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 (16 August 2017)

Consumer Spending Gives Some Retailers a Lift, But Risks Abound Strong retail sales lift economists’ growth outlook, but debt rises as saving rate falls

Sales at U.S. retailers rose a larger-than-expected 0.6% in July, the biggest monthly gain since December, the Commerce Department said Tuesday. Americans shelled out more for cars, furniture, home-improvement supplies and, more than anything, online goods, including purchases during Amazon.com Inc.’s annual “Prime Day” event. Retail sales in June were also far higher than previously reported. (…)

Forecasters said the latest figures suggest the economic-growth rate could reach 3% or more in the quarter, a pace the economy hasn’t hit since early 2015 and a pickup from a 2.6% pace in the second quarter. (…)

A big chunk of spending of late has been covered by debt: Total credit-card balances grew $20 billion in the second quarter to $784 billion, the highest since late 2009, the New York Federal Reserve said in a separate report Tuesday. Overall debt—including mortgages, auto loans and student loans—hit a record $12.8 trillion. (…)

For now, low interest rates are keeping a lid on the amount of money consumers must devote to paying off the debt each month. Debt-service payments account for about 10% of Americans’ disposable income, hovering near the lowest levels on record, Federal Reserve data show. (…)

Auto-loan delinquencies have been slowly rising for several years, and the annualized share of credit-card balances becoming 30-days delinquent climbed to 6.2% in the second quarter from 5.1% a year earlier, the New York Fed said. (…)

Things can change so quickly…when stats are revised. One month ago, May and June retail sales growth were shown declining at a 1.2% annualized rate. Post revisions, they are growing 1.2% annualized. Add July’s +0.6% jump and retail sales are now rising at a 3.7% a.r.. Last 2 months: nearly +5.0% a.r..

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Of course, July will be revised, maybe June as well…Hot smile

(…) The data follow the release of IHS Markit’s PMI survey data, which had shown new orders for consumer goods at US manufacturers rising sharply in July after weakness in prior months.

Having recently peaked in January, the PMI Consumer Goods News Orders Index exhibited a steady downward trend in the first half of 2017, slipping to its lowest for just over one-and-a-half years in June. However, the index measuring new business jumped to a six-month high of 58.0 in July as factories received an influx of new orders for consumer goods, indicating that retailers were restocking amid strong sales.

With the PMI data rising for the first time since January, it remains too early to tell if the upturn represents the start of a turnaround in retail sales, but the July numbers represent a good start to the third quarter, especially given improvements in the wider PMI numbers. Upturns in the manufacturing and services PMI surveys indicated that the economy grew at its fastest rate for six months in July.

  • U.S.: Household debt growing at fastest pace since 2008

As today’s Hot Charts show, household debt grew 4.5% year-on-year in Q2, the fastest pace of growth since 2008. Driving the year-on-year increase were the usual suspects, i.e. student and auto loans. But there was also a ramp up in the pace of growth for debt related to mortgages (3.9% y/y is the fastest pace in nine years) and credit cards (7.5% y/y is fastest pace since 2008Q1). The higher leverage should not be surprising in light of a solid labour market, rising consumer confidence and improving credit scores. The good news is that delinquencies, foreclosures and bankruptcies all remain relatively low. (NBF)

U.S. Home Builder Index Rebounds

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo increased 6.3% to 68 during August and made up most of the prior two months’ declines. Despite uneven m/m performance this year, the index was 15.3% higher y/y. The NAHB figures are seasonally adjusted. During the last ten years, there has been a 72% correlation between the y/y change in the home builders index and the y/y change in housing starts.

The index for conditions in the next six months increased 6.8% (18.2% y/y) and equaled the highest level since December. The index of present conditions in the housing market gained 5.7% (13.8% y/y) to the highest level in three months.

