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 (9 August 2017): CONSUMER ANGST RISES

SMALL BUSINESS OPTIMISM REGAINS MOMENTUM IN JULY

The Index of Small Business Optimism rose 1.6 points to 105.2, preserving the surge in optimism that started the day after the election. Seven of the 10 Index components posted a gain, two declined, and one was unchanged.

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Large companies are expressing a reasonably positive outlook as per the recent PMIs. Small companies also feel good, direct from the horse’s mouth.

Sales are ok, even though actual sales are far from matching expectations…image

…supported by cycle-high job openings…image

…labor compensation is rising faster than sales inflation…image

…but it does not seem to impact profits and margins, just yet anyway, from what biz owners actually report…

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…there is little complaint about sales, labor costs nor even competition from larger companies:

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Bespoke has these 2 charts illustrating the relative importance of sales and labor in small biz worry list:

To complete the loop, the quarterly RSM Middle Market Business Index is also going up reflecting “underlying improvement in economic conditions during the past year, as well as strong corporate earnings and respondent expectations for significant tax reform and regulatory relief this year.

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The major takeaways from the data continue to be the current quarter improvement in gross revenues and net earnings, as well as solid expectations on both over the next six months. Fifty-five percent of middle market executives experienced an improvement in gross revenues, while 53 percent saw improvement in net earnings. During the next six months, 67 percent of middle market executives anticipate growth in gross revenues, with 67 percent anticipating improved net earnings, up from 66 percent previously. (…)

On an industry basis, construction, wholesale trade and financial activities all experienced notable improvements, while retail trade observed a modest increase in business activity. Professional business, education, health care and goods production saw little change in overall business conditions. Manufacturing, transportation and warehousing, information, and leisure and hospitality all saw declines in business conditions. In our estimation, solid domestic demand for goods and improving financial conditions were the primary catalysts for the pick-up in business conditions, while slowing auto production and the lagged impact of U.S. dollar appreciation were the major drags on manufacturing. (…)

As the Q2 earnings season draws to an impressive close, there are few signs of any change in trends from corporate surveys, large medium or small.

S&P 500 Sees Double-Digit Earnings Growth for Second Straight Quarter

(…) If 10.1% is the actual growth rate for the second quarter, it will mark the second highest (year-over-year) earnings growth for the index since Q4’11 (11.6%), and it will mark the first time the index has seen two consecutive quarters of (year-over-year) double-digit earnings growth since Q3’11 (16.7%) and Q4’11 (11.6%). (…)

Companies in aggregate are beating EPS estimates by a wider margin for Q2 2017 (+6.3%) relative to the five-year average (+4.2%). (…) Three sectors account for $7.2 billion (or 74%) of this $9.7 billion increase in earnings since June 30: Health Care, Financials, and Information Technology.

Punch BUT RISKS REMAIN:

Recent data on the U.S. consumer are worrisome:

  • since March 2016, real expenditures have increased 3.5%
  • while real disposable income rose only 1.7%, half the spending pace!
  • Total consumer credit rose 7.3% during the same period, twice the spending growth and more than 4 times the income growth.

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Clearly unsustainable…and the U.S. consumer is 70% of the economy and has been the main growth engine in recent years…

The savings rate could decline further (beware irrational wishful thinking) but would simply increase the economic risk, especially when the Fed is trying to get in a hawkish mood…

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…and lenders are tightening standards as their loan losses are already rising.

Recessions are generally engineered by the Fed when excesses need to be corrected. Not really the case now.

But if the consumer goes on strike during the important second half (back-to-school, Thanksgiving, Xmas)…

This is not just a remote possibility. The consumer math is pretty iffy. Will work on that.

U.S. Job Openings Climb to Record 6.2 Million at End of June The pace of hiring for abundant job openings, though, has remained unchanged

The number of job openings climbed by 417,000 in June for private employers and by 44,000 for government postings, which include state and local government, according to the Labor Department’s Job Openings and Labor Turnover Survey, known as Jolts. (…)

Industries that particularly have seen job openings soar include the education and health-services industry, and professional and business services. Those industries have far more job openings now than they ever did before the recession.

The construction and manufacturing industries, by contrast, have lagged behind. The manufacturing industry has about as many openings today as it did in 2007, while the construction industry still has fewer available jobs than at the height of last decade’s housing bubble.

The JOLT report confirms the NFIB results above. Labor demand is indeed at a cycle high. The problem is that these jobs are not being filled (lack of qualified workers) and employers don’t seem willing to pay up so far.

