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 (30 March 2017): Hard vs Soft

HARD DATA WATCH

The National Association of Realtors (NAR) reported that pending home sales increased 5.5% in February to an index level of 112.3, the highest point since April 2016. The NAR suggested that warm temperatures helped lift sales. The gain followed declines in two of the prior three months. The pending sales figures showed strength across regions.

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  • Smith Travel Research reports that hotel revenue per available room is up 3.2% quarter-to-date (to 03/25), in line with from the full 2016 average with occupancy up 0.6% vs +0.1% in 2016.
The Gap Between Sentiment and Certainty Is ‘Stunning’

(…) “The divergence is stunning,” wrote Morgan Stanley economist Ellen Zentner. “Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected.” (…)The Federal Reserve Bank of New York’s model, which gives more weight to the soft data, is currently projecting a 3% gross domestic product “print” in the first quarter. By contrast, the Federal Reserve Bank of Atlanta’s model, which incorporates soft data but to a lesser degree, is projecting only a 1% print. Morgan Stanley, too, expects 1% GDP when the Commerce Department releases its initial first-quarter reading on April 28. (…)

RETAILING IS HARD
THIS IS REALLY SOFT

  • David Rosenberg yesterday:

Not only is the GOP divided as ever on most policies, but it has been so long that they had an opportunity to legislate, that they somehow have forgotten how to do this – in fact, only 58 of the current 237 Republicans sitting in the House were around the last time they passed a substantial piece of legislation back in 2005!

MORE HARD VS SOFT…
  • U.S. Softens Call for Shift on Nafta The Trump administration is signaling to Congress it will seek mostly modest changes to Nafta in upcoming negotiations with Mexico and Canada despite President Trump having called the trade deal a “disaster” during the campaign.
  • Whatever Happened to Free Trade? Companies and countries are scrambling to adjust to a strange new world created by a decade of economic retrenchment and an upswing in populism.

The decades-long rising wave of globalization that remade the world economy is receding. The recent rise of nationalist politicians and protectionist trade rhetoric is the culmination of a broader push against global business since the financial crisis, the WSJ’s Bob Davis and Jon Hilsenrath write, that’s left global trade barely growing when compared with overall economic output, international capital flows pulling back and managers of multinational companies starting to dismantle the sprawling supply chains that they’ve built up over decades.

The overall picture, from Brexit to Beijing, shows a trading world undergoing fundamental, long-term change—Maersk Chief Financial Officer Jakob Stausholm calls it “a deflationary mindset.” That’s left merchandise exports contracting and global supply chains no longer growing. China is helping drive the trend with its push to produce more goods for domestic consumption, and big industrial players are following. General Electric Corp. is among many looking at a “localization” strategy, which would result in more factories that serve local demand rather than the export markets that have fueled global shipping.

Jumping on that Vespa motor scooter to pick up a bottle of Perrier could get much more expensive. The Trump administration is poised to demonstrate its promised tough approach to trade rules in a long-simmering dispute with the European Union over beef, the WSJ’s William Mauldin reports, and has a menu of goods lined up for punitive tariffs of 100% that could roll out in the White House’s first formal push in a trade dispute.

The beef case, which has been simmering in the World Trade Organization for years, may provide a window into how aggressive the administration will be with trading partners. The value of imports involved is relatively small, amounting to only around $100 million, but the potential impact on light motorcycles and high-end groceries is also already prompting a backlash. U.S. importers say tariffs on products from paprika to foie gras and fine cheeses would be tough for their customers to swallow.

  • Soft yuan:
HARD LANDING AHEAD
  • Margin Debt Hit All-Time High in February Margin debt climbed to a record high in February, a fresh sign of bullishness for flummoxed investors trying to navigate the political and economic crosscurrents driving markets.
SOFT ON CANADA
  • BOC Stephen Poloz two days ago:

If we were to raise interest rates back to normal prematurely, like today, the economy would almost certainly have a recession.

THE DAILY EDGE (29 March 2017): Surveys!

U.S. Home Prices Rise at Fastest Pace in 31 Months U.S. home prices rose in January at their fastest rate since mid-2014, a trend that bodes well for sellers but could start to eat into demand as buyers get priced out of the market.

The S&P CoreLogic Case-Shiller Indices, which cover the entire nation, rose 5.9% in the 12 months ended in January, the strongest increase in 31 months, up from a 5.7% year-over-year increase in December.

The 10-city index gained 5.1% over the year, up from 4.8% the prior month, and the 20-city index gained 5.7%, up from a 5.5% increase. (…)

After seasonal adjustment, the national index rose 0.6% month-over-month, while both the 10-city and 20-city indexes rose 0.9%. (…)

Wages are rising at about 2.5%, much slower than home prices. (…)

Seattle led the way in January with a 11.3% home-price increase, while Portland reported a 9.7% year-over-year gain and Denver had a 9.2% annual increase.

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Surprised smile U.S. Consumer Confidence Improves Significantly

The Conference Board Consumer Confidence Index for March strengthened 8.2% (30.7% y/y) to 125.6, the highest level since December 2000.