Home builders reported that the traffic index rebounded 2.1% m/m. As it made up July’s decline, the index was 11.4% higher y/y. The index has fallen in all but two months this year. (…)

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Hard Economic Data, Still Tepid, Lifted by Retail

A worsening trend in hard economic data got a reprieve today as retail sales handily beat economists’ forecasts. While the signal was encouraging much more is needed to push the Bloomberg Economic Surprise Index —excluding survey data — back to positive, or even neutral territory. (Bloomberg Briefs)

RECESSION WATCH

From 720Global:

(…) we recently stumbled upon a measure of economic conditions that have reliably signaled every recession since 1948. The data point, Real Value Added, is currently in negative territory and may, therefore, be a harbinger of an economic downturn. If it is a false signal, it would be the first in a 70-year history of observations.

GVA is a measure of economic activity, like GDP, but formulated from the production side of the economy. It measures the dollar value of all goods and services produced less all the costs required to produce those goods or services. (…) Despite the differences, the levels of economic activity reported are remarkably consistent. Since 1948, nominal GDP has averaged annual growth of 6.55% while GVA has averaged 6.50%. It is important to note that, while they track each other very well over the longer term, they are less correlated quarter to quarter. (…)

Since 1948 there have been 277 quarters of data. RVA has only been negative during recessions or in proximity to periods leading up to and/or following recessions.

Currently, three of the last four quarters have produced negative RVA levels. Real GDP is not producing similar results, having averaged 2% growth over the same quarters. As mentioned earlier, RVA and Real GDP may not be well correlated over short time frames.

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Once again, I had to check the data because the last time I looked at GVA (About Price/Sales, Profit Margins (and John Hussman), it was not negative. Here’s the rub: 720Global deflates GVA with the CPI when it would be more appropriate to use the GDP deflator. In any event, the BEA produces a real GVA series and theirs, also a good coincident indicator, is not into negative territory as of Q1’17 and is very much in tune with GDP.

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CPI is much more volatile than the GDP deflator which is currently causing the distortion.

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  • US import prices unexpectedly stalled in July despite a softer US dollar. (The Daily Shot)

 

  • Nonetheless, imported consumer goods prices are no longer declining.
  • Here is the Bloomberg Agriculture Index. That’s a 15% slide this year!!! Some examples: Cocoa is down -36% since 09’16; soybeans: –10% since 02’17; coffee: -27% since 11’16; sugar: –38% since 10’16 (these last 2 should help SBUX margins).

But there is also this:

(…) Reinforcing these developments is an analysis by Charles Gaba of acasignups.net, who projected that at the moment, average premium increases next year are likely to total around 29 percent. (…)

(The Congressional Budget Office said on Tuesday that premiums for the most popular health insurance plans would rise by 20 percent next year, and federal budget deficits would increase by $194 billion in the coming decade, if Mr. Trump ends the subsidies.) (…)

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U.S. Sales Managers’ Index at 2 Year High in August

The Headline Sales Managers’ Index (SMI) registered 55.2 in August, representative of strong levels of economic growth. The Sales Growth Index registered a strong monthly improvement, increasing 2.4 index points on the July level. Market growth levels have remained buoyant, driven by strong sales and easing price inflation. The level of the Prices Charged Index was down on the previous month’s reading indicating that consumer prices are slowing slightly whilst the recent low in the Prices Charged Index for Manufacturing suggests Producer Price Inflation is continuing to ease. New employment growth is continuing in August at a modest rate with managers explaining that qualified staff are increasingly hard to find. Overall, panellists in August are saying that the US Economy is experiencing strong sales, easing prices and they are becoming increasingly optimistic that economic momentum is likely to continue in the second half of the year.

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Winking smile WHO’S LAUGHING?

This is really funny…even though none of these guys are. (Tks Terry).

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CEOs Walk Trump Tightrope Into New Era of Corporate Politics

THE DAILY EDGE (15 August 2017)

CONSUMER WATCH

Sales at retailers and restaurants jumped 0.6% from a month earlier, the biggest increase since December, the Commerce Department said Tuesday. Excluding cars, sales rose 0.5%. (…)

Sales over the internet drove last month’s increase, with spending at nonstore retailers growing 1.3%, the most since December. One big factor: Amazon’s Prime Day, a popular day of discounts at the site.

