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 (20 April 2017)

Economic Outlook from Freight’s Perspective – On Your Mark, Get Set, Wait

Hard facts. Looking better…image

…because of the low base. The basic trend remains weak.image

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Fed Beige Book: Modest Wage Growth Is Broadening A tightening labor market is putting broader pressure on wages as U.S. firms increasingly report trouble filling low-skilled jobs, according to a new Federal Reserve report.

(…) In a couple regions, “worker shortages and increased labor costs were restraining growth in some sectors, including manufacturing, transportation and construction,” the Fed said Wednesday in a roundup of anecdotal information on regional economic conditions, known as the beige book. (…)

More broadly, the Fed said economic activity expanded across all 12 districts, “with the pace of expansion equally split between modest and moderate.”

Inflation continued to firm, with prices reported as rising modestly. “Businesses mostly expected mild to moderate price growth to persist in the next several months,” the report said. (…)

“Couple regions”, “modest vs moderate”, “mild vs moderate”?

Other quotes from the Beige Book:

  • Consumer spending varied as reports of stronger light vehicle sales were accompanied by somewhat softer readings in non-auto retail spending.
  • Labor markets remained tight.
  • A larger number of firms mentioned higher turnover rates and more difficulty retaining workers.
Major Oil Producers Reach Agreement to Extend Output Cuts

Here’s why courtesy of The Daily Shot:

Ontario Finally Cracks Down On Toronto Housing Bubble: Launches 15% Foreign Buyer Tax
Bond Markets Send Jitters, But Is Anyone Listening? Bonds have rallied sharply in the past six weeks, but other assets appear unfazed. Political jitters and positioning explain some of the moves, but it also leaves the possibility that investors should be more worried about the future.

The bond-market reversal has been swift. Ten-year U.S. Treasury yields have fallen around 0.4 percentage point in just six weeks and stood at about 2.21% on Wednesday morning in New York; the 10-year German yield is back below 0.2% and Japanese 10-year bonds yield zero. The U.S. yield curve has flattened, with the gap between two-year and 10-year U.S. yields narrowing back to its pre-election level. That could signal concern about the economic outlook. Headline inflation may have peaked, and hard growth data have failed to match the lofty heights suggested by surveys of economic sentiment, particularly in the U.S.

Yet other asset classes haven’t succumbed to gloom. Corporate-bond spreads have remained tight even as Treasurys have rallied; U.S. stocks are moving broadly sideways, with European stocks winning favor. In emerging markets, risk appetite looks alive and well, with bonds and stocks taking the softer U.S. dollar and lower yields as encouragement to push higher, not a reason to sell off. Global growth still looks in decent shape. (…)

But that old movie of rising earnings amid a weakish economy is having another sequel, so far at least:

EARNINGS WATCH
  • 66 companies (18.0% of the S&P 500’s market cap) have reported. Earnings are beating by 6.4%, with 76% of companies surpassing bottom-line estimates. Revenues are surprising by 0.5%.
  • Expectations are for revenue, earnings, and EPS growth of 6.7%, 9.4%, and 11.4%, respectively. EPS is on pace for 15.1%, assuming a typical beat rate for the remainder of the season.
Ninja OMINOUS SIGNS:

(…) New retail brokerage accounts tallied 235,000 during the quarter, up 44%. (…)

  • Personal anecdote: a 53 year old door installer was watching his stock ptf. on his cell phone while doing work at my house this week…

Meanwhile:

The Partisan Conflict Index tracks the degree of political disagreement among U.S. politicians at the federal level by measuring the frequency of newspaper articles reporting disagreement in a given month.

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Research suggests that increased partisan conflict increases uncertainty among firms and households. Such uncertainty has been shown to slow economic activity by delaying business investment and consumer spending.

ALT-FACTS DEPT.:
South Korea Tells Trump It’s Actually Never Been a Part of China

South Korea’s government wants to know whether Chinese President Xi Jinping gave alternative facts on the nation’s history to Donald Trump.

