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$ (23 MARCH 2016)

CONSUMER WATCH

Trying to find as much info about the U.S. consumer, given its importance for the economy. The Richmond Fed surveys retailers within the Fifth District:

Retail sales rose sharply this month [March], driving the index to 36 from February’s reading of 18. Big ticket sales also strengthened, bringing the index to 18 from 11. Shopper traffic was heavier; the indicator added three points to end at 35.

Retail employment increased robustly this month, raising the index to 26 from February’s reading of 13. Average retail wages rose modestly, however. The index edged up to a reading of 4 compared to last month’s index of -1.

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Trudeau in C$60bn Canada stimulus pledge

Justin Trudeau has pledged C$60bn (US$46bn) in new infrastructure spending over the next 10 years, hoping to revive sluggish growth in Canada’s resource-rich economy. (…)

The finance minister forecast that the stimulus would raise gross domestic product 0.5 per cent in the coming year and 1 per cent in 2017-18, creating an estimated 100,000 jobs over two years. The Bank of Canada had predicted growth of 1.4 per cent for 2016-17, not accounting for the new spending. (…)

The government said its deficit would deepen in 2016-17, to C$29.4bn, or 1.5 per cent of GDP, but pledged to cut the deficit in half by 2020-21. In February it had said that the economy’s stumble had widened its projected shortfall to C$18.4bn. (…)

The S&P/TSX has surged more than 12% since its January 20 low, the biggest rebound in over seven years. Oil prices have played an unusually large role in buoying Canadian equities. As today’s Hot Chart shows, the correlation between daily changes in the S&P/TSX and oil prices (WTI) currently stands at an historical high of 0.75. Canadian banks, who account for 23% of the equity benchmark (vs. 19% for the energy sector), have seen their correlation with the price of oil explode to 0.65 – also an historical high. (NBF)

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Oil Security Seen at Risk by IEA After ‘Historic’ Investment Cuts

“Historic” investment cuts taking place now increase the possibility of oil-security surprises in the “not-too-distant” future, Neil Atkinson, head of the IEA’s Oil Industry and Markets Division, said in Singapore on Wednesday. About $300 billion is needed to sustain the current level of production, and nations including the U.S., Canada, Brazil, and Mexico are facing difficulty in keeping up investments, he said.

“We need a lot of investments just to stand still,” Atkinson said at the launch event of SIEW 2016. “There’s danger as we are reaching a point where we are barely investing upstream. If investment doesn’t resume in 2017 and 2018, we can see a spike in oil prices as oil supply can’t meet demand.” (…)

U.S. crude stockpiles are at 523.2 million barrels, the highest level since 1930, according to data from the Energy Information Administration. Supply and demand will move closer to balance in the second half of this year, according to Atkinson.

The oil market will be balanced in 2017 and stockpiles will fall from 2018 to 2021, Atkinson said. Global demand will grow 1.2 percent a year in the five years to 2021, compared with 1.7 percent annual growth in 2009 to 2015, he said. (…)

SENTIMENT WATCH

Among the world’s 63 major stock indexes, 28 with a combined value of $28.5 trillion are in bull markets. Another 10 with $4.3 trillion are poised to join them.

Global shares are rebounding from the worst January plunge in seven years as oil prices recovered and the Federal Reserve slowed the path of interest-rate increases, adding to signals the world’s major central banks remain dovish. That helped to ease investor concern over the drag on the world economy from China’s weakest growth in a quarter century. The MSCI All-Country World Index has jumped 12 percent since its Feb. 11 low.(…)

Technical analysts, who look at patterns and trends in the numbers to divine where the market is headed, have been particularly critical of the breadth of this rally, suggesting that large parts of the market weren’t participating in the broad market’s chug higher.

Thumbs up But, as shown in this chart, courtesy of Yardeni Research, Inc. nearly 60% of stocks in the S&P 500 have topped their 200-day moving averages as of the end of last week. That compares with 20% in mid-January.

The S&P 500 also breached its 200-day moving average last week, as did other indexes. An increasing number of stocks climbing over that hurdle along with the index is a sign the rally is spreading.

Further, as of Monday’s close, 93% of S&P 500 stocks traded above their 50-day moving average, a reading that’s happened on just 0.5% of trading days since 1990, according to Bespoke Investment Group. Such readings are typically good for stocks over the next three to six months, though they haven’t necessarily portended short-term gains, according to the research firm.

Thumbs down That said, skeptics will still find reason to doubt the sustainability of the rally. Yardeni notes that for the 200-day average, “the good news for the bearish technicians is that most of those averages are still in downtrends.”

Thumbs up Another point in favor of widening breadth: The ratio of stocks advancing to those declining has been climbing on the New York Stock Exchange. According to strategists at UBS, led by Julian Emanuel, that’s “likely a sign of further equity market gains to come in the weeks ahead.”

(…) Meanwhile, technical analysts who look at charts to divine the direction of stocks have joined the doubters; some are urging clients to proceed with caution when it comes to U.S. equities.

