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 (12 January 2017)

Trump’s tax cuts may pressure U.S.’s top credit rating: Fitch

(…) “Even before elections the U.S had the highest level of government debt of any triple-A country. If we add on top of that Trump’s plans to cut taxes by $6.2 trillion over the next 10 years that could add around 33 percent to U.S. government debt,” he added. (…)

Other countries around the world could be in line for ratings cuts in 2017. Fitch’s negative outlooks on sovereign ratings currently outweigh positive outlooks by a factor of 6:1. (…)

German GDP Grows at Fastest Rate in Five Years Germany’s economy grew strongly, propelled by a buoyant labor market and a pickup in government spending, likely making it one of the fastest-growing of the G-7 industrialized nations.

Germany’s gross domestic product expanded by 1.9% in 2016 from 2015 in inflation-adjusted terms, the Destatis statistics body said Thursday.

A statistician with Destatis said Thursday that gross domestic product probably expanded by around 0.5% in the fourth quarter from the third quarter. An official forecast is due Feb. 14. (…)

The Bundesbank forecast in December that inflation, measured according to European Union harmonized standards, would rise to about 1.4% in 2017 from 0.3% in 2016. (…)

Government spending rose 4.2% in 2016 from 2015, according to Destatis. Household consumption increased 2.0%, while construction investment rose 3.1%.

A 2.5% rise in exports, meanwhile, was outstripped by a 3.4% increase in imports. Investment in plant and machinery was lackluster, up 1.7% from the 2015. (…)

China’s Car Sales Rose Fastest in Three Years in 2016 More than 24 million vehicles were sold in China in 2016, 15% more than the year before, but sales are expected to slow considerably this year.

A total of 24.38 million vehicles were sold in 2016, 15% more than the year before, the China Association of Automobile Manufacturers said Thursday. It was the strongest expansion since 2013 when sales grew 16%.

The car-manufacturers’ group predicted a considerably slower 5% rise in China’s car sales this year, however.

By contrast the U.S. sold a record 17.55 million light vehicles last year, an increase of less than 1% from the year earlier.

Domestic and foreign auto makers shipped a record 2.67 million passenger vehicles—sedans, crossovers and minivans—to dealers in December, 9% more than the same period in 2015, the association said.

Mr. Xiao said dealer inventories dropped quickly in the last two months of 2016 because of a rush by consumers to beat the expiration of the purchase tax discount.

Buyers of cars with engines up to 1.6 liters last year paid a 5% purchase tax. This year, buyers of such cars will instead pay a 7.5% rate. Although the duty is still lower than the normal 10%, the weaker stimulus measure will put pressure on manufacturers to ramp up their own discounts. (…)

Overall production capacity in China’s car market will rise by 10% this year, compared with demand growth of about 7%, says investment bank UBS. (…)

Sport-utility-vehicles remained the brightest spot in the Chinese market in 2016, with more than 9 million sold, up 45% from a year earlier. Ford Motor Co.’s overall China sales rose 14% to 1.27 million on strong demand for its expanded lineup of SUVs such as the Edge and the Explorer. (…)

China sold 336,000 electric cars last year, including both full and plug-in hybrid electric cars, up 62% from a year earlier.

Chinese Bank Lending Up Sharply in December Chinese banks greatly increased their lending in December, official data showed, possibly signaling a takeoff in corporate demand as Beijing continues to try to stabilize economic growth.

Chinese financial institutions issued 1.04 trillion yuan ($149.9 billion) in new yuan loans in December, up from 794.6 billion yuan in November, the People’s Bank of China reported Thursday.

The jump was a surprise, said Chen Ji, an economist at Bank of Communications, given that banks normally scale back on lending at the end of the year. They are constrained by annual loan quotas issued by the central bank. (…)

Medium- and long-term loans to nonfinancial corporations, a gauge of corporate-sector demand, came to 695.4 billion yuan, more than three times November’s 201.8 billion yuan, according Wall Street Journal calculations based on the central-bank data. (…)

Medium- and long-term household loans, predominantly mortgage loans, came to about 421.7 billion yuan, accounting for 41% of the new loans issued in December. That is down from around 72% in November. (…)

Total social financing, a measure of credit in the economy that includes both bank and nonbank financing, came to 1.63 trillion yuan in December, down from 1.74 trillion yuan in November.

