) during the month. (…) Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.2%, the CPI rose 2.7%, and the CPI less food and energy rose 2.2%.

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  • Last 4 months annualized: +2.7% for all core measures.
  • Last 3 months annualized: +2.8% for all core measures.
  • Last 2 months annualized: +3.0% for all core measures.

Not a good trend. Let’s see what’s in the pipeline (PPI table from Haver Analytics with my highlights)

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  • Final demand core PPI: +3.2% a.r. last 3 months, +4.3% last 2 months.
  • Core goods, supposedly still deflating: +3.2% a.r. last 3 months, +3.0% last 2 months.
  • Intermediate Processed Goods: +7.9% a.r. last 3 months, +9.3% last 2 months.

No good trends there either…Can we rely on deflating import prices?

Nonpetroleum import prices improved 0.3% (0.8% y/y), the largest increase since July. Industrial supplies & materials prices excluding petroleum jumped 1.4% (7.0% y/y), strong for the fourth straight month. Foods, feeds & beverage prices rebounded 1.0% last month (4.4% y/y), following declines in three of the prior four months. Nonauto consumer goods prices improved 0.7%, but the y/y decline accelerated to -0.7%. Motor vehicle & parts prices remained unchanged both m/m and y/y, after declines in the prior two months. Capital goods prices also were steady (-1.0% y/y) after declining from 2013 through 2016.

Nonpetroleum import prices declined -2.8% in 2015 and –1.8% in 2016. They are up at a 2.4% annualized rate in the first 2 months of January and are +0.8% YoY in February in spite of the strong USD (+5.5% since mid-August and +4.1% YoY).

Fed Signals It Is Entering New Phase The Federal Reserve said it would raise short-term interest rates and remained on track to keep lifting them this year, signaling the central bank is moving into a new policy phase as the economy strengthens.

(…) Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year.

“The simple message is the economy’s doing well,” said Fed Chairwoman Janet Yellen in a news conference following the Fed’s two-day policy meeting. “We have confidence in the robustness of the economy and its resilience to shocks.”

Ms. Yellen was careful to note that the Fed hadn’t significantly changed its forecasts for economic growth, unemployment or inflation, but it expected continued improvement.

Another reason for the decision: the Fed, in its policy statement released after the meeting, said inflation in recent quarters was “moving close” to its 2% target after undershooting that level for years.

The bank also said the target remains a “symmetric” goal, meaning that, though the Fed doesn’t want inflation to run above or below that mark, it expects it will happen at times. “It’s a reminder [that] 2% is not a ceiling on inflation. It’s a target,” Ms. Yellen said.

Officials’ median expectation for the fed-funds rate showed few changes from projections released in December. In addition to three quarter-point increases this year, including the one announced Wednesday, the forecasts implied three more moves next year. (…)

On Wednesday, Ms. Yellen played down the idea that the Fed might be on a collision course with the new administration. “We would certainly welcome stronger economic growth in the context of price stability,” she said. (…)

Economic Growth Lags Behind Rising Confidence Data

(…) The latest evidence came Wednesday when the government reported that sales at the nation’s retailers—a key measure of consumer spending—rose just 0.1% in February from a month earlier. Americans cut spending on clothing, sporting goods, electronics and restaurant outings, leading to the smallest gain in retail sales since last summer.

Earlier reports showed a surging trade deficit in January and a recent drop in home sales, as measured by contract signings. Taken together, the economy appears to be stumbling once again in the first months of the year, despite unusually warm weather that might otherwise boost spending and the absence of major crises overseas, as happened in the past.

Forecasting firm Macroeconomic Advisers on Wednesday downgraded its projection of economic growth in the current quarter to an annual rate of 1.3%, from 1.4%. Barclays projected 1.4% growth, compared with 1.6% earlier. The Federal Reserve Bank of Atlanta’s GDPNow model lowered its estimate to 0.9% from 1.2%. Growth has averaged about 2% in the current expansion. Economic output expanded at a 1.9% rate in the fourth quarter and 3.5% rate in the third. (…)

HARD DATA WATCH

Beyond all the positive surveys, we are all searching for hard data to better gauge the U.S. economy amid the “Trump hopes”.