Other retailers also posted strong gains. Car sales jumped 1.2%, as did spending on building materials and garden equipment. Sales at furniture outlets, grocery stores, restaurants and department stores all rose healthily.

Meanwhile, spending on gasoline, electronics and clothing fell. (…)

The May 2017 to June 2017 percent change was revised from down 0.2% to up 0.3%. 

Median household spending growth expectations decreased from 3.3% in June to 2.8%. This series has been volatile, but the current reading is below its average of 3.2% for the most recent 12 months. The decrease was driven mostly by less educated (high school or less) respondents.

Restaurant sales dropped again in July, dealing a blow to an industry that had shown modest signs of improvement in recent months. Same-store sales were down -2.8 percent, a sharp 1.8 percentage point decline from June. The drop was disappointing in light of the -1.3 percent average comp sales for the first six months of the year and -1.6 percent recorded in the last half of 2016.

Same-store traffic declined -4.7 percent in July, a 1.7 percentage point drop from June. (…)

Calculated on a two-year basis, sales in July 2017 were down -4.2 percent compared with July of 2015. Same-store traffic was -8.7 percent for that same period. These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.

The restaurant industry’s data are not as bad, as of June:

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  • The official stats to June:

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  • Part of the reason is that food-at-home prices have dropped significantly, widening the gap between eating at home or going out:
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Eurozone Factory Output Slides Activity at the eurozone’s factories, mines and utilities fell at its sharpest pace in 2017 during June, an indication that the economy may be settling down after an acceleration in growth during the first six months of the year.

The European Union’s statistics agency said Monday that industrial production was 0.6% lower in June than in May, while being 2.6% higher than in the same month last year. The decline in output was the largest since December 2016, and more than the 0.4% forecast by economists. (…)

Of the eurozone’s four large national economies, only Italy bucked the trend, recording a 1.1% rise in output, while Germany and France recorded declines of a similar magnitude and Spain was flat.

Across the eurozone, the June drop would have been larger if not for a 1.8% jump in energy output, as production of capital goods slumped by 1.9%, and of durable consumer goods by 1.2%.

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Whatever line we look at above, the overall trend is not particularly strong, is it? (Eurostat pdf). Haver Analytics is not too worried:

Output appears to be on a steady track with a minor setback this month. The country level data for the EMU also show somewhat widespread declines in June after seeing a solid slate of advances in May. June appears to be a month in which output has slowed to reduce the overall pace of growth to something that is more sustainable rather than signaling a slowdown of any sort.

  • Meanwhile in the USA and China:
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 U.S. Oil Drillers Keep Pressure on OPEC With Record Shale Output
Shadow Fed is Glum on Stock Market Camp Kotok’s fearless forecasters mainly see little change in economic and financial measures such as interest rates, GDP, bond yields and oil prices, but they are somewhat bearish on stocks.

(…) The predictions for core inflation, for example, averaged 1.9%, with a high of 3.2% and a low of 1%. In other words, the consensus expectation is for little change. Likewise, a marginal bond selloff will push yields on 10-year Treasurys to 2.57% and U.S. benchmark oil prices will be $50.20 a barrel or barely changed.

The one bold and surprising prediction is for a modest retreat in stocks over the next year. The forecasts for the S&P 500 were as low as 1800, a 27% drop from today’s levels, while the average was just 2416. (…)

John Mauldin gives more info from the camp here.

  • WTI crude oil: $50.20 (but the range was all over the place, from $30 to $76)
  • S&P 500: 1,340, with surprisingly few really bearish views
  • Gold: $1,340, and while there were a few outliers in both directions, people were generally looking for a strong movement upward.
  • Dollars per euro: $1.14
  • US GDP: 2.12%, again with a very wide range, but interestingly, nobody was predicting a negative GDP or an outright recession.

