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

NEW$ & VIEW$ (9 August 2016)

Auto China Auto Sales Rising Most in 17 Months Spurs Inventory Relief

Retail sales of cars, sport utility and multipurpose vehicles climbed 23 percent to 1.6 million units in July, the biggest monthly percentage gain since February 2015, according to the China Passenger Car Association. Deliveries increased to 12.4 million units in the seven months through July.

Dealers offered discounts on models such as the Audi A4 of about 18 percent to help reduce stockpiles, according to Jochen Siebert, managing director of JSC Automotive Consulting. A gauge of inventory levels fell to an 11-month low and indicated contraction for the first time in that span, the China Automobile Dealer Association said. Keeping supplies in check is typically an indication carmakers can maintain pricing and production.

(…) SUVs sales grew 45 percent in July, outpacing the 15 percent expansion for sedan models. (…)

China producer deflation eases to slowest pace in two years

China’s industrial producer price index fell by 1.7 per cent in the year to July, government statistics showed on Tuesday, a relief compared with a 2.6 per cent pace the previous month and lows of 6 per cent deflation in the second half of last year. (…)

It said the improvement in industrial deflation in Tuesday’s data compared with the previous month was largely the result of a rebound in prices of metal mining and processing, including steel. The prices of petroleum and natural gas extraction, and of coal mining, continued to rise.

China’s consumer price index continued to rise, with inflation at 1.8 per cent in the year to July, according to Tuesday’s data.

The continuing inflation faced by Chinese consumers, including in imported goods, was largely the result of high food prices. This year’s sky-high pork prices accounted for 0.42 percentage points of the rise in the headline figure, according to the National Bureau of Statistics. In addition, the prices of services such as education, leisure and medical care are rising.

Are Negative Rates Backfiring? Here’s Some Early Evidence The European Central Bank hoped that negative interest rates would encourage consumers and businesses to spend more, but many are saving instead.

Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money. (…)

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash. (…)

Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it.

Unintended but nonetheless pretty sensible. Economists often fail to understand how ordinary people actually live and think. If you are retired and living off your life savings, low interest rates, let alone negative rates, have a direct effect on your monthly income. Since people live much longer, lower for longer is scary and immediately forces a change in spending patterns.

Workers aged 55 and over, dreaming of their retired life, also get scared by lower for longer. They MUST increase their savings.

Younger workers must be wondering how all those old age pensions will be able to get paid with lower for longer. How can pension funds meet their obligations if they can only invest at 1-2%. In Europe, some 70% of the bond market trades on negative yields! Somebody will have to foot this pension bill some day.

From lower for longer, here’s higher for shorter:

(…) Rates on short-term loans between banks have risen to the highest levels in seven years.

The common thread: a move by the Securities and Exchange Commission to make money-market funds safer in the wake of the financial crisis.

The regulatory changes are giving investors a reason to flee the $2.7 trillion U.S. money market, putting unintended stress on a crucial funding source for cities, counties and foreign banks.

“You could see $400 billion move out of the private credit markets,” said John Tobin,head of global liquidity portfolio management at J.P. Morgan Chase & Co.’s asset-management arm. “That has implications.”

Money-market funds typically buy short-term corporate and municipal debt, acting as a place for companies, pension funds and insurance firms to park cash at a little better rate than a savings account. The money is used for purposes such as bridge loans for municipalities awaiting tax revenue or cash to pay bills for seasonal businesses.

The new rules don’t come into effect until Oct. 14, but already they are having an impact. Funds worried about outflows are sitting on cash and are reluctant to buy debt that matures after the October deadline.

The rules require prime funds, which typically invest in debt issued by highly rated corporations, and tax-exempt funds that invest in municipal debt to abandon implied guarantees that institutional investors will get their money back and allow the funds to suspend redemptions temporarily in a crisis.

Corporate treasurers that invest in money-market funds and others who can’t afford the risk of losing access to their money find the rules burdensome. The rule changes won’t apply to funds that invest only in the debt issued by the federal government or government-controlled entities such as Fannie Mae and Freddie Mac. (…)

Assets held by prime money-market funds dropped below $1 trillion at the end of July for the first time in 17 years and have fallen by more than a quarter of a trillion dollars since mid-March, according to the Investment Company Institute. (…)

The rules are aimed at preventing the sort of chaos that hit the money market after Lehman Brothers Holdings Inc.’s bankruptcy during the financial crisis. The goal is to increase transparency and contain the fallout that could result from many investors cashing out at once, the SEC wrote in the final rule. (…)

Anticipation of the new rules already has pushed up the London interbank offered rate, or Libor, to the highest levels since May 2009. The rate reflects the cost of borrowing among banks and is a benchmark for other debt like corporate loans and mortgages.

