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$ (5 August 2016)

U.S. Adds 255,000 Jobs in July; Unemployment Rate Steady at 4.9% U.S. employers hired at a steady pace in July, a sign of underlying strength for the labor market despite a host of mixed economic signals.

Revisions showed U.S. employers added 18,000 more jobs in May and June than previously estimated. (…)

So far in 2016 employment gains have averaged 186,000 per month, down from 229,000 per month in 2015. (…)

Average hourly earnings for private-sector workers rose by 8 cents, or 0.3%, from June to July to $25.69. From a year earlier, average hourly earnings were up 2.6%, outpacing inflation. The consumer price index increased 1.1% in June from a year earlier.

The average workweek last month rose 0.1 hour to 34.5 hours.

Another month of hiring was enough to draw more people into the workforce. The labor force participation rate rose to 62.8% in July from 62.7% in June. (…)

Employment growth continues to decelerate on a YoY basis with July up 1.7% down from +2.0% in March. This may explain this:

The Liscio Report says that state level withholding taxes are down 0.5% YoY from +2.7% in June.

BofAML has this chart of 12-month rolling federal tax receipts…

…which, even though it is slowing, hides the drop in the recent numbers: personal taxes flat in Q2 YoY; corporate taxes –9.1% YoY in Q1.

fredgraph (4)

There has been no tax cuts since Congress has been in recess since 2012 Winking smile. This means that personal pretax revenue growth is flattening, confirming my Wednesday chart showing that spending growth is now outpacing declining revenue growth. Not very healthy for an economy essentially relying on consumer spending to stay positive.

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INVENTORIES WATCH:

The peak shipping season on the Pacific appears to be starting with a whimper, at least as far as ocean carriers are concerned. Reports from shipping industry observers show container ship operators have pulled significant capacity from the market, suggesting they’re uneasy waiting for an upturn in demand and are more focused on propping up pricing. Drewry Shipping Consultants Ltd. says in a report that carriers have dramatically increased their idled capacity since early July, according to Global Trade, and writes that “muted demand must have played a part in the usual decision.” Two shipping alliances suspended some trans-Pacific services in recent weeks, according to Drewry and shipping analysts at Alphaliner. Rates may play a big part in the suspensions, but the moves also show shipping customers aren’t providing carriers much confidence in future cargo bookings. (WSJ)

U.S. Factory Orders Decline Further in June, but Shipments Rise

New orders to manufacturers declined 1.5% (-5.6 y/y) during June following a little-revised 1.2% May fall. A 1.7% decline had been expected in the Action Economics Forecast Survey. Durable goods orders fell 3.9%, the same as in the advance report, paced by a sharp drop in transportation sector bookings. Nondefense aircraft & parts orders fell 58.8% (-60.7% y/y). Factory sector orders outside of the transportation sector altogether improved 0.4% (-4.2% y/y) after a 0.2% gain.

Total shipments rose 0.7% (-3.2% y/y) after a 0.1% rise. Nondurable goods shipments, which equal orders, improved 1.0% (-4.6% y/y), led by a steady 3.9% increase (-23.7% y/y) in petroleum refinery shipments. Basic chemical shipments improved 0.5% (0.6% y/y) and textile mill shipments rose 0.2% (4.7 y/y). Apparel shipments declined 1.7% (+8.5% y/y). In the durable goods sector, shipments improved 0.4% (-1.9% y/y), led higher by a 1.4% gain (0.8% y/y) in transportation shipments. Machinery shipments eased, however, by 0.2% (-8.3% y/y).

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Some Small Businesses Curb Expansion, Citing New Labor Law Small-business owners say they are shouldering higher costs and scaling back expansion plans because of a revised rule that gives employees more leverage in settling workplace grievances.

(…) The new policy, intended to hold businesses accountable for labor-law violations against people whose working conditions they control but don’t claim as employees, was put in place last year through a ruling by the National Labor Relations Board, which referees workplace disputes and oversees union-organizing elections. The rule, expected to affect fast-food, construction and other industries reliant on contract workers and employees of franchisees, also aims to ensure workers can unionize and collectively bargain with businesses that help control their fates. (…)

The change could pull franchisers—ranging from big brand companies such asMcDonald’s Corp. and Golden Corral Corp. to smaller operations—into labor disputes involving workers at their networks of independent owner-operators, or franchisees. The brand companies face the risk of having to pay back wages to workers fired for protesting low pay or trying to join a union; the companies also could be swept into collective-bargaining talks alongside store owners they say have total control over the workers at the stores.

