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 (28 October 2016)

Exports boost U.S. growth in third-quarter; consumer spending slows
U.S. Durable Goods Orders Declined in September Demand for long-lasting manufactured goods edged slightly lower in September, but the U.S. manufacturing sector appears to have found firmer ground as it closed out the third quarter.

Orders for durable goods—products designed to last longer than three years, such as trucks, computers and planes—fell 0.1% to $227.3 billion from a month earlier, the Commerce Department said Thursday. But that drop was from upwardly revised figures for August, and when excluding the volatile categories of defense and transportation products, new orders actually rose. (…)

Orders for nondefense capital goods excluding aircraft, a rough proxy for business investment, fell 1.2% in September, after posting three straight months of gains. It was the steepest drop since February. Despite the recent upticks, such spending remains 3.9% lower so far this year than in the same period a year ago. (…)

Haver Analytics’ table shows the uneven and weakish trends:

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Shipments down, orders down (The Daily Shot):

But Markit’s flash October PMI released last Monday offers hope:

October data signalled that U.S. manufacturers started the fourth quarter in a strong fashion, with output and new order volumes rising at markedly faster rates than in September. A rebound in business conditions contributed to greater input buying among manufacturing firms and renewed pressures on capacity. At the same time, manufacturers sought to boost their stocks of inputs, with pre-production inventories rising for the first time since November 2015.

But there’s this, again:

U.S. Pending Home Sales Rebounded in September A gauge of coming home sales moved higher in September, a sign that last month’s rebound in homebuying activity might be sustained in the coming months.

The National Association of Realtors said Thursday that its pending home sales index, which tracks contract signings for previously owned homes, rose 1.5% from August to a seasonally adjusted 110.0. (…)

But pending sales, which close 1-2 months after signing, are flat over the last 3 months and point to lower existing home sales in October. (Charts from Haver Analytics)

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After Hitting a 51-Year Low, the Homeownership Rate’s on the Rise The homeownership rate edges back up from a five-decade low amid tentative signs that renter families are starting to gain the confidence to buy homes.

It hit 63.5% in the third quarter, the Census Bureau said Thursday. That is a significant jump from the prior quarter, when it hit 62.9%, the lowest point in 51 years.

There were other reasons for optimism in Thursday’s release. About 1.1 million households formed in the third quarter, a significant jump from about 944,000 in the prior quarter.

More crucially, about half of the new households formed were owners, rather than renters. About 560,000 new owner households were formed this quarter, up from a roughly 22,000 decline in the second quarter. (…)

High five The homeownership rate is still lower than it was a year ago, when it sat at 63.7% compared with 63.5% today. Seasonally adjusted, the change in the homeownership rate to 63.4% from 63.1% in the prior quarter isn’t considered statistically significant.

The share of first-time buyers rose to 34% in September, the highest since July 2012, according to the National Association of Realtors. A recently released Zillow survey conducted this spring found that half of home buyers who bought in the prior year were under 36 years old. (…)

EARNINGS WATCH
  • 269 companies (63.8% of the S&P 500’s market cap) have reported. Earnings are beating by 6.2% while revenues are surprising by 0.7%.
  • Expectations are for revenue, earnings, and EPS of 2.7%, 0.9%, and 3.1%, respectively. EPS is on pace for +5.4%, assuming the current beat rate for the remainder of the season. This would be +9.1% excluding Energy.
Pointing upThese Are the Charts That Scare Wall Street

Worth your time.

Inflation Fear Fuels Bond Rout

(…) In the year to September, consumer inflation was 1.5% in the U.S. and 0.4% in the eurozone, the fastest annual price increases since 2014. Last month, Chinese factory prices rose for the first time in 4½ years.

The price rises are being driven by factors including U.S. wage increases and an upswing in the cost of commodities, from oil to coal. The Bloomberg commodity index fell more than 58% from its April 2011 peak to January this year but has since rebounded by 9%. (…)

THE DAILY EDGE (27 October 2016): Hiking Season? Q3 EPS Looking Up.

HIKING SEASON?

Markit’s flash PMIs are signalling an acceleration in economic growth in the U.S. and abroad. In America, both the manufacturing and the services PMIs surged in October with the Composite suggesting 2% growth in Q4. Next week will be big: Personal Income and Outlays on Monday, car sales (see below) and ISM PMIs on Tuesday and Employment data on Friday. Gift with a bow A good Xmas would clear inventories and set the stage for a more buoyant 2017.

The Eurozone and Japan flash PMIs also strengthen in October. On The Eurozone, Markit commented:

(…) backlogs of work (orders received but not yet completed or started) accumulated at the fastest rate for over five years, meaning business activity growth and hiring look set to accelerate further as we head towards the end of the year.

Other encouraging forward-looking signals were higher inflows of new orders, increased job creation and busier supply chains, as well as signs of some companies moving away from cost-cutting inventory reduction policies towards restocking. The amount of inputs bought by manufacturers for use in production showed the largest rise for over two-and-a-half years. (…)

The October survey saw an especially encouraging recovery in German growth, with the PMI pointing to a 0.5% pace of expansion and the rate of employment growth climbing to a five-year peak.

Modest growth of 0.2-0.3% is being signalled for France, but there are various indicators which suggest that France will enjoy stronger growth in coming months, including a marked build-up of uncompleted work and a resurgent export growth, both of which rose at the fastest rates for over five years.

In the meantime:

The probability that the Fed will move by year-end is now 74%. (The Daily Shot)

Source: CME

And global bond yields are rising.

U.S. New Home Sales Up in September After August Dip Sales of newly built homes rose in September after an August tumble, a sign modest momentum continues in the housing market.

