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

U.S. SERVICES PMI AT 52.8 ON MODEST NEW ORDERS GROWTH

April data highlighted a sustained recovery in overall business conditions across the U.S. service sector, led by faster growth of activity and incoming new work. However, the rate of job creation slipped down to its weakest so far in 2016 amid a lack of pressure on operating capacity and subdued confidence regarding the business outlook. At the same time, squeezed pricing power remained evident in April, with average tariffs broadly unchanged despite input cost inflation accelerating to its fastest since August 2015.

At 52.8 in April, up from 51.3 in March, the seasonally adjusted final Markit U.S. Services Business Activity Index remained above the neutral 50.0 value for the second month running. The latest reading was the highest since January and signalled a moderate expansion of service sector business activity. While the rate of output growth exceeded the average seen in the first quarter of 2016 (51.4), the headline index remained weaker than its post-crisis trend (55.6).

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The final seasonally adjusted Markit U.S. Composite PMI™ Output Index picked up to 52.4 in April, from 51.3 in March, thereby signalling the fastest expansion of private sector output since January.

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Stronger growth of service sector business activity (index at 52.8, up from 51.3 in March) contrasted with the weakest increase in U.S. manufacturing production for just over five-and-a-half years (index at 50.3 in April, down from 51.2).

Service providers mainly attributed the recent recovery in business activity to gradually improving client demand during April. Reflecting this, latest data indicated a modest rebound in new business growth from the survey-record low recorded in March. Anecdotal evidence suggested that uncertainty about the economic outlook was a key factor weighing on new order books at the start of the second quarter.

The latest survey highlighted that business confidence across the service economy was up fractionally in comparison to March, but still close to the lowest seen since the survey began in October 2009. Some survey respondents suggested that the presidential election season and heightened economic uncertainty had dampened the near-term growth outlook for their business units.

In contrast to the trend recorded for business activity and new work, the latest survey pointed to softer job creation at service sector companies. Moreover, the rate of employment growth was the weakest seen since December 2015. A slower rise in payroll numbers partly reflected an ongoing lack of pressure on operating capacity. Backlogs of work declined for the ninth consecutive month, which is the longest continuous period of depletion since the survey began in late-2009.

Service providers registered a renewed acceleration in input price inflation during April. Although only modest, the latest increase in average cost burdens was the fastest for eight months. However, average prices charged by service firms were broadly unchanged in April, which suggested further pressure on operating margins across the sector.

Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said

The surveys are consistent with economic growth picking up from the 0.5% seen in the first quarter to a mere 1.0% at the start of the second quarter, suggesting the bounce-back from the weak start to the year is far from impressive.

The fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low seen in March, and optimism about the year ahead also remains close to a post-recession low.

The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signalling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.

NEW$ & VIEW$ (4 MAY 2016)

U.S. Light Vehicle Sales Recover as Truck Purchases Surge

Total sales of light vehicles during April increased 5.1% (4.0% y/y) from March to 17.42 million units (SAAR), and recovered most of the prior month’s decline. Sales of light trucks jumped 7.3% (12.5% y/y) to 10.36 million units, a five month high. Truck sales moved higher to 59.5% of the light vehicle market. Auto sales improved 2.1% to 7.06 million units (-6.3% y/y), and recovered much of the prior month’s decline.

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Eurozone Retail Sales Fell Sharply in March

(…) The European Union’s statistics agency said on Wednesday that sales volumes were 0.5% lower in March than in February, although they were 2.1% higher than in March 2015. That was a sharper month-to-month fall than the 0.1% decline economists had expected. (…)

November-February sales were up at a 4.0% annualized rate, in real terms. March’s setback brings the annualized rate down to 1.9% over the last 5 months. March sales were particularly weak in Germany (-1.1%, 0.0% in last 5 months), France (-0.7%, +1.3%) and in the U.K. (-1.3%, +0.1%). U.K. sales were hard hit in the last 2 months, cratering at a 13.3% annualized rate. (Eurostat)

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Saudi Binladin Group Lays Off 50,000 as Low Oil Prices Bite Saudi Arabian company cuts a quarter of its workforce, mostly construction-site workers from Asia

(…) The scale of the retrenchment means the Jeddah, Saudi Arabia-based conglomerate cut nearly a quarter from its workforce of about 200,000. (…)

For the past half year, SBG has been grappling with the strained finances of its biggest client, the Saudi Arabian government, and the fallout of a deadly crane accident in the city of Mecca last year. That situation has left the construction conglomerate buried under billions of dollars of debt, bankers and financial advisers familiar with the matter said.