In an interview with the Wall Street Journal last week, Trump said Xi told him during a recent summit that “Korea actually used to be a part of China.” The comments sparked outrage in Seoul and became an issue in South Korea’s presidential race, prompting the foreign ministry to seek to verify what Xi actually said.

“It’s a clear fact acknowledged by the international community that, for thousands of years in history, Korea has never been part of China,” foreign ministry spokesman Cho June-hyuck said at a briefing in Seoul on Thursday. (…)

THE DAILY EDGE (19 April 2017)

U.S. Housing Starts Fell 6.8% in March U.S. housing starts declined in March, but not enough to signal a reversal from the long-term trend of improvement in new home construction.

The decline comes after an unusually strong winter, buoyed by temperate weather in most parts of the country. Single-family housing starts in February hit their highest level since October 2007. (…)

Residential building permits, which can signal future home construction and tend to be a less volatile measure, rose 3.6% to an annual pace of 1.260 million last month and were up 17% compared with the same month last year. (…)

New home construction was up 8.1% in the first quarter from the same period in 2016. Permits in the first three months of 2017 jumped 10.4% from a year earlier.

From Haver Analytics:

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From CalculatedRisk:

U.S. Industrial Production Increases, but Factory Output Falls

Industrial production strengthened 0.5% during March (1.6% y/y) following a 0.1% February uptick, revised from no change. Manufacturing sector output declined 0.4% (+0.8% y/y) and reversed February’s 0.3% increase. Utilities output surged 8.6% (4.6% y/y). Mining output improved 0.1% (3.0% y/y) following strong gains during the prior two months.

Production of final products rose 0.8% (1.3% y/y) after two months of decline. (…)

Capacity utilization increased to 76.1%, its highest point since January 2016. Factory sector utilization, however, fell to 75.3%, its lowest point in three months. Factory sector capacity rose a steady 0.7% y/y.

Somewhat better overall but mainly because of utilities output up 4.6% YoY. Manufacturing output, despite all the positive PMIs, is up only 0.8% YoY in March and +1.2% annualized in Q1.

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Office Market Swings in Tenants’ Favor The seven-year expansion in the U.S. office market slowed in many big cities in the first quarter.

Overall, average asking office rents increased 1.8% between the first quarter of 2016 and 2017, the slowest annual rate of growth since 2011, according to data firm Reis Inc.

Meanwhile, tenants occupied 5 million square feet more at the end of the first quarter than at the beginning of the year, compared with an average of 9.4 million square feet per quarter in 2016. (…)

Lately, in some top markets, rents and occupancy rates have been pressured by new supply. More than 3 million square feet of new space is expected to be delivered in San Francisco this year, the most since 1987, according to Robert Sammons, Cushman & Wakefield’s head of research for that market. (…)

The Daily Shot has these depressing charts today:

The NY Fed’s model, which takes into account soft data, is much more sanguine about the first quarter’s performance. However, it’s showing a troubling trend for the second quarter.

An important reason for the sluggishness is the consumer (remember the “Consumer Goods Manufacturing” stats above), squeezed by rising inflation (THE U.S. CONSUMER: FRAGILE STRENGTH):

Meanwhile, somewhere in a tower:

IMF Boosts Global Growth Forecast to 3.5% The global economy is on course for its best performance in several years despite trade tensions and geopolitical uncertainties, the IMF said ahead of a meeting of world finance chiefs in Washington this week.

[From +3.4%, just to put “boosts” into the right context.]

(…) While the IMF kept its forecast pickup for U.S. growth at 2.3% for the year—up from 1.6% last year—it notched higher outlooks for all five of Europe’s largest economies. The U.K.’s bump-up was the biggest, a 0.5 percentage point increase to 2% for the year.

In Asia, another dose of government stimulus has pushed China’s growth forecast up a tenth of a percentage point to 6.6%, and the fund lifted Japan’s outlook by 0.4 percentage point to 1.2%.

