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 October 2016):

SMALL BUSINESS OPTIMISM DIPS LOWER

The Index of Small Business Optimism fell 0.3 points to 94.1, another monthly decline, and four points below the 40 year average of 98. Four of the 10 Index components posted a gain, six declined. There was a huge improvement in the outlook for business conditions, but rising only to a net 0 percent expecting improvement. Offsetting that gain were large losses in job openings, inventory satisfaction and plans for inventory investment.

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  • The margin squeeze:
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  • Lower profits, lower employment:
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LABOR MARKET CONDITIONS INDEX WEAKENS

The latest LMCI update came in at -2.2. The previous month was revised downward to -1.3 (from -0.7).

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THIS, JUST BEFORE CHRISTMAS:
Saudis Leave Istanbul With Russia Pledge, OPEC Disputes to Solve
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Low crude prices have led U.S. oil producers to idle more than a thousand rigs over the past two years, resulting in a big decline in so-called associated gas, a byproduct of oil drilling. This gas typically represents about 40% of total supply, but its production isn’t particularly responsive to gas prices.

Since September 2015, associated-gas production outside the Northeast, the country’s fastest-growing gas-producing region, has fallen by nearly 9%, or about 2.5 billion cubic feet a day, according to energy data firm Platts Analytics Bentek. (…)

The decline in production along with an unusually hot summer has helped to shrink a record gas glut that had been pressuring prices. U.S. gas production in September was about 2.4% lower than a year earlier and down 3.5% from its peak in February, according to Platts. (…)

Eurozone Industrial Production Picks Up in August

(…) industrial output in the eurozone was 1.6% higher than in July, and 1.8% up on August 2015. That was a slightly stronger performance than had been expected, with economists surveyed by The Wall Street Journal last week having estimated that output rose 1.5%. Eurostat also cut its estimate for the decline in output during July to 0.7% from 1.1%.

The pickup was led by Germany, the eurozone’s largest exporter to the U.K. But there were also significant increases in France, Italy, Spain and the Netherlands. (…)

Lumpy IP: down, up, down, up…Last 3 months: +7.0% annualized. Last 4 months: +0.9%; last 6 months: +1.6%.

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Pointing up Economic data from the euro area remains broadly better than expected as the Citi economic surprise index recovers. (The Daily Shot)

House prices up by 2.9% in the euro area  Up by 4.0% in the EU

House prices, as measured by the House Price Index, rose by 2.9% in the euro area and by 4.0% in the EU in the second quarter of 2016 compared with the same quarter of the previous year.

Compared with the first quarter of 2016, house prices rose by 1.4% in the euro area and by 1.6% in the EU in the second quarter of 2016.

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Pound at Weakest Level in History Against Currency Basket The British pound is now at its weakest ever level against a basket of global currencies, data from the Bank of England shows.

The chart below shows the renminbi 1-month forward, which indicates expectations of a further decline. (The Daily Shot)

More pounding (from The Daily Shot):

  • The South African rand quickly lost over 4% while CDS spreads and bond yields rose.
  • The Thai baht continues to slide as the king’s health remains a concern.
  • The Malaysian ringgit is under pressure again on declining global risk appetite. The ringgit is often the “punching bag” for fast money moving in and out of risk assets.
  • The Egyptian pound forward rates are still falling as the market prices in a massive devaluation after the conclusion of the IMF bailout deal.
  • With the recent dovish comments from Riksbank, this weak inflation report took the Swedish krona sharply lower. Since last May, the declines in the currency (shown against the euro below) have been dramatic.
  • In spite of all the positive economic data, the euro came under pressure over the past couple of days in response to rate hike expectations in the United States (which pushed the dollar higher).
  • With a rate hike later this year hanging over the markets, the dollar continues to rise. If this trend continues, it will once again tighten financial conditions in the US and return volatility to vulnerable emerging markets (such as Malaysia – above).
Auto China Car Sales Rise Sharply in September

Government tax breaks and dealer discounts helped fuel a 29% jump in China car sales last month for the biggest gain since January 2013.

