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 (28 December 2016)

Last-minute spending surge lifts U.S. holiday shopping season A jump in consumer spending in the final stretch of December significantly offset a slow start to the U.S. holiday shopping season, and is likely to help many retailers beat sales forecasts, industry research groups said on Tuesday.

(…) Brick-and-mortar sales in the week ending Dec. 24 rose 6.5 percent year-over-year after having fallen for the rest of the month, according to data from analytics firm RetailNext.

Strong demand for furniture, home furnishings and men’s apparel from the start of November through Christmas Eve pushed U.S. retail sales up 4 percent, higher than the previously expected 3.8 percent, according to data from MasterCard’s holiday spending report, also released on Tuesday. The report, which tracks spending by combining sales activity in MasterCard’s payments network with estimates of cash and other payment forms, offers an early look into how the holiday season shaped up. (…)

Craig Johnson, president of consultancy Customer Growth Partners, told Reuters that he now estimates sales growth of 4.9 percent in November and December, up from his initial estimate of 4.1 percent. (…)

U.S. Home Prices Climbed Sharply in October The home-price index rose 5.6% in the 12 months ended in October, with the market showing no signs of slowing after setting a record a month earlier.

The S&P CoreLogic Case-Shiller Indices, which covers the entire nation, rose 5.6% in the 12 months ended in October, up from the 5.4% increase reported in September.

The 10-city index gained 4.3%, up from 4.2% in September. The 20-city index gained 5.1% year over year, up slightly from a 5% increase in September.

The hottest markets in the country remain concentrated in the Northwest, as many buyers priced out of the Silicon Valley area flee to secondary tech hubs. Seattle reported a 10.7% increase, Portland reported a 10.3% year-over-year gain, and Denver had an 8.3% increase in home prices. (…)

After seasonal adjustment, the national index rose 0.9% month over month. The 10-city index and the 20-city index each rose 0.6%.

After seasonal adjustment, all 20 cities saw prices rise in October.

  • Housing Gains Highlight Economic Divide The volatile housing market is widening the divide between pricey urban and coastal areas and more affordable inland regions, creating large swaths of winners and losers based largely on geography.

Housing Gains Highlight Economic Divide(…) A study by Weiss Analytics, a housing-data firm, found homes in ZIP Codes where the median value is $500,000 to $1 million are now worth 103% more than they were 16 years ago, before a boom in the mid-2000s was followed by the worst housing crash since the Great Depression. Home prices in those areas have shot up 39% since the bust. (…)

In ZIP Codes where the median home was worth $100,000 to $150,000, prices have risen 16% since the trough of the market and are now worth 24% more than they were in 2000. (…)

In more rural areas outside major cities, demand for housing has been flat, with little new supply and more people leaving for larger cities and coastal regions.

The demand for lower-priced homes was also weakened by the tightening of lending standards following the foreclosure crisis, which made it more difficult for buyers with imperfect credit scores or lower incomes to qualify for mortgages. (…)

  • House Flipping Makes Comeback as Home Prices Rise The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007, and about one-third of the deals were financed with debt, a percentage not seen in eight years.
  • Real-Estate Industry Braces for Tax Upheaval Many in the real-estate industry are expressing concern about the seismic changes in the tax code that could be ushered in by President-elect Trump for all businesses, including real estate.

(…) real-estate executives say a sweeping blueprint for overhauling most of U.S. tax law made in June by House Republicans appears to have a better chance with a Republican in the Oval Office. The plan appears to be gaining traction, according to real-estate industry lobbyists who have been having extensive behind-the-scenes discussions about what it would mean for real estate.

“The House is ready to roll,” said Jeffrey DeBoer, chief executive of the Real Estate Roundtable.

Among other things, the GOP blueprint calls for the elimination of the deduction for state and local property tax. Industry executives also worry the plan could severely cripple the mortgage interest deduction—long considered a sacred cow of U.S. tax policy.

The blueprint proposal released in June said it would preserve the mortgage interest deduction. But it also would nearly double the standard deduction that taxpayers could receive, thus eliminating most itemized deductions. Mr. Trump proposed an even larger standard deduction.

“Because of the other provisions included in the new tax system, far fewer taxpayers will choose to itemize deductions,” says the Better Way proposal released in June.

The upshot, real-estate industry leaders worry, would be that fewer people would be incentivized to purchase homes, which would weigh on demand and possibly the broader economy.