Purchases of new single-family homes increased 3.1% in September from the prior monthto a seasonally adjusted annual rate of 593,000, the Commerce Department said Wednesday.

Economists surveyed by The Wall Street Journal had expected a sales pace of 600,000 last month.

Sales for August were revised down sharply, to a 575,000 pace from an earlier estimate of 609,000. New data shows sales declined 8.6% in August from July. (…)

Through the first nine months of the year, sales are up 13% compared with the same period in 2015. (…)

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This in spite of that:

The effective interest rate on a 15-year mortgage was steady at 3.08%, up slightly from the July low of 2.97%. Rates were down from the 3.50% highs of November and December. The effective rate on a 30-year fixed-rate loan eased to 3.81%, remaining down from 4.28% near year-end. The rate on a Jumbo 30-year loan held steady at 3.81%. For adjustable 5-year mortgages, the effective interest rate fell to 3.05%, still higher than 2.87% early in July.

Auto CAR SALES PREVIEW

I came across a recent survey of car dealers. The October forecast is for 17.9 million US Light Vehicle SAAR, modestly above September’s 17.8mm SAAR roughly in line with the trailing 3 month rate of 17.5mm. Absolute sales of ~1.37mm in October would be down -6% YoY. On a selling day adjusted basis (26 days vs. 28 LY), sales would be up 1% YoY.

Inventories seem a little on the high side with 58% of respondents saying inventory levels are “too high” or “slightly elevated”, versus 33% last month and last year.

  • Auto Lenders Have New Reason to Worry Several large companies have warned that prices of used vehicles are likely to weaken, potentially leading to higher losses on loans on which cars are the collateral

(…) Auto-loan balances topped $1 trillion for the first time ever this year. Actual default rates remain low, but losses are starting to tick up, leading some big lenders to scale back. That has the credit underpinnings of the auto boom looking shakier. (…)

Indeed, prices of used cars that are up to eight years old are down 3.6% in 2016 through September versus the same period a year earlier, according to the NADA Used Car Guide, a division of J.D. Power.

“It is the first time since 2008 that prices have fallen by any material amount,” said Larry Dixon, director of market intelligence at the NADA Used Car Guide. The firm is projecting prices will finish the year down by an average of 4% compared with 2015. (…)

The number of cars coming off of leases this year is expected to hit 3.1 million, up 33% from a year earlier, Mr. Dixon said. (…)

New subprime auto loans in 2015 totaled $109.5 billion, up some 11% from the prior year and up roughly 124% from 2010, according to Equifax.

Annualized net losses for subprime securitized loans hit 8.9% in August, up from 7% a year earlier and 5.9% the year before that, according to Fitch.

Lenders have been loosening standards to keep loan volume growing. That raises the prospect of more defaults. (…)

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Slowdown in State, Local Investment Dents U.S. Economy A sharp pullback in spending by cities and states on infrastructure—from highways to sewage systems to police stations—is hurting economic growth.

(…) State and local governments spent an annualized $248.47 billion on construction in August—the least since March 2014 and down nearly 11% from its recent peak in mid-2015. (…)

In late 2015, inflation-adjusted tax revenue was lower in 21 states compared with the peak before or during the recession, according to Pew Charitable Trusts. (…)

Fingers crossed Construction of public buildings—courthouses, fire stations and other government facilities—should begin to rise in 2017, Dodge Data & Analytics predicted in a recent annual outlook. “This is expected to be the bottom of the cycle for public buildings, as government fiscal conditions have slowly mended,” the report said. (…)

Surprise U.S. Inventory Decline Pushes Oil Prices Higher Oil prices edged up Thursday, supported by the surprise decline in U.S. inventories, suggesting that the global glut in supply is slowly being worked through.

EARNINGS WATCH
  • 214 companies (51.3% of the S&P 500’s market cap) have reported. Earnings are beating by 6.4% while revenues are surprising by 1.0%.
  • Expectations are for revenue, earnings, and EPS of 2.6%, 0.7%, and 2.7%, respectively. EPS is on pace for +5.8%, assuming the current beat rate for the remainder of the season. This would be +9.4% excluding Energy.

Following the tough Tuesday, yesterday was a better day for earnings. The beat rate was 76% overall and 83% ex-Financials. The EPS of 214 companies that have reported are up 2.1% YoY on revenue growth of 2.3%.

It looks like this will end up as a positive quarter. Thomson Reuters calculates a blended growth rate of +2.2% from –0.5% on Oct. 1. Expectations for Q4 are slipping a little, up +7.8% vs +8.3% at the beginning of the month.

Deutsche Bank Swings to Profit Deutsche Bank posted an unexpected profit and set aside more cash to cover litigation costs amid talks aimed at settling mortgage-securities probes with U.S. authorities.
Election Update: Where Are The Undecided Voters?

(…) On the whole, the data released over the past several days suggests that the race may have tightened just the slightest bit. But this seems to be the result of Trump having seen his image rebound some among Republican voters, rather than having taken any votes away from Clinton. In fact, Clinton’s standing in our national polling average — 46 percent — is the highest it’s been all year, including when she was in the midst of her convention bounce. But Trump’s at 40 percent, about 1 percentage point better than a week ago, and — believe it or not — also not far from his high on the year (Trump peaked at 41 percent in late September).

Both candidates, in other words, are slowly gaining votes from undecided voters and from third-party candidates. Emphasis on “slowly,” because there are still a lot of these voters up for grabs. About 15 percent of the electorate isn’t yet committed to Clinton or Trump, as compared to just 5 percent who weren’t committed to President Obama or Mitt Romney at this point in 2012. That’s one of the reasons why our models still give Trump an outside chance at victory. (…)