Foreign and domestic auto makers shipped 2.27 million cars—including sedans, crossovers and minivans—to dealers last month, the China Association of Automobile Manufacturers said Wednesday, up from 1.75 million in September 2015.

So far this year, China’s new-car sales are at 16.75 million vehicles, a 15% increase from the same period a year earlier.

The sharp uptick in September car sales reflects just how weak the market was a year ago.

In response to four straight months of slow sales, China’s central government in October 2015 halved the 10% purchase tax on vehicles with 1.6-liter engines or smaller.

Sales have since rebounded strongly. More than 70% of cars sold in China qualify for the incentive, which helps consumers save up to 10,000 yuan, or about $1,500, when buying a new vehicle.

The tax break is scheduled to expire Dec. 31, as car dealers aren’t shy about reminding customers. (…)

Deutsche Bank Quietly Raises Another $1.5 Billion

The German lender sold another $1.5 billion of investment-grade notes on Tuesday to mostly the same investors who bought last week’s $3 billion private deal, according to a person with knowledge of the matter, who asked not to be identified because the information isn’t public. The deal was priced at a premium of 290 basis points, close to the average of 300 basis points for highly-rated junk debt in dollars and more than twice the 143 basis points Deutsche Bank paid for similar notes in August 2015, data compiled by Bloomberg show. (…)

The October 2021 notes are combined with a sale on Oct. 7 and pay a coupon of 4.25 percent, according to data compiled by Bloomberg.

Railroads’ Earnings Turmoil Deepens as Trucks Poach Freight

Intermodal cargo, goods hauled in containers, fell a second consecutive quarter for the first time since 2009, according to the Association of American Railroads trade group. A surplus of trucks has pushed down freight rates and lower diesel prices have chipped away at rail’s usual fuel-savings advantage, taking a toll on once-steady growth. (…)

Container volume for the industry dropped 5.3 percent while all traffic declined 6.3 percent, according to the association.

Here’s the monthly trend from the AAR:

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THE RULE OF 20

The Fair Index Value (yellow line: (20 – inflation) * EPS)) needs to stabilize soon…Current Fair Value is 2039, 4.4% lower than the S&P 500 Index. The technicals don’t look good here. We sure need a good earnings season.

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THE DAILY EDGE (11 October 2016):

Did you miss yesterday’s Daily Edge? Laboring Labor. Oil. Earnings Watch.

Auto Ford Shuts Mustang Factory for One Week After Sales Plunge 32%

(…) The idling may be a sign of the growing weakness of the U.S. auto market, which had been a leading driver of economic growth. Automakers’ monthly sales have been coming up short — though they beat expectations in September — and many analysts are now predicting the U.S. auto industry won’t match last year’s record of 17.5 million cars and light trucks. (…)

CHINA NOT IMPLODING

China’s economic growth has shown stronger signs of stabilising during the third quarter, reflecting a turnaround in the manufacturing sector. Services activity has maintained a moderate pace of expansion, providing stability to overall economic growth.

Although the Caixin China Composite Output Index – which tracks business activity in the combined manufacturing and service sectors – showed that output growth lost slight momentum in September from August, dipping from 51.8 to 51.4, its average over the third quarter was the highest for two years, lifted by a rise in manufacturing activity, while services growth remained steady.

Greater new work inflows signalled improving client demand, which encouraged companies to raise production. Expansion in new orders during the third quarter as a whole was the highest since quarter four 2014, albeit still only moderate. (…)

The revival of growth in the manufacturing sector is a welcoming relief. But the modest rate of expansion of the service sector is a reminder that the rebalancing of China’s economy to a consumption-based growth model is a slow process.

Honda (7267.T) and Nissan (7201.T) reported on Tuesday their strongest monthly vehicles sales growth for China this year in September, thanks to a tax cut on small engine vehicles and comparatively weak growth for the same month last year.

