NEW$ & VIEW$ (31 August 2016): Name Change!

Bearnobull Becomes “Edge and Odds”

Tomorrow Sept. 1, 2016, Bearnobull will become Edge and Odds. The name change will take effect immediately and, barring unforeseen difficulties, everything else will easily follow with the possible exception of email delivery which should be effective soon after.

For now this only involves a name change with little or no cosmetic changes although some will likely be made during September. You should be able to reach Edge and Odds at https://www.edgeandodds.com/ for a few more days. If not, try www.edgeandodds.com. Sorry for the inconvenience. The team (me, myself and I) is trying to make this as smooth as possible.

Why the change? The name Bearnobull was mainly a reflection of my personal character as an investor, being neither a permabear or a permabull, simply an investor seeking “the truth” and trying to be right most of the time without losing his shirt when he is wrong. I am also a grey-hair (or is it all white now?) investor who does not bear bull from the media and other “pundits”, especially when it impacts ordinary people’s hard earned savings. Finally, my reporting and analysis bear no bull, as far as I know…

But this blog is not really about me, rather about the two essential ingredients in investing: finding an edge and understand the odds.

The Edge comes from seeking and objectively analysing timely and pertinent information to get better insights. The Odds are the probabilistic relationship between risk and reward at any given moment in time. Combining a good edge with the right odds is the winning formula. This is what this blog and its predecessors since 2009, New$-To-Use and Bearnobull, are all about.

Edge and Odds will remain open and free.

So, please bear with me for a week or so as I complete the transition.

Workers All Over America Are Getting a Raise

The median U.S. worker benefited from a 3.4 percent year-on-year increase in wages in July, only marginally lower than the bumper 3.6 percent the previous month, which was the fastest pace of wage growth since January 2009, according to the Federal Reserve Bank of Atlanta’s wage growth tracker. (…)

In a research report published on Monday, equity analysts at Macquarie Capital Markets highlight the broad-based nature of U.S. wage gains. They demonstrate how the drag on national wage growth from weak labor markets in the oil states — Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming — has loosened in recent months, citing Bureau of Labor Statistics’ average hourly earnings data. (…)For businesses, there’s a medium-term risk here: an increase in real hourly pay, in the absence of productivity and volume growth, will eat into profit margins. Still, there’s some evidence that a tightening labor market could, in theory, drive productivity higher.

Bespoke Investment had a good post yesterday:

Since January 2015, our monthly Bespoke Consumer Pulse Report has shown that the share of consumers that expect a deteriorating labor market in the US is trending higher.  Interestingly, at the same time we haven’t seen an increase in the percentage of consumers concerned about losing their own job.  This divergence is fascinating and an excellent indicator that the economy and labor market is much stronger than its popular perceptions.

(…) consumers should be feeling good for a number of other reasons.  First, gas prices tend to be a great predictor of overall sentiment and with cheaper gas, consumer sentiment has recently picked up with regards to the economy.

But the trend has changed since mid-August as this gasbuddy.com chart shows:

U.S. Home Prices Continued Strong Gains in June Home prices continued to make strong gains in June, as continued price run ups put a damper on demand.

The S&P CoreLogic Case-Shiller Indices, covering the entire nation, rose 5.1% in the 12 months ended in June, identical to the increase reported in May.

Price growth did show some sign of slowing in the country’s largest cities. The 10-city index, which includes some of the country’s largest cities, gained 4.3% from a year earlier, down slightly from 4.4% last month. The 20-city index gained 5.1% year-over-year, down from a 5.3% increase in May. (…)

Some of the hottest markets in the country, primarily on the West Coast, continued to show double-digit price gains, with Portland reporting a 12.6% year-over-year gain, Seattle showing an 11% gain, and Denver with a 9.2% increase.

But California, which for months led the country in price growth, has been cooling. Home prices in San Francisco increased 6.4% in June, the smallest annual gain since August 2012, Mr. McLaughlin said.

Month-over-month prices in the U.S. index rose 1% in June before seasonal adjustment, while the 10- and 20-city indices both increased 0.8% from May to June.