Franchisees, meanwhile, say they could lose their independence to hire, fire and manage workers as they please. They are also concerned about becoming too independent: Some say their franchisers have scaled back worker training tools and other guidance, fearing regulators would view such involvement as joint-employer-like control.

Businesses say they are in a regulatory limbo because the new standard is vague about what constitutes control. (…)

Employers say the NLRB is confusing control with contractual relationships that help businesses and workers thrive. (…)

US economy: Decline of the start-up nation

(…) Despite headline-grabbing tales of tech unicornsin Silicon Valley, the portion of the US workforce employed in young companies has been shrinking, as has the pace at which new employer-owned businesses are created. In another sign of depressed dynamism, Americans change jobs and move between geographies less frequently.

Figures released yesterday by the Kauffman Foundation, which tracks entrepreneurship in the US, showed that the share of companies that are start-ups employing at least one person was at the second-lowest level on record in 2013, and 20 per cent below its pre-recession levels. There has been improvement since, with a bounce in openings in the fourth quarter of 2015 to their highest level in 10 years.

But the improvement has not been enough to dispel the musty air surrounding large parts of American business. Companies are growing older, competition is less fierce and market power is consolidating in the hands of a few large companies in many industries.

In three-quarters of US sectors, the 50 biggest companies boosted their revenue share between 1997 and 2007, according to research by Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, and Peter Orszag, an economist and banker. Industries from retail and finance to transportation became increasingly concentrated. (…)

While there has been a long-term decline nationwide in the share of businesses that are start-ups, analysis from the OECD finds similar trends in its other member countries, suggesting the US is by no means uniquely challenged. (…)

German Manufacturing Data Point to Sluggish Economy

[June] Orders fell by 0.4% in adjusted terms versus expectations in a Wall Street Journal survey of 0.5% growth. Foreign orders declined by 1.2% while domestic orders rose by 0.7%. The data showed that orders from the rest of the eurozone sharply fell by 8.5% on the month, while those from non-eurozone states rose by 3.8%.

The ministry said that in the second quarter new orders were down 0.5% versus the first three months of the year. (…)

High five Markit’s German PMI for July remained good:

Despite falling from June’s 28-month high of 54.5 to 53.8, the index remained above its long-run series average (51.9). Part of the fall in the headline PMI was attributed to a slower rise in new order intakes. Nevertheless, the latest increase in new work was the second strongest in 28 months. New export orders also
continued to rise during the month, with nearly one quarter of the survey panel reporting an expansion. As was the case with total new business, the rate of
increase slowed slightly.

Manufacturers reported an acceleration in output growth at the start of the third quarter, which they generally linked to rising demand and the processing of backlogs. The pace of expansion was the fastest since April 2014.

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Meanwhile, in the U.K.:

According to the Recruitment & Employment Confederation, the UK labor markets have been impacted by the elevated uncertainty in the corporate sector.(The Daily Shot)

SENTIMENT WATCH
Goldman, Gundlach, and Gross Are Worried About U.S. Markets. Time to Get Out?
Goldman Warns ‘Supply Storm’ to Engulf Global Copper Market
Gap Between Emerging Markets, S&P 500 Nears Record High: Chart
  • Also: Japanese equities are the cheapest in 30 years when compared to US equities. (The Daily Shot)

‘Trump Is Cratering’: New Polls Signal Deep Trouble for Republican

NEW$ & VIEW$ (4 August 2016)

Heavy-Duty Truck Order Slump Deepens

An unusually high number of cancellations in orders of heavy-duty trucks caused net orders in North America to plummet to the lowest point in over six years, according to a new report by research firm FTR.

Trucking companies in July ordered 10,400 Class 8 trucks, used for long-haul routes, below expectations and 56% fewer than the same period last year, according to preliminary numbers from research firm FTR released Wednesday. It was the fewest number of orders since February of 2010.

Heavy-duty truck orders, which have been sliding for months, were hit with “several significant order cancellations,” which is uncharacteristic for this time of year, FTR said in its report. “The high cancellations are likely the result of fleets placing large orders at the end of 2015, for delivery a year out,” said Don Ake, vice president of commercial vehicles at FTR in the report. (…)

There are “too many trucks chasing too little freight,” said Steve Tam, vice president at ACT Research, which also tracks heavy-duty truck sales. Truck orders are low now asfleets adjust their overly optimistic expansion plans after seeing strong growth in 2014and early last year, he said. ACT reported 10,500 Class 8 orders for July.

