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 May 2017)

U.S. Retail Sales Improve Strongest sales gain in three months came with positive revisions to earlier data

Total retail sales and spending at restaurants increased 0.4% during April (4.5% y/y) following a 0.1% March gain, revised from -0.2% reported initially. Earlier figures also were revised. It was the strongest gain in three months. A 0.6% increase had been expected in the Action Economics Forecast Survey.

Sales at motor vehicle & parts dealerships increased 0.7% (4.4% y/y) after as 0.5% decline. The increase compares to a 1.6% gain (-3.0% y/y) in unit motor vehicle sales. Retail sales excluding autos increased 0.3% (4.5%) following a like increase during March, revised from 0.2%. A 0.4% rise had been expected.

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Better but not great. Non-auto sales +0.8% in the last 3 months, +3.2% annualized vs +4.6% YoY in April. But goods inflation was negative (see below) so real sales are stronger. Real spending has been rising much faster than real earnings since October 2016 as consumer credit is increasing at a 6.0-6.5% YoY clip.

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According to the University of Michigan latest consumer survey, consumers have the most favorable real income expectations in a dozen years. The recent rise in optimism, which saw a boost after President Donald Trump’s election in November, reflects a turnaround from consumers’ attitudes in October, when sentiment had matched a two-year low.

This President sure needs to make America great again.

U.S. Consumer Prices Rose Modestly in April

The consumer-price index, which measures what Americans pay for everything from radishes to rent, advanced a seasonally adjusted 0.2% in April from the prior month, the Labor Department said Friday. Excluding the often volatile categories of food and energy, so-called core prices rose just 0.1% from March.

The annual increase in consumer prices slowed for the second straight month, with prices rising 2.2% in April from a year earlier. February’s 2.8% annual increase was the largest in five years.

Prices excluding food and energy were up 1.9% on the year. It was the first time the annual gain in core prices had been below 2% since October 2015. (…) Food prices rose 0.2% last month, and were up 0.5% from a year earlier.

Shelter costs—which account for about a third of the overall price index—increased 0.3% on the month and rose 3.5% on the year in April.

Prices for cars, apparel and prescription drugs all fell last month.

A separate Labor Department report showed average weekly earnings for private-sector workers, adjusted for inflation, rose 0.4% in April from the prior month. From a year earlier, inflation-adjusted weekly earnings were up 0.3%. (…)

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.4% annualized rate) in April. The 16% trimmed-mean Consumer Price Index also rose 0.1% (1.0% annualized rate) during the month. Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, the CPI rose 2.2%, and the CPI less food and energy rose 1.9%.

There was, in effect, a big break in inflation trends after January. Core Goods prices are dropping hard: –3.0% annualized in last 2 months. Even prices of core Services are slowing, flat in last 2 months. Unless wages also slow down, margins are being squeezed.

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image(Haver Analytics)

Big break? Long break in inflation? Let’s look at some facts:

  • The inflation trends in the pipeline are mixed but still pointing to rising prices.
  • Final demand PPI was up 0.5% MoM in April (+2.5% YoY) and + 2.8% a.r. in last 3 months.
  • Core final demand PPI shows similar trends in the last 3 months.
  • That includes Trade Services PPI +0.9% in Jan., +0.4% MoM in Feb., -0.1% in March and -0.3% in April. Trade Services PPI measures profit margins at wholesale and retail ends and these are dropping fast.
  • Excluding declining margins, Core PPI rose 0.7% in April and is up +4.4% a.r. last 3 months (+2.1% YoY).
  • Core CPI-Services is flat in last 2 months but PPI-Services is +2.8% a.r. in last 3 months.
  • PPI Intermediate demand for processed goods rose 0.5% MoM in April (+5.4% YoY) and is +4.0% a.r. last 3 months.
  • Non-petroleum import prices are +3.2% a.r. last 3 months.

In all, inflation does not seem to be breaking down meaningfully. Median CPI is +2.0% a.r. last 3 months and inflation in the pipeline remains in the 2-3% range. As of May 12, the Cleveland Fed’s Inflation Nowcast shows core CPI up 0.16% from April, a 2.0% annualized rate.

