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$ (30 NOVEMBER 2015)

Gift with a bow Online Shopping Surges on Black Friday Weekend More people shopped online than in stores during the Thanksgiving and Black Friday weekend, a retail survey said, a sign of how quickly and deeply American shopping habits have changed.

(…) Consumers spent an estimated $4.45 billion online Thursday and Friday, with Black Friday sales rising 14% from a year ago, according to Adobe Systems Inc., which tracks purchases across 4,500 U.S. sites. It estimated that more than half of Black Friday shopping came from mobile devices. At Wal-Mart Stores Inc. about half of online orders since Thanksgiving have been placed on mobile devices, almost double the amount last year, according to the retail chain.

At the same time, the Thanksgiving shopping ritual appears to be losing steam overall, blending into a longer holiday season that starts before Halloween and extends up until the hours before Christmas for some shoppers. Americans spent an estimated $12.1 billion at traditional stores over Thanksgiving and Black Friday, a decline from last year, according to ShopperTrak, which uses cameras to measure shopping. (…)

On Sunday, the retail federation estimated that more than 103 million people shopped online over the Thanksgiving weekend and nearly 102 million shopped in stores, based on its survey of 4,200 shoppers. (…)

Emerging-Market Defaults Hit Six-Year High Emerging-market corporate-debt defaults reached their highest level since 2009, as economic conditions worsen for companies that spent years piling up their borrowings.

(…) Corporate defaults in emerging countries have hit their highest level since 2009 this year, and are already up 40% over last year, according to Standard & Poor’s.

For the first time in years, emerging-market companies are defaulting more often than their U.S. peers. The default rate on emerging-market corporate high-yield debt over the past 12 months has reached 3.8%, compared with 2.5% in the U.S., according to Barclays. Four years ago, the emerging-market default rate stood at 0.7%, well below 2.1% in the U.S. (…)

While emerging-market corporate debt globally has risen fivefold over the past decade, totaling $23.7 trillion in early 2015, according to the Institute of International Finance, much of the increase has come from emerging Asia, where the nonfinancial corporate debt to GDP ratio has risen to 125%, up from 100% five years ago. (…)

Waning lender appetite and the growing inability to raise capital despite low interest rates has left bond issuance in emerging markets down almost 30% from a year ago. (…)

Against that backdrop, companies and countries in emerging markets are due to repay almost $600 billion of debt maturing next year, according to the Institute of International Finance, of which $85 billion is dollar-denominated. Almost $300 billion of nonfinancial corporate debt will need to be refinanced next year. (…)

OPEC Is Ready to Rumble Over Saudi Output Pressure is building on Saudi Arabia to rein in its oil output after a year of pumping full tilt, setting up the most contentious OPEC meeting in years this week.

(…) Privately, Saudi officials acknowledge they too have been distressed by the persistence of low oil prices, which has forced the kingdom to spend down some of its reserves of hard currency. They are considering their options “because there is a growing discontent in the kingdom about the low oil price,” said an oil official from a Persian Gulf country.

But Saudi Arabia is unlikely to consider cutting until June 2016 at the earliest, when Iran’s ability to return to the market and the effect on prices becomes clear, analysts and officials say. Answers to questions about demand, especially surrounding an economic slowdown in China, the world’s biggest consumer of energy, will also be clearer then. (…)

The most likely outcome of the meeting, OPEC delegates have said, is an increase in the group’s production target to about 31 million barrels a day, up from 30 million barrels a day, to accommodate the re-induction of Indonesia to the group—a move that won’t change the world’s supply-demand balance. (…)

“No one is happy with the current situation,” said a Persian Gulf country official. “The lower oil prices are lasting longer than initially expected and everyone wants the price to bounce back up soon.”

(…) The belt-tightening comes at one of the most testing times in the kingdom’s history, with the Sunni Saudi monarchy locked in a regional power struggle with Shia Iran and sectarian tensions flaring across the region. Determined to reassert its leadership role in the Sunni Muslim world and confront Tehran, Riyadh in March launched a military campaign in neighbouring Yemen to push back Iran-backed Houthi rebels. (…)

Saudi authorities have cracked down on Isis cells in the country in recent months. But while Saudis see themselves as victims of Isis, many outsiders consider the kingdom’s dependence on the clerical establishment, and its determination to spread its Wahhabi brand of Islam worldwide, as part of the problem, contributing to the radicalisation of Sunni youth and breeding jihadis.

