One week ago, my laptop suddenly died on me. I will be working with a less effective backup and limited resources for about 2 weeks. 
The Daily Edge will not be published on Monday Nov. 11.
Trump Says U.S. Hasn’t Yet Agreed to Ease China Tariffs President Trump said the U.S. hasn’t yet agreed to a rollback of tariffs, disputing a statement from China Thursday that tariff relief would be part of the first phase of a trade accord between the two nations.
(…) “I haven’t agreed to anything,” Trump told reporters at the White House. “But we’re getting along very well with China. They want to make a deal. Frankly, they want to make a deal a lot more than I do.” (…) “China would like to get somewhat of a rollback, not a complete rollback because they know I won’t do it,” Mr. Trump said. (…)
“I like our situation very much,” the president said Friday, referring to the amount of tariff revenue that the U.S. is collecting. But he signaled he was still inclined to make a deal. “They want to make a deal much more than I do, but we can have a deal,” he said. (…)
Reuters:
Hu Xijin, editor of China’s state-run Global Times newspaper tweeted “It’s not a flat denial. What’s certain is that if there’s no rollback of tariffs, there will be no phase 1 deal.”
RAIL TRAILS
From the Association of American Railroads:
In October 2019, total U.S. rail carloads were down 8.4% from October 2018, their ninth straight decline. Just four of the 20 carload categories we track had gains in October, led by stone, clay, and glass products and petroleum products. Their gains were overwhelmed by big declines in most other categories, including coal (down 15.0%); motor vehicles and parts (down 10.3%, with the GM strike probably playing a role); crushed stone, sand, and gravel (down 6.8%); and grain (down 6.0%). (…)
The chart nearby shows U.S. rail carloads of industrial products, an amalgamation of many different rail traffic categories that together provide a gauge of the health of the U.S. industrial sector generally. It’s not a pretty picture. Carloads in October 2019 were down 5.2% in October, their ninth straight decline and the third biggest percentage decline since July 2016. (…)
Many non-rail industry people pay attention to rail traffic in part because it’s a useful economic indicator. Generally speaking, when the economy is doing well, so is rail traffic, and vice-versa. That’s especially true when you exclude carloads of coal, grain, and petroleum products, which tend to rise or fall for reasons that have little or nothing to do with the state of the economy. In fact, the category “intermodal + carloads excluding coal, grain, and petroleum products” appears to be the rail traffic aggregate that is most closely correlated with GDP.
Notice how bad it is now compared with 2016 with no sign of a change in trend:
No big surprises there given the trade war. But this next part could be telling something about consumer demand:
U.S. intermodal originations in
October 2019 were 7.8% lower than in October 2018,
their ninth straight monthly decline — something that
hasn’t happened since 2009 during the Great
Recession. Year-to-date intermodal volume through
October was down 4.5%, or 553,863 containers and
trailers, from 2018.
Note that there is also no sign of a change in trend:
Canada is not feeling a similar drop in growth:
Consumers Could Spread Some Holiday Cheer Americans’ moods have dimmed, but the economy is still providing them with the wherewithal to spend
(…) Wages among full-time and salary workers at the top of the lowest decile—those who make less than 90% of all U.S. workers—were up 7% from a year earlier in the third quarter, according to the Labor Department. That matters because people who make less have a higher propensity to consume additional income. Also helping those lower-earning workers: Gasoline prices are down from a year ago, so less of their paychecks are going into the gas tank. The news for retailers that serve poorer consumers could be good this holiday season. (…)
But there are cracks in the consumer story:
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More Borrowers Are Going Underwater on Car Loans Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon can leave owners trapped.
(…) Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars. (…)
Those borrowers owed about $5,000 on average after they traded in their cars, before taking on new loans. Five years ago the average was about $4,000. (…)
Borrowers with negative equity at the time of purchase tend to get longer loan terms, higher interest rates and higher monthly payments, according to Edmunds. The higher rates and longer repayment periods mean a smaller share of their monthly payments goes toward paying down principal in the first few years of the loan. The result for some consumers is a cycle in which each new trade-in leaves them deeper underwater. (…)
Many of the loans are bundled into bonds and snapped up by Wall Street investors. (…) Some 5.2% of outstanding securitized subprime auto-loan balances were at least 60 days past due on a rolling 12-month average during the period ending in June, up from 4.8% the year before and 4.9% two years before, according to Fitch Ratings. (…)
- Geopolitical Futures revealed last week that there have been 580 chapter 12 farm bankruptcy filings across the U.S. over the [past year, a 24% jump.
