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 (9 September 2016)

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Rise in U.S. Consumer Credit Reflects Steady Household Spending Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $17.71 billion in July from the prior month, the Federal Reserve said, topping expectations for a $16 billion increase.

Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $17.71 billion in July from the prior month, the Federal Reserve said Thursday.

July’s 5.83% seasonally adjusted annual growth rate outpaced June’s upwardly revised 4.8%.

Revolving credit, mostly credit cards, climbed at a 3.45% annual pace in July, compared with an 11.5% pace in June.

Nonrevolving credit, including student and auto loans, advanced at a 6.7% annual pace in July. June’s growth rate was 2.41%, a nearly five-year low.

From Haver Analytics:

Over the past ten years, there has been a 46% correlation between the y/y growth in consumer credit and y/y growth in personal consumption expenditures.

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  • Another way to look at it from The Daily Shot:
  • And my own way. So much for deleveraging. And the Fed wants to raise rates!
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Massive weekly draw on US crude oil inventories. Crude oil jumped sharply in response. (The Daily Shot)
Prognosis uncertain: Obamacare

Parts of the Affordable Care Act are looking a little shaky. The law established “exchanges”, government-run marketplaces where individuals lacking employer-provided health insurance can buy coverage. In April Unitedhealthcare, America’s largest insurer, said it would pull out of almost all the exchanges, citing losses. Last month Aetna, another large firm, said it would quit many. Next year as many as one in six potential customers may live in counties with only one insurer.

Firms are raising prices across the market for individual plans, which includes the exchanges as well as direct sales to customers, by about 25%. For most of those on the exchanges federal subsidies ease the pain. But others—especially healthy folk who are attractive to insure because they don’t much need it—may be tempted to drop their plans. The administration will hope that fines levied on those who go without coverage make enough of them continue to buy insurance. (The Economist)

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China Car Sales Revved Up, Again, in August

Foreign and domestic auto makers delivered about 1.8 million cars including sedans, sport-utility vehicles and minivans to dealers last month, up 26% from a year earlier, the China Association of Automobile Manufacturers said Friday. August was the fourth consecutive month in which sales grew at a double-digit rate.

Recent gains haven’t come as a surprise given the market’s poor performance a year earlier.

China’s car sales fell for three months in a row in the summer of 2015, when plummeting stock prices disrupted purchases of big ticket items including cars. In a bid to resuscitate the auto industry, Beijing in October halved the 10% purchase tax on vehicles with engines no larger than 1.6 liters.

More than 70% of cars sold in China qualify for the tax break, said Shi Jianhua, a deputy secretary-general of the manufacturers’ group. In the first eight months of this year, auto makers sold 14.4 million cars, up 13% from a year earlier. (…)

Nationwide, the average inventory at dealerships was equivalent to about 43 days of sales in the past two months, the association said. Anything above 45 days is considered unhealthy for dealers.

Overall vehicle sales of passenger and commercial vehicles increased by 24% in august from a year earlier, to 2.1 million. (…)

In the year to date, 16.8 million motor vehicles including cars, trucks and buses have been sold, 11% more than the previous year.

The Ghost Ships of Hanjin and Why They’re Spoiling Christmas

(…) September and October are part of the key period when manufacturers and suppliers, including those in Asia, deliver holiday-season goods to retailers, such as those in the U.S. (The effort to identify this year’s hottest holiday-season toy is well under way.) The Hanjin logjam is expected to have minimal impact if it’s resolved within a matter of weeks. Citigroup, in a research note, predicts that inventory shortfalls for the holiday season “are unlikely.” (…) Fingers crossed

SENTIMENT WATCH
“This Is A Big, Big Moment” – Gundlach Warns Yellen May Surprise Markets 

In his presentation titled appropriately “Turning Points” (presented below) Gundlach said that “this is a big, big moment,” predicting that “interest rates have bottomed. He also said that the Fed “wants to show that they are not guided by the markets” and that “they can’t be replaced by WIRP.” A Fed surprise would send rates spiking, and Gundlach warns the 10Y may close 2016 at 2% or higher.