The House proposal also would eliminate for all businesses the current deduction for debt interest payments. Leverage has long played a major role in most acquisitions of office buildings, stores, hotels and other commercial property in part because interest payments are tax deductible.

Another sea change in commercial real estate would be in the way the House blueprint would affect depreciation. Tax law currently allows buyers of rental apartment buildings to depreciate the cost over 27.5 years and other commercial real estate over 39 years.

The House plan would eliminate depreciation for real-estate companies as well as other businesses. Instead, buyers of real estate would be able to treat the entire cost of buying a property—excluding land—as a business expense that could be used to reduce income. If a buyer didn’t have enough income in the year they bought the building, they could be able to carry the expense forward into future years as a net operating loss.

Real-estate industry officials describe those proposals as “radical.” They are concerned that, if not handled right, changes in tax law could warp the economics behind real estate, creating upheaval in the industry. (…)

Dollar’s Rise Threatens Manufacturing Recovery A strengthening dollar is re-emerging as a threat to U.S. manufacturers, endangering the profits of some companies and complicating Donald Trump’s drive to boost factory employment.

(…) Ben Herzon, senior economist at Macroeconomic Advisers, an independent economic forecasting firm, conducted a simulation for The Wall Street Journal to illustrate how a further 10% increase in the strength of the dollar would ripple through the U.S. economy.

Over the next three years, companies would gradually adjust, by among other things boosting capacity at foreign plants while reducing at home, changing their supply chain or increasing the use of automation.

If the dollar doesn’t strengthen further, inflation-adjusted gross domestic product would cumulatively rise by 6.3% over the next three years. If it strengthens by a further 10%, that growth would be 1.8 percentage points lower, or 4.5%, according to Macroeconomic Advisers’ simulation.

The pain of a further 10% dollar rise would be especially concentrated in U.S. factories. Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower.

Initially, U.S. consumers would stand to benefit by paying lower prices for imported goods.

“It’s good for consumers, as long as they’re still working,” said Mr. Herzon. As time goes on, this benefit will also be offset by the job loss in the manufacturing sector, he said.

Corporates lead surge to record $6.6tn debt issuance Borrowing levels beat 2006 mark but rising US rates set to cool demand

(…) Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.

Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction. (…)

THE DAILY EDGE (16 December 2016)

U.S. Consumer Prices Posted Fourth Straight Rise in November Consumer prices rose in November for the fourth consecutive month, the latest sign of firming U.S. inflation as the Federal Reserve moves ahead with its plan to gradually ramp up short-term interest rates.

The consumer-price index, a measure of what Americans pay for everything from potatoes to prescription drugs, increased a seasonally adjusted 0.2% in November from a month earlier, the Labor Department said Thursday. (…)

Excluding the often-volatile categories of food and energy, prices also rose 0.2% from October. The rise in both overall and core prices matched economists’ expectations, though the monthly gain in core prices was a more modest 0.151% without rounding and little changed from October’s 0.149% increase. (…)

Compared with a year earlier, overall prices in November rose 1.7%, the strongest annual price growth since October 2014. Core prices were up 2.1% on the year for the second straight month. (…)

The index for medical care rose 4% on the year in November and shelter costs were up 3.6% from a year earlier. Food prices were down 0.4% from November 2015 and energy prices rose 1.1% on the year.

The Labor Department on Thursday also reported that private-sector U.S. workers saw a 0.3% decline in their inflation-adjusted weekly earnings in November compared with the prior month. Average hourly earnings fell 0.1%, prices rose 0.2% and the average workweek was unchanged from October. (…)

  • Prices for goods other than food & energy declined 0.3% (-0.7% y/y) after a 0.1 rise.
  • Non-energy services prices increased 0.3% (3.0% y/y), the quickest gain in three months.
  • Shelter prices rose 0.3% (3.6% y/y) while owners’ equivalent rent of primary residences increased 0.3% (3.5% y/y). Rental prices of primary residences also rose 0.3% (3.9% y/y).

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. The 16% trimmed-mean Consumer Price Index also rose 0.2% (1.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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The Cleveland Fed also provides daily nowcasts for the core PCE and core CPI. Mid-December, the core PCE has edged up to +1.8% YoY.

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  • The “sticky CPI” sticks above 2.5%. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. One possible explanation for sticky prices could be the costs firms incur when changing price.

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Home Builders’ Confidence Rises in Anticipation of Trump Boost U.S. builders’ confidence in the market for single-family homes jumped in December to the highest level in more than a decade.