“I think the trucking community had an expectation that [growth] was going to continue. But with 20/20 hindsight, that did not happen. Freight has been very flat for basically the last year,” he said. “There are anecdotal signs that freight is improving very modestly, but I would liken it to treading water but still below surface at this point.”

Here are the charts from Zerohedge:

Eurozone retail sales fall flat in June

Sales growth was 0 per cent in the single currency area – falling short of a small expected rise – and fell 0.2 per cent in the wider EU.

On a yearly basis, retails sales rose 1.6 per cent in June and were up 2.4 per cent across the 28-member bloc.

The FT was the only mainstream media to report this important data but this is all it gave its paying readers.

Here’s what my non-paying readers get:

Pointing up Q2 sales volume rose 0.6% (+2.4% a.r.) after a flat Q1. Ex-food, ex-gas, real sales rose 0.3% in June when gas sales dropped 1.3%. “Core” sales are thus up 4.0% annualized in Q2 after a flat Q1. And this is in spite of a pretty weak June in the U.K. (Data from Eurostat)

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  • And this from Markit on trends in July:

imageLatest Markit Eurozone Retail PMI® survey data showed the continuation of contrasting trends in sales performance across the bloc’s big-three retail sectors, with a further sharp drop in sales in Italy offsetting steady growth across Germany and France.

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About the U.K. (via The Daily Shot):

Bank of England Cuts Rates, Orders New Round of Money Printing
China’s Central Bank Plans to Keep Policy ‘Prudent’
OIL
Analysts Turn Bearish on Oil Again Investment banks have cut their outlook for oil prices for the first time in four months, concerned about the continued oversupply in crude that has already sunk this year’s market rally, according to a Wall Street Journal survey.

A survey of 13 investment banks by The Wall Street Journal predicts that Brent crude, the international oil-price benchmark, will average $56 a barrel next year, down by more than a dollar from June’s survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $55 a barrel next year, down almost a dollar from the previous survey. (…)

The banks in the survey see oil prices staying below $50 a barrel until the end of this year and rising to $60 a barrel by the end of next year. Last summer, many of the same banks were predicting oil prices would rise to more than $70 a barrel this year. (…)

  • What Oil in the $40s Means for Oil Majors For how long can Europe’s big-five energy companies maintain dividend levels? Second-quarter results disappointed and the oil price fell about 20% in the past two months.

(…) The five big European groups, BP, Shell, Total SA, Eni SpA and Statoil ASA, began the year on consensus forecasts of $7 billion in total free cash flows for the next four quarters, according to Morgan Stanley analysts. By the end of June, that rolling four-quarter forecast had leapt to $25 billion.

That is far away from how the five companies have been performing. Free cash flows actually have been worsening and recent results took cumulative flows for the past four quarters at the big five down to minus $23 billion, according to Morgan Stanley.

Companies with negative free cash flow can support dividends with higher debt for a while if they think rising commodity prices are going to bail them out, but not forever. (…)

Despite second-quarter hiccups, analysts are still forecasting a big recovery in cash flows and profits in 2017 and beyond. But these depend on a pickup in oil prices: at UBS for example, forecasts are based on oil at $60 a barrel on average next year, $70 in 2018 and $75 thereafter.

And companies are working to lower breakevens, with BP aiming for a business that works at $50 to $55 a barrel. Brent crude has been below that level for most of the past year.

Nevertheless, payout promises will need to be revised if stuttering global growth and oil back in $40s is a taste of more disappointments to come.

Same in U.S. and Canada…

From the FT’s Lex column:

(…) The price crash last summer brutalised the US shale sector. According to law firm Haynes and Boone, 85 North American producers have filed for bankruptcy since early 2015. However, amid the wreckage, drillers have taken defensive action. Research firm Wood Mackenzie notes that of the $250bn of global E&P capital expenditure cuts in 2016 and 2017, two-thirds has come from US independent producers. It reckons that 56 US producers can now break even at $50/barrel.

