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$ (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

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)

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