Edge and Odds

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Edge and Odds

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THE DAILY EDGE (28 September 2016): Food For Thought

Grocery Prices Are Plunging

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 — with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters.

This is Bloomberg’s chart of MoM price trends:

The actual seasonally-adjusted index with total CPI in red.

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This chart plots Food-at-home YoY with Total CPI. Food deflation is pretty rare and rarely gets much worse than –2.5% YoY. It currently is –1.9%.

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The “Food-at-Home” component is 8% of the CPI.

If you invest in food retailers, you must understand that because volume is growing very minimally, margins are key to the industry’s profits. The reality is that grocers have little control over the price of the products they sell. Accordingly, their margins can be very volatile, swinging along with the difference between food-at-home inflation (inflation on sales) and total inflation (inflation on costs), plotted below. History shows that periods of margins squeeze often trigger price wars as grocers attempt to boost volume to offset declining sales. This year’s squeeze is amplified by the widespread increases in minimum wages across the USA.

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This is Kroger since last December:

Kroger
 
Saudis soften oil stance on Iran but OPEC deal still elusive

OPEC might still agree an oil output-limiting deal later this year as the economic problems of its de-facto leader Saudi Arabia force Riyadh to cede more ground to arch-rival Iran.

Saudi Energy Minister Khalid al-Falih said on Tuesday Iran, Nigeria and Libya would be allowed to produce “at maximum levels that make sense” as part of any output limits which could be set as early as the next OPEC meeting in November. (…)

Case-Shiller: U.S. Home Prices Grew Briskly in July

The S&P CoreLogic Case-Shiller Indices, covering the entire nation, rose 5.1% in the 12 months ended in July, slightly higher than a 5% increase reported in June.

The 10-city index gained 4.2% from a year earlier down slightly from 4.3% last month, and the 20-city index gained 5% year-over-year, down from a 5.1% increase in June.

After seasonal adjustment, the national index rose 0.4% month-over-month, the 10-city decreased 0.1% and the 20-City index remained unchanged.

The hottest markets in the country have shifted away from California and toward the northeast, as many buyers priced out of the Silicon Valley area flee to secondary tech hubs. Portland reported a 12.4% year-over-year gain, Seattle showed growth of 11.2%, and Denver had a 9.4% increase. (…)

BTW, yesterday’s release of the Conference Board’s Consumer Confidence Index revealed that plans to buy a new home plummeted to the lowest percentage (0.6%) since April of last year. In most other aspects, the survey was pretty good, even though this indicator is coincident at best.

All-Cash Sales in the U.S. Hit Record Low

All-cash transactions in the U.S. home market have hit a record-low level, accounting for 29.3% of total home sales in June, according to the California-based data firm CoreLogic.

On a year-over-year basis, cash sales in June declined 2.5 percentage points . And this is the first time the figure stood below 30% for a single month since late 2007.

The percentage of cash sales peaked in January 2011, when cash transactions accounted for 46.6% of total home sales nationally. Prior to the housing crisis, the percentage of total home sales that were paid in cash averaged approximately 25%, according to CoreLogic.

Cash sales are declining partly because “a reduction in foreclosure activity which is generally a cash-based investor transaction,” said Jonathan Miller, the chief executive of appraisal firm Miller Samuel.

Easier access to financing has also helped diminish all-cash transactions. “We are also seeing some easing in credit conditions likely influenced by improving household income,” Mr. Miller added. (…)

“Some easing in credit conditions” continue…

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…but no longer in auto loans…

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…as US auto debt delinquency rates remain elevated relative to pre-crisis levels…

…causing this (The Daily Shot):

U.S. Parents Are Saving More Money for Children’s College

(…) Fifty-seven percent of parents with children under the age of 18 are saving for college this year, up from 48% last year, according to the report by SLM Corp., better known as Sallie Mae, and market-research company Ipsos Public Affairs.

On average, those families that are saving have $16,380 set aside for college, a four-year high, and up from $10,040 last year. (…) Parents of teens have saved an average of $22,998, compared with $13,216 saved by parents of 7- to 12-year-olds. (…)

This year, 37% of parents report using 529s, the highest rate reported since the study began in 2009, and higher than 27% reported last year. (…)

In 2016, 51% of parents report having a plan for how to pay for all four years for college, up from 42% last year. (…)

SENTIMENT WATCH
Citi Warns on Gold as Bank Boosts Odds of Trump Win to 40%
Bank of America Sees China Financial Crisis, BlackRock Expects Only Bumps in Road
Europe’s banks ‘not really investable’ says Credit Suisse’s Thiam

European banks are in a “very fragile situation” and are “not really investable as a sector”, Credit Suisse chief executive Tidjane Thiam said in a FT interview in London.