“The picture is bleak,” says a Riyadh businessman. “The longer oil prices are depressed and turmoil in the region continues and the longer we have security issues in the country, the less options there are and the more dire the situation will be for Saudi Arabia.” (…)

The government has slashed public spending by a quarter, raised $27bn through local debt issuance this year and is considering an international bond programme in 2016. The swingeing $80bn in cuts, bringing spending down to $267bn, will be followed by more austerity next year as the government looks at a budget of $229bn-$240bn. (…)

(…) Traders are alreadyboosting bets the Saudi riyal may be devalued and Standard & poor’s has lowered the country’s credit rating. Now liquidity in the banking system is being squeezed, with demand deposits dropping 4.7 percent in October as businesses, individuals and government entities withdrew cash. (…)

Global growth bounces back a bit Economic data published in November have shown a further uptick in worldwide activity growth

(…) It now appears almost certain that the 2015 Q3 dip in world activity was not the precursor of a slide towards global recession. Instead, it seems to have been another of the minor mid-course corrections that have been a consistent feature of the moderate upswing in global activity that started in 2009. (…)

Overall, the global economy continues to grow below trend rates, so at some deep level the deflationary pressures in the system are not abating. However, the specific deflationary impetus from the commodity price collapse is now passing its maximum effect so recorded rates of headline and core inflation are likely to rise significantly in the next few months. (…)

In China, activity growth has not followed the pessimistic path that was predicted by so many observers in August. At that stage, activity growth dipped to about 5.8 per cent but since then it has gradually recovered to 6.4 per cent, which is almost exactly in line with the model’s estimate of long-term trend growth. It is likely that the combination of monetary and fiscal easing announced from April onwards has had some beneficial effect, but it also appears that the recessionary forces in the industrial and construction sectors have not been as great as the pessimists feared.

Of course, there are many observers who believe that Chinese activity data are largely fictitious, and no amount of published data will change their minds. But our nowcast models include many official and some unofficial data sources, and it seems unlikely that systematic “cheating” is capable of completely distorting this entire raft of data for long periods.

Full details of this month’s nowcasts and global industrial production data are attached here.

Amazon shows new Prime Air drone Clarkson video highlights footage of part helicopter, part plane

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NEW$ & VIEW$ (17 NOVEMBER 2015): Where’s Waldo follow up; Submerging Cos.

N.Y. Fed: Business Conditions Decline Fourth Straight Month

The Empire State’s business conditions index came in at -10.7 this month, compared with -11.4 in October and -14.7 in September. (…)

Details of the report painted a mixed picture of the New York-area manufacturing sector. The new orders subindex improved to -11.82 from -18.91, while shipments improved to -4.1 from -13.61. But unfilled orders and inventories deteriorated to -18.18 and -17.27, respectively. They had been at -15.09 and -7.55.

Labor-market indicators, meanwhile, steadied slightly, consistent with the Labor Department’s recent report, with the index measuring the number of employees at -7.27, from -8.49 last month.

Given the continuing weakness, it was no surprise that manufacturers’ attitude about future conditions turned more negative. The index measuring the six-month outlook fell to 20.33 from 23.36 last month, while the gauge of future capital spending plans edged up slightly to 12.73 from 12.26. (…) (Charts from Haver Analytics)

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WHERE’S WALDO? (follow up)

Following up on yesterday’s post WHERE’S WALDO? three big retailers reported this morning:

Earnings were 99 cents a share in the period, excluding some items, the Bentonville, Arkansas-based company said in a statement Tuesday. Analysts had predicted 98 cents on average, according to data compiled by Bloomberg.

For the current quarter, Wal-Mart forecast earnings of $1.40 to $1.55 a share. Analysts polled by Thomson Reuters had forecast $1.42 in per-share profit.

The company now expects profit of at least $4.50 a share this year, up from a previous forecast of at least $4.40.

Pointing up Comp sales at Walmart U.S. were positive for the fifth consecutive 
      quarter, up 1.5%. Traffic increased 1.7%.

Home Depot Inc , the world’s No. 1 home improvement retailer by revenue, reported a better-than-expected rise in quarterly same-store sales, helped by strong demand from both retail customers and professional contractors and builders.

Call me Richard S., a Bearnobull reader, rightly observes that many of the dinostores actually cater to the first victims of the Fed’s ZIRP.

The problem with demand is that the retirees and near retirees (the dinosaurs) aren’t buying because their interest income is zero.  The stores which serve these customers are showing the impact.  The FED is hurting the economy.

I don’t know Richard’s age but I am not considering myself a dinosaur, just yet anyway. Winking smile

Meanwhile, Shake Shack last week talked about “growing labor costs” and so did Panera.

U.S. Producer Prices Post a Surprising Decline

The overall Final Demand Producer Price Index fell 0.4% during October (-1.6% y/y) following an unrevised 0.5% September decline. Prices excluding food & energy were off 0.3% (+0.1% y/y) and repeated the prior month’s decline.