Takeaway 1: Almost everyone expects a serious market correction before the end of the year. Most of the people I talked to were concerned about market complacency; and even if they were bullish, which many of them were, they were surprised that we’ve gone this long without a correction.

Takeaway 2: In talks with people I seriously respect, I found more concern about valuations and spreads in the bond market than about valuations in the stock market. As I sat with a few people and “war-gamed” what the next recession will look like, a general agreement emerged that the credit markets will be far more volatile than they were last time, even though banks are better capitalized today than they were 10 years ago. The problem is simply that credit markets have no liquidity and valuations are extraordinarily stretched. And not just in the US.

U.S. Stock Buybacks Are Plunging

FULL CIRCLE: FROM BOOM TO BUST TO BOOM TO …
Miami Beach Faces 31-Month Supply Of Luxury Condos Listed For Sale

More than 675 luxury condo units are formally listed for sale at a minimum price of at least $1 million in the barrier island city of Miami Beach in the South Florida county of Miami-Dade, according to a new report from Condo Vultures® Realty LLC.

Based on luxury condo sales of nearly 22 units monthly in the first half of 2017, Miami Beach now has more than a 31-month supply of units available for purchase in the tricounty South Florida region of Miami-Dade, Broward and Palm Beach during this year’s Summer Buying Season, according to the report based on data from the Southeast Florida MLS Matrix v7.0.

A balanced market is generally considered to have about six months of supply. (…)

Surprised smile It is worth noting this report only tracks those Miami Beach luxury condos formally listed for sale. The report does not factor in the nearly 47,700 new condo units currently in the development pipeline east of Interstate 95 in the tricounty South Florida region. (…)

Currently, about 31 Miami Beach luxury condo units are under contract waiting to transact – or pending – at an average asking price of about $4.1 million each or $1,537 per square foot, according to the statistics. 

Between January and June of 2017, the average transaction price of a Miami Beach luxury condo was less than $2.5 million or $1,255 per square foot.

This means the current asking price of a Miami Beach luxury condo listed for sale is about 42 percent higher than the average transaction price achieved on a per-unit basis and nearly 22 percent higher than the average transaction price on a per-square-foot basis in the first six months of 2017.

In the first half of this year, the sellers who were able to unload their units needed about 180 days to transact a Miami Beach luxury condo listed for sale. The current Days-On-The-Market average for Miami Beach luxury condos listed for sale is about 226, according to the statistics.

Merck, Intel and Under Armour CEOs Quit Trump Advisory Council

(…) Mr. Frazier, who is African-American, and Mr. Krzanich and Mr. Plank, who are white, were three of the 28 business and union leaders the president named to the advisory council aimed at helping him boost U.S. manufacturing jobs. (…)

In June, Elon Musk of Tesla Inc. and Robert Iger of Walt Disney Co. resigned from advisory roles after Mr. Trump said the U.S. would withdraw from the Paris climate accord. (…)

Source: RealClear politics

Sun A glut of low-cost solar panels in the U.S. is triggering an unusual fight over tariffsand environmental policy. The U.S. International Trade Commission this week will hear arguments over calls by bankrupt solar-panel maker Suniva Inc. for new barriers on imported solar cells. The WSJ’s Erin Ailworth reports that Suniva’s demand for tariff and other restrictions on foreign manufacturers has united disparate forces, including green-energy advocates and conservative free-trade policy groups that oppose the tariffs. Suniva says it’s being crippled by cheap imports, mostly from Asia, that have pushed down prices. The imports have been a boon to U.S. solar installers, with the cheap prices spurring adoption of rooftop solar panels, but they’ve pushed Suniva to close factories in Michigan and Georgia and enter bankruptcy. A lawyer backing the petition says its “time to take a stand” against Chinese manufacturers on behalf of Suniva—which is majority owned by a company based in Hong Kong.