(…) Builders’ confidence rose seven points this month to a reading of 70 in the first survey conducted entirely after the election. Readings above 50 indicate more builders view conditions as good than poor. Current market conditions and expectations for the next six months both significantly improved. The component measuring traffic of prospective buyers moved into positive territory for the first time in more than a decade. (…)

Builders’ hopes may be just that although traffic of prospective buyers, the only objective measure in this survey, did increase nicely last month. The Trump effect could be significantly tampered by this:

But “with nearly 1 in 4 construction workers from other countries and labor shortages a significant headwind, closed-door immigration policies could bulldoze builder confidence.”

Mortgage rates have been historically low this year, but have risen around three-quarters of a percentage point since the election. Home-loan rates could face additional upward pressure with the Federal Reserve signally further increases to the central bank’s benchmark rate next year, after announcing a move Wednesday.

Also, consider this problem (From The Daily Shot):

Most measures of consumer confidence rose sharply post-elections. Yet:

Total retail sales & spending at restaurants nudged 0.1% higher (3.8% y/y) during November following a 0.6% October rise, revised from 0.8%. A 0.4% increase had been expected in the Action Economics Forecast Survey. Three-month sales growth eased to 1.2%, its slowest pace since May.

A 0.5% decline (+3.3% y/y) in purchases of motor vehicles &  parts held back last month’s overall spending increase. The decline roughly matched a 0.8% drop in unit sales of light vehicles. Excluding autos, overall retail sales improved 0.2% (3.9% y/y) after a 0.6% gain. That was the weakest rise in three months. A 0.5% increase had been expected. 

Discretionary spending growth slowed markedly. (…) To the upside were restaurant sales. Sales at food service & drinking places rose 0.8% (4.9% y/y), a rebound after a 0.3% decline.

Sales in the retail control group, which measures nonauto sales less gasoline & building materials, inched 0.1% higher (3.4% y/y), the weakest gain in three months. Three-month growth improved, however, to 4.1%, the strongest rise since Q2. (…)

(…) Dealership sales, measured in dollars, fell a seasonally adjusted 0.5% in November from the prior month, the Commerce Department said Wednesday. Light-vehicle sales, in units, were up 0.1% through November, compared with the same period in 2015, according to Autodata Corp., but that small gain is due to increases in sales to fleet buyers, such as car-rental firms.

Manufacturing output of motor vehicles and parts fell 2.3% last month, the first pullback in six months, the Federal Reserve said on Wednesday.

With vehicle supplies outstripping demand, prices are being slashed.

Last month’s stockpile of 4 million vehicles, or a 73 days’ supply, is the highest level recorded for a November, according to WardsAuto.com. Haig Stoddard, a Wards analyst, said last week that auto makers will need a strong sales performance in December to keep first-quarter production schedules intact.

Average incentives, including rebates and discounts, reached a record $3,542 per vehicle this year, market-research firm J.D. Power said. Though transaction prices have averaged a record $31,044 in 2016—driven primarily by customer migration to pickups and SUVs from cheaper cars—the 9.9% discount offered on those vehicles exceeds the previous high set in 2008, when sales were collapsing.

In addition to conventional rebates, auto finance companies are making deals with an increasing number of buyers who have negative equity on the cars they are trading in. J.D. Power estimates that 31.3% of buyers in November were upside down—meaning they still owed more than the vehicle was worth—on their auto loan, the highest level since June 2006.

(…) According to DynamicAction Inc., which analyzed $4 billion in online transactions, the number of U.S. receipts that included promotions jumped 79% in November from the same period a year earlier. For the first week of December, the number was more than double that of a year ago. (…)

Fed Raises Rates, Boosts Outlook for Borrowing Costs in 2017
Hawkish Fed Exacerbates Dollar Fears for Emerging Markets
Chinese Consumer Inflation Heats Up

China’s consumer-price index increased 2.3% in November from a year earlier, a quicker pace than a 2.1% year-over-year gain in October, the National Bureau of Statistics said Friday. (…)

A big factor in higher prices was fresh vegetable prices, which climbed 15.8% from a year earlier last month, lifting the headline CPI figure by about 0.37 percentage point. (…)

Gasoline and diesel prices were up 4.6% and 6.0% respectively. (…)

China’s producer-price index rose 3.3% in November from a year earlier, compared with a 1.2% on-year increase in October. The PPI increased 1.5% in November from a month earlier. In October, it rose 0.7% from the preceding month. Economists’ median forecast had been for only a 2.4% increase. (…)

China Central Bank Extends Emergency Loans to Financial Firms China’s central bank extended hundreds of billions of yuan in emergency loans to financial firms on Friday and ordered some of the country’s biggest lenders to extend credit as well, as it moved to ease a liquidity crunch and continuing debt selloff.