The Persian Gulf’s biggest construction firm has already defaulted on an unspecified number of debt repayments and been unable to pay a number of subcontractors and suppliers, bankers familiar with the company’s finances previously said.

Creditors and advisers to SBG have said that one of the main reasons behind the company’s financial woes stem from the Saudi government’s failure to pay for completed or ongoing construction work. SBG in recent years has completed work on multiple multibillion-dollar government projects, including hospitals, universities, highways and the extension of the holy mosque in Mecca. (…)

The job cuts, which were first reported by Saudi media, coincided with riots in Mecca during the weekend. Pictures and footage circulating on social media, which couldn’t be independently verified, showed protesters setting buses on fire. A spokesman for the Mecca Civil Defense confirmed they had to extinguish fire in seven buses and that an investigation was under way. He declined to say whether the protesters belonged to the Binladin Group.

Demonstrations in Saudi Arabia are rare. But the group’s financial trouble has sparked previous bouts of labor unrest. In February, hundreds of Binladin workers took the streets to demand unpaid wages. (…)  

Ninja China Warns Economists to Brighten Outlooks Chinese authorities have issued verbal warnings to economists, analysts and business reporters whose gloomy public remarks on the economy are out of step with the government’s upbeat statements.

(…) In the past, Chinese authorities have targeted mainly political dissidents while commentary about the economy and reporting on business has been left relatively unfettered in a tacit acknowledgment that a freer flow of information serves economic vitality.

But Beijing has moved to reassert control of the country’s economic story line after policy stumbles that contributed to selloffs in China’s stock markets and its currency last year fed doubts among investors about the government’s ability to navigate the slowdown. (…)

While evidence of the clampdown is anecdotal, it appears widespread. (…)

While restrictions on foreign media have always been tight, they are becoming tighter; a growing list of foreign publications have had their websites blocked from view within China, including The Wall Street Journal. (…)

The clampdown on criticism is reaching beyond publicly available news and comments at investor forums to include policy research and market analysis. That potentially could skew the information that leaders, officials and investors rely on to make decisions.

In February, the central bank abruptly stopped releasing data on foreign-exchange purchases by commercial banks—long viewed by market analysts as a key snapshot of China’s capital flows—a move some analysts attributed to growing worries over more money leaving its shores. In a statement days later, the central bank said it took the step because the data were “no longer a true reflection of China’s capital flows.” (…)

A Chinese government crackdown on the sale of data from its sprawling statistics agencies has prompted a marked deterioration in the numbers that investors rely on to understand the world’s second-largest economy.

In recent months, executives searching for figures on China’s petroleum exports or wind power output have noticed growing gaps in the numbers, with some data released later than expected or missing entirely. That has made it harder to assess the state of the broader economy and the many industries in which the country has become the dominant producer or buyer of raw materials. (…)

Much of the most detailed information is not published publicly by the National Bureau of Statistics but is sold to news agencies, banks, consultancies or other parties by departments within the bureau. In some cases, different departments will compete for revenue by issuing rival data sets. (…)

EARNINGS WATCH
  • 361 companies (80.0% of the S&P 500’s market cap) have reported. Earnings are beating by 4.6% while revenues have missed by -0.2%.
  • Expectations are for a decline in revenue, earnings, and EPS of -1.8%, -7.3%, and -5.0%.
  • EPS is on pace for -4.1%, assuming the current beat rate for the remainder of the season. This would be +1.0% excluding Energy.

At 2050 (pre-opening), the Rule of 20 PE is 19.6 on TTM EPS which seem set to decline $1.00 after Q1.

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