BTW, FYI A Powerful Combo: the Rule of 20 and the “120 Yield Spread”
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Fitch: Sector Outlook on U.S. Life Insurers Revised to Negative

Fitch Ratings has revised the Sector Outlook for U.S. life insurers to Negative based on heightened macroeconomic challenges and uncertainty, which are expected to negatively impact the industry’s underlying credit fundamentals over the near to intermediate term. Fitch’s Sector Outlooks reflect our view of underlying fundamental trends in the industry and the current operating environment.

At the same time, the Rating Outlook on the U.S. life insurance sector remains Stable. Rating Outlooks indicate the direction in which ratings are likely to move over a one to two year period.

Key macroeconomic challenges impacting U.S. life insurers include declining interest rates and increased financial market volatility, which are expected to have a more pronounced impact on the industry’s earnings profile and reserve adequacy relative to Fitch’s base case scenario for 2016 and 2017. While we don’t anticipate immediate implications for ratings of most companies, deterioration in the macroeconomic environment in 2016 exacerbates an already challenging operating environment for U.S. life insurers.

Over the past several years, U.S. life insurers have been able to largely mitigate compression of interest margins on spread based products through active management of crediting rates, interest rate hedging, and new business repricing. However, the industry’s ability to further reduce crediting rates on in-force business has become increasingly limited. As a result, the decline in portfolio yields supporting legacy in-force business over the past one to two years has led to more meaningful deterioration in interest margins and an increase in reserve charges, which have led to declines in operating earnings, a trend we expect to continue over the near term. (…)

However, should interest rates remain at current low levels or decline further, Fitch would likely revise its Rating Outlook to Negative on both the sector and a cross section of individual companies. Without an uptrend in interest rates, Fitch believes this could occur within two to three years on an expectation of deterioration in key profitability metrics and reserve adequacy. As one point of context, Fitch would view a further decline in the industry’s GAAP operating return on equity (ROE) by 1.5 to 2.0 percentage points as a potential ratings trigger. Over the past year, the industry’s average ROE has been in the 11%-12% range. (…)

It’s past midnight for the US share buyback bonanza

Between 2012 and 2015, US companies acquired $1.7tn of their own stock, according to Goldman Sachs, counteracting sales by pension funds, foreign investors and households.

Indeed, excluding corporate buybacks, net US equity flows would have been negative to the tune of $1.1tn over that period, despite burgeoning inflows into exchange traded funds. (…)

But the buyback-palooza has begun to splutter. US shareholder payouts rose by 15 per cent annually between 2010 and 2014, but an earnings downturn meant growth slowed to 2 per cent last year. And the outlook for 2016 is looking even gloomier.

A handful of companies, most notably Biogen, Visa, CBS and AIG, announced multibillion-dollar buyback programmes, but the overall volume in the first seven months of 2016 was down by over a fifth compared with the same period a year ago, according to TrimTabs, a research company.

Slower buybacks would not matter if companies were shifting their shareholder reward programmes in favour of dividends. But dividend-per-share growth is set to slow from 9.3 per cent in 2015 to 5.5 per cent this year according to BCA. And the S&P 500’s dividend yield is just 2.1 per cent, well below the historic average of 3 per cent, the Canadian research firm notes.

Corporate austerity has come as their once-towering cash piles have begun to shrink modestly, both due to falling profitability and recent shareholder generosity. Non-financial companies in the S&P 500 still sit on $825bn, but America’s 50 wealthiest companies account for most of the nest egg. The median cash or cash equivalent for all S&P 500 companies shrank to $860m in the second quarter of the year, the lowest in three years according to Bloomberg data.