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Unfilled jobs are piling up:

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An all-time high total of 9,773 robots valued at approximately $516 million were ordered from North American robotics companies during the first quarter of 2017. This represents growth of 32 percent in units over the same period in 2016, which held the previous record. Order revenue grew 28 percent over the first quarter of last year. Robot shipments also reached new heights, with 8,824 robots valued at $494 million shipped to North American customers in the opening quarter of the year. This represents growth of 24 percent in units and five percent in dollars over the same period in 2016. (…)

Robots ordered by automotive component suppliers were up 53 percent while orders by automotive OEMs increased 32 percent. Another good sign for the future of robotics was the continued growth in non-automotive industries like metals (54 percent), semiconductors/electronics (22 percent), and food & consumer goods (15 percent). (…)

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SENTIMENT WATCH
Dimon Sides With Bears, Says Sovereign Bonds Are Too Pricey
Pyongyang Defies Trump ‘Fire and Fury’ Warning, Threatens U.S. in Guam President Donald Trump demanded North Korea not “make any more threats” to the U.S., saying the country “will be met with fire and fury like the world has never seen.” Hours later, North Korea says it is considering a plan to launch missiles at Guam.

(…) Those familiar with the matter say Mr Trump, who only three months ago said he would be ““honoured” to meet supreme leader Kim Jong Un, is torn between competing advice.  “There is a camp that believes we should push very hard — even to the point of launching a pre-emptive strike,” said a person familiar with the matter, who characterised the second camp as preferring to pursue talks, but having little to show for it amid North Korea’s rapidly accelerating nuclear efforts.

“The first camp is going to win the argument by default unless the second camp can actually walk into [Mr Trump’s] office and prove they have something real,” said the person. (…)

Rex Tillerson, US secretary of state, is in Asia seeking a policy of “peaceful pressure” combining sanctions and regional lobbying while looking to reassure Mr Kim that he and his regime are not at risk. He has said Washington will consider talks so long as Pyongyang stops its missile launches, suggesting the US sees such an outcome “as the best signal that North Korea could give us”. (…)

“The North Koreans need to realise that if they don’t give the second camp some ammunition — some indication that there is a path to sincere and effective talks that could address the US concerns — the first camp is going to win and it is going to be a bloodbath,” said the person familiar with the matter. “It’s up to them to decide.”

(…) North Korea’s military doctrine, as expressed in recent exercises, envisages the first use of nuclear weapons to ward off defeat or destruction. Jeffrey Lewis, an academic expert, wrote recently in Foreign Policy: “Kim’s strategy depends on using nuclear weapons early — before the United States can kill him or special forces can find his missile units . . . He has to go first, if he is to go at all.” (…)

Mr Trump is capable of shameless switches in rhetoric and policy. So it is certainly possible that he will simply back down on North Korea, or will embrace the status quo as the dramatic change that he has been seeking all along.

However, it is also possible that Mr Trump has convinced himself that a first strike on North Korea is a workable option. Any such conclusion would fly in the face of standard military advice, which holds that it is impossible to “take out” the North Korean nuclear programme with a single wave of attacks and that therefore, following any such assault, South Korea, Japan and US bases in the region, would be exposed to retaliation. (…)

THE DAILY EDGE (8 August 2017)

U.S. Consumer Credit Usage Continues to Ease

Consumer credit outstanding grew $12.40 billion during June following an $18.30 billion May increase, revised from $18.42 billion. During the past ten years, there has been a 49% correlation between the y/y growth in consumer credit and y/y growth in personal consumption expenditures.

Nonrevolving credit usage softened, rising $8.27 billion (5.8% y/y) after an $11.42 billion gain. It was the smallest increase in twelve months. (…) Revolving consumer credit balances rose $4.13 billion (5.5% y/y) after a $6.87 billion increase. (…)

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Conference Board’s Employment Trends Index Rose in July

The Conference Board said its employment trends index rose to 133.77 in July from its revised June reading of 132.42. The July figure represents a 4.8% gain from last year.

The Conference Board’s employment trends index combines eight market indicators, including industrial-production figures from the Federal Reserve, job openings from the Bureau of Labor Statistics and jobless claims from the U.S. Department of Labor. The index filters out volatility in data to more clearly reveal underlying trends in employment conditions. (…)

All eight of the components of the index were positive in July, with the “percentage of firms with positions not able to fill right row” contributing the largest positive reading. The component flipped from June, when it posted the biggest decline in the basket.

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U.S. Growth Seen Steadying, Soothing Slowdown Fears

The OECD’s composite leading indicator for its 34 member countries was steady at 100. (…)

Across the Group of 20 largest economies, which account for most of the world’s output, growth firmed in the final three months of 2016 and stayed at that faster pace in the first three months of 2017.

