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 (7 April 2017): China Turning Up? Hmmm…

American Jobs Are Headed to Mexico Once Again

(…) Illinois Tool Works Inc. will close an auto-parts plant in Mazon, Illinois, this month and head to Ciudad Juarez. Triumph Group Inc. is reducing the Spokane, Washington, workforce that makes fiber-composite parts for Boeing Co. aircraft and moving production to Zacatecas and Baja California. TE Connectivity Ltd. is shuttering a pressure-sensor plant in Pennsauken, New Jersey, in favor of a facility in Hermosillo. (…)

The pressure to reduce costs is that relentless.

“When you dissect the worst-case scenarios, it still makes sense to go forward with their business plans,” he said. “It’s a competitive world.”

  • Merrill Lynch: “You can’t build a wall to keep the robots out.”

 

Source: BofAML, @joshdigga (via The Daily Shot)

China’s economy downshifts in Q1 but slowdown unlikely to persist

Markit has a positive spin on China’s economy:

The upturn in the Chinese economy lost some momentum at the end of the first quarter, but forward-looking indicators suggest that the slowdown is likely to be temporary (…) [mainly because] new order growth for the first quarter rose to a four-year high, with manufacturing export sales returning to growth after more than two years of largely declining, supported by the depreciation in the yuan and strengthening demand in key markets.

High five I would not bet the farm on that:

  • The composite PMI is at the top of its range since 2011 and there are no meaningful stimulus at this time.

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  • It took a 13% devaluation of the renimbi to move new export orders back up. However, world economies, primarily the USA and Europe, are not strong enough to expect a surge in demand for Chinese goods.image
  • Exports orders have increased but the trend remains down as the two main ultimate consumers for Chinese goods are growing very, very slowly.

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tradingeconomics.com

  • Exports now only account for 20% of China’s GDP from 35% in 2005. Nevertheless, the transition from an export-led economy to on driven by domestic demand remains far from complete as consumer spending is a low 37% of GDP.

  • The onus thus remains on the government sector but there is a limit to overcapacity, ghost cities and bridges to nowhere:

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Three more charts to try to convince you…

   69e39ddc-eba4-4b8e-b9b6-22d6969f71a5  044a5813-6d0d-47c8-8971-1db61f7adaae

…to subscribe to this more likely trend:wsjs-daily-shot-fed-causes-the-biggest-market-reversal-in-over-a-year

Following up on yesterday’s post:

Not a Dot-Com Bubble, Not 2007, but a Nasty Mix of Both

(…) Old hands in the markets like to say that one year in seven investors worry about balance sheets, rather than profit. It has been eight years since that last applied, but as the Federal Reserve starts to discuss running down its own balance sheet, it’s a good time to think about corporate indebtedness again.

Companies have been loading up on debt based on two assumptions, shared by investors: that economic growth will be slow, and it will be steady. This is the perfect environment for leverage, as low growth keeps interest rates low relative to inflation, while the expectation of steady growth means few worry about a bad year interrupting repayments.

The danger is that either assumption proves wrong, and the focus shifts back from profit to balance sheet. Such a shift could be ugly, because there is so much more debt than usual being piled up by companies outside the finance sector: The ratio of debt to operating cash flow of the highest-quality U.S. companies is just slightly down from a record reached last year, Morgan Stanley calculates. Given leverage has in the past jumped in recessions, this is particularly unusual.

Rather than expanding overall profit, companies have been boosting the return to shareholders by replacing equity with debt—a zero-sum transfer which cannot be repeated indefinitely. (…)

Today’s market is different from both 2000 and 2007. Equities are expensive, but still look relatively cheaper compared with debt on widely used models which compare bond yields to the “earnings yield,” forecast earnings as a percentage of share price. CFOs like to issue whatever investors will pay the most for, and at the moment that is debt, so companies have been selling debt to buy back shares. (…)

1Q Borrowing Booms Across Leveraged Loan, HY, & HG Markets; M&A, Pro Rata Underwhelm

U.S. Leveraged loan issuance hit a record $202 billion, from $121 billion in 4Q16 and $91 billion in 1Q16. (…)

Quarterly Leveraged Loan Volume

THE DAILY EDGE (6 April 2017)

MORE ON AUTOS

Boating looks better:

Dealer optimism continues to grow, as 61% of respondents are somewhat to significantly more optimistic about the industry over the next six months (48% in 4Q16). 1Q17 new boat order response trends appear to be at their highest level in years (potentially mid-to-high single digits). This is supported by lower new boat inventories so it doesn’t seem like dealers are getting out over their skis. We picked up on dealer enthusiasm at the Miami Boat Show. Now, our survey shows that 47% of dealers reported higher orders during 1Q17 (compared to just 14% who reported lower orders). (RBC)