David Rosenberg argues that “there is no room for inflation to be sustained – Amazon is doing to the retail industry writ large what Wal-Mart started to do two decades ago.” To prove his point, David refers us to the battered consumer-sensitive stocks as proof that there is no pricing power.

But pipeline inflation is real.

Pointing up What should worry investors though is the recent compression in wholesale/retail margins as labor costs increase faster than inflation on sales. Core Goods PPI is +3.2% a.r. last 3 months, +2.3% YoY in April while core Goods CPI is –2.0% a.r. last 3 months, –0.6% YoY in April.

Winking smile In the May 8 Daily Edge, I wrote””

In all, the writing is on the wall: unless the economy really cools off, the labor market is tight enough for wage pressures to intensify in 2017. The Employment Cost Index is now rising at a 3.5% annual rate in Q1 and the number of anecdotes about wage increases are mushrooming by the day.

I hope you appreciate when you read it here first…This was in Saturday’s WSJ, 5 days later.

(…) To try to solve the labor shortage, growers have been increasing wages. Yeatman & Sons in January raised piece rates at one of its farms to $1 for every five-pound box of mushrooms from 82 cents for large mushrooms and 80 cents for medium.

Phillips Mushroom Farms recently upped the bonus harvesters get after picking 55 pounds in an hour from 11 cents a pound to 16 cents, said general manager Jim Angelucci. Good pickers, who start at $8.75 an hour, can collect 100 pounds an hour, he said, so the extra nickel can yield a $2.25 bump to $15.95 an hour. The change helped Phillips fill five jobs and resume full production, he said. (…)

Mushroom production (…) is year-round and indoors. Growers offer employees health and retirement benefits as well as paid vacation.

Even so, the pool of workers is tight—and has shrunk in recent months. Growers attribute this partly to the strong economy in Chester County, where unemployment fell to 3.5% in March. Another factor is fears over the Trump administration’s crackdown on illegal immigration, which growers say has prompted some workers to leave the U.S.

The labor woes are dragging on production, which dropped 9% to 395 million pounds between the 2013-14 and 2015-16 growing seasons. Chester County’s share of the U.S. market for Agaricus mushrooms, which include white button and Portobello varieties, fell to 43% from 49% over the same period, according to U.S. Department of Agriculture figures. (…)

China’s retail sales up 10.7% in April

China’s retail sales, a key indicator of consumption, grew 10.7 percent year on year in April, 0.2 percentage points slower than the March level, official data showed Monday.

In the first four months, total retail sales of consumer goods rose 10.2 percent year on year, 0.2 percentage points faster than the growth in the first quarter, according to Xing Zhihong, a spokesperson with the NBS.

Consumption activities were relatively stronger in rural areas, with retail sales expanding 12.6 percent in April, outpacing urban areas, where retail sales climbed 10.4 percent year on year. (…)

China's retail sales up 10.7% in April

China’s industrial output rose 6.5% YoY last month, compared to 7.6% in March. Fixed-asset investment excluding rural areas expanded 8.9% for the first four months.

Home Capital’s Troubles Are Contained, Poloz Says
Global Oil Prices Jump on Talk of Extending Production Cuts Oil futures rose sharply after energy ministers from Russia and Saudi Arabia said they would back an extension to global production cuts.

…to the end of March 2018. (…)

The latest data showed that while participants have been compliant with quotas, stockpiles have remained elevated.

Crude stockpiles in the most industrialized nations increased from the fourth quarter of 2016 by 31 million barrels to just over 3 billion—276 million barrels above the five-year average, said OPEC last week. (…)

Even if the production cuts are extended at next week’s meeting, more oil is coming online from Canada, Brazil, Russia Kazakhstan and the U.S., notes Commerzbank. (…)

American drilling activity has risen for 17 weeks in a row, according to rig-count data from Baker Hughes . And last week, the U.S. government raised its domestic-production estimates for this year and next. (…)

Profit Growth Will Come From Overseas Foreign operations for U.S. companies will benefit from buoyant economies and with little wage pressure, boosting profit growth.

(…) But the U.S. accounts for only about 44% of the sales at the companies that comprise the S&P 500, according to S&P Dow Jones Indices. The rest comes from overseas, and the profits outlook there is stronger.