Final demand goods prices (35% of the total index) fell 0.4% (-4.8% y/y), down for the fourth straight month. The latest decline was led by a 0.8% drop (-4.2% y/y) in food prices. (…) Gasoline prices rebounded 3.8% (-37.9% y/y), but home heating oil prices eased 0.1% (-40.9% y/y). Residential natural gas prices also were off 0.1% (-10.8% y/y) and residential electric power costs fell 0.5% (+0.1% y/y).

Final demand goods prices excluding food & energy declined 0.3% (-0.1% y/y) after remaining steady in September. Core finished consumer goods fell 0.2% (2.6% y/y) and reversed the prior month’s rise. Core consumer nondurables costs remained steady (3.3% y/y) following a 0.2% rise, but consumer durables dropped 0.5% (+1.0% y/y). Private capital equipment costs eased 0.2% (0.9% y/y) while core goods prices for government purchases were off 0.1%, unchanged y/y. Prices of goods for export fell 0.4% (-3.5% y/y), down for the fourth straight month.

Final demand services costs (63% of the total index) declined 0.3% (+0.1% y/y) after a 0.4% fall. This was led by trade services which fell 0.7% (-0.7% y/y); trade services represent the margins charged by retail and wholesale dealers and merchants. (…)

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Deeper into the red  Emerging market companies under debt pressure

(…) By some estimates, $7tn of QE dollars have flowed into emerging markets since the Fed began buying bonds in 2008. Now, a year after the Fed brought QE to an end, companies in emerging markets from Brazil to China are finding it increasingly hard to repay their debts.

The excess capacity these companies created became apparent just as China’s slowing economy triggered a collapse in global commodity prices, hurting companies across the emerging world and sending Brazil’s economy into deep recession. Some experts say QE policies by the Fed and other central banks have left a legacy of oversupply from which it will take years to recover.

They also warn that the leveraging of QE money has resulted in piles of debt around the emerging world that are very hard to measure or even detect. As Carmen Reinhart, a Harvard University economist, said recently, it is often only after things go wrong that the size and destructive power of hidden debts become apparent. (…)

What is clear is that debt has risen to alarming levels. As a percentage of gross domestic product, private sector debt (households and companies) is now greater in emerging markets than it was in developed markets on the eve of the financial crisis.

Taking on more debt for productive investment may well be a good idea, but it is not what has happened. Philip Turner and colleagues at the BIS looked at leverage and profitability at 280 big EM corporate bond issuers. They found that while leverage at those companies was up, profitability was sharply down. (…)

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Last week, the Institute of International Finance said bank lending conditions in emerging markets — a broad measure that includes credit demand, availability and non-performing loans — had deteriorated sharply, with some measures at their worst levels since the IIF began monitoring conditions in 2009.

Hung Tran, the IIF’s managing director, says EM companies are finding it harder to repay their debts and raise new money for investment, putting further downward pressure on growth. And he does not buy the argument that currency mismatches — especially in the overseas debts of EM governments — no longer present the danger they did in the crises of the 1990s.

“People say, this time there is no currency mismatch,” he says. “They are not wrong. But the problem now is much deeper and much more general than a currency mismatch. This is a pure and simple problem of over-indebtedness and of slowing economic growth.”

(…) too much borrowing invested in too much capacity, coming to market as demand is falling. This misallocation of capital is blowing the ill winds of deflation to the developed world. The process is not over yet: as the Fed pulls back, the ECB and BoJ are in full QE mode.

(…)  He says the developed world is heading for a recession similar to the one that followed the turn of the century; if no action is taken, he expects the impact to be worse than the Asian financial crisis of the late 1990s.

“QE has made this possible,” says Luis Oganes, head of EM research at JPMorgan. “Our concern is not of a full-blown EM crisis but of the heavily indebted companies and the banks exposed to them, as they fall into a vicious circle of low profitability, higher non-performing loans and tighter credit conditions. We should not expect an investment-led recovery anytime soon.”

Chinese companies may have more immediate help. Beijing has reined in credit over the past two years to curtail overcapacity, mainly through restrictions on shadow banking. But this year, official lending has again been on the rise. (…)

SENTIMENT WATCH
  • Investors continue to pull money out of equity mutual funds: -$128B out of equity mutual funds and ETFs YtD. Surprised smile
  • Evercore ISI hedge fund survey plunged -1.1 to 47.4, “close to an outright BEARISH reading”.

Understand that hedgies are not born with a much better crystal ball than anybody else. The last time they were as bearish was in Dec. 2012…