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$ (27 MAY 2016): More On The China Risk

Surprised smile Pending Home Sales Highest in Decade The number of homes that went under contract in April to be sold climbed to the highest level in over 10 years, a sign the housing market is gaining traction and supported by steady job creation and historically low interest rates.

Pending sales of previously owned homes, reflecting contract signings, rose 5.1% last month from March, the National Association of Realtors said Thursday, handily exceeding the 0.7% rise expected by economists surveyed by The Wall Street Journal.

The sales index climbed to 116.3, the highest level since February 2006. (…)

Pending sales in April rose 4.6% compared with a year earlier, marking the 20th consecutive month of year-over-year gains.

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Drivers Won’t Suffer at Gas Pump From Oil’s Rise

Gasoline prices are 16% cheaper today than the last time oil was at $50 a barrel in November. Refineries have been running hard this year, with fewer outages than a year ago. That keeps gasoline supplies healthy and blunts the impact of rising crude prices. (…)

Retail prices jump about 25 cents for every $10 change in crude futures, according to AAA (…).

Gasoline is more expensive than it was three months ago, with the national average for regular now at $2.31, according to AAA. Pump prices are up 33% from their recent low in mid-February, which came just as oil futures crashed to their own 13-year low. But that rebound in gasoline prices hasn’t been as severe as the 89% rise in crude prices over the same period.

U.S. households are still likely to save $160 billion in 2016 compared with what they spent on gasoline two years ago, when oil prices were more than $100 a barrel, according toJason Thomas, director of research at private-equity firm Carlyle Group.

The savings is equivalent to a 2.6% raise in the median household income of $51,900 in 2014, according to Citigroup. AAA estimates the savings at about $700 per licensed driver, even with crude prices on the rise.

AAA expects more than 34 million Americans to travel at least 50 miles this Memorial Day weekend, up 2.1% from 2015 and the most since 2005. (…)

Travel by air is also forecast to rise this weekend though by a less robust 1.6% even though flights on the 40 most popular U.S. routes are about 26% cheaper than a year ago, according to AAA. (…)

From Doug Short:

Vehicle Miles Traveled

U.S. Durable Goods Orders’ Strength Led by Civilian Aircraft; Capital Spending Weakens

New orders for durable goods jumped 3.4% during April (1.9% y/y) following a 1.9% March increase, revised from 0.8%. A 0.2% April gain had been expected in the Action Economics Forecast Survey. Data were revised back to 2001.

A 64.9% rise (5.1% y/y) in orders for civilian aircraft drove total transportation sector orders 8.9% higher (8.2% y/y). Orders for defense aircraft & parts declined 4.5% (+29.8% y/y) and motor vehicle & parts orders gained 2.9% (4.1% y/y). Excluding the transportation sector altogether, total durable goods orders improved 0.4% (-1.4% y/y) after a 0.1% rise.

Business investment remained soft. Nondefense capital goods orders excluding civilian aircraft eased 0.8% (-5.0% y/y), down for the fifth month in the last six.

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MORE ON THE CHINA RISK
Chinese firms’ financial outlook worsens Credit ratings suffer record deterioration, says Moody’s

(…) The agency more than quadrupled the number of Chinese debt issuers it classified as having a “negative outlook bias” on their credit ratings at the end of the first quarter of this year, compared to the end of 2015. A negative bias includes both those companies with ratings on review for a downgrade and those with a negative outlook on their rating. (…)

Chart: Negative bias among rated Chinese issuers at a record high

“We believe that China’s authorities have the tools to prevent a financial crisis from materialising in the near future,” said the report. It added that the fact that the Chinese banking system was state-backed, funded domestically and that authorities have considerable powers of moral suasion all helped to impart solidity. (…)

In addition, the debt servicing ratio — which measures cash flow against debt obligations — has also worsened (see chart above), leaving fewer funds available to companies for productive uses as the debt burden has climbed. (…)

Chart: The productivity of China’s capital investment is declining

Another key measure of corporate health — returns on assets — have also been in retreat, especially for state-owned enterprises (SoE) rated by Moody’s. Overall SoE returns on assets slipped to 2.9 per cent in 2015 from a post-crisis high of 5.9 per cent hit in 2010. (…)

State-owned firms’ profits slump

  • THE ROBOTS ARE HERE

From MishTalk:

Today, Adidas announced the first ever 100% robot-made shoe. (…)

Deutsche Welle, Germany’s international broadcaster, reports . (…)

The new production site in the southern German city of Ansbach is still under construction, but it represents a return to local production for Adidas, which stopped manufacturing shoes in its home market more than two decades ago in favor of Asia.

