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$ (29 JULY 2016)

Regional Fed Manufacturing Overview: July Remains Negative

Regional Overlay

U.S. Homeownership Rate Falls to Five-Decade Low But household formation climbs as more Americans look to rent

(…) The homeownership rate, the proportion of households that are owner-occupied, fell to 62.9%, half a percentage point lower than the second quarter of 2015 and 0.6 percentage point lower than the first quarter 2016, the Census Bureau said on Thursday. That was the lowest figure since 1965.

(…) the homeownership rate for 18- to 35-year-olds slipped to 34.1%, the lowest level in records dating to 1994.

At 77.9%, the homeownership rate was highest for those 65 years and over.

But the broader picture suggests a degree of economic strength: Renters are spurring a steady increase in overall household formation. Renter-occupied housing units jumped by 967,000 from the same period a year earlier. Overall, household formation has been fairly steady since the early days of the expansion. (…)

Fingers crossed Down the road, renters will likely look to become buyers, spurring a housing market that already appears constrained by rising prices and limited inventories.

CalculatedRisk has the chart:

Oil Prices Continue to Fall in Flooded Market A gasoline glut, rising output from OPEC and signs of increased U.S. production continue to take their toll on Brent and West Texas Intermediate crude oil.

Brent crude, the global oil benchmark, fell 1.2% to $42.71 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 1% at $40.74 a barrel.

A combination of an expanding global gasoline glut, early signs of increasing production in the U.S., and rising output from the Organization of the Petroleum Exporting Countries have dragged down oil prices by around 20% since they broke above $50 in June. (…)

The market was caught off-guard by an unexpected rise in weekly U.S. gasoline stocks which showed inventories rose 452,000 barrels to hit 241.5 million barrels in the week ended July 22. The increase comes at a time when stocks are usually being drawn. (…)

Support from temporary factors including Canadian wildfires, oil workers on strike in Kuwait and militant attacks in Nigeria that helped oil prices recover since February have now dissipated and the focus has reverted to the overhang of supply.

“In addition to having more rigs drilling, the average productivity of rigs continues to increase,” said the U.S. Energy Information Administration. In the three major oil producing regions of Bakken, Eagle Ford, and Permian, daily productivity picked up by 155 barrels, 226 barrels and 111 barrels, respectively, per well, over the 2015 average.

In June, OPEC crude production increased by 264,000 barrels a day to average 32.86 million barrels, according to the cartel’s monthly report. (…)

Bank of Japan Takes Modest Action The Bank of Japan said it would expand only its buying of exchange-traded funds, a move that disappointed investors and indicated it may have reached the limits of monetary policy.
EARNINGS WATCH
  • 295 companies (67.5% of the S&P 500’s market cap) have reported. Earnings are beating by 5.3% while revenues are surprising by 0.9%.
  • Expectations are for declines in revenue, earnings, and EPS of -0.6%, -4.2%, and -1.9%, respectively.
  • EPS is on pace for -0.2%, assuming the current beat rate for the remainder of the season. This would be +4.2% excluding Energy and the Big-5 Banks. (RBC)

NEW$ & VIEW$ (28 JULY 2016)

U.S. Pending Home Sales Improve Slightly

The National Association of Realtors (NAR) reported that pending home sales rose 0.2% (1.0% y/y) during June following an unrevised 3.7% May decline. These sales are reported as an index with 2001=100.

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U.S. Durable Goods Orders Tumble 4.0% on Overseas Turmoil Demand for long-lasting factory goods fell sharply in June, a sign overseas turmoil is weighing on U.S. manufacturers.

New orders for durable goods—aircraft, industrial machinery and other products that are designed to last at least three years—decreased a seasonally adjusted 4.0% in June from the prior month, the U.S. Commerce Department said Wednesday. The drop comes after May’s downwardly revised fall of 2.8%. Through the first half of the year, durable good orders were flat compared with the same period in 2015.

The June decline was led by weaker demand for civilian aircraft and defense products, but there was a pull back in several other categories including computers and metals. Economists surveyed by The Wall Street Journal had expected a decline of 1.4%. (…)

Orders for durable goods excluding the transportation category fell 0.5% from May, and orders excluding defense fell 3.9% last month. Transportation demand declined 10.5%, largely due to a 58.8% drop in civilian aircraft orders, a highly volatile category. (…)

In a positive note, a closely watched proxy for business investment, new orders for nondefense capital goods excluding aircraft, rose 0.2% in June from May, after falling the prior two months. Still orders in the category were down 3.8% in the first half of the year compared with the same period in 2015. (…)

The durable orders report stands in contrast to other recent data suggesting the U.S. manufacturing sector stabilized in June. A Federal Reserve report showed manufacturing output was modestly above year-earlier levels in June. The Institute for Supply Management’s gauge showed manufacturing activity in June to its highest level since February 2015.

Wednesday’s report showed orders for motor vehicles and parts rose 2.6% in June from May, and demand for machinery only slipped 0.1%.

Shipments of durable goods rose 0.4% during the month, but are still running behind the rate set in the first half of last year.

Fed Leaves Door Open to September Move The Federal Reserve upgraded its assessment of the economy’s performance and said near-term risks to the outlook have diminished, effectively leaving the door open to raise rates later this year, possibly as early as September.

Near-term risks to the economic outlook have diminished.

EARNINGS WATCH

More than half way:

  • 230 companies (55.1% of the S&P 500’s market cap) have reported. Earnings are beating by 5.9% while revenues are surprising by 1.0%.
  • Expectations are for declines in revenue, earnings, and EPS of -0.6%, -4.4%, and -2.1%, respectively.
  • EPS is on pace for +0.6%, assuming the current beat rate for the remainder of the season. This would be +4.8% excluding Energy and the Big-5 Banks.
SENTIMENT WATCH

Are stocks the “new bonds”? (The Daily Shot)

Carlyle Rainmakers Cast Dark Cloud Over Returns The private-equity firm said soaring stock markets and intense competition for deals will make it harder to reap big profits on leveraged buyouts.

(…) Investors are “willing to take lower rates of return than the kinds that we’ve averaged over our history,” Mr. Rubenstein said. “It’s just so difficult now with low interest rates and low equity market appreciation to get these kind of returns anywhere else.” (…)

CETERIS NON PARIBUS:

Unilever is paying $1 billion for Dollar Shave Club, a five-year-old start-up that sells razors and other personal products for men. Every other company should be afraid, very afraid.

The deal anecdotally shows that no company is safe from the creative destruction brought by technological change. The very nature of a company is fundamentally changing, becoming smaller and leaner with far fewer employees. (…)

Everything changed in 2012, when Mr. Dubin’s comedic free ad posted on YouTube. Within 24 hours, the new business had more than 12,000 orders, more than it could handle. The ad went on to get over 20 million views and rocket Dollar Shave Club to over $240 million in revenue. (…)

It captured about 8 percent of the market in only a few years. It also expanded into other personal care products like “One Wipe Charlie,” a wet wipe to replace toilet paper. (…)