At the same time, borrowing to boost shareholder payouts becomes less feasible, with many measures of corporate indebtedness now at or near record highs, after the frenzied post-crisis bond issuance spree. (…)

The tremendous outperformance of US dividend-focused shares over the past year. (The Daily Shot)

Related to my post HARD HAT ZONE:

SMALL CAP LEVERAGE!
La Nina Is Already Here According to Japan as U.S. Drops Watch

La Nina, a weather pattern that can cause flooding in parts of Asia and colder weather in the U.S. , has set in and may continue through the winter, the Japan Meteorological Agency said, a day after the U.S. dropped its watch for the event.

There is 70 percent chance that the event, which also causes dry weather in Brazil, may continue through the winter period, the Japanese forecaster said on its website Friday. The U.S. Climate Prediction Center said Thursday it was dropping its La Nina watch and lowered the odds it will form this year to 35 to 45 percent from 75 percent in June. The Australian Bureau of Meteorology says a late and weak La Nina is still possible.

The onset of La Nina can bring more rains to countries including Indonesia, India and Thailand and help ease stress on palm oil and sugar cane from two years of below average rains caused by El Nino. While there’s little chance of the event forming this year, any event is unlikely to affect commodity supplies, according to Olam International Ltd. Still some investors may be caught off-guard if the weather event materializes, according to Naohiro Niimura, partner at Market Risk Advisory Co., a researcher in Tokyo.

“Investors have built up short positions in grains and oilseeds futures on an outlook for record U.S. crops,” Niimura said. “They may be forced to buy back them, sending Chicago prices surging, if the La Nina phenomenon causes abnormal weather.” (…)

Last year’s El Nino was one of the three strongest on record, generating the hottest global temperatures in more than 130 years, according to the U.S. National Centers for Environmental Information in Asheville, North Carolina. The event reduced Indian rainfall, parched farmland in Asia and curbed cocoa production in West Africa.

“Supplies from South America would become even tighter next year after drought in Brazil and floods in Argentina hurt corn and soybean production this year,” Niimura said.

North Korea Says It Tested Nuclear Bomb and Can Now Put Warheads on Rockets

THE DAILY EDGE (8 September 2016)

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A New Record for Job Openings Deepens Mystery Over Lack of Hiring The number of job openings available at the end of July climbed to a new record of 5.9 million, yet the number of people actually being hired into those jobs was unchanged from June.

The number of job openings available at the end of July climbed to a new record of 5.9 million. Yet the number of people actually being hired into one of those jobs was 5.2 million for the second month in a row.

The number of unemployed workers per job opening has fallen to 1.3, the lowest since 2001. What would normally sound like good news—abundant jobs—is tempered by the fact that people simply aren’t being hired into the positions at rates like in the past. About 300,000 fewer people are being hired each month compared with the pace reached in February. (…)

More people are being hired each month than leaving a job. That means the net number of jobs is increasing. But the pace of hiring and the pace of voluntary job-quitting are both lower than prerecession levels, a sign of a lack of vibrancy in the labor market. Because job-hopping is a key way that many Americans get raises, an increase in voluntary job-quitting tends to coincide with faster wage growth. (…)

Many theories have been offered to explain the gap between job openings and actual hiring. It could be workers lack the skills for available jobs or that employers have become too picky, or that available workers and available jobs are in different geographies.

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All JOLT charts here.

(…) The retailers, logistics companies and package-delivery companies, among others, say they expect to step up recruiting, start hiring earlier than usual and pay more for the extra help they need for the peak shopping season. (…)

XPO, which employs about 24,000 year-round warehouse workers, said it expects wages to be up by as much as 4% to 8% this year for the seasonal workers it needs for jobs ranging from driving forklifts to packing products for shipment. The company expects to hire 5,000 to 6,000 such workers, up from 4,000 last year.

United Parcel Service Inc., where seasonal wages start at $10.50 an hour, says it is preparing to pay more, if necessary. (…)

In many markets, wages are expected to increase between about $1.50 and $3 an hour from the typical nonseasonal hourly rate of $10 to $12 during the fourth quarter to attract seasonal workers, according to ProLogistix, one of the largest logistics-staffing companies in the U.S. Most companies will have to pay the workers they have at least $1 an hour more just to retain them, said Brian Devine, senior vice president at ProLogistix.