Competitor Ford (F.N) posted its strongest growth since January, while Toyota (7203.T) sales increased the fastest since March. (…)

That tax cut will continue to drive strong growth as consumers rush to buy cars before its planned expiry at the end of the year, according to analysts and industry officials. (…)

The China Association of Automobile Manufacturers (CAAM) will report sales growth for the market overall on Wednesday, with Zhang predicting top-line growth of 25-30 percent.Honda posted the quickest growth among automakers reporting Tuesday, with a 46.5 percent year-on-year increase for the month. (…)

China’s auto sales have outstripped expectations this year, with CAAM reporting last month that sales grew 11.4 percent for January to August, compared to its projection in January of 6 percent annual growth for 2016.

Oil output record underlines Opec’s struggle to raise prices Impact of planned cut to cartel’s production ‘difficult to assess’, says International Energy Agency

The IEA said crude oil supply from Opec’s 14 members climbed to 33.6m b/d, an all-time high in September and would hover around that level in the run-up to the group’s next ministerial meeting in November.

Higher Russian and Kazakhstan production raised non-Opec output by 500,000 b/d last month, reversing more than a third of the production decline outside the cartel in the past 12 months.

The IEA said that “the market, if left to its own devices, may remain in oversupply through the first half of next year. If Opec sticks to its new target, the market’s rebalancing could come faster.”

“Russia is ready to join in joint measures to limit output and calls on other oil exporters to do the same,” Putin said on Monday at the World Energy Congress in Istanbul. “In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market.” (…)

“We support OPEC’s recent initiative to cap output and think that at the OPEC meeting in November this idea will materialize in a specific agreement, giving a positive signal to the markets and investors,” Putin said. (…)

Meanwhile, in the USA:

 
Sinking Yuan Risks Dragging Down Banks

(…) Chinese savers will get even more spooked that the value of their funds is dropping in dollars and will seek to move more money out of the country.

Outflows in turn will further weigh on the yuan in a vicious cycle that could have serious effects on China Inc., especially given that the country’s corporations have taken on record amounts of foreign currency debt. This year alone, dollar- and euro-denominated loans taken out by Chinese companies have reached $195 billion, bringing the total outstanding to about $650 billion. That’s equivalent to the total amount of subprime mortgage loans outstanding in the U.S. in 2008.

Foreign currency losses were already a major topic for publicly traded Chinese companies. The yuan has declined 3.3 percent against the dollar this year after dropping 4.4 percent in 2015. If the carnage continues in tandem with the rise in offshore debt, this will be an even more dominant theme in 2017. More losses could mean additional bankruptcies after what’s already been a record year for corporate failures. (…)

S&P predicts that problematic credit in bank balance sheets could triple to 17 percent of all loans by 2020.

If the yuan continues to depreciate at this pace, that number may arrive much earlier.

    SENTIMENT WATCH
    Investors See New Risk in Trump Swoon: A Democratic Congress As the chances of Donald Trump taking the White House decline, investors must weight the possibility of the Democrats taking the House.

    (…) That outcome—a Clinton presidency with a Democratic congress—is still seen as unlikely, but is potentially devastating for industries such as finance, pharmaceuticals and energy, and bad news for high-income taxpayers. (…)

    “There’s a real chance that the House could go into Democratic hands,” says Cornerstone Macro political strategist Andy Laperriere. “As an investor, that’s what you have to contend with.” (…)

    Thumbs up Thumbs down S&P 500’s ‘triangle’ chart pattern warns of a big selloff, analyst says

    (…) Many technicians believe triangles represent continuation patterns, or periods of pause in a bigger trend, which means they should eventually be resolved in the direction of the preceding trend. In the S&P 500’s case, that would mean a big rally is coming.

    But Worth said that based on his interpretation of the charts, the S&P 500’s triangle looks more like a reversal pattern.

    “We believe the current formation is a setup for a move lower,” Worth said. (…)

     
    Alien Brain Exercises Don’t Live Up to the Hype, Researchers Say Computerized brain-training exercises and games, touted for their ability to improve overall cognitive function, may actually only help you get better at the specific game you’re playing.