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 (15 January 2018)

U.S. Retail Sales End 2017 on Solid Footing

Retail sales increased a seasonally adjusted 0.4% in December from the prior month, the Commerce Department said Friday, matching expectations of economists surveyed by The Wall Street Journal.

The December sales growth was driven by increases in building material stores and online retailers, with both categories posting 1.2% month-over-month increases. Sales at nonstore retailers, mostly online-shopping outlets, rose 12.7% on the year. (…)

Retail sales had increased a revised 0.9% in November, and October sales growth also was revised higher. Sales in the fourth quarter as a whole increased 5.5% compared with the same period a year earlier. (…)

Total retail sales grew 4.2% in calendar-year 2017 compared with 2016, following annual increases of 3.2% in 2016, 2.6% in 2015 and 4.3% in 2014. (…)

Wow! U.S. consumers are spending like if a major tax cut is coming their way…Non-Auto ex gasoline sales rose 0.4% MoM in December on top of November’s +1.2% and October’s +0.5%. Last 3m annualized: +8.7%!!!

Given the trend in income, the savings rate will reach new lows in December. Should we worry about this recent reversal?

Unemployment Claims since 2007
Finally, a Clearer Picture on Inflation Last year’s bout of weak inflation figures really was transitory, just like Janet Yellen said

(…) Core prices were up 1.8% versus a year earlier, and even if inflation moderates, the annual figure will should be more than 2% by April.

The Fed would hardly count such a pickup in inflation as dangerous. What is important is that any doubts among Fed policy makers about inflation are in the past and Friday’s report should make them a lot more comfortable with raising rates. (…)

The WSJ may see a clearer picture but it does not really share it with us, does it?

BloombergBriefs sees no change in inflation trends but also does not provide much real meat:

Inflation for core services trended sideways, while a pickup in the core goods category is unlikely to be sustained. Disappointing results recently in both import prices and the core PPI suggest that price pressures are not building in the inflation pipeline. (…)

The breadth of price weakness combined with the fact that auto demand appears to have plateaued — and will look particularly soft in January due to inclement weather — suggest that a new trend of a less-deflationary core CPI goods is not emerging.

Some real meat on inflation trends:

  • From the Cleveland Fed:
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The UIG measures currently estimate trend CPI inflation to be approximately in the 2.2% to 3.0% range, with the prices-only measure close to the actual twelve-month change in the CPI.

  • The bond market is showing some inflation angst, although it’s been darn wrong before:

The FT’s John Authers thinks the bond market is wrong again:

Authers argues that: 

  1. The tax cut is largely going to companies which do not have the same strong propensity to spend as consumers do.
  2. The new industrial orders are for equipment that should help boost productivity so this industrial boom need not be inflationary.
  3. 18% of American men between 21 and 30 who did not have a college degree last year did no work at all. “This large potential workforce, which may be occupying itself with video games, could yet deploy itself if the economy grows as expected and stop wages from rising.”
Bank of Japan’s $50 Billion Question: When to Stop Buying Stocks

(…) The BOJ owns more than 40% of outstanding government bonds, well above its central-banking peers, and branched out into stocks, which the Fed isn’t allowed to buy. Under the stock-buying program, the BOJ has committed to buy ¥6 trillion ($54 billion) a year in exchange-traded funds covering most listed stocks. The program started in 2010 at less than one-tenth the current size and was ratcheted up by Mr. Kuroda since he took office five years ago. (…)

Mr. Kuroda has denied that the bank’s stock purchases have caused market distortions. He has observed that the BOJ’s holdings represent only a small portion of the overall Tokyo stock market—about 3% currently—meaning other investors can press individual companies for better governance. (…)

EARNINGS WATCH

From Thomson Reuters/IBES

Through January 12, 26 companies in the S&P 500 Index have reported earnings for Q4 2017. Of these companies, 76.9% reported earnings above analyst expectations and 11.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 72% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 5.9% above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and above the 4.7% surprise factor recorded over the past four quarters.

84.6% reported revenues above analyst expectations and 15.4% reported revenues below analyst expectations. In aggregate, companies are reporting revenues that are 1.5% above estimates.

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 12.1%. If the Energy sector is excluded, the growth rate declines to 9.6%.

The estimated revenue growth rate for the S&P 500 for Q4 2017 is 7.0%. If the Energy sector is excluded, the growth rate declines to 5.8%.

The estimated earnings growth rate for the S&P 500 for Q1 2018 is 14.8% [from +12.2% on Jan. 1] . If the Energy sector is excluded, the growth rate declines to 13.4%.

Full year earnings growth is now estimated up 14.5% from +12.0% on Jan. 1.

Trailing EPS now $131.71. Could rise to $135 after Q1’18 and $150 for all of 2018.

