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 (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…

THE DAILY EDGE (18 April 2017)

Empire State Business Conditions Index Weakens; Prices Improve

The Empire State Manufacturing Index of General Business Conditions for April fell to 5.2 from 16.4 in March. It was the weakest reading since November.

A decline in the new orders component led the weakness in last month’s component series. It was the softest reading in three months. The unfilled orders and employee workweek readings also declined. Working the other way were the shipments, delivery times and inventory series. The employment index jumped to its highest level since March 2015. During the last ten years, there has been a 69% correlation between the employment index and the m/m change in factory sector payrolls.

The prices paid series also strengthened modestly m/m and remained up sharply versus its low in October 2015. An improved 36.5% of respondents reported paying higher prices, while an increased 3.6% reported them lower. The prices received index similarly rose to 12.4 and regained just part of its March decline.

US Restaurant Industry Suffers Worst Collapse Since 2009

(…) restaurant struggles continued in March as sales and traffic again declined year-over-year: same-store sales were down 1.1% while traffic dropped 3.4%. March results were disappointing for an industry desperately trying to reverse performance trends; with sales now negative in 11 out of the last 12 months, the longest stretch since the financial crisis. There was a modest improvement sequentially, however, and while still negative, sales improved by 2.5% points compared to February as traffic rose marginally by 1.6%. (…)

Boeing to Dismiss Hundreds of Engineers Amid Sales Slowdown

(…) The Chicago-based company, which emerged as the face of U.S. manufacturing under President Donald Trump, has been winnowing employment for more than a year as a record jetliner sales spree fades. Boeing trimmed the Washington workforce by 9 percent to 70,640 employees over the past year. The company’s total headcount has shrunk 7.6 percent to 146,962 since March 2016.

Total revenue for 2016 dipped 1.6 percent to $94.6 billion as Boeing slowed output of the 747 jumbo jetliner amid declining sales and said it would reduce the production rate of the 777 twin-aisle plane for a second time. As demand for new planes has waned amid record order backlogs and a surplus older models, Boeing has trimmed its overhead and worked to ratchet down supplier costs. (…)

China Market Opening ‘Slow and Faltering,’ U.S. Business Group Says China’s persisting restrictions on foreign investment while its companies freely do business abroad are fueling further frustration among U.S. firms, according to a report by an American business group.

An annual policy paper by the American Chamber of Commerce in China criticized the “obvious imbalance” between closed Chinese markets and more open ones in the U.S. and said that the situation isn’t likely to change soon.

The pace of market-opening restructuring has been “slow and faltering,” the 850-member business group said in the report released Tuesday. It cited a majority of respondents in a recent membership survey as reporting “little or no confidence” that Beijing would open up its markets more in the next three years. (…)

Surprised smile The Citi US Economic Surprise Index has been declining rapidly, with several reports missing economists’ forecasts lately. (The Daily Shot)

Investors Follow the Herd as 10 Big Stocks Power Market’s Gains Ten big stocks are exerting an unusually large influence on the S&P 500 in 2017, the latest sign that the herd instinct is alive and well on Wall Street.

Those 10 large stocks have powered nearly 53% of the S&P 500’s 4.7% advance this year, according to Fundstrat Global Advisors’ data through the middle of last week. During an average year, the 10 stocks with the greatest impact typically account for only 45% of the market’s price moves, according to analysis of data from AQR Capital Management.

Technology-oriented companies dominate the list: Apple AAPL 0.55% Inc., the world’s largest company by market capitalization, is up more than 22% this year through Monday. Social-media company Facebook Inc. FB 1.46% has risen nearly 23% while e-commerce powerhouse Amazon.com Inc. AMZN 1.96% has climbed 20%.

Combined, shares of these three companies account for almost one-third of the S&P 500’s 2017 advance through this past Wednesday. (…)

Some investors say that the popularity of low-cost index-tracking funds that assign greater heft to the market’s largest companies helped boost the most widely held stocks. Some $2.1 trillion in assets were directly linked to the S&P 500 at the end of 2015, according to the most recent data available from S&P Dow Jones Indices. (…)

FYI:

Source: @databreak