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

NEW$ & VIEW$ (15 August 2016): Earnings Watch; “Outside Information”

Where We Spend Is Upending Traditional Retail Health care and travel are keeping the economy moving, as clothing and electronics chains suffer

(…) Since 2000, there has been a significant rotation in U.S. spending away from goods and toward services. Craig Johnson, president of retail consulting firm Customer Growth Partners, estimates the shift represents about 5% of all consumer spending, or about $600 billion annually. (…)

Health care accounts for about 20% of total consumption today, up from 5% in 1960, according to IHS Global Insight economist Chris Christopher. He expects the figure to rise to 25% of consumption by 2025.

When it comes to discretionary spending, consumers are opening their wallets for travel and leisure activities. According to First Data Corp., which tracks sales at four million merchant locations across the country, travel expenditures rose 8.6% last month over a year earlier. (…)

Business Inventories Increase Slightly; Sales Jump

Total business inventories edged 0.2% higher (0.5% y/y) during June following an unrevised 0.2% increase in May. Total business sales strengthened 1.2% (-0.6% y/y) after a 0.3% rise, revised from 0.2%.

Sales have strengthened lately which slowed the rate of inventory accumulation. But inventories are still rising everywhere but in manufacturing. Note that inventories tend to drop during recessions…

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…but the I/S ratio remains so high. If sales don’t pick up solidly, merchants will need to liquidate, i.e. stop buying and take markdowns.

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Meanwhile, July import volume through the Southern California port complex fell 0.3% compared to the same period in 2015. Exports were down 1.8%, and empty cargo containers were off 14%, for an overall volume decline of nearly 5% across the two ports.  

Oil Bulls Take Heart as OPEC Rekindles Hopes of Output Freeze

Money managers increased wagers on rising crude prices by the most since January as futures rebounded from a three-month low. Prices jumped after OPEC’s president said Aug. 8 the group will hold informal talks in Algiers next month and Saudi Arabia signaled Aug. 11 it’s prepared to discuss taking action to stabilize markets. (…)

PBOC Says Money Supply Growth Will Rebound, No ‘Liquidity Trap’

China’s central bank said July new credit growth slowing to a two-year low was a distortion and that money supply data for August and September will show a rebound.

Investors should avoid over-interpretation of short-term data for a specific month, the People’s Bank of China said Monday in Q&A statement posted to its website. Liquidity in the banking system is ample, it said.

The comments follow data released Friday showing the broadest measure of new credit rose at the slowest pace in two years. Aggregate financing was 487.9 billion yuan ($73.4 billion) in July, less than the 1 trillion yuan estimate in a Bloomberg survey of economists. The broad M2 money supply climbed 10.2 percent, the least since April 2015. (…)

From The Daily Shot:

Bond yields are dropping in China as well (Bloomberg):

  • Panic? China Is Hoarding Cash At The Fastest Pace Since Lehman The last few months have seen trillions of dollars of fresh credit puked into existence in China to enable goal-seeked growth numbers to creep lower (as opposed to utterly collapse). The problem is… the Chinese are hoarding that cash at the fastest pace since Lehman as liquidity concerns flood through the nation.
Japan’s Economic Growth Nearly Stalls

The economy expanded an annualized 0.2% in the April-June quarter, weaker than a 2% expansion in the first three months of the year, Japan’s government said on Monday.

The economy would have contracted in the quarter were it not for a rise in public investment. The government front-loaded infrastructure spending in the quarter, the first of Japan’s fiscal year. Prime Minister Shinzo Abe’s cabinet in early August approved a ¥28 trillion ($276 billion) stimulus package that includes ¥15,000 handouts to 22 million low-income people, so the government spending should continue in the latter part of the fiscal year. (…)

Business investment fell for the second straight quarter, while exports dropped an annualized 5.9%. Exports of ships, steel product and oil-related goods fell. U.S. and European demand for Japanese goods weakened, said a government official briefing reporters on the data. (…)

Household spending also was nearly flat. Consumer spending makes up roughly 60% of Japan’s gross domestic product. (…) Total compensation received by Japanese employees increased 0.3% from the previous quarter. (…)

The Bank of Japan most recently estimated Japan’s potential growth rate at 0.21%, and the Cabinet Office put it at 0.3%. Any negative factors such as weak exports can easily cause a contraction.