But the company has struggled with steadily rising wages across the continent, where it employs around a million people.

Six subcontractors of Adidas in China declined to comment or said they were not aware of the new production sites in Germany, news agency AFP reported. (…)

The sportswear and equipment company also plans to open a second Speedfactory in the United States in 2017, with similar ones to follow in Britain or in France. (…)

Let’s not sugar coat what’s going to happen. 1,000,000 Adidas shoe making jobs in China will vanish by 2018. Nike? Converse? Everyone else? (…)

Also consider Robots Taking Over: Foxconn Terminates 60,000 Employees, Hires Robots! (emphasis theirs)

In one of the largest terminations ever recorded in human history, iPhone manufacturer Foxconn has decided to fire 60,000 employees in one single go. Earlier this factory based out of Kunshan in Jiangsu province of China had 110,000 employees, but now, it will only have 50,000 human employees. (…)

And the interesting aspect is that, almost all of the 600 major manufacturing companies based in Kunshan are about to fire humans, and assign their tasks to robots. In fact, 35 biggest manufacturing companies from Taiwan, including iPhone’s main manufacturer Foxconn have spent a collective 4 billion yuan or HK$4.74 on improving and optimizing automation.

And this recent termination of 60,000 humans is just the start.

Earlier this year, we reported that top Indian IT companies hired 24% less employees; and automation is the reason for this sharp decline. Cognizant Technologies was the company which was impacted to the max, as they hired 74.6% less employees in 2015, solely due to rise in automation.”

Mish to conclude:

New Slogans Needed

Instead of “Buy Union!” we need “Buy Human!”

Anyway, China’s problems are compounding fast. Waiting for the other shoe to drop?

Equity fund outflows pass $100bn in 2016 Further $9.2bn shed in week ending May 25 despite brighter data

Japan falls deeper into deflation

(…) The headline consumer price index fell 0.3 per cent year on year in April, after a fall of 0.1 per cent in March, marginally better than economists’ expectations but a far cry from the 2 per cent targeted by the BoJ. (…)

Yet the BoJ’s preferred measure of underlying inflation, which strips out energy and fresh food, slowed to a rise of 0.9 per cent year on year in April from 1.1 per cent in March, according to estimates by Capital Economics. (…)

There are signs that the slide will accelerate in the months ahead. Preliminary data for the Tokyo area in May showed headline prices falling at an annual rate of 0.5 per cent, quicker than the 0.4 per cent decline in April, but in line with economists’ forecasts. (…)

NEW$ & VIEW$ (26 MAY 2016): Q2 Bounce?

Q2 BOUNCE?

Yesterday’s release of Markit’s flash Services PMI has not been mentioned in any of the mainstream media that I read daily. The Services industry has kept the U.S. economy afloat amid weak manufacturing and exports. That support is seriously weakening.

U.S. service providers indicated a sustained upturn in overall business activity during May, but the rate of expansion was only marginal and the weakest for three months. Survey respondents cited relatively subdued client demand and less favourable domestic economic conditions as key factors weighing on business activity in May.

In line with the trend for business activity, service providers also recorded a renewed slowdown in growth of incoming new work during May. The latest expansion of new business intakes was only modest and one of the weakest recorded since the survey began in late-2009.

Pointing up Having correctly forewarned of the near-stalling of the economy in the first quarter, the surveys are now pointing to just 0.7% annualised GDP growth in the second quarter, notwithstanding any sudden change in June. (…)

Pointing up The surveys are signalling a non-farm payroll rise of just 128,000 in May.

US productivity breaks three decades of rises Prospect of wage stagnation boosts fear of populist backlash

Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year. (…)

Unless the rate of productivity growth increases, advanced economies will struggle to raise living standards and pay for the costs of their ageing populations. (…)

Output per person, an alternative measure of productivity, grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006. (…)

The poor productivity numbers are in some ways surprising given the breakneck pace of digital innovation in powerhouses such as Silicon Valley and other US research hubs.