China’s broadest measure of money supply, M2, ended December up 11.3% from a year earlier, slowing slightly from November’s 11.4% pace and short of the economists’ forecast, also 11.4%.

Another measure, M1, which covers liquid assets such as cash and demand deposits, ended December up 21.4% from a year earlier, down from November’s 22.7% pace.

US shale oil output remains resilient despite rig count fall Increasing productivity will be closely watched by Opec and other oil exporters

(…) Oil watchers obsess over the “rig count” statistics released each Friday by Baker Hughes, an oilfield services company. The tally is a good indication of oil companies’ intentions to expand supply. The 529 rigs now deployed are 213 more than the low in May and currently top the sum in the field a year ago, reflecting producers’ response to a modest rebound in crude prices to more than $50 a barrel.  But the rig count is only part of the picture. While the number of US oil rigs is two-thirds less than the peak in October 2014, the EIA estimates that US onshore crude oil production has shrunk only 6 per cent. (…)

From The Daily Shot:

Stocks, Dollar Fall on Lack of Clarity on Trump Stimulus Pharmaceutical shares and bond yields fell Thursday while the dollar continued to weaken as investors world-wide digested comments President-elect Donald Trump made at his news conference.

(…) Drugmakers also fell sharply in Australia and Japan, echoing a drop in their U.S. peers Wednesday when Mr. Trump said the drug industry was “getting away with murder” and called for “new bidding procedures.” (…)

Analysts said a lack of clarity around Mr. Trump’s stimulus plans and trade policies at the news conference disappointed some investors who had hoped for more details on his plans to cut taxes and reduce regulation. (…)

  

U.S. vs CHINA

Bad news for US grain traders and ethanol producers – China has slapped higher-than-expected anti-dumping tariffs on a US animal-feed ingredient made from a by-product of corn ethanol production.

Trade tensions between the US and China are expected to increase after Beijing announced duties on distillers dried grain with solubles (DDGS) ranging from 42.2 per cent to 53.7 per cent, sharply higher than the 33.8 per cent figure in the Commerce Ministry’s preliminary decision in September. Anti-subsidy tariffs will be 11.2 per cent to 12 per cent, the ministry said.

The Obama administration is expected to launch a formal complaint Thursday against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry, according to people familiar with the matter.

The complaint would represent an escalation of trade disputes between countries with the world’s two largest economies almost a week before Donald Trump assumes the U.S. presidency. Mr. Trump suggested again Wednesday in a news conference that trade relations with Beijing would be a top priority, saying the U.S. trade imbalance with China was too large. (…)

Confused smile Invest and Profit With the POTUS Indexes

(…) To help you make sense of this, we have created two indexes based on Donald Trump’s tweet and other pre-presidential utterances. (…)

THE DAILY EDGE (11 January 2017): Synchronized Acceleration?

U.S. JOLTS: U.S. Labor Market Activity Improves Slightly

The total job openings rate of 3.7% during November was improved from October’s 3.6%, revised from 3.7%. It remained down from the record high of 3.9% in July. The private-sector job openings rate held steady, however, at 3.9%. It was slightly higher versus last year’s 3.6% average. In the government sector, the job openings rate improved to 2.4%, the highest level since July. (…)

The actual number of job openings increased 1.3% (6.2% y/y) to 5.522 million, down from the April high of 5.845 million. Private-sector openings improved 0.4% (5.2% y/y) to 4.972 million, but that was down 6.4% from the April high. (…) Government-sector job openings jumped 16.1% y/y.