“I think there is also a lot of doubt, a fundamental doubt, is there a viable business model that covers its cost of equity?” Mr Thiam is quoted by the FT. “That’s the big big big question,” he said, describing it as something that “makes banks not really investable as a sector”.

Bubble Watch: Market Starting to Feel Like 1999

The Twitter takeover frenzy is spreading, and it’s causing investors to overpay for Internet stocks.

On Tuesday, shares of Yelp (ticker: YELP), TripAdvisor (TRIP), Expedia (EXPE), andGrubHub (GRUB) were all jumping, without any business rationale. It seems that investors are bidding up the stocks on the idea that the companies could become the next acquisition targets, after a (hoped-for) Twitter deal (TWTR). Yelp was the largest gainer with a 5.2% gain, while TripAdvisor, Expedia, and GrubHub were all up at least 3%. (…)

The stocks all trade at high multiples of earnings. In the case of GrubHub, investors are paying $51 for every dollar earned by the company this year. And Yelp won’t even make money in 2016. Expedia is the cheapest of the bunch, with a price-to-earnings multiple, or P/E, of 22. (…)

U.S. FLASH SERVICES PMI SUGGESTS 1.0% GDP GROWTH IN Q3

The rate of expansion in business activity at U.S. service providers picked up for the first time in three months during September, but remained relatively modest. Meanwhile, growth of new orders eased to a four-month low and companies reacted to modest inflows of new work by reducing their rate of hiring.

There was no sign of inflationary pressures building during the month as both input costs and output prices rose at weaker rates than in August. A dip in confidence was also registered in the latest survey period.

Adjusted for seasonal influences, the Markit Flash U.S. Services PMI™ Business Activity Index rose to 51.9 in September from the previous month’s final reading of 51.0. This signalled the fastest monthly rise in activity since April, albeit one that was still relatively modest. Activity has now increased in each of the past seven months. Where higher activity was recorded, this was widely linked by panellists to ongoing new business growth.

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However, although continuing to increase during September, new business was up only modestly compared to August. In fact, the rate of growth eased to a four-month low. The pace of accumulation in backlogs of work also eased and was the slowest in the current three-month sequence of rising outstanding business.

A weaker expansion of new business had a negative impact on employment growth in September. Staffing levels continued to rise, but the latest increase was only slight and the slowest since March 2013. The rate of job creation has now eased in two consecutive months.

The rate of input cost inflation slowed to a 19-month low, with input prices up only slightly compared with August. A similar trend was recorded with respect to output prices, which rose only marginally and at the weakest pace since April. A number of firms reported having lowered their charges in an effort to try and secure more new business.

Companies in the service sector registered a drop in confidence in the latest survey period. Although still predicting a rise in activity over the coming 12 months, optimism was the lowest since the series record low seen in June. Those firms that expected a rise in activity over the coming year often linked this to hopes that business would pick up. There were also predictions that new product development would bear fruit.

The seasonally adjusted Markit Flash U.S. Composite PMI Output Index ticked up to 52.0 in September from 51.5 in August. This pointed to the fastest monthly increase in output for five months, albeit one that was still relatively modest.

The service sector saw growth of activity pick up during the month (‘flash’ index at 51.9 in September), while manufacturing firms registered a weaker expansion of production (‘flash’ output index at 52.3).

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Chris Williamson, Chief Business Economist at IHS Markit:

“… even with the latest uptick in activity, the overall rate of economic growth remains subdued. Add these service sector results to the manufacturing data and the PMI surveys suggest that the economy is growing at an annualised rate of only around 1% again in the third quarter.

“The slowdown in hiring means the survey results are consistent with a 120,000 rise in non-farm payrolls in September, which is a solid rate of expansion but somewhat disappointing compared to the gains seen earlier in the year.

“The slowdown in hiring is perhaps a natural symptom of the economy reaching full employment, but companies also reported a reduced appetite to hire due to  weaker inflows of new business and worries about the outlook.