However such new technologies are only gradually being rolled out across the economy. There are also difficulties measuring the fruits of the digital economy. Free online media and open-source software are, for example, hard to capture in GDP numbers. (…)

US productivityChina productivityEurozone productivity

Thumbs up Thumbs down Confused smile How High Can Oil Prices Go? Analysts appear unable to reach consensus as market offers opposing hints to oil rally’s potential

(…) Many analysts cite strong demand from major emerging countries such as China and India, coupled with supply constraints on many main producers in the Middle East, as a reason to remain bullish on oil.

However, those in the “bear” camp reckon there is still plenty of global supply that could potentially come on line, with a number of U.S. producers of shale oil ready to step up production as prices rise. The return of thousands of barrels of crude onto global markets from Iran is also helping keep oil plentiful. (…)

In China, oil imports have risen 12% this year, government data show. That is thanks in part to the country’s efforts to fill up its strategic reserves of oil. The gain has also been supported by the rise of independent Chinese refiners, known as teapots, that have been processing more oil for both the domestic and export markets.

In India, fuel consumption rose 10% in the first quarter as auto sales there hit a record, according to International Energy Agency estimates. (…)

At the same time, the U.S. is littered with drilled wells that haven’t been activated and $50 oil makes doing so profitable, according to Citigroup, while prices at $60 are likely to spur fresh drilling. The recent price rally could release 400,000 barrels a day or more of new U.S. output.

The bank’s analysts forecast oil prices could reach around $65 a barrel by the end of 2017, though they say they have only “65% or so confidence in this price path.”

The return of $50 oil promises to sting motorists and other energy consumers across Asia, leaving them stuck with higher energy bills following the rollback of costly fuel subsidies.

India, Malaysia, Indonesia and Thailand are among big fuel consumers in the region that took advantage of the slump in oil prices to scale back long-standing government assistance for gasoline, diesel and other fuels. (…)

That is translating to higher fuel prices across the region. Diesel prices in Delhi have climbed more than 7% this year, while diesel in Thailand is up 17%, according to data compiled by BMI Research. (…)

Meanwhile in the USA:

Fed Survey Finds Improvement in Household Finances Most Americans reported their household finances mildly improved last year, but nearly half said they would struggle to cover a $400 expense in an emergency.

(…) A total of 69% of respondents in the Fed’s 2015 Survey of Household Economics and Decisionmaking said they were either “living comfortably” or “doing okay,” up from 65% in 2014 and 62% in 2013.

However, the survey found that 31%, or roughly 76 million adults, are either “struggling to get by” or are “just getting by.”

For nearly half of Americans, household finances are precarious: 46% of respondents said they wouldn’t be able to cover a $400 expense in an emergency or would have to borrow money or sell something to meet it. (…)

The majority of working adults without a disability, 77%, are confident that they have the skills necessary to get the kind of job they want. That is an increase of 10 percentage points from the 2013 survey.

The number of people who would prefer to work more hours at their current wage was roughly the same year-over-year, at 35% in 2015 compared with 36% in 2014. Around one in five workers said they are juggling two or more jobs. (…)

Nearly a third of respondents who aren’t yet retired reported that they have no retirement savings or pension at all, the survey found. (…)

Fingers crossed Trillions in Debt—but for Now, No Reason to Worry

U.S. households owed $12.25 trillion at the end of the first quarter, up 1.1% from the end of 2015, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released Tuesday. If the first quarter repeats itself through the end of the year, U.S. household debt will approach its peak of $12.68 trillion, which it hit in the third quarter of 2008. (…)

This time is different because short-term interest rates have been stuck near zero since then. For U.S. consumers, that means household debt-service payments as a percent of disposable personal income are at their lowest level since at least 1980, despite a much higher debt load. In addition, more loans are going to higher-quality borrowers.

The combination of better-quality borrowers, plentiful jobs and low rates means U.S. default rates are at historic lows.

Low rates have had an even more dramatic impact overseas, where economies are weaker or less stable. Global debt—including households, businesses and governments—has risen from 221% of GDP at the end of 2008 to 242% at the end of the first quarter. But the cost of interest payments, as a share of GDP, has fallen to 7% from a peak of 11%, according to J.P. Morgan.

