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

THE DAILY EDGE (5 February 2018):

U.S. Adds 200,000 Jobs; Wage Growth Best Since Recession
  • nonfarm payrolls rose a seasonally adjusted 200,000 in January, more than economists had expected. The unemployment rate held at 4.1%, its lowest level since December 2000, for the fourth straight month.
  • average hourly earnings for private-sector workers rose 2.9% in January from a year earlier, their largest year-over-year increase since June 2009, when the last recession ended.
  • The average workweek declined in January, meaning the average weekly paycheck declined from December even though hourly wages rose. Managers seemed to enjoy the biggest raises; wages for production workers and non-supervisors, who account for 82% of the private-sector workforce, rose a more modest 2.4% on the year.

That’s all? These are the only facts the WSJ deemed useful to mention?. The WSJ!

Here’s what is also relevant:

  • Nonfarm payrolls increased 200,000 (1.5% YoY) during January following a 160,000 December gain and a 216,000 November rise.
  • Together these two figures were revised down by 24,000.
  • The diffusion index declined from 65.5% to 57.9%. It was 53.9% in manufacturing where employment in January rose only 15k (1.5% YoY), the weakest increase in four months. Employment growth seems to be out of breath.
  • And the work week declined from 34.5 in November and December to 34.3, equivalent to about 720k fewer jobs. January’s weather may have played a role, although construction added a big 36k jobs that month.
  • Average hourly earnings rose 0.3% following upwardly revised increases of 0.4% (from 0.3%) and 0.3% in the prior two months.
  • Private service sector earnings rose 0.4% (3.0% YoY) following a 0.5% December increase. That is a sharp (+5.5% a.r.) acceleration at year-end in the large service sector which produced 68% of the total new jobs in the last 3 months.

From an economic standpoint, the recent acceleration in wages is timely, coming when employment growth breaks below the 1.5% YoY level, much like during the 2015-16 period.

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However, wages of production and non-supervisory workers, which are 80% of the labor force, rose only 0.1% in January and are up 2.4% YoY, down from +2.6% last September. Just when the minimum wage was set to increase in many states. The drop in the work week may not be a coincident!

Overall, this employment report is not as strong as pundits claim. On the wage acceleration front and its impact on demand, let’s see a few more months before concluding.

(…) Today’s wage numbers understate the boost to spending power that many consumers have gotten or are just seeing. One-time bonuses, like the ones that companies announced following the tax plan’s passage late last year, don’t get included in average hourly earnings. And many of the companies that said they would raise wages hadn’t done so by mid-January when the Labor Department was collecting employment data. Walmart ’s wage increases, for example, start this month.

The tax cut will help boost wages in two ways. Starting this week, workers begin to see lower withholding in their paychecks, meaning more cash in their bank accounts. At least some of that is going to be spent, boosting demand and prompting companies to hire more workers to keep up. The second impact will be businesses, who got the biggest chunk of the tax cut, using some of their windfall to pay higher wages to get the workers needed to meet the higher demand. (…)

INFLATION WATCH
  • USD down 13% in 12 months. Making America great again! A weak dollar tends to boost import prices.

EARNINGS WATCH

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Overall, 50% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, 9% have reported actual EPS equal to the mean EPS estimate, and 16% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (72%) average and above the 5-year (69%) average.

In aggregate, companies are reporting earnings that are 4.0% above expectations. This surprise percentage is below the 1-year (+4.6%) average and below the 5-year (+4.3%) average.

In terms of revenues, 80% of companies have reported actual sales above estimated sales and 20% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is well above the 1-year average (64%) and well above the 5-year average (56%).

In aggregate, companies are reporting sales that are 1.4% above expectations. This surprise percentage is above the 1-year (+0.8%) average and above the 5-year (+0.6%) average.

The blended earnings growth rate for the fourth quarter is 13.4% today, which is higher than the earnings growth rate of 12.2% last week. The blended sales growth rate for the third quarter is 7.5% today, which is above the sales growth rate of 7.0% last week.

If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would decrease to 11.5% from 13.4%.

Thomson Reuters/IBES’ numbers are fairly similar to Factset’s:

  • The estimated earnings growth rate for the S&P 500 for Q1 2018 is 17.7%. It was +12.2% on Jan. 1. If the Energy sector is excluded, the growth rate declines to 15.7%.
  • Earnings revisions remain very positive:
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  • Preannouncements for Q1’18 are also strong with 27/57 (47%) positive compared with 35% and 33% at the same time during Q1’17 and Q4’17 earnings seasons.

  • Trailing EPS are now $132.68, up 12.0% YoY and could jump to $137.50 after Q1’18nwith the first quarterly impact of the tax reform. Full year 2018 EPS are now seen reaching $155.26

The Rule of 20 P/E has declined from 23.5 at the recent peak to 22.4. It is 22.0 after Q1’18 as per above estimate and as reflected in the below chart.

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TECHNICALS WATCH

Lowry’s Research sees only a “modest correction” within a market that remains in a “primary uptrend” given continued positive readings in its “Buying Power” and Selling Pressures” index.