Fed Officials Expect to Whittle Down Portfolio Later This Year: Minutes

Federal Reserve officials agreed at their March policy meeting they would likely begin shrinking a $4.5 trillion portfolio of Treasury and mortgage securities later this year, though they remained undecided on how quickly to reduce the holdings and to what level, according to minutes released Wednesday. (…)

Reducing the balance sheet is a delicate task as it could cause long-term rates to rise and undermine the expansion. (…)

“Most participants … judged that a change in the [Fed’s] reinvestment policy would likely be appropriate later this year,” the minutes said. (…)

Among the details not worked out in March was whether the Fed would phase out its reinvestment policy slowly or cease it all at once, though the minutes suggested officials saw the first option as the primary way to shrink the portfolio. (…)

Some officials said they wanted to set a numerical interest-rate trigger, meaning they would start shrinking the portfolio after their benchmark rate rose to a specified level. (…) Others favored a qualitative approach based on broader assessments of the economy and financial conditions. (…)

Under the emerging scenario they have outlined in public comments and interviews, the central bank would raise short-term interest rates two more times this year and then pause rate increases late in the year while setting in motion an effort to reduce the balance sheet. A pause would allow the Fed to watch for ill-effects before resuming rate increases in 2018. (…)

Nerd smile 10Y treasuries are holding around 2.5% while 3-months bills have crept up from 0% to 0.8%, shrinking the gap from 200 bps last December to 157 yesterday. There is only 37 bps remaining to the 120 yield spread (A Powerful Combo: the Rule of 20 and the “120 Yield Spread”).

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In Europe:

(…) “I do not see cause to deviate from the indications we have been consistently providing in the introductory statement to our press conferences,” the ECB President said in a speech in Frankfurt on Thursday. “We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook — which remains conditional on a very substantial degree of monetary accommodation.” (…)

The ECB president countered such demands saying that the current policy path — which expects that interest rates will “remain at present or lower levels for an extended period of time, and well past the horizon” of asset purchases — is still appropriate to make sure that growth and inflation are solid enough to withstand the end of stimulus. (…)

Thinking smile Hmmm…If Germany is any guide:

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[Manufacturing] capacity remained under pressure with backlogs increasing at the strongest pace since the start of 2014, and suppliers’ delivery times lengthening to the greatest extent in nearly six years. (…) prices charged by German manufacturers increased at the second strongest rate in 68 months.

Pressure on German service sector firms’ costs continued to build in March. The rate of input price inflation quickened for the sixth time in seven months to the strongest in five years, widely linked by survey respondents to salaries and fuel. With input prices increasing at a faster rate, service providers hiked their own charges. The rate of charge inflation strengthened for the fourth time in five months to the sharpest since July 2008. Moreover, the rate of inflation was the fourth highest in the near-20 year survey history.

Amazon to Add 30,000 Part-Time U.S. Jobs Amazon.com said it will create 30,000 part-time positions in the U.S. over the next year, nearly doubling the total as its customer base and sprawling warehouse network expand.

Of the jobs, 25,000 will be warehouse positions and the remaining 5,000 home-based positions answering customer calls, emails and chats in what the online retail giant calls its virtual customer-service department. (…)

Amazon’s workforce has been growing rapidly in recent years as it builds dozens of warehouses to be closer to customers, which reduces shipping costs and allows the company to deliver more of its own packages. Last year the world-wide workforce grew 48%, to 341,400. (…)

Meanwhile:

Surprised smile This will not end well:

Toronto Home Prices Just Jumped Another 33%

(…) Prices increased by a third in every major housing category, including townhouses and condominiums, amid intense competition among buyers, according to figures from the Toronto Real Estate Board. More people opted to put their homes on the market in March as new listings rose 15 percent to 17,051, after a drop in February. Still, the gap between listings and sales underscores a tight market, with supply and demand out of sync, the trade group said in a statement. (…)

The average home price in the Toronto area rose to a record C$916,567 last month, from C$688,011 a year earlier. Unit sales jumped 18 percent to 12,077, the board said in the statement. (…)

While Usher is wary of possible new measures aimed at taming the market, Bank of Nova Scotia’s Canadian banking head James O’Sullivan said governments may have to intervene in if prices remain “overheated.”

Toronto’s market is of prime concern because of unsustainable and unhealthy price increases, he told reporters Tuesday after Scotiabank’s annual meeting. He’d like to see how home sales play out between April and June before pushing for further measures.

A foreign-buyers tax, such as the one British Columbia imposed last year to cool Vancouver’s housing market, and a speculation levy should be “on the table,” he said.