Japan is the prime example of how low interest rates can change the rules of the game. At 400% of GDP, Japan’s debt level is by far the highest in the world. (…)

But Japan’s interest-cost-to-GDP ratio is just 2%, among the lowest in the world, according to J.P. Morgan. At that level and with ample domestic savings, that game could go on forever.

Japan’s example eases some of the short-term worries about China, where borrowing to juice the economy has become national policy. Debt to GDP in China has risen from just over 140% before the financial crisis to 243% currently. But China’s interest cost to GDP is 12%. That’s among the highest in the world, and higher than the U.S. precrisis, but the ratio hasn’t risen in two years, even as borrowing increased.

More important, China has plenty of room to cut interest rates. And lenders are also rolling over loans and extending maturities. Debt can’t rise forever, but if there’s no big shock in China, there’s little reason the debt game can’t keep going for the foreseeable future.

TRUMPED?

High five But hold on; those polls do not mean much yet. The presumptive Democratic nominee is still battling Bernie Sanders, while the Republican Party is uniting behind Mr Trump. In April 2008, John McCain was ahead in opinion polls matching him against Barack Obama, who was then still tussling with a troublesome Democratic rival—Mrs Clinton. And what of the State Department report? It contains some damning evidence about the former secretary of state’s behaviour, but also censures her predecessors. There is nothing in it that makes an indictment from the FBI (what really worries those Democrats interested in winning the presidency) seem likely.

Confused smile Confused smile Once Bullish, Miners Turn Bearish on Metals Prices

(…) Analysts are also bearish, but the negative call from once bullish miners underscores just how poor sentiment is in metals markets, even after five years of declines.

“Although we have recently seen some positive signals…we are expecting another year or two of low copper prices,” said Jean-Paul Luksic, chairman of Chilean copper producer Antofagasta PLC, last week.

Other senior executives from the world’s largest miners have a similar message on their metals and iron ore. (…)

As this year’s rally faded, the sector faced the same problems it has wrestled with for years, in particular the overcapacity that built up during the decadelong commodity boom that began at the turn of the century. Analysts have repeatedly said that more mines and smelters need to close for prices to really bottom out, particularly in metals such as aluminum and nickel and in iron ore. (…)

Norilsk Nickel, the world’s largest nickel producer, estimates that about 70% of global production in this metal is currently loss-making. Only 17% of this capacity is close to shutting down, the Russian miner estimates. (…)

The FTSE 350 mining index, which includes some of the world’s largest miners, climbed 83% from its low this year to a peak in April, before falling 15% to date. Shares in commodities giant Glencore PLC more than doubled from their low in January to their March peak. They have since fallen 19%. (…)

Punch I hope people don’t invest on the basis of these “forecasts”. None of these people really know what’s going on. Investing in commodities and mining companies is a losers game.

Hedge Funds May Lose 25% of Assets, Blackstone’s James Says

The $2.9 trillion hedge-fund industry may lose about a quarter of its assets in the next year as performance slumps, said Tony James, Blackstone Group LP’s billionaire president.

“It’s kind of a day of reckoning that we face here,” James said Wednesday in an interview with Bloomberg TV Canada’s Pamela Ritchie at a conference in Toronto. “There will be a shrinkage in the industry and it will be painful. That’s going to be pretty painful for an awful lot of places.”

The hedge-fund industry is having its worst start to a year in performance and investor withdrawals since global markets reeled after the financial crisis. Third Point, the hedge-fund firm founded by Dan Loeb, last month said the industry is in the first stage of a “washout” after “catastrophic” results this year. (…)

Confused smile Lending in China Is So Risky That Cows Are Now Collateralized

China Huishan Dairy Holdings Co., which operates the largest number of dairy farms in the country, is selling about a quarter of its herd -– some 50,000 animals — to Guangdong Yuexin Finance Lease Co. for 1 billion yuan ($152 million) and then renting them back. (…)

“Huishan Dairy seems to be selling cows and leasing them back in order to raise money now, because they’ve been using cash to buy back shares,” said RHB’s Yuen, who has a “sell” rating on the stock. “The chairman wants to prop up the share price for reasons that are unclear. It could be a way to get better terms for share pledged-based loans, which he’s done before.” (…)

New type of bull market…