The ultimate question for a recovery in prices is how output responds. Even though rig counts are down nearly 80 per cent since 2014, efforts to enhance well productivity have kept production resilient. From its April 2015 peak of 9.7m barrels per day, production is off less than a tenth. And for companies with efficient operations in low-cost regions, there is temptation to grow. Pioneer Natural Resources, focused on the desirable Permian Basin in Texas, said it would boost its oil production by a quarter in 2016, reasoning that even if prices are wobbly, incremental barrels remain profitable. Its investors are happy with the plan: it raised $2bn in new equity in March and its shares are up a quarter over the past year.

Pioneer and other marginal firms can survive, and even expand a bit, with a depressed oil price. But over time the decline in investment, productivity gains aside, is curtailing future output growth. Wood Mackenzie says that resultant production losses will be 4m barrels a day by 2020. Prices may have to snap back. A happy ending for those who have managed to survive to the end of the movie.

Pointing up By the way, here is the spread between Saudi and US oil production. It’s moving in the direction the Saudis want. (The Daily Shot):

SENTIMENT WATCH
Goldman Finds The Treasury Market No Longer Reacts To Economic Data

(…) Goldman’s Elad Pashtan writes, “the sensitivity of US Treasury yields to economic data surprises has declined to near record-lows over the last two years. We find that the pattern of reactions to data surprises across the yield curve matches pre-crisis norms—with higher sensitivity for short-term rates than longer-term rates—but the average reactions are much lower; for breakeven inflation reactions to growth data are not discernible from zero.”

So if it is not the economy, then what does the “market” respond to?  Take a wild guess:

In contrast, Treasury yields have reacted more strongly to Fed communication, at least according to one measure of policy surprises, and the sensitivity of exchange rates to activity news has increased. (…)

One possible explanation for this phenomenon is that investors are now more focused on Fed communications, rather than to economic data releases—perhaps due to uncertainty about the central bank’s reaction function. And we do see some evidence along these lines. (…)

Add this to the list of strange things happening at this stage of the cycle:

BTW: Turkey’s inflation jumped on higher food prices and weaker lira (after the coup). More inflation to come? (The Daily Shot):

Beware of Customized ‘Earnings Before Bad Stuff’ Companies that report significantly stronger earnings by using tailored figures like ‘adjusted net income’ or ‘adjusted operating income’ are more likely to encounter some kinds of accounting problems than those that stick to standard measures, according to new research.

(…) The study focused on companies in the S&P 1500 index. It found that just 3.8% of those exclusively using standard GAAP metrics had formal earnings restatements from 2011 to 2015. Among heavy users of non-GAAP measures—those whose non-GAAP earnings were at least twice as high as their GAAP net income—the rate was 6.5%.

Similarly, 7.5% of the GAAP-only group had material weaknesses in internal controls—flaws in their procedures to prevent financial errors and fraud—versus 11% of the non-GAAP group.

(…) the results suggest companies using non-GAAP metrics heavily “may be somewhat less rigorous in other accounting areas” than companies using only GAAP, said Robert Pozen, a senior lecturer at the MIT Sloan School of Management. (…)

Even critics acknowledge the tailored metrics can sometimes be helpful—showing a company’s results in constant currency is a legitimate adjustment, for instance, Mr. Pozen said.

But there is also a concern they are being abused, that companies are stripping out normal, ongoing costs to make themselves look healthier. (…)

  • Alliance Bernstein adds this (via ValueWalk)

(…) In 2015, about 87% of companies in the S&P 500 reported adjusted earnings, up from 73% in 2010. And the median size of the adjustment increased from 8% in 2010 to 25% in 2015. In aggregate, reported GAAP earnings were almost 22% below adjusted earnings last year. Overall, there has been a sizeable increase in both the frequency and the magnitude of the adjustments. (…)

Although earnings adjustments in 2015 were higher than the 10-year average in six out of ten sectors studied, the bulk of the increase was driven by energy and healthcare (Display). Energy companies have been writing down investments made when oil prices were a lot higher than they are now. In healthcare, a spate of deals and consolidation among the largest companies has led to steady growth in amortization of intangible assets, generally excluded from adjusted earnings. (…)

GAAP Earnings, GAAP Accounting

While the causes of the write-offs in these two sectors may seem different on the surface, they share a common root. In each case, managements were striving to grow earnings in a low-growth world—and, to put it bluntly, they overreached. Energy companies paid too much for drilling rights and development crews, banking on the idea that oil prices would remain at their historical highs or rise even higher. In the case of healthcare, high valuations for target acquisitions drove companies to make overly optimistic projections about their ability to raise prices, expand distribution and commercialize drug pipelines.