The rise in confidence reflected a 9.5% gain (36.1% y/y) in the expectations reading to 113.8 from 103.9. The present situation reading increased 6.5% (24.5% y/y) to 143.1 from 134.4.

The percentage of respondents indicating that business conditions are “good” strengthened to 30.7%, while those saying business conditions are “bad” fell to 12.9%. Respondents stating that jobs are “plentiful” surged to 31.7%, the highest percentage since August 2001, while those claiming jobs are “hard to get” eased to 19.5%. This change in views on labor market conditions led to a strengthened labor market differential (a reliable indicator of the unemployment rate) of 12.2 percentage points, which also was the highest level since 2001.

The percentage expecting business conditions to improve over the next six months surged to a roughly fourteen year high of 27.1%. For labor markets, the percentage expecting more jobs in the months ahead rose to 24.8% and surpassed its 1983 peak. The percentage of consumers expecting their incomes strengthened to 21.5% and equaled the recent high in December. (…)

The rise in the headline confidence index was paced by greatly improved optimism amongst individuals over age 55. Confidence amongst individuals aged 35-to-54 also strengthened. Respondents under age 35 registered a rise in confidence that remained slightly below the recent high.

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Bespoke provides more granularity:Sample

HARD OR SOFT?

Lance Roberts illustrates the gap that has built up between consumer confidence and hard data on the economy. Such dichotomy only occurred in 1999-2000 and in 2007. Disappointed smile

There is little doubt that since the election both investor and consumer confidence has soared. In fact, confidence (soft data) has become extremely detached from the actual activity (hard data) within the economy. Historically, this deviation has not lasted long, and it has always been ‘hope’ giving up ground to the underlying ‘reality.’ But nonetheless, it is ‘hope,’ which is more commonly known as ‘animal spirits,’ which drives markets higher in late stage market advances.

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So far, higher confidence has not triggered higher spending:

  • Consumer sentiment on job availability now points to an unemployment rate that is below 4%. Amazing.

Source: @jbjakobsen via The Daily Shot

This National Restaurant Association chart displays the same dichotomy between current hard data and operators expectations:

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The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 98.6 in January – down 0.9 percent from a level of 99.5 in December. January represented the fourth consecutive month in which the Current Situation Index stood below 100, as same-store sales and customer traffic levels remained soft.

Eating out is probably the most discretionary spending decision for the average American. This next chart shows the recent sharp slowdown which is even worse when considering the inflation component. Real sales growth is now barely positive …

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…while customer traffic is getting weaker and weaker; in fact, traffic is almost back to the 2008 lows! Talk about hard data!

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Bloomberg Briefs did the deconstructing for us:

The accompanying chart strips out the survey data subcomponent of the Bloomberg Economic Surprise Index, creating a hard economic data surprise index, which remains close to neutral. At the same time, the survey based data index, which has surged since November, is showing signs of peaking.

Meanwhile, here’s a hard soft survey:

Trump Starts Presidency With Lowest Approval Rating on Record

Republicans’ Tough Call on Taxes: Quick, Short Yardage or Hail Mary? After their loss on the health law, GOP leaders are weighing two options for accelerating changes to the tax code. Also on the table: working with Democrats.

(…) They have three main options: A fast-track plan that would yield quick action this year but limit how aggressively they can cut corporate and individual rates; a slower path to a more ambitious rewrite of the tax system that risks another nasty intraparty fight; and working with Democrats.

Party leadership is looking carefully at the first approach but hasn’t made a decision yet, and each choice has clear benefits and drawbacks. (…)

Reconciliation bills can only be triggered if the House and Senate agree on a budget blueprint that sets out the parameters for their decisions. Such a blueprint was written in January for 2017, but it was written specifically with the health legislation in mind and it leaves Republicans with at least $450 billion less than they had planned. Using it as the scaffolding for a tax overhaul would thus leave Republicans less room to lower tax rates as much as they want. (…)

From The Daily Shot:

(…) And now, given that the repeal of the Affordable Care Act is off the table — and with it the $1 trillion in tax cuts over the next 10 years that the administration needed to help make its tax plan deficit neutral — there is a good chance that any tax package would include a corporate rate that is even further from Mr. Trump’s initial pledge, perhaps as high as 28 percent.

Don’t take my word for it. That’s the figure that Grover Norquist, the anti-tax activist who is the president of Americans for Tax Reform, and who has long sought the lowest rate possible, has calculated would be needed for the plan to be deficit neutral after 10 years. That way it could come under the heading of budget reconciliation, which would allow the Senate to pass legislation with a simple majority.

If the 28 percent corporate tax rate sounds familiar, that’s because it is: It was the same rate that President Barack Obama proposed in 2012 and again in 2013, when he also proposed to lower the tax rate for United States manufacturers to 25 percent. He made the proposal again in 2014, 2015 and 2016. Each time, his tax plan was summarily dismissed by Republicans who called the rate too high and uncompetitive. (…)

BTW, the effective tax rate for the S&P 500—based on the last three years of data to smooth out some noise in profitability—was approximately 27.7%, whereas the effective tax rate for small caps was almost 32%. (TAXATION MATTERS)

Another survey!

Americans Haven’t Been This Optimistic About Stocks for Nearly Two Decades

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