After seasonal adjustment, the national index rose 0.2% month-over-month, and both the 10- and 20-city indexes reported 0.1% month-over-month decreases. (…)

Hmmm…Here’s how Bespoke Investment looks at the same data:

Curious to know where you stand? Bespoke has the tables and the charts:

• Seven of Twenty Cities Now Above Housing Bubble Highs

U.K. House Prices Defy Brexit Vote

Prices rose by 0.6% in August compared with the previous month, Nationwide Building Society said, a slight increase from July’s monthly growth rate. Compared with August last year, house prices grew by 5.6%.

But this chart from The Daily Shot suggests there may be a lag effect here:

Eurozone Inflation Flat in August as ECB Meeting Looms

Consumer-price inflation in the eurozone was unchanged in August, as a weak economic recovery left the European Central Bank no nearer to meeting its inflation target than when it launched the first of a series of stimulus measures more than two years ago.The European Union’s statistics agency Wednesday said consumer prices were 0.2% higher in August than during the same month a year earlier. That was a surprise, since economists surveyed by The Wall Street Journal last week had estimated that prices rose by 0.3%. (…

Germany’s statistics agency reported Wednesday that retail sales were up 1.7% in July from June, the largest increase since January 201

However, French consumer spending dropped unexpectedly in the same month as households cut back on cars and home furnishing, statistics agency Insee said. Consumer spending fell 0.2% in July from June.

ROBERT BRUSCA: Euro Area and EU Indices Fall; No Longer Firm Readings- Be Afraid?

The EU Commission indices for the EU and EMU fell hard in August. Their slippages have been ongoing. There are no more truly `strong sectors’ in the EU, but the EMU is faring slightly better on that front. The strength in services and in retail has evaporated. The Big Four economics have very middling rankings in their historic queues of data. There is no `strong’ economy anymore. And do not -NOT- blame it on Brexit. The slippage dates from a peak reading in December 2015 of 108.5 for the EU and a peak reading of 106.6 for the EMU at the same time. Europe is eight months into this new cycle of slippage. And these recent cycle `peaks’ compare to pre-recession and pre-financial crisis readings of 114.5 for the EU and 113.2 for the EMU (both May 2007). (…)

There is a lot of weakness in the EU area in August. Both the EU and EMU are showing withering readings and losing momentum on a broad-based front. Indications of a more synchronized cycle raise a warning flag of sorts, but the individual country measures are still clustering above their respective medians. There is no disaster, but there is fellowship in mediocrity and slippage. That is worrisome enough, especially with ECB policy showing no signs of generating traction.

Deutsche Bank chief calls for mergers in Europe

The head of Deutsche Bank made a rare public call on Wednesday for cross-border mergers in Europe, weeks after Germany’s flagship lender scraped through regional stress tests.

John Cryan’s remarks will likely spur further discussion about the future of the struggling bank, although he was quick to throw cold water on reports that Deutsche examined a merger with Commerzbank – which is partly owned by the German state.

Criticising what he called the “scattered regionalism among banks”, Cryan said: “We need more mergers, at a national level, but even also across national borders.” (…)

Copper flashing red signals on China

Copper prices are signalling that demand may be weakening in China, the world’s largest consumer, as stocks of the metal flow out of the country to warehouses elsewhere in Asia.

The red metal, which is often seen as a gauge of global economic activity due to its ubiquitous use in wiring, has relinquished its gains for the year, falling 2 per cent. That is in contrast to other metals also heavily tied to Chinese demand such as zinc, tin and nickel, which have all staged rallies.

The drop in price to a 10-week low on Tuesday comes after imports of the metal into China fell in July, and stocks have built up on London Metal Exchange warehouses in South Korea and Singapore.

Global stocks of copper are now at their highest levels since October 2015, according to data from broker Marex Spectron. (…)

Moody’s warns China’s smaller lenders are a systemic risk to bank sector

China’s banking system faces a systemic risk from a significantly increased reliance by small and mid-tier lenders on interbank funding, top credit rating agency Moody’s Investors Service warned on Monday.

The most liquid assets of these banks are held largely as interbank assets, so they would need to withdraw funds from other banks to meet their own funding needs, which could in turn cause contagion, Moody’s said in a report.

“With an increasingly larger number of banks now more actively engaged in the interbank financial product business, the banks are becoming more sensitive to the risk of potential counterparty failure, which could magnify any collective reaction to negative news and trigger a sharp tightening in system liquidity,” said Christine Kuo, a Moody’s senior vice-president.