Much of the competition stems from the growing number of fulfillment centers, facilities that process and fill online orders. They tend to be concentrated around places like Louisville, Ky., and Memphis, Tenn., where UPS and FedEx, respectively, have some of their biggest package-sorting hubs. (…)

Fed’s Beige Book Shows Rising Wages, but Muted Inflation Pressure A tight labor market and rising wages aren’t generating substantial inflation pressure, a Federal Reserve report said, muddying the economic outlook for Fed officials ahead of their September policy meeting.

Overall, the economy continued to expand at a modest pace in July and August, and respondents said they expected growth to continue at a “moderate” pace in the coming months, according to the central bank’s beige book, a review of regional economic conditions. The survey collected anecdotal information on economic activity from early July through Aug. 29, from 12 district banks.

Most districts cited tight labor markets and moderate growth in hiring, consistent with steady payroll gains reported by the Labor Department in the past two months. Upward pressure on wages continued to build, especially for workers with specialized skill sets such as engineers and certain construction workers. But the pickup in wages didn’t translate into significant inflation pressure, the report said. Price increases were described as “slight overall.” (…)

Wage pressures accelerated for highly skilled workers and were “fairly modest” for most workers, the beige book said, and price inflation was “modest.” (…)

Most districts reported a slight rise in manufacturing activity. The sector had appeared to stabilize for much of the spring and summer, although a report last week from the Institute for Supply Management signaled the factory sector contracted in August.

Housing activity, another mainstay of the economic expansion, continued to grow, but the report noted a limited supply of homes was weighing on the pace of sales in some districts. Commercial real estate activity also continued to expand.

The report said sales of nonfinancial services accelerated over the time period covered, with growing demand at restaurants, for health care and for staffing services. (…)

It appears that the Beige Book does not poll the same people as Markit and the ISM. Both had manufacturing and services surveys which showed a marked deceleration in August.

OECD Signals Little Impact From Brexit Vote The outlook for the global economy hasn’t changed as a result of the U.K.’s vote to leave the EU, according to leading indicators released by the Organization for Economic Cooperation and Development.

“Although there remains uncertainty about the nature of the agreement the U.K. will eventually conclude with the EU, the volatility in data that emerged in the weeks immediately following the referendum appears to have reduced,” the OECD said.

Indeed, improved prospects for a number of large economies suggest the global outlook has brightened over recent months, easing worries that a sharp slowdown is under way at a time when policy makers appear to be low on ammunition with which to boost activity.

The OECD’s leading indicators, based on information available for July, now point to steady growth in most developed economies, including the U.S. But in contrast to the earlier months of 2016, they also point to pickups in a number of large developing economies, including China, Brazil and Russia. (…)

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ECB trims growth forecasts for 2017/18

Growth forecasts (per cent):

New (old)

  • 2016 1.7 (1.6)
  • 2017 1.6 (1.7)
  • 2018 1.6 (1.7)

Inflation forecasts (per cent):

New (old)

  • 2016 0.2 (0.2)
  • 2017 1.2 (1.3)
  • 2018 1.6 (1.6)
Robert Brusca: German IP Drops and Sets a Negative Trend

German IP dropped in July falling by 1.5%. The drop more than offsets a 1.1% gain in June and makes it two declines in the last three months.

IP is falling on a consistent basis and it is nearly accelerating its drop from 12-Mo to 6-Mo to 3-Mo. While the drop is not accelerating for total IP it is accelerating for each of consumer goods, capital good and intermediate goods. Construction has been strong enough to keep these sectors from dictating the overall IP trend. Most disturbing is that the way lower is being led by capital goods output declines instead of being resisted by that key sector. Has global excess capacity finally come home to roost and to kill off the vaunted German capital goods sector? (…)

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But Markit is not as pessimistic:

The industrial production data follow weaker-than-expected factory orders figures, adding to signs that the eurozone’s largest economy may be set for a growth slowdown.

The decline means that industrial production would have to expand by more than 1% in August and September for the sector to eke out any growth over the third quarter as a whole.