The weak GDP figure might also reflect the effects of the leap year, which pushed up growth in the first three months of the year and made the second quarter look weaker by comparison. Stripping out the leap-year effect, Japan’s economy expanded an annualized 1.3% in the April-June quarter, accelerating from a 0.9% expansion in the first quarter, said SMBC Nikko Securities economists in a report. (…)

Fiscal Stimulus Revisited

Budget deficits may be coming out of retirement. With economies all over the world growing too slowly and little scope left for new monetary stimulus, governments are turning their attention back tofiscal policy.

This shift in thinking is overdue. In many countries, though not all, fiscal expansion is not just possible but also necessary. A resumption of budget activism, if it happens, won’t be riskless, so caution will be needed. A stubborn commitment to fiscal austerity, though, would be riskier still. (…) 

EARNINGS WATCH

Factset’s summary

Overall, 91% of the companies in the S&P 500 have reported earnings to date for the second quarter. Of these companies, 70% have reported actual EPS above the mean EPS estimate, 11% have reported actual EPS equal to the mean EPS estimate, and 19% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is equal to the 1-year (70%) average, but above the 5-year (67%) average.

In aggregate, companies are reporting earnings that are 4.0% above expectations. This surprise percentage is slightly below both the 1-year (+4.2%) average and the 5-year (+4.2%) average.

In terms of revenues, 54% of companies have reported actual sales above estimated sales and 46% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (49%), but below the 5-year average (55%).

In aggregate, companies are reporting sales that are 0.5% above expectations. This surprise percentage is above the 1-year (0.0%) average, but below the 5-year (+0.6%) average.

The blended earnings decline for the second quarter is -3.5% this week, which is smaller than the blended earnings decline of -3.6% last week. The blended earnings decline for Q2 2016 of -3.5% is smaller than the estimated earnings decline of -5.5% at the end of the second quarter (June 30).

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to 0.4% from -3.5%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would improve to 2.5% from -0.2%.

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At this point in time, 90 companies in the index have issued EPS guidance for Q3 2016. Of these 90 companies, 62 have issued negative EPS guidance and 28 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 69%, which is below the 5-year average of 74%.

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From Ed Yardeni:

  • Are we done with surprises?image
  • The bulls sure hope not:image
  • Sleepy smile So calm out there!image
  • Transports are not moving much:image
  • Mean-reverting would be painful:image
  • Especially in the higher yield sectors:image
SENTIMENT WATCH

The S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index all notched record highs Thursday, a triple-threat that hadn’t occurred since the dot-com boom.

Meanwhile, 15 block trades, bulk sales of big chunks of stock, raised a total of $5 billion in the biggest week for such deals since March 2015. Private-equity firms, which use block trades to sell out of companies they previously took public, accounted for nine of the 15 deals. (…)

  • David Tepper Goes Big on Allergan, Shies From S&P Hedge-fund manager David Tepper dramatically increased his stake in pharmaceutical company Allergan PLC during the second quarter, the same period in which he sold off nearly all of holdings that track the Standard & Poor’s 500, according to filings Friday.
  • Pointing up Pointing up The number of executives buying their own stock has plunged 44% YoY and the Globe & Mail reports that the actual 316 number in July was the lowest for any month on record. For every C-suite resildent that is buying, almost 5 are selling their own stock. the 0.23x buy-sell ratio is down almost 70% in the past 6 months and is a fraction of the historical norm of 0.69x. (David Rosenberg)
A bang and a whimper: global M&A