In contrast, China’s big four banks are not dependent on the interbank market and are mostly fund suppliers, reflecting their strong deposit base and more prudent growth strategy, the credit rater said. (…)

Japan’s in a Bind as Total Debt Tops 600% of GDP, Pimco’s Baz Says

THE HUNT FOR YIELD

From Casey Research (tks Freddie)

(…) According to The Wall Street Journal, dividends have become a driving force of the stock market:

The five-year rolling correlation between S&P 500 companies’ dividend yield and the index’s performance has been at 0.80 or above for the five quarters through June, according to S&P Global Market Intelligence. That is the highest since 1993 and up from an average of minus-0.1 dating back to 1941.

Keep in mind, the correlation between earnings and stocks has plunged to -0.2. This means dividends have more impact on stocks right now than earnings. This is almost unprecedented.

Since 1941, the correlation between stocks and dividends has been -0.1, meaning they’ve had almost no impact on the performance of the S&P 500 for the past 75 years. (…)

Beware of companies that promise fat dividends.

Today’s chart compares forecasted with realized dividend yields for companies in the S&P 500.

You can see most companies over-promise and under-deliver when it comes to dividends. In fact, based on data going back to 1996, you’re likely to earn a bigger dividend by investing in a company that projects to pay a 3%–4% dividend versus one that projects a double-digit yield.

So, if a company’s dividend yield sounds too good to be true, it probably is. This is another reason why we like to invest in companies with proven dividend track records.

All related:

• Fed’s Evans, citing slow growth, says low U.S. rates are here to stay Chicago Federal Reserve Bank President Charles Evans on Wednesday said he is increasingly convinced that U.S. economic growth has slowed permanently, a situation that will keep U.S. interest rates low for a long time ahead.

• Fed’s Fischer Says Negative Rates Seem to Work in Today’s World

Federal Reserve Vice Chairman Stanley Fischer said negative interest rates seem to be working in other countries, while reinforcing that they aren’t on the table in the U.S.

While the Fed isn’t “planning to do anything in that direction,” the central banks using them “basically think they’re quite successful,” Fischer said Tuesday on Bloomberg Television with Tom Keene in Washington. (…)

“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”

Fischer’s assessment compares with the views of Mark Carney, the governor of the Bank of England, who earlier this month rejected the idea of negative rates as an effective option. “What we’ve seen in other countries is, to be honest, they’ve got this a bit wrong,” Carney said in a radio interview in early August.

Swiss National Bank President Thomas Jordan has said that negative rates are “absolutely necessary” in his country. (…)

That could be because “time is money”

But there’s also this:

• Swiss Central Bank Steps Up Stock Buying Spree

(…) the Swiss National Bank has become a multi-billion-dollar equity investor due to its campaign to hold down the Swiss franc.

It is now the world’s eighth-biggest public investor, data from the Official Monetary and Financial Institutions Forum show. While most analysts think the strategy is sound, this does expose the SNB to stock market risks that the likes of the European Central Bank and U.S. Federal Reserve avoid.

“The SNB is in a bit of a corner, they have acquired a lot of foreign currency as part of their efforts to weaken the franc and they have to invest it somewhere,” said Alessandro Bee, an economist at UBS. “The bond market is drying up and so they are going increasingly for equities.” (…)

The SNB’s balance sheet is now proportionately the biggest of any leading central bank. On top of that, its stock portfolio has risen at roughly twice the rate of the overall balance sheet as it diversifies its holdings.

In the last 12 months the SNB’s equity holdings have surged 41 percent to around 127 billion francs, according to Reuters calculations. (…)

The United States is its favoured location, with its holdings on Wall Street jumping to nearly $62 billion at the end of June from $38.6 billion a year earlier, according to a Securities and Exchange Commission filing. (…)

The SNB does not comment on the details of its strategy, but says it does not pick stocks, investing instead in companies according to their weight in various indices. (…)

Around 20 percent of the SNB’s foreign currency reserves are now in equities, up from 17 percent last year and 10 percent in 2010. (…)

“The SNB creates Swiss francs out of thin Alpine air,” said James Grant, publisher of Grant’s Interest Rate Observer, a U.S. financial markets journal.

“Then they go and call their broker and go on a tour of the U.S. stock exchange,” he told Finanz und Wirtschaft newspaper. “They get involved in important companies from the S&P which create real profits, and they do that with money which has been created out of nothing.”

The BOJ is another big equity investor these days (The Daily Shot):