The total hires rate held m/m at 3.6%, but that remained down from February’s high of 3.8%. The private-sector hiring rate was stable m/m at 3.9% and remained below the high of 4.2% reached in February. (…)

The number of hires increased 1.1% (-0.6% y/y) to 5.219 million. Private-sector hiring improved 0.9% (-1.1% y/y) as jobs in leisure & hospitality jumped 7.1% (4.9% y/y). Construction employment gained 1.2% (-1.5% y/y), but factory sector hiring improved 0.4% (-1.1% y/y). The number of professional & business services jobs rebounded 1.6% (0.4% y/y), but jobs in retail trade experienced a 9.6% decrease (-12.8% y/y). Government- sector hiring recovered 4.2% (6.3% y/y) following a sharp October fall. (…)

  • One area of the job openings report that showed a positive trend was the number of voluntary quits. The trend is unmistakable, suggesting that Americans are increasingly more comfortable leaving their job. (The Daily Shot)

From a Bespoke survey:job-concern

Job openings are very strong, up 6.2% YoY but hires are down 0.6%. Either these are fake openings (!), or the shortage of (skilled) workers is getting very acute. From the NFIB:

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Job openings at America’s main employer group is at a cyclical high and employers are actively raising compensation…

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…and prices:

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Synchronized acceleration?

In its semiannual flagship economic report, the development institution said the global economy should expand by 2.7% this year, down a bit from the 2.8% predicted last June. But it is up from last year’s postcrisis low of 2.3%. The U.S. economy is picking up steam and stabilizing commodity prices are helping major emerging-market economies rebound, it said.

The bank estimates the U.S. president-elect’s proposals to slash corporate and personal income taxes could add up to 0.3 percentage point to American growth this year and up to 0.8 percentage point next year. That could raise the U.S. growth rate to 2.5% this year and 2.9% next, and add 0.3 percentage point to global growth next year, the bank said. (…)

And the institution warned Mr. Trump could offset potential gains from his promised tax cuts if he triggers a trade war with rivals such as China and Mexico. Officials at the bank and its sister institution, the International Monetary Fund, fear the Trump administration could stir global protectionism by delivering on threats to slap China and Mexico with tough new tariffs. They caution such trade restrictions could curb already weak global growth. That, some officials warn, raises odds for geopolitical conflict, pointing back to the protectionist origins of the Great Depression and World War II.

Political and policy uncertainty in the U.S., Europe, China and in other major economies around the world is at unprecedented levels, the bank said. That is a major factor behind corporations around the world focusing more on acquisitions than pouring capital into new projects. (…)

Growth in the volume of cross-border sales of goods averaged 0.9% through September 2016, well shy of its long-term trend of 6.5%. (…)

An unexpected surge in U.S. inflation could force the Fed to raise rates much faster than currently planned. Higher borrowing costs would then hit emerging-market firms and governments with large debt loads, particularly commodity exporters.

The Paris-based research body’s gauges of future activity showed firmer signs of a pickup in growth in the U.S. and other developed economies, as well as large developing economies such as China and Brazil. (…)

As recently as May, the leading indicators for the U.S. were pointing to a slowdown in growth. They then switched to signal a stabilization, but the latest figures based on information available in November mark the second straight month in which they point to a pickup. (…)

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The rate of global economic expansion ticked up to a 13-month high at the end of 2016, supported by strengthening inflows of new business and increased levels of employment. (…)

December saw the rate of expansion in worldwide manufacturing production accelerate to the fastest for two-and-a-half years. The trend in service sector business activity also remained solid, with the latest rate of growth matching November’s 12-month high.

National PMI data signalled positive performances for the majority of the nations covered by the global survey. (…)

December saw global all-industry new business rise at the quickest pace since July 2015. Faster increases were registered at manufacturers and service providers alike. New order inflows expanded in almost all of the nations covered, the exceptions being Brazil and India.

Improved inflows of new work led to a further increase in outstanding business, the fifth in as many months. (…)

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Oh! There was also this at the end of the release:

Price pressures intensified in December. Cost inflation rose to a 63-month record, leading in turn to the sharpest increase in output prices since April 2014. Rates of inflation in both price measures were stronger at manufacturers than service providers.