After a boom in 2014 and 2015, global dealmaking is limping along. Transactions in June and July were worth $692 billion, down by 29% on the prior year, according to Dealogic. This is despite the fact that American share prices are higher than a year ago and borrowing costs lower. Antitrust regulators have become more aggressive. The European Union has just said it will investigate the $130 billion marriage of Dow Chemical and DuPont. Geopolitical strains are hobbling deals, too: last week Australia rejected two Chinese bids for a utility on national-security grounds. The populist mood isn’t helping. America is cracking down on “inversions”—deals designed to cut tax bills—and Britain’s new government plans to take a more protectionist stance. Jittery bosses plotting takeovers are watching America’s political race closely: few like the idea of a President Trump, even if his autobiography is entitled “The Art of the Deal”. (The Economist)

How New U.S. Money-Market Rules Could Push Down China’s Yuan China’s currency, the yuan, has declined in value this year, and now imminent changes to the way the U.S. regulates money-market funds are adding to the downward pressure.

The link between these funds and the yuan-dollar rate comes from the effect these new money-market regulations are having on the London interbank offered rate, or Libor, which measures the cost of short-term interbank borrowing. 

The 3-month U.S. dollar Libor rate has risen sharply since June, and since then has hovered around levels not seen since 2009, when trust between banks dropped during the global financial crisis. On Friday, that rate was 0.81825%, the highest since May 2009, according to Thomson Reuters.

Analysts say Libor’s recent rise is thanks to new Securities and Exchange Commission regulations that are expected to make it less attractive for money-market funds to hold any debt not issued by the government.

Starting in October, funds that invest in nongovernment debt will be able to suspend redemptions temporarily during any future crisis, making it harder for investors to get their money back. That is making money-market funds less willing to invest in debt issued by companies, including banks. With a once-reliable source of funding being choked off, banks are instead having to borrow more from each other and that, in turn, pushes up Libor.

So how does this affect the yuan?

The answer lies in the impact on Chinese companies that borrowed heavily in dollars after the financial crisis as U.S. interest rates fell near to zero. The cost of many of those loans was often closely linked to 3-month U.S. dollar Libor rates. (…)

Chinese companies “could borrow in U.S. dollars at a cheap rate and bring it back and invest in China.”

But more recently, he says, Chinese companies have been rushing to pay down dollar-denominated loans as the cost of servicing that debt rises thanks to the Libor spike. That process involves Chinese companies swapping yuan for dollars to repay those loans.

In turn, that should help weaken the yuan further against the dollar. (…)

Tiny Satellites: The Latest Innovation Hedge Funds Are Using to Get a Leg Up The latest technological innovation for data-hungry hedge funds is a fleet of five dozen shoebox-sized satellites.

A company called Planet Labs Inc. has launched a small constellation of what it calls “cubesats” that can deliver much more frequent imagery of economically sensitive spots than traditional satellites. Those spots include retailers’ parking lots, oil-storage tanks or farmland.

The company, founded by three former NASA scientists, has now signed an agreement to supply data to Orbital Insight Inc., which mines satellite imagery for trading tips for hedge funds.

Until now, Orbital has relied on monthly or bimonthly imagery for its analysis. The deal with Planet Labs will give them access to weekly images at first. Next year, if Planet Labs succeeds in a plan to launch another 40 or so cubesats, Orbital will have access to daily images of every piece of land on earth.

“Almost all economic activity is change,” said  Jimi Crawford, a former Google executive who founded Orbital. “Once you get down to daily images, tremendous new horizons open up to being able to monitor and track that change.”

Orbital counts several large hedge funds and other investment firms as clients.

Orbital has offered clients “signals”—predictions on how prices will move for certain stocks—based on its automated analysis of satellite imagery since 2014. This analysis includes revenue predictions for big-box retailers such as Wal-Mart Stores Inc. andTarget Corp. based on changes in the number of cars in their U.S. parking lots, or forecasts for oil inventories based on the height of floating lids in oil tanks in the U.S. In both cases, the company makes its predictions on a statistically significant sample of images. (…)

The leaders of the Orbital-Planet Labs tie-up have big aspirations to shed light on economies where government data is considered less reliable, such as China.

One effort is under way to gauge steel production in mainland China by tracking the entire supply chain from where ore is dug from the ground to the refineries to the ports where steel is shipped. The company already has a China economic index based on construction rates revealed by changing heights of new buildings and vehicle counting.