Thumbs down Analysts at Bespoke Investment Group noted that while the latest rally has pushed more than 93 percent of stocks in the S&P 500-stock index above their 50-day moving averages—which smooths out price moves over the past 50 days—there may yet be cause for concern. The strongest moving average reading since the start of the bull market in 2009 is not necessarily a bullish sign for markets, they warned, as it could indicate that stocks have surged past fair value.

“In the coming weeks we expect this breadth measure to cool off a bit as the market works off extreme overbought measures. If you’ve been waiting to buy and haven’t yet, it’s best to wait for a pullback at this point,” Bespoke analysts wrote in a note.

Still, Bespoke is far from bearish. The research firm points out that greater breadth is positive for the market’s strength over a longer-term time frame.

Thumbs up “Strong breadth is a sign that all stocks are participating instead of just a few,” the team said. “This action is the complete opposite of the weak breadth we saw in the early part of last year when the S&P 500 was making new highs but fewer stocks were doing the same. Eventually, we saw a significant correction later in the year.” 

Technical Analysts at UBS AG seem far less optimistic.

Thumbs down “With the rally of the last few weeks and looking at our daily trend work, the S&P 500 has reached its most overbought position since 2009!!” wrote analysts Michael Riesner and Marc Muller, with added grammatical emphasis. “We see the market vulnerable for a significant reversal this week, which we would see as the beginning of a tactical top building process and subsequent correction into deeper [second quarter]. We reiterate … [that we] would not chase the market on current elevated levels.”

They recommend that investors sell now, rather than await further price increases.

To sum up: Confused smile

EARNINGS WATCH

Meanwhile, the earnings picture for Q1’16 is not improving at all. Thomson Reuters’ tally now says EPS will decline 6.9% YoY vs – 6.7% one week ago.

NEW$ & VIEW$ (17 MARCH 2016): Inflation; Missing Barrels; Chinese Consumers.

Fed Dials Back Pace of Rate Hikes Federal Reserve officials reduced estimates of how much they expect to raise short-term interest rates in 2016 and beyond, nodding to lingering risks to the economic outlook posed by soft global growth and financial-market volatility.

Policy makers left short-term interest rates steady and said they expect to raise their benchmark rate just twice this year, after an initial increase in December, down from the four they previously predicted. (…)

“Caution is appropriate,” Fed Chairwoman Janet Yellen said at a press conference after the rate decision was announced, summing up her approach in handling a vulnerable economy, weak global growth and a central bank with few tools to respond if new threats derail the expansion.

(…) without committing to a timetable for rate increases, officials said the next move would depend on “realized and expected economic conditions” and reiterated that they plan to move gradually. (…)

She made clear the central bank is juggling mixed economic signals: a strengthening job market but surprisingly weak wage growth, and a resilient U.S. expansion amid global weakness.

Fed officials still expect the economy to grow briskly enough to cause unemployment to fall and inflation to rise toward their 2% target over time, Ms. Yellen said. If things unfold as forecast, they would likely continue raising interest rates gradually, she said. (…)

“Inflation picked up in recent months,” the Fed’s statement said, however Ms. Yellen cautioned that she is wary about the sustainability of the uptick since it was mostly driven by volatile categories. (…)

After the Fed’s Wednesday announcement, futures market participants put a 42% probability on just one quarter-point Fed rate increase this year and a 22% probability on two. (…)

U.S. Consumer Prices Fell in February U.S. consumer prices fell in February due largely to a slide in gasoline prices, but other evidence pointed to steadily building inflation pressures that could reassure the Fed as it considers raising rates.

The consumer-price index declined 0.2% over the month, the Labor Department said Wednesday. Overall prices haven’t risen since November and are up just 1% over the past year.

Outside of energy and food, so-called core prices rose 0.3% last month, as items like rent, medical care and apparel became more expensive. Over the past year core prices rose 2.3%, the strongest 12-month gain since May 2012. (…)

Shelter costs, reflecting home rent and mortgage payments, increased 0.3% over the month and 3.3% over the year. The cost of medical-care services climbed 0.5% over the month and 3.9% over the year.

Look at this Haver Analytics table: inflation is accelerating: last 3 and 2 months at annual rates:

  • Core +3.2%/+3.7%.
  • Core Goods: +2.4%/+3.0%
  • Core Services: +3.2%/+3.7%

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Now that Core Goods prices have joined Core Services on an accelerating trend, the last thing the Fed needs is rising oil prices.

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BTW:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.6% annualized rate) during the month. The CPI less food and energy rose 0.3% (3.4% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, the CPI rose 1.0%, and the CPI less food and energy rose 2.3%.

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Speaking crudely, the Fed is not alone in the dark:

Crude Mystery: Where Did 800,000 Barrels of Oil Go? There is mystery at the heart of the oversupplied global oil market: missing barrels of crude. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Last year, there were 800,000 barrels of oil a day unaccounted for by the International Energy Agency, the energy monitor that puts together data on crude supply and demand. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Some analysts say the barrels may be in China. Others believe the barrels were created by flawed accounting and they don’t actually exist. If they don’t exist then the oversupply that has driven crude prices to decade lows could be much smaller than estimated and prices could rebound faster. (…)

Barrels have gone missing before, but last year the tally of unaccounted for oil grew to its highest level in 17 years. At a time when the issue of oversupply dominates the oil industry, this matters. (…)

In the fourth quarter, the number of missing barrels reached as high as 1.1 million barrels a day, or 43% of the estimated oversupply. (…)

Demand data is derived from models rather than from real measured consumption and is often substantially revised, investment bank DNB Markets said in a research note. More than half of global oil demand also now comes from non-OECD nations where statistical gathering isn’t as well developed, the bank said.