  • imageHotel lodging demand has been slowing since mid-October. Based on data from Smith Travel Research, analysts estimate that RevPar (revenues per available room) was in the 0-2% range in February, following +1.0% in January and +3.2% in Q4’16. (Chart from Raymond James Associates)
  • Is the ‘Trump Slump’ real? Spending on tourism in the U.S. slides

Fewer Americans are traveling within the U.S. and, despite evidence of a “Trump slump” keeping foreigners from visiting the U.S., the origins of the domestic dip are more complex.

Spending on travel and tourism in the U.S. fell 3.3% on the year to $1.7 trillion in the fourth quarter of 2016, after rising 3.7% in the previous quarter, according to the “Travel and Tourism Satellite Accounts” of the Bureau of Economic Analysis, a government data agency. The biggest component of the downturn was air travel, which fell 15% after increasing 2% in the previous quarter. Money spent by tourists on accommodation dropped around 6% after increasing more than 8% in the third quarter.

The fall in domestic tourism figures are likely due to prices more than politics, said Christopher Elliott, consumer advocate and author of “How to Be the World’s Smartest Traveler.” Tourism prices increased 9.1% in the fourth quarter of 2016 from just 0.1% in the third quarter, the latest data found. That also appeared to have an impact on jobs: Employment growth in the travel and tourism industries slowed in the fourth quarter, increasing 0.7% after increasing 1.6% in the previous quarter. (…)

Europeans are already avoiding the U.S., according to travel search site liligo.com. Searches for U.S. destinations in the 20 days after Trump’s original immigration ban was announced fell, including a 17% decline in searches from Italy, 14% from Germany and 12% from France. (…)

  • Below is a “heat map” of the latest “soft” and “hard” economic data. (The Daily Shot)

Source: Goldman Sachs, @joshdigga

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Pointing up U.S. Sees Mexico Joining Regional ‘Powerhouse,’ Navarro Says

Peter Navarro, who as head of the White House National Trade Council will play a leading role in the effort to re-negotiate the North American Free Trade Agreement, said in an interview the U.S. wants Mexico and Canada to unite in a regional manufacturing “powerhouse” that will keep out parts from other countries.

The Trump administration is re-examining a critical component of the free trade pact: the rules of origin, which dictate what percentage of a product must be manufactured in North America, Navarro said.

“We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” said Navarro, 67. “It’s just as much in their interests as it is in our interests to increase the rules of origin.”

For example, under the current agreement, 62.5 percent of the total value of cars sold in North America must originate in the U.S., Canada or Mexico to avoid import tariffs. The U.S. wants to raise that threshold, making it harder for parts from other countries to enter the supply chain. (…)

Trump Proposes Historic Cuts Across Government to Fund Defense
Trump’s Revised Travel Ban Blocked by Hawaii Judge A federal judge in Hawaii issued a nationwide temporary restraining order that bars implementation of Trump’s revised order on immigration and refugees, a significant legal blow to the president.
China Raises Key Short-Term Interest Rates, Following Fed Closely

(…) The unprecedented, nearly simultaneous rate increase following the Fed’s decision betrays Beijing’s sense of urgency to prevent capital outflows from accelerating. It also shows Beijing’s desire to keep risks in its financial system from generating crises in a weak economy, analysts say. (…)

Minutes before domestic financial markets opened, the People’s Bank of China announced that it has raised the interest rates it charges commercial banks in the money market on the seven-day, 14-day and 28-day loans each by 0.1 percentage point. These rates are also known as reverse repurchase agreements, or repos.

As a result, the central bank pushed the benchmark seven-day repo rate to 2.45% from 2.35%. That followed an identical move on Feb. 3, after the PBOC had kept the borrowing cost unchanged since October 2015.

Separately, the PBOC also raised the interest rate by 0.1 percentage point on a form of special loans to 22 financial institutions known as a medium-term lending facility, for the second time since Jan. 24. (…)

Where are the Bulls in This Bull Market?

Corporations have spent hundreds of billions annually in recent years buying back their own stock. But what if, after netting out all the supply and demand flows in the equities market, the corporations are the only ones on balance buying their stock?

That’s the conclusion, at least for 2016, of Ed Yardeni of Yardeni Research. “The bottom line is that the current bull market has been driven largely by corporations buying back their shares,” he wrote on Tuesday. (…)

Those trends have helped fuel what’s been called a “de-equitized” stock market, in which there is simply less publicly traded stock available. (…)

And on the demand side:

To the extent that there’s money flowing into the equities market that isn’t corporate or institutional, it’s just money flowing out of other funds, and into ETFs. (…)