“The most excitement we’ve heard from Wall Street clients is understanding markets like China or places in the world that are not as transparent,” Mr. Crawford said.

Hopefully, the Fed will subscribe to also get the “outside information”!

NEW$ & VIEW$ (12 August 2016)

U.S. retail sales unexpectedly flat in July  U.S. retail sales were unexpectedly flat in July as Americans cut back on purchases of clothing and other goods, pointing to a moderation in consumer spending that could temper expectations of an acceleration in economic growth in the third quarter.

The Commerce Department said on Friday that the unchanged reading last month followed an upwardly revised 0.8 percent increase in June. Retail sales in June were previously reported to have increased 0.6 percent.

Sales rose 2.3 percent from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales were also unchanged last month after an unrevised 0.5 percent increase in June. (…)

Automobile, furniture and online sales were bright spots in July. Sales at auto dealerships increased 1.1 percent in July after rising 0.5 percent in June. Online retail sales jumped 1.3 percent, while receipts at clothing stores fell 0.5 percent.

CalculatedRisk has the chart:

U.S. producer prices fall on services, energy costs

The Labor Department said on Friday its producer price index for final demand dropped 0.4 percent last month, the first decline since March and the largest since September 2015. It increased 0.5 percent in June.

In the 12 months through July, the PPI slipped 0.2 percent after rising 0.3 percent in the 12 months through June. (…)

A key gauge of underlying producer price pressures that excludes food, energy and trade services was unchanged last month after rising 0.3 percent in June.

The so-called core PPI was up 0.8 percent in the 12 months through July. It increased 0.9 percent in the 12 months through June.

Doug Short has the chart:

Producer Price Index

Trucking Pushes For-Hire Shipments Higher for Third Straight Month

A new U.S. Transportation Department report shows the amount of freight carried by the nation’s for-hire transportation industry rose 0.6% in June from the month before, due in part to increased trucking shipments, and is up 0.4% from the same time in 2016.

The increases put the Freight Transportation Services Index (TSI) at a reading of 122.3, its third straight monthly gain, while the May reading was revised down slightly to 121.6 from 121.8.

The June recent figure is just 1.1% below the all-time record high level of 123.7 hit in December 2014 and is 29.1% above the April 2009 low during the most recent recession. (…)

The June Freight TSI increase from May was broad in terms of mode but with drops for water and rail intermodal, which declined after significant rises in May. The June gain was driven by growth in the mining, including oil and gas well drilling and servicing, utility and manufacturing sectors of the economy, according to the report.

The second quarter TSI increase of 2.2% from the first quarter is the first time the TSI rose three months in succession since December 2014. The three months of successive increases followed two months of successive declines, leaving the June level 0.2% below the level of January 2016.

The second quarter increase is also the largest quarterly rise since the first quarter of 2013. It followed two quarters of drops and declines in four of the previous five quarters.

Freight Transportation Services Index, June 2011 - June 2016. Graphic: U.S. DOT

China Economy Slows as Stimulus Impact Wanes A swath of economic activity—from factory output to investment and retail sales—slowed last month, reflecting renewed weakness in China’s economy.

Industrial production, long a rough proxy for growth in the world’s second-largest economy, rose 6.0% in July from a year earlier, according to government data released Friday. The pace was slower than the 6.2% growth recorded in June—a rate economists had expected would be sustained in July.

Investment in factories, buildings and other fixed assets in nonrural areas climbed 8.1% year over year in the January-July period, decelerating from the 9% increase in the first six months of the year and again lower than the 8.9% predicted by economists. (…)

Growth of private investment, which accounts for around 60% of total fixed-asset investment, slipped to a record low of 2.1% in the first seven months, shrugging off recent official efforts to slash red tape and reduce market barriers to encourage more spending. (…)

Meanwhile, retail sales, which have been a bright spot in the economy, also showed signs of softness, growing 10.2% in July from a year earlier, down from 10.6% in June. (…)

Chinese banks scaled bank lending in July to 463.6 billion yuan ($69.9 billion), far below June’s 1.38 trillion yuan, according to central bank data released Friday. Total social financing, a broad measure of credit in the economy that includes nonbank financing, came to 487.9 billion yuan in July, also down sharply from 1.63 trillion yuan in June.

