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 (22 September 2017): LEI Leading?

U.S. Leading Economic Indicators Strengthen

large imageThe Conference Board’s Composite Index of Leading Economic Indicators increased 0.4% (4.4% y/y) in August following an unrevised 0.3% July gain. Three-month growth remained firm at 5.5% (AR).

Performance amongst the components of the leading indicator series was mostly positive. Building permits, a steeper interest rate yield curve, consumer expectations for business/economic condition, the ISM new orders and the average workweek series each contributed positively to the overall index rise. Stock prices and factory orders for both consumer and capital goods had neutral effects. Initial claims for unemployment insurance had a negative effect on the index.

The Index of Coincident Economic Indicators held steady m/m, up 1.9% y/y, following a 0.3% rise. Gains in payroll employment, personal income less transfer payments and business sales were countered by a decline in industrial production. Three-month growth in the index slowed to 1.4% (AR), its weakest since March.

High five I am a bit surprised that the LEI keeps rising amid generally tepid economic data in recent weeks. Especially since the ECRI Weekly Leading Index is clearly weak and the Surprise Index remains negative as the Ed Yardeni charts show.

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So, I took a look at some of the series that are pushing the Conference Board’s LEI up:

  • Building permits were up last month but not in the past year.

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  • The yield curve is not really steepening.

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  • The U of M Consumer Sentiment Index is rather weakish.

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  • Actual New Orders have flattened out. Markit’s Manufacturing PMI Index, which I consider more accurate and less volatile than the ISM, has been rather uninspiring lately: “new orders rose at a pace only slightly weaker than July. (…) new export sales were broadly unchanged in August, following a fractional contraction in July.”

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  • The average week rose a little last month after being in a very narrow range for 2 years. All of the rise came from overtime hours which can be volatile. And it’s not as if the work week could rise much more from its current 42.1 hours. It reached 42.2 hours 3 months during 2014, a number never exceeded since WWII!

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These series have all in common that their most recent data were up but within declining or flattening trends.

In any case, here’s the still positive picture as Doug Short illustrates it:

Smoothed LEI

DID HE REALLY SAY THAT?

Kim Jong Un of North Korea, who is obviously a madman who doesn’t mind starving or killing his people, will be tested like never before!

Confused smile Why would you want to test an obvious madman given the kind of weapons he got? Confused smile

THE DAILY EDGE (21 September 2017)

Existing-Home Sales Tumble for Third Straight Month

Sales of previously owned homes fell in August to the lowest level in a year, reflecting a shortage of properties on the market and a sharp drop in Houston home purchases because of Hurricane Harvey.

Existing-home sales declined 1.7% from a month earlier to a seasonally adjusted annual rate of 5.35 million, the National Association of Realtors said Wednesday. That marked the third straight monthly drop, with continued declines expected in the coming months. Sales rose just 0.2% over the 12 months ending in August.

(…) the number of homes for sale at the end of August declined 2.1% from a month earlier and is 6.5% lower than a year ago.(…)

Mr. Yun estimated that overall sales would have been flat from the previous month without the hurricane effects. (…)

The median price of homes sold last month reached $253,500, up 5.6% from a year earlier. That was more than double the growth in Americans’ incomes. (…)

Weakish just about everywhere (chart from Haver Analytics):

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Note that first-timers are now 31% of buyers, down from 33% last month.

Fed’s Signals Bump Up Bank Stocks Global bank shares climbed and haven assets remained under pressure as investors ramped up bets the Federal Reserve would tighten monetary policy.

(…) The Fed left rates unchanged and penciled in one more rate rise in 2017, signaling continued optimism about the economy even though persistently low inflation has prompted some officials to voice greater skepticism about a move this year.

(…) they also showed rate increases are likely to end at a lower point than they had previously projected.

The median projection for the longer-run level of interest rates edged down to 2.75% from 3% in June. This is considerably lower than where Fed officials have stopped raising rates in the past. (…)

“I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been as low,” she said.

She said officials had more work to do to determine if the inflation soft patch would continue, and if it did, it could require an even more gradual pace of rate rises. (…)

Beginning in October, the Fed will end its practice of fully reinvesting the principal payments of maturing into new bonds and instead allow $10 billion in holdings to roll off without reinvestment every month. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion. (…)

Overall somewhat less hawkish Fed on softer economy and puzzlingly low inflation. Firm but flexible…

S&P Lowers China’s Credit Rating Credit-rating firm also changes outlook to stable from negative

(…) The action brings all the three major credit-rating firms in line in terms of their views of the creditworthiness of the world’s second-largest economy. Fitch Ratings lowered China’s rating in 2013, and Moody’s Investors Service did so in May.

The downgrade of China’s rating, the first such move by S&P since 1999, reflects its assessment that “a prolonged period of strong credit growth has increased China’s economic and financial risks.” (…)

What Passive Buying and Selling Means for Stocks The rise of passive investing is changing the makeup of markets. Even active investors are now resigning themselves to the influence of indexing and are contriving ways to take advantage of its impact.

(…) But with passive investing this year representing about 29% of assets in domestic stock funds alone, according to Moody’s Investors Service —a figure the firm sees topping 50% as soon as 2021—investors who pick single stocks are paying attention. (…)

So far, researchers say, the influence of passive investing is most pronounced for midsize- and small-company stocks, which generally trade less frequently than the largest ones. (…)

“Portfolio managers should be aware of heavy ETF ownership,” Mr. Pankaj said. “It can be an advantage when flows are positive, but you want to be careful when they turn around.” (…)

Meanwhile, the S&P 500 hits new highs without help from its past stalwarts:

  • GOOG.a: –6.4% since July 24.
  • AMZN: –11.0% since July 27.
  • FB: –3.0% since July 27.
  • NFLX: –3.3 since July 21.
  • MSFT: 0.0% since August 31.
  • AAPL: –6.9% since September 1.