“We hence suspect that demand in non-OECD in reality is meaningfully larger than what is reported by the IEA,” they said. (…)

U.S. Housing Starts Rose 5.2% in February

Housing starts rose 5.2% from a month earlier to a seasonally adjusted annual rate of 1.178 million in February, the Commerce Department said Wednesday.

Starts on single-family homes, which account for roughly two-thirds of the market, rose 7.2% in February to 822,000, their highest level since November 2007. Permits for single-family homes rose 0.4% to 731,000, the second-highest level since the end of December 2007. (…)

Multifamily units, which include apartments and condominiums, rose 0.8% to 356,000. (…)

But new applications for building permits fell 3.1% to 1.167 million, from a revised January rate of 1.204 million, driven by a 8.4% fall in multifamily units. Some of that slowdown could be due to rising prices for land; home builders have been reporting shortages of land and labor for months.

Brian Johnston, chief operating officer of Mattamy Homes, which operates in four U.S. states and Canada, said his company has slowed the pace of land purchasing because prices have gotten so high.

”There are more builders out there and everyone is feeling more positive,” Mr. Johnston said. “They see their land supply diminishing, and they’re getting into the market to replace it.” (…)

Home-starts figures are volatile and often revised. Wednesday’s report showed new-home starts revised up to 1.120 million in January, compared with an initial estimate of 1.099 million. (…) (Charts from Haver Analytics)

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U.S. Industrial Production Slips in February

Industrial production decreased a seasonally adjusted 0.5% in February from the prior month after surging a revised 0.8% in January, the Federal Reserve said Wednesday. Total production fell 1.0% in February from a year earlier, the fourth consecutive annual decline. (…)

The Fed said overall capacity utilization, a measure of industrial slack, slipped by 0.4 percentage point to 76.7% in February. It averaged 80% from 1972 to 2015. (…)

Last month’s weakness was concentrated in the mining sector and in utilities, where the Fed said in a statement that “unseasonably warm weather curbed the demand for heating.”

Manufacturing production rose by 0.2% in February after climbing 0.5% the prior month. It was up by 1.8% from February 2015, led by a 9.1% year-over-year increase in motor-vehicle production. (Charts from Haver Analytics)

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(…) When combined with the mere 0.2% rise signalled for recent core retail sales data, the industrial malaise adds to suggestions that the pace of economic growth could disappoint in the first quarter compared to widespread expectations among analysts of 2-2.5% annualised growth.

Markit’s PMI surveys, which provide a reliable advance indication of economic growth, have also indicated a poor start to the year. Growth weakened further in February after having already slowed in January as problems spread from manufacturing to services, raising the possibility of a stalling of the economy.

Markit US PMI surveys v GDP

 
Pointing up China’s consumers tighten belts while retailers cut jobs, offer discounts

Retailers in China are shedding staff, slowing expansion plans and seeing stocks pile up in warehouses as shoppers tighten their belts – a major headache for a country that has pinned its hopes on consumers to drive economic growth.

With that growth running at its slowest in a quarter of a century, China’s consumption patterns are changing, with wealthy middle-class households trading down to more affordable brands, and poorer families paring back on basic purchases.

China’s top 50 retailers saw sales fall 6 per cent at the start of the year, and sales of basic goods from noodles to detergent grew just 1.8 per cent at the end of last year, down from more than 9 per cent just three years ago, according to Kantar Worldpanel data. (…)

This is a problem for sectors from retail to luxury and even fast food, where many international names have banked on continued growth.

Procter & Gamble Co., whose China products include Pampers diapers and Tide laundry detergent, said in January its sales were “significantly down” compared with 2014. Infant formula maker Mead Johnson Nutrition Co. said price competition and a shift to smaller shops and online hit sales. (…)

Westpac Bank’s most recent consumer survey showed sentiment at its lowest since October. “The February update points to continued weak conditions and elevated job-loss fears again weighing on the consumer mood,” said senior economist Matthew Hassan, adding that any loss of momentum for consumer demand could raise the risk that growth stays weaker for longer.

Some firms are bucking the downturn.

International brands offering “affordable luxury,” such as coffee chain Starbucks Corp. and high-end sporting goods giants Nike Inc. and Adidas AG have still grown. Adidas says it has not seen an impact on its business and plans to open about 3,000 stores in China by the end of 2020.

But retail executives and consumer goods makers said China’s slow growth is punishing the sector and forcing many to cut back, focus on smaller, faster-growing cities and offer more discounts.

“We are struggling to adapt as sales move online or to small mom-and-pop stores,” said a senior sales executive at a major Western consumer goods firm. “At the moment, it’s carnage.”

He said inventory levels at some clients had jumped to as much as nine months, from a normal average of around two weeks. (…)

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