The credit data provided further evidence that companies are reluctant to spend and instead are holding on to cash. China’s broadest measure of money supply, M2, decelerated to a 10.2% growth rate at the end of July compared with a year earlier, lower than the 11.8% rise at the end of June. The nation’s M1 money supply, a measure of liquid assets such as cash and demand deposits, sustained a robust 25.4% year-over-year pace in July compared with a 24.6% rate of growth a month earlier.

Charts via The Daily Shot:

 
China house price surge is over, says statistician

(…) Mr Sheng said after announcing broadly downbeat data that point to a deceleration of growth in housing and fixed asset investment: “There are big differences [in housing] between regions. But overall we can draw one conclusion: the high-growth period is over”.

Real estate investment and sales slowed for the third successive month in July, suggesting that economic growth would moderate in the third quarter after increasing 6.7 per cent over the first six months of this year.

The sector contributed 15 per cent of economic growth in the first quarter, according to government statistics; a figure that swells further if related sectors such as cement, iron and other materials are included.

Chi Lo, senior economist at BNP Paribas Investment Partners, estimates that the real estate sector ultimately accounts for more than half of total economic investment. (…)

 

Oil Rises After Saudi Call for Action on Prices Oil prices ticked higher after Saudi Arabia said it would work with other oil producers to stabilize prices, a comment interpreted by some to mean the world’s biggest oil producer could support a collective production cap.

The comment by Saudi Arabia’s energy minister, Kahlid al-Falih, boosted oil prices by more than 4% overnight to a three-week high. (…)

SENTIMENT WATCH
U.S. Stocks Hit New Highs, and Some Say That’s Just the Start The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all rose to new highs Thursday, an alignment that hasn’t occurred since 1999. For some traders, the factors driving shares up suggest markets could surge from these already-lofty levels.

On Thursday, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Compositeall rose to highs on the same day, an alignment that hasn’t occurred since Dec. 31, 1999. The records punctuate a march that defies stocks’ sharp downdraft at the year’s start. The ratio of stocks that trade on the New York Stock Exchange and the Nasdaq hitting 52-week highs versus 52-week lows recently surged to its highest level in years.

“The last time we’ve seen levels like this consistently was in 2013, which went on to be one of the best years for stocks,” said Frank Cappelleri, executive director of institutional equities at Instinet LLC. In 2013, the S&P 500 rose 30%. (…)

Punch Just so you know, the S&P 500 Index was selling at 14.4x trailing EPS on Dec. 31, 2012 (19.1 currently). The Rule of 20 P/E was 16.2 (21.4). Earnings were also rising, with trailing EPS up 4.2% YoY in Dec. 2012 and up another 3.4% by Dec. 31 2013. And inflation eased from +2.2% in Oct. 2012 to a low of 1.6% by June 2013. Look at the chart. In 2013, the Rule of 20 valuation (black line) went from deep undervalued to fairly valued while the Rule of 20 Fair Index Value (yellow) was rising. Not quite the case now!

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For some traders, the trends suggest stocks could enjoy a sudden surge. The bump could happen once investors return from summer vacations and begin taking some cash off the sidelines, they say. U.S. stock-trading volumes have been below the 2016 average in recent weeks. (…)

The rally in stocks in the late-1990s is often viewed as a case study for how stocks can shoot up even after reaching new highs. Between when the Nasdaq Composite hit a record high in November 1998 and the index’s peak in March 2000, the index more than doubled.

John Linehan, portfolio manager of the T. Rowe Price Equity Income Fund, says typical melt-ups come when exiting a recession, when a significant stock-market overhang has been eliminated or when investors are fundamentally rethinking how to value stocks.