Growth outside the U.S. appears to be picking up, there is still plenty of labor-market slack in many countries, and central banks are still a while off from raising rates.

Consider the euro area in particular, which according to the Commerce Department accounts for about 40% of the income generated by U.S. multinationals’ overseas operations. Europe is  growing more rapidly than the U.S., but its unemployment rate, at 9.5% in March, is much higher. Put simply, says Bank of America Merrill Lynch economist Ethan Harris, “the U.S. is running up against labor-supply constraints and Europe isn’t.”

That ought to translate into substantially stronger profits growth for U.S. multinationals’ European operations. Workers aren’t in a position to ask for raises and companies, which aren’t running close to capacity, don’t need to add new workers quickly to meet rising demand. An added bonus: The euro has been strengthening in recent months, which translates into higher dollar profits. (…)

The upshot is that the more business a company does overseas, the better its profit growth ought to be in the year ahead. So larger companies, which tend to have greater overseas exposure, might shine. The same is true of more globally exposed areas of the market, such as the technology sector. More U.S.-focused companies, such as retailers, and more broadly, small companies, could get left out.

Actually happening as this RBC chart shows:

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But many of these companies are commodity sensitive…

And note that Eurozone growth is actually not picking up all that much, is it?

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EARNINGS WATCH

Factset’s weekly summary:

To date, 91% of the companies in the S&P 500 have reported actual results for Q1 2017. Of these companies, 75% have reported actual EPS above the mean EPS estimate, 7% have reported actual EPS equal to the mean EPS estimate, and 18% 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 (70%) average and above the 5-year (68%) average.

In aggregate, companies are reporting earnings that are 6.0% above the estimates. This surprise percentage is above the 1-year (+4.3%) average and above the 5-year (+4.1%) average.

In terms of revenues, 64% of companies have reported actual sales above estimated sales and 36% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (53%) and above the 5-year average (53%).

In aggregate, companies are reporting sales that are 1.0% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.1%) average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) year-over-year earnings growth rate for Q1 2017 is 13.6% today [13.5% last week]. If the Energy sector is excluded, the blended earnings growth rate for the remaining ten sectors would fall to 9.4% from 13.6%

The blended sales growth rate for Q1 2017 is 7.8%. If the Energy sector is excluded, the
blended revenue growth rate for the index would fall to 5.9% from 7.8%.

At this point in time, 90 companies in the index have issued EPS guidance for Q2 2017. Of these 90 companies, 61 have issued negative EPS guidance and 29 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 68%, which is below the 5-year average of 74%.

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Recent guidance is heavily influenced by IT and HC. The other 9 sectors show 38 negative and 7 positive. Three months ago for Q1, it was 32-8. Twelve months ago for Q2’16: 35-9.

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Guidance being slightly more negative, Q2 estimates are being revised downward. While total S&P 500 EPS have been ratcheted down from 8.6% to 6.8% growth, 8 of the 11 sectors have seen their average estimated growth rate cut by more than half from +3.8% to +1.8%. But who believe these anymore when beats exceed 6%?

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Still, 3 sectors are now forecast to show negative growth in Q2. Even the dependable HC and CS sectors are only expected to grow EPS by +0.8% and +2.9% respectively.

Trailing 12-month EPS are now $122.85, up 3.6% from their level after Q4’16 and up 7.8% from their mid-2016 low. Inflation has declined from +2.2% to +1.9%. As a result fair value per the Rule of 20 is now 2224, up 6% from earlier this year, about in line with the actual S&P 500 Index.

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Economic surprises are not helping sentiment…

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…even though…image

But, under the radars, some people seem to care. The bulls keep running but are increasingly out of breadth as David Rosenberg’s chart reveals. This is not a robust market.

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UNPAID MARKETING Winking smile

The equal-weighted S&P 500 Index happens to support my equity stances largely based on the Rule of 20:

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Deflating Equities in February 2015 was not a bad call on a risk/reward basis.

THE DAILY EDGE (12 May 2017)

U.S. Producer Prices Jump 0.5% in April

The producer-price index for final demand, measuring changes in the prices that U.S. companies receive for their goods and services, increased 2.5% in April from a year earlier. The advance marked the index’s steepest climb since February 2012, the Labor Department said Thursday.