  • The latest PMI figures are consistent with the global GDP growth of 3.2%. (The Daily Shot)

Source: Deutsche Bank, @joshdigga

  • BTW, China’s PPI is now +5.5%.

 

  • According to Blomberg’s GDP trackers (similar to Atlanta Fed’s GDPNow for the US), the Eurozone economic growth is rapidly improving. The ECB remains behind the curve. (The Daily Shot)

 

Punch Richard Bernstein, Chief Executive and Chief Investment Officer, Richard Bernstein Advisors

There is an old saying that “It’s chess, not checkers,” which implies that things are more complicated than one might expect. However, right now we view the markets as being more checkers than chess. The stock and bond markets’ performances are currently based on a
rather simple construct: when in the past has Washington, DC ever proposed significant fiscal stimulus when the economy was NOT in recession? Answer: never. Adding significant fiscal stimulus to a healthy, albeit not robust, economy is virtually unprecedented. (…)

Observers always make the financial markets seem more complicated than they really are, and today is no different. The simple reality is significant fiscal stimulus is being discussed when the economy is already healthy. On paper, this would imply stronger stock markets, stronger commodity markets, and weaker bond markets.

All those performance characteristics are indeed happening. It’s not that complicated. It seems like checkers.

But make sure to check your chest! Related image

Pointing up 1930s-like Demographic Headwinds Are Restraining the U.S. Economy
Ninja America’s Fastest-Growing Loan Category Has Echoes of Subprime

(…) booming corner of the lending industry called Property Assessed Clean Energy, or PACE. Such loans, set up by local governments across the U.S., are designed to encourage homeowners to buy energy-efficient solar panels, window insulation and air-conditioning units.

About $3.4 billion has been lent so far for residential projects, and industry executives predict the total will double within the next year. That would likely rank PACE loans as the fastest-growing type of financing in the U.S.

As the loans spread, so do problems that echo the subprime mortgage crisis. Plumbers and repairmen essentially function as loan brokers but have scant training and oversight. They often pitch PACE loans to help land contracting jobs and earn referral fees from lenders, according to loan documents and more than two dozen borrowers, industry executives and employees.

Creditworthiness matters little to lenders, because loans are based on the value of a homeowner’s property. PACE loans typically require no down payment, and the debt is added to property-tax bills as an assessment. (…)

  

Investors Bolt Mexico as Peso Enters Free Fall

The peso tumbled 2% on Tuesday to another all-time low against the dollar, frustrating Mexican central-bank efforts to slow the currency’s decline. Bank officials said Tuesday that they spent $2 billion last week to prop up the peso, which has weakened nearly 16% against the dollar since the U.S. election. (…)

Mexico’s benchmark stock index has tumbled 5.3% in the two months since the U.S. election. Yields on 10-year Mexican government debt, which move in the opposite direction of price, have jumped to 7.76% from about 6% before Mr. Trump’s victory. (…)

About 80% of Mexican exports go the U.S. (…)

Almost 30% of the country’s gross domestic product comes from trade with the U.S., Natixis estimates.

Fitch Ratings in early December cut its rating outlook on Mexico’s long-term debt to negative from stable, a sign that currency depreciation resulting from Mr. Trump’s victory had increased uncertainty to the point that it could hurt Mexico’s public finances. (…)

A weak currency often comes with benefits by making a country’s exports more competitive. But a falling peso may not boost the Mexican economy as much as a weakened currency did for other developing countries. If Mr. Trump carries out his threat to put new tariffs on Mexican goods if the country doesn’t revise trade terms, new duties on Mexican products could partially offset the competitive advantage from a weaker peso, economists say. (…)

Luis de la Calle, a former top Mexican trade official, said Mr. Trump’s statements and policies that have caused the peso to decline could backfire. They would dent Mexicans’ ability to buy U.S. goods, which could expand the U.S. trade deficit. A weaker peso is also likely to spur more illegal immigration if Mexico’s economy falters. (…)

Great Debate Erupts Over Great-Rotation Thesis for Stocks, Bonds