Growth figures for the second quarter are incomplete, but those available for the U.S., the eurozone and China point to a further pickup. Indeed, Capital Economics estimates that on an annualized basis, global economic growth accelerated to 3.7% in the three months to June from 3.2% in the first quarter.

The leading indicator for the U.S. was unchanged at 99.7 for the third straight month, signaling that its growth outlook has steadied, albeit at a weaker rate than normal. This is an improvement on indicators published in July, which hinted at a U.S. slowdown, and implies global economic prospects could be boosted as U.S. trade flows pick up.

The Paris-based research body’s gauge of future activity, based on data for June, continued to point to faster growth in Germany, France, China and Brazil. (…)

OECD pdf here.

China’s exports increased 7.2% in July from a year earlier, down from an 11.3% gain in June while imports expanded 11.0% from a year earlier, slower than June’s 17.2% expansion, the General Administration of Customs said Tuesday. (…)

Slower shipments to the U.S. and EU weighed on July’s export growth. China’ exports to U.S. and EU grew 8.5% and 9.5% in July from a year earlier, respectively, compared with double-digit expansions in June. Exports to Southeast Asian nations rose 1.6% in July from a year earlier, following a 0.6% drop in June. (…)

Germany’s industrial production took an unexpected step lower in June, but its upward thrust is still in place with only the sense of relentless momentum diminished. German IP is now up by 2.5% over 12 months, at a 7.7% pace over six months, and at 3.3% pace over three months. Previously, the three-month pace was at an 8.4% annual rate. With the backing off in June, Germany’s growth rates settle into a more moderate framework of sustainability. (…)

On the month, German IP stepped back in consumer goods, capital goods and intermediate goods. Construction output is now lower for three months running. Manufacturing IP has a 1.7% rate of growth over 12 months and a 1.1% annualized pace over three months. (…)

On a quarter-to-date basis, all these signals are more in tune with manufacturing IP up at a 5.3% pace, real orders up at a 3.2% pace and real sales up at a 6.1% pace. (…)

Other economic reports for Germany, like the Markit manufacturing PMI reading, have been positive but not effusive. These readings now all seem to coexist better as German growth is solid and it is not running way ahead of the rest of Europe as it may previously have hinted.

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…but German construction biz is booming:

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Growth was broad-based across residential, commercial and civil engineering, and new business rose strongly. Subsequently, construction firms boosted employment and usage of sub-contractors during the month, with the latter increasing their charges at the second-fastest rate in the survey history. (…)

The volume of new orders received by German construction firms rose for the ninth consecutive month in July. The rate of expansion strengthened since June and was among the strongest signalled by the survey to date.

GOP Plans Tax Compromise to Sidestep Democrats

Republicans struggling to pass a major tax overhaul that doesn’t add to the federal deficit are discussing a kind of compromise: mixing permanent revisions with temporary rate cuts for individuals and businesses.

Officials on the House and Senate tax committees are talking with the White House about a hybrid approach that would combine lasting tax code changes to deter offshore profit shifting by corporations with lower rates for a number of years, according to three people familiar with the discussions. (…)

Jeffrey Gundlach Has a Warning for You

The co-founder and chief executive officer of DoubleLine Capital LP says risky assets such as junk bonds and emerging-market debt are overvalued. He’s reducing those positions in DoubleLine funds and investing more in higher-quality credits with less sensitivity to rising interest rates, mindful that doing so may mean he gives up some performance for a while.

Gundlach, 57, says he can’t predict what event or development will trigger a change in investor sentiment. Like Howard Marks, the co-chairman of Oaktree Capital Group LLC, who last month warned that markets had crossed into “too-bullish territory,” Gundlach says it’s better to be cautious now than to hold on until it’s too late. (…)

The complacency in markets is understandable. Gundlach acknowledges that there are no obvious signs of a recession within six months, the only thing he says would bring about a major correction in asset prices. Everything from consumer confidence to employment to gauges of manufacturing health are strong.

He expects the Federal Reserve to raise rates again in December and in successive quarters so long as the data are supportive. He doesn’t see the unwinding of the Fed’s balance sheet as a threat because Chair Janet Yellen and others have communicated their plans “extremely well.”

Also, while optimism for tax reform and infrastructure spending have faded, Gundlach said it’s not clear when doubts about the Trump presidency will start to weigh heavily on investors.

“I don’t see the big drop, unless there’s something out of left field, like some sort of really escalating conflict,” he said. “I think you’re supposed to be gradualistically moving toward the exits.”

WWII HEROES

Very impressive then and now comps. (Tks Terry)

https://interactive.guim.co.uk/embed/2014/apr/image-opacity-slider-master/index.html?ww2-dday