Excluding often-volatile prices for food and energy, the index grew 1.9% in April from a year earlier. (…)

Producer prices in April increased a seasonally adjusted 0.5% from March. Prices on services, such as securities brokerages and investment advice, contributed heavily to April’s gains. (…)

Jan-April: core PPI is up at 3.3% a.r.. (Chart from Haver Analytics)

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Auto CAR TALK
U.S. used-car glut is a dealer’s dream, automakers’ nightmare

(…) By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters. (…)

For a graphic showing leasing activity, see: [tmsnrt.rs/2pe1E2x] (…)

wsjs-daily-shot-percentage-of-americans-collecting-unemployment-lowest-since-1969 (1)(The Daily Shot)

viewer.aspx (6)(David Rosenberg)

wsjs-daily-shot-the-used-car-market-is-very-sick (1)(WSJ)

wsjs-daily-shot-kickstarting-americas-productuvity

 

(Bloomberg Briefs)

Larger and possibly prolonged layoffs this year, stemming from recent sales weakness, may send net industry hiring lower and jobless claims higher in the coming weeks. The history suggests that when auto payrolls drop in July, they usually undershoot the 12-month moving average by 26,000 jobs. Growth in the sector’s employment has been flat over the past year. BI Economics estimates the recent slowdown in auto sales could cost the industry at least 20,000 jobs. (BB)

Plate Restaurant Industry Snapshot

Restaurants experienced a third consecutive month of negative same-store sales in April, with results essentially unchanged vs. March. Sales declined by -1.0 percent for the month, which is only a 0.1 percentage point improvement from March. This insight comes from data by TDn2K™ through The Restaurant Industry Snapshot™, based on weekly sales from over 27,000+ restaurant units and 155+ brands, representing $67 billion dollars in annual revenue.

Same-store traffic declined -3.3 percent during April, also a very modest improvement of 0.1 percentage points over March’s results.

Through April, 2017 sales are down -1.5 percent vs. a -2.3 percent sales decline in the fourth quarter of last year. If sales remain at April levels for the balance of the second quarter, it would be the best quarterly performance in over a year.

(…) sales started softening considerably starting with June of last year. (…)

Staffing woes continue for the industry as hourly employee and restaurant management turnover rates continued to rise, according to the latest data from TDn2K’s People Report™. While it may seem impossible for things to get any worse, restaurant operators continue to predict increasing recruiting difficulties for upcoming quarters based on the People Report Workforce Index.

Almost four out of every five restaurant terminations in 2016 were employees leaving their jobs voluntarily, and about 40 percent of all hourly employee terminations are within 90 days of hire. This obviously speaks to the tight labor market and increased competition for employees. (…)

German Growth Outpaces U.S. as Mild Weather Boosts Construction Germany’s economy accelerated in the first quarter, led by a revival in global trade and buoyant construction activity, cementing its role driving Europe’s economic upswing.

Germany’s gross domestic product grew at a quarterly clip of 0.6%, or 2.4% in annualized terms, the Destatis statistics office said Friday. (…)

Destatis said mild winter weather contributed to a sharp rise in construction, while rising exports also helped lift first-quarter growth from an annualized 1.7% in the fourth quarter of 2016.

There were signs of a broadening in Germany’s growth, which entered its eighth year. Investments in plant and machinery picked up in the course of the first quarter, Destatis said, and many economists forecast this trend will continue. (…)

Germany’s acceleration was key to maintaining a steady pace of expansion in the wider eurozone, which grew at an annualized rate of 1.8% in the first quarter. But while milder weather boosted construction activity in Germany, it appears to have damped growth in other parts of the currency area at the start of the year.

Figures released by the European Union’s statistics agency Friday showed industrial production fell for the second straight month in March, and was broadly flat during the first quarter. That was a surprise, and was largely due to a decline in energy output, which fell 3.2% in March from the previous month, after a 4.9% decline in February. (…)

Macron wants tougher EU on trade and foreign investment French president-elect wants ‘Buy Europe’ measures in bid to win over domestic critics
Ninja China Bonds Send Fresh Stress Signal China’s $1.7 trillion government-bond market is exhibiting a new sign of stress: The yield on longer-term debt has fallen below that on shorter-term debt—an anomaly that some traders blame on Beijing’s efforts to reduce financial risk.