A robust rebound is in fact a strong possibility, as it is likely that the weakness in the official measure for industry was at least in part linked to calendar factors. Note that August had 23 working days, an additional two days compared to July. Calendar-caused volatility in the data is not unusual. In July 2014 (23 working days) for example, industrial production rose 1.1% before falling 2.5% in August (21 working days) and then rising 1.8% in September (22 working days).

Encouragement can also be sought from business survey data such as the PMI, which have been signalling steady, although unspectacular growth in recent quarters. Germany’s Composite PMI (which measures the combined output of the manufacturing and service sectors) is still consistent with overall economic growth, despite falling to a 15-month low in August. The index was dragged down by a struggling service sector and adds to worries that GDP growth will fail to accelerate from the moderate 0.4% pace seen in the second quarter.

The sharp slowdown in the service sector contrasts with further solid growth at manufacturers, which points to ongoing growth of German industry in the third quarter. The survey data are often less volatile than official production figures and provide a good indication of the underlying health of German manufacturing.

Moreover, data from VDA industry association showed that domestic registrations of new cars in Germany increased 8% on a year ago in August, following a 4% decline in July. This is stronger than the trend observed for 2016 so far (6%), and suggests that the German car market remains in good shape despite orders being restrained by factors such as the Volkswagen (VW) scandal and Brexit uncertainty.

Fingers crossed The latest ISI survey suggests some green shoots for Europe. (The Daily Shot)

Chinese Exports Slow Their Decline

Exports slid 2.8% last month over year-earlier levels, following a decline of 4.4% in July, the General Administration of Customs said Thursday. (…) Imports in August increased by 1.5% from a year earlier, reversing a 12.5% slump in July. The rise, which beat forecasts, was largely a reflection of higher prices for raw materials with little sign that domestic demand, consumption or investment have picked up. (…)

Export comparisons were helped somewhat by the calendar as last month saw two more working days than August 2015. The yuan also depreciated by around 7% year on year in July against a basket of currencies, which made Chinese exporters more competitive when signing August contracts, Mr. Ding said.

China’s customs agency said exports should improve by the fourth quarter, citing improved confidence, rising orders and declining costs seen in a recent online survey it conducted. (…)

But from the FT:

More importantly, the latest trade data show healthy growth in commodity import volumes which adds to the recent positive signs on domestic demand, including better-than-expected PMI readings. (…)

In addition to automobiles and auto parts, imports of semiconductor products also increased significantly in August. This may have been supported by preparations for the launch of the iPhone 7 in September.

Imports of iron ore and oil also improved significantly, which suggests domestic investment improved as well in August, helped by post-flood reconstruction. (…)

Tens of Thousands of Jobs Go as China’s Biggest Banks Cut Costs

China’s four biggest banks reported that staff numbers fell by the most in at least six years in the first half, highlighting the possibility that employment has peaked at the firms that are the world’s biggest providers of banking jobs.

A decline of 1.5 percent from the end of last year left 1.62 million workers at Agricultural Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd., earnings filings showed. Agricultural Bank, the No. 1 bank employer, saw its number of employees slip below half a million.

While a fall in the first half is not unusual, the 25,000-job decline is the biggest since at least 2010 and analysts at firms including BOC International Holdings Ltd. and DBS Vickers Hong Kong Ltd. say changes to how banking is done will limit prospects for increases. (…)

Besides a reduced number of workers, the first-half data also pointed to pressure on pay. The big four banks’ combined staff compensation costs — including salaries, bonuses, allowances and post-employment benefits — fell 2.6 percent from a year earlier. At the mid-sized China Minsheng Banking Corp., the decline was 22 percent.

Flat revenue and rising pressure on asset quality means “banks have been pushing even harder in cost optimization,” Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a note.

Italy Lays the Groundwork to Offer a 50-Year Bond The Italian government has started talking to investors about selling a 50-year bond, in another sign of how the search for yield is helping even poorly performing economies lock in funding for longer periods.