- Schwab’s warning:
Many pundits have opined that the strength of the consumer has been and will be enough to hold up the U.S. economy, despite myriad uncertainties and an ailing business community. Yet, the reality is that business investment’s ultimate impact carries a lot more heft than its 14.3% weight (measured by the Bureau of Economic Analysis) in overall GDP. In fact, in nearly half of the 41 negative quarters of GDP since World War II, business investment turned negative while personal consumption stayed positive. Thus, even if the consumer remains solid in the near future, it doesn’t necessarily portend a meaningful rebound in growth if business investment continues to wane. There are high correlations among business confidence, corporate profits, capital spending and ultimately job growth. Those are the transmission mechanisms on which to keep a close eye. For now though, the dividing line between business and consumer confidence remains firm; as does that between manufacturing and services.
China’s Consumer Inflation Soars to Highest Level in Years A doubling of pork prices last month sent Chinese consumer inflation to its highest level in nearly eight years, constraining Beijing’s ability to stimulate the economy as growth continues to slow.
China’s consumer-price index rose 3.8% in October from a year earlier, the National Bureau of Statistics said Saturday—higher than a median forecast of 3.5% by economists polled by The Wall Street Journal, and far outpacing September’s 3.0% reading. (…)
Nonfood price inflation moderated further to 0.9% in October, from 1.0% in September.
China’s producer-price index dropped deeper into deflationary territory in October, falling 1.6% in October from a year earlier, more than economists’ median forecast of a 1.5% decline. Producer prices fell 1.2% in September from a year earlier.
EARNINGS WATCH
Near the end of the Q3 earnings season, essentially missing 26 consumer-centric and 15 Tech companies. Refinitiv’s weekly summary:
Through Nov. 8, 446 companies in the S&P 500 Index have reported earnings for Q3 2019. Of these companies,
74.2% reported earnings above analyst expectations and 18.6% reported earnings below analyst expectations. In a
typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters,
74% of companies beat the estimates and 18% missed estimates.In aggregate, companies are reporting earnings that are 4.5% above estimates, which compares to a long-term (since
1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.Of these companies,
58.0% reported revenues above analyst expectations and 42.0% reported revenues below analyst expectations. In a
typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters,
59% of companies beat the estimates and 41% missed estimates.In aggregate, companies are reporting revenues that are 1.1% above estimates, which compares to a long-term (since
2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.9%.The estimated earnings growth rate for the S&P 500 for 19Q3 is -0.5%. If the energy sector is excluded, the growth
rate improves to 2.1%. The estimated revenue growth rate for the S&P 500 for 19Q3 is 3.9%. If the energy sector is excluded, the growth rate
improves to 5.3%.
Revisions have been positive for 3 consecutive weeks, across the board but not by wide margins:
Corporate guidance has not worsened, but fewer companies provided guidance:
The estimated earnings growth rate for the S&P 500 for 19Q4 is 0.6%. If the energy sector is excluded, the growth rate
improves to +2.8% which would mark the first uptrend in a long while. Analysts expect revenues to keep growing more than 5% with much of the improvement coming from Financials and Utes (!!??):
Revenues don’t simply grow out of thin air, or analysts’ spreadsheets, as Ed Yardeni illustrates so well: world economy matters, manufacturing matters and U.S. exports matter:
It thus seems heroic to expect that revenue growth will not slowdown any more.
Same with earnings, given increasing competition, rising labor costs and upset supply channels.
That said, it is always safer (and simpler 
) to use trailing EPS when valuing equity indices.
Trailing EPS are now $163.85, down from $164.20 at the same time in Q2 and 0.4% lower than the $164.43 and $164.31 at the end of August.and September respectively.
The Rule of 20 P/E is 21.2 while the Rule of 20 Fair Value (yellow line = trailing EPS x (20 – inflation)) is weakening. Strong investor confidence is needed to bring valuations much higher against declining Fair Value.
TECHNICALS WATCH
Lowry’s Research is getting more optimistic seeing new highs in its Small Cap Adv-Dec Line (“suggests this bull
market continues to show few signs of age”) and new
all-time highs in both the NYSE and OCO Cum.
Net Volume Indexes (“suggest a rally that is showing the sustained
strong Demand likely to lead to additional new
highs in the weeks and months ahead”).
In effect,
Buying Power has strengthened and Selling Pressure has declined. “The drop to a
new reaction low in Selling Pressure appears
most significant as it highlights the fact that the
current rally to new all-time highs in the price
indexes has generated little profit-taking. This is
the opposite pattern of what typically occurs in
an aging bull market approaching its final top
when increased profit-taking results in a steady
uptrend in Lowry’s Selling Pressure Index.”