(…) Such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. (…)

The answer seems to lie in Beijing’s recent campaign to tamp down the burgeoning shadow-banking sector, whose growth is due in large part to so-called wealth-management products; the amount of such products outstanding has ballooned to $4.2 trillion in the first quarter of 2017, Moody’s Investors Service says, which is more than a third of China’s annual gross domestic product. (…)

“The inversion is a form of mispricing in the bond market,” said Liu Dongliang, senior analyst at China Merchants Bank . “The fact that no one is taking the bargain despite the higher yield on the five-year bond just shows how depressed investors’ mood is.” (…)

In Fight Against U.S. Shale Oil, OPEC Risks Lower for Longer

Merge these 2 charts and you get 2 critical readings: much higher well productivity and much, much lower lifting costs in the U.S..

POLITICS

Not happy to write about politics but President Trump is such a key factor in financial markets that we must all keep track of what’s going on in D.C..To me it’s all about the President’s credibility.

Yesterday morning, I read the WSJ’s very favorable editorial on Trump’s move on Comey. Then I read the WaPo’s account of how things happened which did not fit quite along with the WSJ’s viewpoint.

(…) Back at work Monday morning in Washington, Trump told Vice President Pence and several senior aides — Reince Priebus, Stephen K. Bannon and Donald McGahn, among others — that he was ready to move on Comey. First, though, he wanted to talk with Attorney General Jeff Sessions, his trusted confidant, and Deputy Attorney General Rod J. Rosenstein, to whom Comey reported directly. Trump summoned the two of them to the White House for a meeting, according to a person close to the White House.

The president already had decided to fire Comey, according to this person. But in the meeting, several White House officials said Trump gave Sessions and Rosenstein a directive: to explain in writing the case against Comey. (…)

The pair quickly fulfilled the boss’s orders, and the next day Trump fired Comey — a breathtaking move that thrust a White House already accustomed to chaos into a new level of tumult, one that has legal as well as political consequences.

Rosenstein threatened to resign after the narrative emerging from the White House on Tuesday evening cast him as a prime mover of the decision to fire Comey and that the president acted only on his recommendation, said the person close to the White House, who spoke on the condition of anonymity because of the sensitivity of the matter. (…)

Rosenstein is a highly respected person in Washington. He was confirmed by Congress 94-6.

This morning, the White House and Trump had no choice but to transform the alt-facts into facts, essentially confirming the WaPo’s account:

  • Trump Planned Comey’s Firing Before Letter President Donald Trump, contradicting previous White House accounts, said he had planned to fire former FBI Director James Comey regardless of any advice from his Justice Department, because Mr. Comey was a “showboat.”

(…) Mr. Rosenstein had been summoned Monday to the White House, where he discussed Mr. Comey’s performance with the president. Mr. Trump asked Mr. Rosenstein to write a memo detailing his concerns about the director’s conduct. (…)

(…) Mr. Rosenstein left the impression that he couldn’t work in an environment where facts weren’t accurately reported, the person said. The deputy attorney general objected to statements by White House aides citing Mr. Rosenstein’s critical assessment of Mr.Comey’s job performance to justify the firing. (…)

Mr. Rosenstein, who had been confirmed by the Senate just two weeks earlier, met with Mr. Trump on Monday, where they discussed Mr. Comey’s job performance. At the White House’s prompting, Mr. Rosenstein Tuesday wrote a memo to the president detailing his concerns about the director’s conduct.

In that letter, Mr. Rosenstein never expressly recommended that Mr. Comey be fired. (…)

The president’s termination letter to Mr. Comey, written on the same day, began by pointing to the memos he had received from the attorney general and deputy attorney general, and offered no further explanation for his decision to fire him. (…)

Asked if Mr. Trump had directed Mr. Rosenstein to write a recommendation that Mr. Comey be fired, she [Sarah Sanders, a White House spokeswoman] said, “No.” (…)

Hmmm…

Red heart THANK YOU

I received numerous kind words re: yesterday’s “This Time Seems Very, Very Different.” Really?. Can’t possibly personally reply to all of you but I very much appreciate your comments.