Growth in cross-border trade of goods and services this year—while still well below pre-crisis levels—is projected to nearly double to 3.8%. Consumer price inflation across advanced economies is projected to pick up to 2% on average, more than twice the previous year, and is gathering pace in emerging markets, too. (…)

Even with the generally positive projections outlined by the IMF, however, trade frictions, political uncertainty and China’s debt problems still threaten to erode and potentially upend global growth. Those and other headwinds are expected to keep world growth capped at 3.8% for the foreseeable future, according to the IMF’s long-term outlook. (…)

  • The IMF has boosted its global GDP growth forecast. It’s hard not to be skeptical given the organization’s track record. (The Daily Shot)

Source: Capital Economics

Euro zone March inflation confirmed at 1.5%, core rate revised up

Eurostat confirmed inflation in March in the 19 countries sharing the euro slowed down to 1.5 per cent year-on-year from a four-year high of 2.0 per cent recorded in February.

But core inflation, which excludes volatile prices of energy and unprocessed food and which the European Central Bank monitors closely, was revised up to 0.8 per cent year-on-year in March from an earlier estimate of 0.7 per cent.

The core figure remained, however, lower than the 0.9 per cent recorded in February. (…)

Core prices have been very volatile in recent months in Europe: they declined at a 4.4% annualized rate between November and January but jumped at a 9.0% annualized rate in February-March. Check this out (MoM): Nov. to March: -0.1%, +0.4%, –1.4%, +0.3% +1.2%.

EARNINGS WATCH
  • 51 companies (15.1% of the S&P 500’s market cap) have reported. Earnings are beating by 6.3%, with 76% of companies surpassing bottom-line estimates. Revenues are surprising by 0.2%.
  • Surprised smile Expectations are for revenue, earnings, and EPS growth of 6.8%, 9.2%, and 11.2%, respectively. EPS is on pace for 14.9%, assuming a typical beat rate for the remainder of the season. (RBC)
TAX REFORM

  • From a FT interview with Steven Mnuchin on April 17:

FT — Does the renewed focus on healthcare raise the risk of August being an unrealistic deadline? Because certainly a lot of people in Congress [say that]. 

SM — What I said from day one was that August was an aggressive deadline. I think that we’re now shooting to have the plan in place, but I think at this point it’s unlikely that we’re going to have a plan passed before August. Just given where we are and the delays that went on other things.  It doesn’t mean that we’ve given up on it, but I would say that realistically it started as an aggressive timeline, and it’s fair to say that it’s probably delayed a bit because of the healthcare. 

FT — But do you still think it could be something which is in time for 2017 tax returns? 

SM — Absolutely. And I go back to saying it’s a big part of the president’s agenda to create economic growth.

More than four in 10 American households (44.3%) — or upwards of 76 million — didn’t pay any income tax to the federal government last year, according to data for 2016 from the Tax Policy Center. This year that number is expected to be roughly the same, at 43.9%.

Most of these people aren’t paying income taxes because they either don’t have any income that is taxable (many fall below the poverty line), or because they get enough tax breaks and don’t owe the government money. Common tax breaks include the child tax credit, the earned income tax credit (EITC), and the exclusion of some or all Social Security income, explains Roberton Williams of the Tax Policy Center.

Of course, this doesn’t mean that this group is completely tax exempt: “Roughly 2/3 of those paying no federal income tax work and pay federal payroll taxes that support Social Security and Medicare; about 60% of the rest are elderly and thus retired and not working; and most of the rest have very low incomes,” says Williams.

More than 31% of all federal individual income tax is paid by those who bring in more than $1 million a year, who have a net effective tax rate of 25.3%, the highest of any group. Another 14% of income tax is paid by those who make between $500,000 and $1 million, who have a 20% tax rate, the second highest.

Tough to produce a tax reform to mainly benefit the low-middle class with these numbers…