Financial companies’ borrowing rates have jumped in the commercial-paper market as well. As of Aug. 4, those companies were paying 0.9% on average to borrow for 90 days, according to data from the Federal Reserve, up from 0.7% a week earlier and the highest level since February 2009. (…)

The SEC has said it had anticipated increases in borrowing rates when it passed the rule in 2014, but felt the trade-off was worth it to avoid a repeat of 2008. (…)

NEW$ & VIEW$ (8 August 2016): July NFP, Earnings Watch

Robust Jobs Report Spurs Fed Watch The U.S. labor market in July capped off the best two-month stretch of hiring so far this year despite global turbulence and slower business spending, posing a challenge for the Federal Reserve as it aims to raise interest rates again in coming months without spooking investors.
  • Employers added 255,000 jobs in July. Job growth was also stronger in May and June than previously thought. Employers added 292,000 jobs in June, up from the initially estimated 287,000. They added 24,000 in May, up from the prior estimate of 11,000. Over the past three months, job growth has averaged 190,000. In 2015, growth averaged 229,000.
  • More Americans joined the labor force, keeping the jobless rate steady at 4.9%. The labor-force participation rate rose to 62.8% in July from 62.7% in June.
  • Average hourly earnings for private-sector workers rose by 2.6% in July from a year earlier. Wages grew 8 cents, or 0.3%, in July from June, settling at $25.69.
  • One blemish on Friday’s report was a rise in a measure of unemployment and underemployment, including Americans who stopped looking for work. The rate rose to 9.7% in July from 9.6% in June, largely because of a rise in the number of people who were working part-time but wanted a full-time job.

Robust Jobs Report Spurs Fed Watch

‘The U.S. Labor Market Earned a Gold Medal’ one economist said. David Rosenberg said the NFP was “clean as a whistle” and went on to list all the positives:

  • A strong companion household survey with surging part-time jobs.
  • A work week that expanded from 34.4 hours to 34.5, the highest in 2016.
  • The diffusion index rose from 61.8 in June to 63.7, the highest since Nov. 2014.
  • Etc., etc.

Kessler Investment Advisors are not as impressed:

The economy actually lost 1 million (-1.03mm) jobs in July, but the seasonal adjustment brought that back into the positive; to +255 thousand. Seasonal adjustments are valid and we accept the +255k, but the point is that when the seasonal adjustment is more than 5 times the amount of the job gain, the adjustment is so great that you really need to look at multiple data points to get any clarity.

And so, in looking at the average of the last 12 months to eliminate the seasonality, the economy is generating about 200k (209k) new jobs on average per month, and more importantly, this metric has been trending lower since Q1 2015. While this is certainly not a recessionary number, it looks no different than the labor slowdowns preceding recessions of the past.

Lance Roberts also was not as enthusiastic:

The large number in July of 255,000 defies the payroll tax collection data. Remember, the BLS takes a phone survey of individuals asking them what their employment status is, or is not. The corporate tax receipt data is an actual measure of the amount of payroll taxes being paid for all employees. (Which do you think is a more accurate measure?)

As Nick Colas of Convergex recently noted:

“Looking at individual tax/withholding receipts (available from the U.S. Treasury) for the month of July, there is a reason for caution on both indicators.  July “Withheld” receipts – those tax and withholding payments that come straight from wage earner pay stubs – are down 1.0% year over year.

Also worth noting: YTD non-withheld tax receipts (such as those that come from ‘Gig economy’ workers) are down 6.5%, and July’s comp is 15% lower than a year ago.

Last, corporate tax receipts are down 11% YTD, and if the current pace of these payments holds it will be the first negative comp since 2011. Bottom line: if the tax man isn’t as busy, can the U.S. economy really be expanding?”

But then there is also the ongoing seasonal adjust “fudgery” going on with the employment data this week as well.

“As Mitsubishi UFJ strategist John Herrmann wrote in a note shortly after the report, the ‘jobs headline overstates’ strength of payrolls. He adds that the unadjusted data show a ‘middling report’ that’s ‘nowhere as strong as the headline’ and adds that private payrolls unadjusted +85k in July vs seasonally adjusted +217k.

In Herrmann’s view, the government applied a ‘very benign seasonal adjustment factor upon private payrolls to transform a soft private payroll gain into a strong gain.’”