SENTIMENT WATCH

Friday’s selloff finally ended a streak of 404 days in which the S&P 500 sailed along without a 3 percent decline from any previous point, a record in data going all the way back to 1928. (Barron’s)

(…) “The Fed is going to have to move the interest rates, the bond market is recognizing that this incremental economic growth will spur on inflation from various sources.”

Note The Surprising Good News About Demographics and the Stock Market Millennials could step in for the boomers in the stock market, defying the conventional wisdom—and boosting equities.

Everybody knows the conventional wisdom that the demographic trend these days is not a friend of the stock market. The baby-boom generation, we’ve been told, is moving into retirement, and selling stocks in the process. (…)

The millennials are entering the period of their lives in which they increasingly will be investing heavily in the stock market, and according to the leading economic model that relates demographic trends to the stock market, they are a big enough generation to overcome the bearish impact of the baby boomers’ retirement. In fact, according to this model, demographics will be a positive for stocks until 2035 (of course, with jarring market declines along the way). (…)

Though their model is complex, its essence can be distilled to a single number: the ratio of those the authors label as middle-aged (ages 35-49) to those labeled young (ages 20-34).

The model’s prediction is that stocks on balance should perform better when this so-called MY ratio is rising than when it is falling. It is this ratio that turned up at the beginning of last year and will continue rising until 2035. (…)

THE DAILY EDGE (2 February 2018): Manufacturing PMIs

U.S. Light Vehicle Sales Continue to Decline

Total sales of light vehicles during January declined 4.1% (-1.8% y/y) to 17.12 million (SAAR) following a 1.9% December increase to 17.85 million, according to the Autodata Corporation. It compared to an 18.6 million September high and was the lowest level since August.

Light truck sales fell 3.5% (+4.5% y/y) to 11.36 million after a 4.9% December rise. Domestically-made light trucks were off 4.4% (+1.2% y/y) to 9.18 million units, reversing a 4.7% December rise. Imported light truck sales rose 0.8% (20.7% y/y) to 2.17 million units, a record high.

Trucks’ share of the U.S. vehicle market jumped to a record 66.3% in January and was higher than 63.2% during all of last year.

Auto sales fell 5.3% (-12.1% y/y) to 5.77 million units following three consecutive months of 3.6% decline. Domestic passenger car sales declined 6.5% (-12.1% y/y) to 4.11 million, the lowest level since August 2011. Sales of imported passenger cars eased 2.2% (-12.3% y/y) to 1.66 million units, the lowest level since December 2008.

Imports’ share of the U.S. vehicle market rose to 22.4% last month from a 19.9% low during all of 2015. Imports’ share of the passenger car market increased to 28.7%, a twelve-month high. Imports share of the light truck market strengthened to 19.1%, up from a 12.7% low during all of 2014.

These charts from CalculatedRisk show that vehicle demand has yet to break out from previous cycle peaks:

 

MANUFACTURING PMIs

Operating conditions across the US manufacturing sector continued to improve in January, with the latest survey data indicating the strongest upturn since March 2015. Moreover, production levels and new orders grew at the quickest rates in twelve months. Rising global demand also drove a faster expansion in new export orders.

Higher production requirements resulted in a sharp and accelerated increase in buying activity. At the same time, the rate of input cost inflation eased slightly but remained marked overall. Consequently, firms raised their selling prices at the second-steepest pace since September 2014.

The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.5 in January, up from 55.1 in December. The latest index reading indicated a strong improvement in business conditions across the manufacturing sector. Moreover, the index signalled the strongest upturn in the health of the sector for over two-and-a-half years.

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Extending the trend seen since June 2016, manufacturers indicated a further rise in production in January. The rate of growth accelerated to the sharpest in twelve months. (…) Greater domestic and foreign client demand underpinned the largest rise in total new orders since January 2017. New business from abroad registered one of the largest gains seen over the past year and a half.

For the thirteenth month running, vendor performance deteriorated as capacity pressures at suppliers led to longer lead times. Purchasing activity rose at the quickest rate since September 2014, stretching supply chains, and pre-production inventories accumulated at the fastest pace in twelve months.

The latest rise in input costs largely stemmed from greater raw material prices and higher transport costs. Although the rate of inflation was marked, it dipped slightly to a three-month low. Conversely, output charge inflation accelerated to the second-highest since September 2014.

Higher new orders contributed to a further rise in backlogs of work in January. The level of outstanding business at manufacturing firms increased at the fastest rate since October 2015. Staffing numbers also grew strongly, with a number of panel members linking payroll growth to greater business activity and improved future output expectations. (…)

The eurozone manufacturing sector made a strong start to 2018. Although January saw rates of growth in output and new orders ease from near-record highs at the end of last year, they remained among the best seen since the survey began in 1997.