The CY 2018 bottom-up EPS estimate

At the sector level, nine of the eleven sectors have recorded an increase in their bottom-up EPS estimates for 2018 during this window, led by the Financials sector

As expected, tax reform is already impacting earnings, even in Q4’17, as companies must adjust some balance sheet items to account for lower future tax rates while some others play games to optimize their overall taxes. The result is many one-time items which may or may not be included in operating results by various aggregators. Here’s Factset’s account of the Q4 results so far to be compared with TR’s above:

In terms of earnings, companies are reporting actual EPS above estimates at a rate (69%) equal to the 5-year average. In aggregate, companies are reporting earnings that are 3.2% below the estimates, which is below the 5-year average. In terms of sales, more companies (85%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 1.4% above estimates, which is also above the 5-year average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the fourth quarter is 10.2% today, which is lower than the earnings growth rate of 10.7% last week. If the Energy sector were excluded, the estimated earnings growth rate for the remaining ten
sectors would fall to 7.7% from 10.2%.

Banks Are Upbeat as New Tax Law Muddies Earnings JPMorgan and Wells Fargo posted fourth-quarter earnings that were roiled by the recent tax overhaul but forecast the changes would bolster future profits and stoke the broader U.S. economy.

(…) JPMorgan , JPM 1.65% the biggest U.S. bank by assets, said a $2.4 billion charge related to the recently enacted tax law caused its profit to fall 37% from a year earlier to $4.23 billion. Even so, Chief Executive James Dimon said the tax law enacted late last year was “a big, significant positive and much of it will fall to our bottom line in 2018 and beyond.” (…)

At Wells Fargo, the immediate impact of the tax law was a gain due to shrinking tax liabilities, which boosted net income by about $3.35 billion.

PNC Financial Services Group Inc., which also reported earnings Friday, similarly cited a tax-related boost to net income due to the declining value of tax liabilities. (…)

Aswath Damodaran on US tax reform.
Wal-Mart Plans to Cut Over 1,000 Corporate Jobs

(…) The expected corporate job cuts add to around 10,000 store jobs being eliminated this month as Wal-Mart closes 63 Sam’s Club locations, about 10% of the warehouse club’s U.S. stores. (…)

Barron’s Roundtable: Bright Outlook for Stocks Global growth and rising profits should keep the bull market humming. But keep an eye on interest rates.
The Periodic Table of Commodity Returns 2017 Explore how natural resources have performed over the last 10 years on the interactive chart

best of the year top 5 frank talk posts of 2017

THE DAILY EDGE (12 January 2018)

Consumer Prices Rose 2.1% in December From a Year Earlier Inflation seen ending the year on a somewhat stronger note

Prices rose 0.3% in December when excluding the often-volatile categories of food and energy, the largest increase for so-called core prices since January 2017. Economists surveyed by The Wall Street Journal had expected core prices would rise a more modest 0.2% versus November.

Overall prices climbed 2.1% in December compared with a year earlier, easing a bit from November’s 2.2% annual gain. Prices excluding food and energy were up 1.8% from the end of 2016, firming slightly from the prior month’s annual increase. (…)

In a separate report Friday, the Labor Department said inflation-adjusted average weekly earnings for private-sector workers rose 0.2% in December from the prior month, as wages grew faster than prices and the average workweek was unchanged. (…)

Core CPI: last 3 months annualized: +2.4% vs +1.2% the previous 3 months.

Business-Level Inflation Falls Unexpectedly The producer-price index fell 0.1% in December from a month earlier, the first decline since August 2016

Prices fell broadly, particularly for services in industries like airline travel and apparel. Excluding volatile food and energy categories, so-called core prices also fell 0.1%. (…) Producer prices rose 2.6% in December compared with a year earlier, the largest calendar-year increase since 2011. Core prices climbed 2.3% last year. (…)

From Haver Analytics’ table, last 3 months annualized (previous 3 months): Core Final Demand: +2.8% (+1.6%), Core Goods: +3.2% (+2.0%), Intermediate Demand-Processed Goods: +8.2% +3.7%), all accelerating. Not in table: Intermediate Demand-Core Processed Goods: +4.9% (+1.2%).

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PPI Services declined 0.2% in December, after 9 consecutive increases and mainly because of the weakness in Trade Services, down in both November and December. Here’s how the BLS defines Trade Services:

Most of the decrease can be traced to a 0.6-percent decline in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and
retailers.)

  • Brent crude tops $70 a barrel as global inventories tighten

Wal-Mart Raises Its Minimum Wage After Tax Overhaul

(…) The giant retailer, which employs around 1.5 million people in the U.S., currently pays $9 or $10 an hour to most new store workers. The wage increase to well above the federal minimum could pressure restaurants, warehouses and smaller retailers that compete for low-skilled hourly workers.

On Thursday, the company also announced plans to cut roughly 10,000 jobs by closing about 10% of its 660 U.S. Sam’s Club warehouse stores. (…)

Retail rivalTarget Corp. recently lifted its starting pay to $11 an hour and Costco Wholesale Corp.starts hourly staff at $13.