Southbay Research also blasted today’s seasonal adjustment factor, this is how the seasonal adjustments look like relative to history.

seasonal adjustment_0

Meanwhile in Canada:

Turning to Canada, the nation lost the most full-time jobs in nearly 5 years while the labor force participation continues to drop (though remains about the US levels). A temporary blip? (The Daily Shot)

China dollar imports fall further as export contraction eases

Exports valued in dollar terms shrank 4.4 per cent year-on-year in July, easing somewhat from a fall of 4.8 per cent in June. Imports using the same currency tumbled 12.5 per cent, sharpening again from the previous month’s reading of -8.4 per cent, according to China’s General Administration of Customs.

Consensus forecasts from economists had predicted exports and imports would fall only 3.5 per cent and 7 per cent respectively. Between the two figures, China’s trade balance in dollar terms came to $52.31bn for July, up from June’s $48.11bn.

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Exports to most major trading partners – with the exception of South Korea and Hong Kong – did grow on a month-to-month basis, but in year-on-year terms exports to most top markets contracted.

Still, shipments to most of those shrank less in July in annualised terms compared to the previous month, with those headed to the US falling only 2 per cent compared to a 10.4 per cent drop in June. Exports to the EU and Asean fell 3.2 and 3.9 respectively; those to South Korea and Japan were down 1.1 and 5.2 per cent for the period.

China’s renminbi-denominated exports rose 2.9 per cent year-on-year in July – up from 1.3 per cent in June – while imports purchased using the currency shrank 5.7 per cent last month, sharpening markedly from a fall of 2.3 per cent the month prior, according to figures from China’s General Administration of Customs.

Export growth in domestic currency terms beat a consensus forecast from economists of 2.3 per cent growth year-on-year, while the fall in imports vastly exceeded expectations of a 1.1 per cent contraction.

From Bloomberg:

A year on from China’s surprise devaluation of the yuan, the weaker currency is buffering the effects of weak global demand as local receipts get a boost.

Taiwan exports grow for first time in 18 months

Exports grew 1.2 per cent last month compared to a year earlier, according to Taiwan’s Ministry of Finance, pulling the rug out from beneath economists’ consensus forecast of 2.1 per cent contraction. Expectations of 5.1 per cent contraction in imports were spurned by an annualised fall of just 0.2 per cent.

Exports of machinery and electrical equipment rose 3.1 per cent to $13.237bn, compensating for annualised falls in a number of other categories. Shipments to Japan rose 10.2 per cent year on year, while those to China and Hong Kong were up 3.4 per cent and those to Europe grew 4.5 per cent for the period, offsetting a drop of 7.3 per cent in exports to the US.

That brought the trade balance to $3.61bn, up slightly from the previous month and coming in below a forecast calling for $3.83bn.

The latest figures suggest export growth has returned to more robust levels than expected and track nicely with the latest reading from Taiwan’s Nikkei-Markit purchasing managers’ index for the manufacturing sector, which came in at 51 for July, up from 50.5 in June and marked a second month of expansion thanks to the strongest growth in new export business in 18 months. (…)

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EARNINGS WATCH

From Factset:

Overall, 86% of the companies in the S&P 500 have reported earnings to date for the second quarter. Of these companies, 69% have reported actual EPS above the mean EPS estimate, 12% have reported actual EPS equal to the mean EPS estimate, and 19% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (70%) average, but above the 5-year (67%) average.

In aggregate, companies are reporting earnings that are 4.2% above expectations. This surprise percentage is equal to both the 1-year (+4.2%) average and the 5-year (+4.2%) average.

In terms of revenues, 54% of companies have reported actual sales above estimated sales and 46% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (49%), but below the 5-year average (55%).

In aggregate, companies are reporting sales that are 0.8% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.6%) average.

The blended earnings decline for the second quarter is -3.5% this week, which is smaller than the blended earnings decline of -3.9% last week. Upside earnings surprises reported by companies in multiple sectors were mainly responsible for the decrease in the overall earnings decline for the index during the past week.

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to 0.3% from -3.5%.

The blended earnings decline for Q2 2016 of -3.5% is smaller than the estimated earnings decline of -5.5% at the end of the second quarter (June 30). Seven sectors have recorded an increase in earnings growth since the end of the quarter (June 30) due to upside earnings surprises, led by the Information Technology (to -1.5% from -7.3%) and Consumer Discretionary (to 10.7% from 6.4%) sectors. Three sectors have recorded a decrease in earnings growth
during this time due to downside earnings surprises and downward revisions to estimates, led by the Energy (to -82.0% from -78.1%) sector.

At this point in time, 79 companies in the index have issued EPS guidance for Q3 2016. Of these 79 companies, 53 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (53 out of 79), which is below the 5-year average of 74%.

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SENTIMENT WATCH