(…) If the bond selloff accelerates, some analysts fear China could see a market crash like the one that hit stocks last year. (…)

On Friday, the PBOC tapped an emergency lending facility it created in 2014 to extend 394 billion yuan ($56.7 billion) in six-month and one-year loans to 19 banks. That pushes the net amount extended through the facility to 721.5 billion yuan so far in December, a monthly record, according to Beijing-based research firm NSBO.

The PBOC also ordered a few large banks to extend longer-term loans to nonbank financial institutions, while China’s securities regulator asked brokers tasked with making a market in bonds to continue trading and not shut any companies out of the market, according to Mr. Zheng of Dongxing Securities. (…)

(…) Underscoring the skittish feeling among investors, Thursday’s selling pressure was also driven by rumors spreading through the markets. A midsize Chinese brokerage denied a report in a major Chinese newspaper that it had defaulted on a large bond payment. One of the country’s biggest fund managers, meanwhile, denied a rumor circulating on cellphone chat groups that it was facing large redemptions.

Analysts said such rumors carried weight because many fund managers are heavily in debt, making them vulnerable to declining bond prices. (…)

Surprised smile
   
 
 
SENTIMENT WATCH

The Dow’s 8% gain in the five weeks after Donald Trump’s victory is the biggest surge following any U.S. presidential election in history. The rally, which has the blue-chip average on pace for its fastest 1,000-point rise ever, has been accompanied by a sharp jump in bullish sentiment.

When stocks move this far this fast, caution is usually warranted. This time, history might suggest otherwise.

There have been five other instances in which the Dow jumped at least 5% in a five-week period following a presidential election. Over ensuing six-month time frames, it continued rallying four of five times, gaining another 10%, on average.

The most recent example came in 1996. The Dow jumped 5.3% in the five weeks after Bill Clinton was re-elected and then surged another 18% over the following six months. It had similar reactions following elections in 1900 and 1924. The only time the pattern didn’t prevail was in 1952 when Dwight Eisenhower was elected. The Dow jumped 5.3% immediately after the election, but then fell 7.5% over the ensuing six months. (…)

In early November, only 23% of AAII respondents said they were bullish, among the lowest readings of the year. By Thursday, that had jumped to 45%, the third-highest reading in 2016 and one of the sharpest swings in the current bull market.

A similar move in sentiment took place in May 2013, just as stocks had rallied right before the so-called taper tantrum. Right on cue, bullish sentiment peaked in late May and stocks fell in the following weeks.

But investor sentiment is often most useful as a contrarian indicator when it hits extremes. It isn’t there now. One of the AAII’s lowest bullish readings ever came on March 5, 2009, which almost precisely marked the beginning of the current bull market. The most bullish reading was captured in January 2000, just two months before the dot-com bubble peaked.

Today, the absolute level of bullishness is still far from stretched. Bullish sentiment has remained below 50% for 102 consecutive weeks. “It has become seemingly impossible for the bullish camp to get a majority,” analysts at Bespoke Investment Group wrote Thursday.

Now if you missed THE TRUMP LOVE-IN yesterday, please have a look.

(…) The true danger to this latest bull run—the Trump rally—comes from itself. The genius of a matador is to wear out the bull by persuading it to keep charging, entrancing the audience in the process. The stock market has been attracted by the flourishes of Mr. Trump, the appealing prospect of tax cuts and infrastructure spending.

The question for the next month is whether the bull will be worn out before Mr. Trump even takes office.

When markets move a long way very fast, they become vulnerable. Late investors who pile on to little more than momentum have less confidence in their positions. The more momentum builds, the more it hurts if the bull trips and those momentum investors jump off.

This market has moved very fast indeed. The post-election rotation from defensive stocks to economically sensitive cyclical shares has been the biggest of any similar period since the bounce back after the Lehman crash. The 10-year bond’s losses have almost matched the selloff of the 2013 taper tantrum. And the dollar has surged 9% against the yen, taking it to its strongest since 2002 against a basket of currencies. (…)

The market is becoming ever more crowded into the Trump trade, leaving it more vulnerable to any sign that Mr. Trump might not be as effective as hoped. Those who are staying on had better hope this bull isn’t tiring.

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