Some manufacturers, too, are reacting. Fiat Chrysler Automobiles NV said Thursday it would pay $2,000 bonuses to about 60,000 U.S. salaried employees and invest $1 billion in a Michigan plant following the tax overhaul. (…)

The higher wage will add about $300 million in annual expenses for Wal-Mart while the bonuses will result in a $400 million hit to the current quarter’s profit, the company said. But the payout is just a sliver of what Wal-Mart, which had nearly $500 billion in revenue last year, stands to gain from the tax overhaul.

“The $300 million of incremental labor expenses in 2018 only represents about 15% of the potential cash windfall we estimate that [Wal-Mart] could enjoy,” wrote Ray Young, a retail analyst for Gordon Haskett Research Advisors. (…)

To combat wage pressures, Wal-Mart has tried to save on labor costs by adjusting the number of workers per store and more recently by automating many rote tasks. It is adding more self-service registers and using robots to scan shelves for items that are out of stock. Last year, Wal-Mart had around 15% fewer workers per square foot of store than a decade ago, according to an analysis by The Wall Street Journal. (…)

Wal-Mart’s average hourly wage for full-time U.S. store employees is expected to rise to around $14.50 an hour after the latest change, up from $13.85 an hour currently, said Mr. Lundberg. (…)

More pressure on these smaller guys:image

Alien More on robots: “British online grocer Ocado is testing a robot that would help maintain automation equipment in its warehouses.” (The Guardian via the WSJ)

More on wage inflation:

U.S.: Job creation now tilting towards sectors with higher wage inflation

(…) And while wage growth remains low, it is arguably heading in the right direction. As today’s Hot Chart shows, unlike in 2016, job creation now seems to be tilting towards sectors with higher wage inflation. (NBF)

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Take-Home Pay Is Set to Increase The government estimates that more than 90% of workers will have bigger paychecks under the withholding changes, and it says employers should implement the changes by Feb. 15.
Fed’s Dudley Worries Tax Cuts Risk Overheating U.S. Economy

Sad smile And then, there were none:

(…) ECB officials “widely” agreed that the bank would need to change its guidance to investors, though they stressed the move should take place “gradually over time to avoid sudden and unwarranted movements in financial conditions.” (…)

WORLD TRADE
China Reports Biggest-Ever Annual Trade Surplus With U.S. China’s chronically high trade surplus with the U.S. hit a record level in 2017, adding fuel to Trump administration criticisms about Chinese trade practices just as it weighs a range of penalties and other actions to curb the imbalance.

‘I will say that if we don’t make a fair deal for this country, a Trump deal, then….I will terminate.’ (President Donald Trump, in a WSJ interview, on the Nafta negotiations.)

Middle-Market Private Companies Earnings Growth Surged In Q4

Earnings at private, middle-market companies in the U.S. grew at their fastest pace since 2012 during the fourth quarter, according to a report by Golub Capital, a lender to these companies.

The report is based on the Golub Capital Altman Index, which measures the median revenue and earnings growth of more than 150 closely-held companies in Golub Capital’s loan portfolio. There are no energy companies in the index.

Earnings increased 12.8% in the fourth quarter of 2017 from a year earlier, the fastest rate of year-over-year growth since the inception of the index in 2012 and up from 4.9% growth in the third quarter. Revenue rose 11.5%, up from 6.8% in the third quarter. (…)

The information technology sector posted standout performance during the quarter, with earnings up 29.7%, according to the report. Revenue for the sector expanded 15.4% during the fourth quarter. (…)

The second-largest gains in earnings came from the industrials sector, which posted 15.6% growth for the quarter, while revenue rose 14%. (…)

The Spark Behind Iran’s Unrest: Millions of Defrauded Investors The collapse of investment firms offering outlandish returns fueled the protests that grew into the biggest challenge to the regime since 2009. Iranians blame the firms for pocketing funds and the government for not adequately regulating the industry.

(…) Protests have ebbed in recent days. But the working-class grievances that gave rise to the protests remain, including double-digit inflation, a 12% unemployment rate and the perception that systemic corruption is robbing the country’s wealth from the majority.

Iran’s economy, strained under international sanctions, structural mismanagement and the diversion of funds to battlefields in Syria, Iraq and Yemen, has been in disarray for years. The nuclear deal boosted economic growth—the International Monetary Fund expects 3.8% growth this year—but that hasn’t solved underlying problems. (…)

Mr. Rouhani caused a stir in early December when he revealed the details of his proposed government budget to the public, showing millions of dollars allocated to religious foundations and clerical offices outside the government’s control. The Islamic Revolutionary Guard Corps received around $8 billion. At the same time, he warned that cash handouts for the poor would be slashed and some fuel prices could rise 50%. (…)

Iranian analysts and economists say the [more than 7,000 such financial] firms were doomed to fail. They were owned and managed not by financial experts but by people with close links to religious institutions, the judiciary and the Revolutionary Guards. (…) A lack of regulation, accountability or transparency and a culture of corruption sped the collapse of many. (…)