In the case of the late-1990s, the U.S. market was shaking off the emerging-market crisis and the collapse of hedge-fund firm Long-Term Capital Management and its reverberations across financial markets, and focusing instead on a batch of new, disruptive technology companies. Furthermore, investors were increasingly ignoring long-held beliefs about measuring a company’s value based on its earnings in favor of metrics such as price-to-eyeballs, or how many page views a dot-com company received in a given month. (…)

What does point to a melt-up situation, some analysts say, is a shift in how investors are valuing stocks. Stock prices compared with their past 12-month earnings are at elevated levels compared with their 10-year averages. But many investors are justifying buying more stocks because valuations based on bond yields, which remain near unprecedented lows, suggest multiples could climb even higher and stocks still are relatively attractive. (…)

Yet,

Investor Demand for Bond Funds Relative to Stocks Highest on Record

Investors have poured $202 billion into global bond funds and withdrawn $47 billion from global equity funds this year, putting stocks on track for their first yearly outflow since 2008, according to the bank [J.P. Morgan]. (…)

Bank of America Merrill Lynch’s most recent monthly survey showed fund managers are holding their first underweight position in equities in four years. (…)

Around $12 trillion of global debt currently trades at a negative yield, according to Bank of America Merrill Lynch, including vast swaths of Japanese and European government bonds. But there are pockets of fixed income that still offer good returns, from emerging markets to U.S. corporate debt, some investors say.

Emerging-market dollar-denominated government debt has an average yield of 4.7%, according to Barclays. That compares with a dividend yield of 2.1% on the S&P 500. (…)

Investors in U.S. investment-grade credit have reaped a total return of 9.2%, according to Barclays, while U.S. high-yield bonds and emerging-market dollar-denominated debt has produced a return of more than 13%. (…)

Why Earnings Beats Are a Poor Measure of Corporate Health Whether profits beat or fall short of analyst forecasts has succumbed to Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure.

(…) With most results now in, European second-quarter earnings have been 2.6% ahead of forecasts, calculates RBC. That is not because corporate Europe is performing well but because expectations were low: profits fell 4% year-over-year, dragged down by oil companies and banks. This isn’t a Europe-specific problem: second-quarter U.S. earnings fell 4.2% year over year. (…)

In the first half, European earnings-per-share forecasts for 2016 were revised down by over 12%, far more than in previous years, according to Barclays. (…)

Earnings beats really have to do with investors sentiment although there are occasional periods when the beat rates are much different than “normal”.

CETERIS NON PARIBUS

Alibaba Group Holding Ltd., its business maturing at home in China, is looking to wring more growth from India and Southeast Asia.

In India, the internet giant in recent months has snapped up executives with experience in the country’s fast-growing, highly competitive e-commerce sector, a sign it could be planning an online-shopping push there. In Southeast Asia, it paid $1 billion for a controlling stake in Singapore-based e-commerce startup Lazada Group in April, its biggest overseas acquisition to date.

“We acquired the majority control of Lazada in an effort to start to serve local consumers in Southeast Asia, and that’s something that’s going to be a very important potential market for us,” Alibaba Executive Vice Chairman Joe Tsai said on an earnings conference call Thursday after the company reported revenue growth of 59% in its fiscal first quarter. “It’s a market with over 500 million potential consumers.” (…)

  • Brick-and-mortar retailers are making slow progress in their attempt to win consumers who increasingly are shopping online. Macy’s Inc. says it is closing 100 stores, shrinking its footprint by 14%, amid falling sales that have rendered some stores more valuable as real estate than as retail outlets, the WSJ’s Suzanne Kapner writes. Still, the company’s results were better than investors had feared, as were profits at Kohl’s Corp., another traditional retailer that has struggled to adapt to the rise of e-commerce. Department stores are reworking their supply chains and distribution networks to make it possible to cheaply deliver merchandise to online customers and shrink their networks of physical stores that are seeing declining traffic. Green Street Advisors, a real-estate research firm, says they have a long way to go: the firm estimates roughly 800 more department stores, or about a fifth of all mall anchor space, will need to close. (WSJ)
  • Global container demand grew 2% year-over-year, but Maersk says the global container fleet grew 6% during the same period. Freight rates declined across all trades, by the most in North America and West Central Asia. Maersk says it still expects global demand for seaborne container transportation to grow just 1% to 3% this year. (WSJ)