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

A TRAMP ABROAD?

David Rosenberg yesterday displayed several conditions needed for bubbly markets. Equity market values to GDP is a kind of price to sales ratio often mentioned by Warren Buffet.viewer.aspx (1)

P/S ratios are really only relevant if compared with profit margin trends. One dollar of sales generating 5% profits is worth more than one dollar generating 2%. The mother of all bubbles was in the late 1990s when P/S went trough the roof, and more, while profit margins were collapsing. The more recent inflation in the P/S ratio has been supported by sharply rising margins through 2011. However, the drop in oil prices cut margins by nearly 30% in 2014-15. The recent recovery brought margins back to the low end of their range since 2005, but still 15% below their 2012 peak.

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The S&P 500 Index lost 15% in 2015 from peak to trough but the Trump Rally erased all this as investors quickly discounted the impact this Administration said it would have on the economy, after tax margins and profits. The Rule of 20 barometer illustrates the Trump impact: valuations jumped even though the Fair Value Index (yellow line below) remains weak and trending lower as inflation has been accelerating faster than profits.

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Similar divergences occurred in 2007, in 1998-99, in 1987, in 1979-80, in 1970 and in 1962. Just so you know…

Two more scary charts from David:viewer.aspx (2)

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We all know something not funny will eventually happen. Eventually, like after an event, or a lack of expected events… For now, we’re into the first innings of the Q1 earnings season, but it’s getting gradually late for health care, tax reform, infrastructure. etc…We now have to worry about the unknown knowns Confused smile.

A TRAMP ABROAD

Given the now widely accepted overvaluation of U.S. equity markets, your friendly broker will surely tease you with this chart:

Looking at this chart, it is very tempting to shun the US and move money abroad.
Oups! Mind the European gap!

Mean reversion? Well, sir, it’s been 7 years now.
FYI, sir, Thomson Reuters sees the STOXX 600 EPS up 7.8% in Q1 vs +10.0% for the S&P 500. How much longer before the reversion please?
Also, sir, should we care about: Brexit? France? Italy? Greece? Merkel? Russia?
Emerging markets? Maybe…but, sir, look at this interesting correlation courtesy of Ed Yardeni:

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Sir, any solid forecast on where commodity prices are heading to? Can this help?

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Any sign of mean reversion up there?
Still comfortable with emerging markets now, sir?
Sarcastic smile Mean reversion? Careful, sometimes the expected reversion can be pretty mean…

Here’s what I wrote in Feb. 2015: Don’t Be A Jerk!

THE DAILY EDGE (14 April 2017)

U.S. Retail Sales Fall For Second Straight Month U.S. retail sales fell for the second straight month in March, marking the worst two-month stretch for the consumer-spending gauge in more than two years.

Sales at U.S. stores, restaurants and online retailers decreased 0.2% from the prior month to a seasonally adjusted $470.84 billion in March, the Commerce Department said Friday. February sales were revised down to a 0.3% decrease from an initial estimate of a 0.1% gain. (…)

Excluding both autos and gasoline, sales were up 0.1% last month. (…) Sales at restaurants and bars fell 0.6% in March.

U.S. Consumer Prices Fall 0.3% in March

The consumer-price index, which measures what Americans pay for everything from chewing gum to haircuts, declined a seasonally adjusted 0.3% in March from the prior month, the Labor Department said Friday. Excluding the often-volatile categories of food and energy, so-called core prices fell 0.1% from February. (…)

Consumer prices rose 2.4% in March from a year earlier, down from 2.7% annual growth in February. Core prices were up 2.0% on the year, the weakest annual reading since November 2015. (…)

Also on Friday, the Labor Department said average weekly earnings for private-sector workers, adjusted for inflation, rose 0.5% in March from the prior month. The increase reflected rising wages, falling prices and a steady average workweek. (…)

U.S. Producer Prices Down 0.1% in March A gauge of U.S. business prices fell in March, underscoring modest inflation pressures throughout the economy.

The producer-price index for final demand, measuring changes in the prices that U.S. companies receive for their goods and services, declined a seasonally adjusted 0.1% in March from the prior month, the Labor Department said Thursday. The first decrease since August in large part stemmed from a monthly step-back in energy prices. (…) From a year earlier, producer prices advanced 2.3%, the biggest year-over-year rise in five years.

(…) excluding often-volatile prices for food and energy, the producer-price index was up 1.6% from a year earlier. When excluding food, energy and a jumpy measure of wholesaler and retailer margins known as trade services, prices climbed 1.7% on the year. (…)

Energy prices, down 2.9% from the prior month, drove the change in headline PPI. From a year earlier, though, energy prices climbed 15.2% in March. (…)

“With major moves in prices at the producer level necessary to spark significant shifts in prices at the consumer level, we do not believe there is any cause for alarm whatsoever from recent PPI data,” said Joshua Shapiro, chief U.S. economist at MFR. (…)

Hmmm…look at this Haver Analytics table: the drop in March is from Energy and Services, the latter having risen at a 4.3% annualized rate in Jan-Feb. Core goods PPI is up 3.7% a.r. in last 3 months while Intermediate Processed Goods are up 2.4% a.r and +r.3% YoY. Goods inflation’s death announcement has been exaggerated…

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Forecasters Trim U.S. Growth Outlook as Hopes for Quick Stimulus Fade More forecasters are reconsidering their bullish outlooks for the U.S. economy as doubts grow over the extent to which President Donald Trump will be able to implement his agenda, the latest WSJ economic survey found.

(…) In December, the average forecast called for 2.3% growth in the first quarter. That had fallen to 1.9% in March and dipped again to 1.4% in this month’s survey. (…)

In January, 71% of economists in the Journal’s survey were including significant fiscal policy changes in their forecasts. In April, that number was down to 44%. A majority now say “significant” changes are unlikely, although many said a small fiscal boost remains possible. (…) In April, 46% of forecasters saw greater upside risks, compared with 62% last month. (…)

Saudi Arabia, Iraq, Kuwait Aim for $60 Oil Some of OPEC’s biggest oil producers, including Saudi Arabia, are now targeting $60 a barrel as the level they want to push crude prices to, OPEC officials said, signaling they will support additional production cuts next month.
China Warns of War Risk as Trump Rattles Saber at North Korea