The final IHS Markit Eurozone Manufacturing PMI® posted a three-month low of 59.6 in January, down from December’s record high of 60.6 and identical to the earlier flash estimate. (…)

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Sector data signalled solid growth across the consumer, intermediate and investment goods categories, with the steepest rates of expansion in the latter two. This was despite consumer goods being the only category to see growth accelerate during the latest survey month. (…)

Companies indicated that they were experiencing solid inflows of new business from both the domestic and export markets during January. The level of new export orders rose at a robust pace, albeit a three month low. (…) Solid increases in staffing levels were seen across the nations covered by the survey (…)

Higher staff headcounts reflected improved inflows of new orders, rising business confidence and efforts to increase capacity in light of increasing backlogs of work. (…)

Inflationary pressures picked up at the start of 2018, with both output charges and input prices rising at faster rates. Output price inflation accelerated to an 80-month high.

Purchasing costs rose to the greatest extent in over six-and-a-half years, reflecting higher commodity prices (including oil) and greater pricing power at vendors. The latter factor was the result of shortages developing for some inputs as demand outstripped supply. This also led to one of the sharpest lengthening of supplier lead times on record.

The headline Nikkei Japan Manufacturing  Purchasing Managers’ IndexTM (PMI)®  increased to 54.8 in January, up from 54.0 in December. The headline PMI has risen for three successive months and the latest reading signalled the sharpest improvement in the health of the Japanese manufacturing sector since February 2014.

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Panellists reported a favourable receipt of new orders during January due to new product launches and strong demand from existing customers. New order growth quickened for a third month in succession to a four-year high. Similarly, new business from abroad increased at a faster pace, recording the quickest rate of growth since May 2010. Firms attributed the rise to stronger demand from China, Korea and Taiwan. Subsequently, firms increased output for the eighteenth consecutive month and at the sharpest rate in 47 months.

Operating capacities were tested as a result of greater sales. Backlogs of work were accumulated for a fifth month running in January, albeit at a fractionally slower pace. Anecdotal evidence suggested that panellists anticipate the upward trend in order book volumes to continue. (…)

The rate of job creation accelerated to the joint fastest since April 2014, on a par with February 2017.

In line with forecasts of greater new order intakes, Japanese manufacturers increased purchasing activity. Input buying increased to the joint strongest extent since February 2014. Confident that output growth would be sustained, Japanese manufacturers were less cautious regarding inventory levels. Input stocks increased for the first time since October last year. Reports from panel members suggested that higher demand for inputs had led to a deterioration of vendor performance.

Suppliers’ delivery times lengthened markedly in January, and for a twenty-first successive month. On the price front, purchase costs increased during the latest survey period, maintaining an inflationary run that started in November 2016. Firms noted that the higher oil price was a key source of cost pressures. In turn, output charges were raised to partly offset the squeeze on profit margins. Output price inflation accelerated to the sharpest extent since October 2008.

The U.S., Europe and Japan are all in acceleration mode with strong inflows of new orders from both domestic and foreign customers, rising capacity constraints and clearly rising pressures on input and output prices.

China, on the other hand, is softer:

China’s manufacturing sector continued to expand at the start of 2018, with production rising to the greatest extent in just over a year. Growth was supported by further, albeit slightly softer, increases in total new work and new export sales. Higher production requirements led firms to increase their buying activity, while employment fell at the weakest pace for nearly three years. Capacity pressures meanwhile persisted, with backlogs of work rising to the greatest extent since early-2011. Prices data showed that input cost inflation eased to a five-month low and factory gate charges rose only slightly. (…)

The seasonally adjusted Purchasing Managers’ Index™ (PMI™) was unchanged from December’s reading of 51.5 in January, to signal a further modest improvement in overall operating conditions. The health of the sector has now strengthened in each of the past eight months, while the pace of improvement was slightly stronger than the long-run trend.

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January data signalled a solid and accelerated increase in Chinese manufacturing output, with the rate of growth the strongest since December 2016. A number of companies mentioned that improving demand conditions and rising new work led them to raise output. Notably, total new orders rose for the nineteenth month in a row, albeit at a moderate pace that was weaker than in December. Growth in new export sales also softened to a similarly modest pace.

Employment continued to decline in January, which was partly linked to company downsizing policies. That said, the rate of job shedding was the weakest since February 2015. At the same time, rising new order volumes exerted further pressure on operating capacity. Notably, outstanding business increased at a solid pace that was the quickest since March 2011.

In line with higher output, manufacturing companies in China continued to raise their purchasing activity in January. However, the time taken for purchased items to be delivered continued to increase.

Stocks of finished goods declined slightly as firms made greater use of current inventories to fulfil new and existing orders. Stocks of purchases were meanwhile unchanged after a slight drop in December.

The rate of input price inflation softened to a five-month low in January, but remained sharp overall. Companies commonly linked higher costs to greater prices for raw materials such as metals and packaging. At the same time, output charges rose at the weakest pace since June 2017.

EARNINGS WATCH

Earnings keep coming in strong, almost at the halfway mark (227 reports in). The beat rate is a high 80% and the surprise factor 6.0%. Trailing EPS are now $132.32 with Q4’17 EPS seen up 14.9% (+12.4% ex-Energy) from +12.0% on Jan. 1. Q1’18 growth is now forecast at +17.8% from +12.2% on Jan. 1.

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