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$ (3 DECEMBER 2015)

Yellen Signals Fed on Track to Raise Rates in December Fed Chairwoman Janet Yellen expressed confidence that the U.S. economy is likely to register continued modest growth and a small pickup in inflation, a sign she is ready to raise short-term interest rates later this month

(…) “On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market,” Ms. Yellen said in her speech. “Continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2% objective over the medium term.” (…)

U.S. Wages Show Signs of Breaking Out Hourly compensation up 3.4% as productivity picks up

(…) On Wednesday, the Labor Department released new productivity and compensation figures showing that inflation-adjusted hourly compensation for the nonfarm business sector grew 3.4% in the third quarter compared with the same quarter a year ago, the second-largest jump since the third quarter of 2009. That comes after hourly compensation grew 3.3% in the second quarter over the same quarter of 2014.

Higher pay has also taken hold in the manufacturing sector, where real compensation climbed 3.5% in the third quarter from a year ago after a 2.5% increase in the second.

The wage growth comes as productivity also shows signs of improvement. Productivity grew at annualized rates of 2.2% in the third quarter and 3.5% in the second.

Other wage measures have also shown improvement. Average hourly earnings of private-sector employees were 2.5% higher in October than the previous year, the largest annual increase since July 2009, according to a separate Labor Department report. (…)

The WSJ failed to get to the crux, which Haver Analytics did:

As a result, unit labor cost growth last quarter was raised to 1.8% (3.0% y/y) from 1.4%, but the Q2 increase of 2.0% was lifted even more sharply from a 1.8% decline.

Manufacturing unit labor cost grew 2.3% (2.1% y/y), revised from 0.8%. That followed a 3.3% Q2 gain which was revised from -2.0%.

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Global manufacturing growth remains soft in November

At 51.2 in November, the J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and Markit in association with ISM and IFPSM – was broadly unchanged from the five-month high of 51.3 reached in October. The rate of expansion signalled by the headline PMI remained relatively lacklustre nonetheless, meaning that November continued the subdued run of data for the global manufacturing sector through 2015 so far.

The respective averages for the PMI sub-indices tracking output, new orders and new export orders are all around 1.0-1.5 points below the levels achieved for 2014 as a whole.

November saw growth of new orders slow from October’s recent high and employee numbers continue to rise at a soft pace. The trend in production volumes
improved, however, with output growth accelerating to an eight-month peak.

North America and Europe continued to register solid expansions of production in November. Growth in the US remained close to October’s seven-month high,
while an acceleration in Mexico more than offset the continued (but slowing) downturn in Canada. Output growth in the eurozone ticked up to its fastest in one-and-a-half years, with expansions registered in almost all of the euro area nations for which data are collected.(…)

With the exception of Japan – where production rose at the quickest pace since March 2014 – Asian economies generally reported lacklustre or decreasing
trends in output during November. India partly bucked this trend by recording a slight gain in production, although the rate of expansion was below those seen
during its current 25-month sequence of increase. Output stagnated in China and Vietnam, and declined in Taiwan, South Korea, Indonesia and Malaysia. A
marked contraction was also signalled in Brazil. (…)

Price pressures remained on the downside during November, with both input prices and output charges falling during the latest survey month. This was mainly
due to the ongoing reductions in international commodity prices, part of which manufacturers passed on to their clients.

Brazil’s Industrial Output Plunges 11.2%
THE LONELY SAUDIS:
Saudis throw down oil production cut challenge Kingdom says it will back output reductions if supported by rivals

Saudi Arabia has thrown down a challenge to big rival oil producers ahead of this week’s Opec meeting, saying it would back output cuts as long as they were supported by countries both inside and outside the cartel.

The kingdom, Opec’s de facto leader, has set a very high bar for a deal that is unlikely to be met by the time of Friday’s meeting in Vienna, but it leaves open the possibility of an agreement in 2016. (…)

“In order for there to be a cut in production non-Opec must participate, Iraq has to participate and the Iran output picture has to be clear,” the delegate said. (…)

Both countries [Irak and Iran] have argued that Saudi Arabia has taken advantage of their difficulties to increase its own market share, so any increase in production should be unhindered by output constraints. (…)

EARNINGS WATCH

Thomson Reuter’s tally of pre-announcements for Q4 EPS shows 27 positives so far vs 19 at the same time last year and 83 negatives vs 90. So far so good.

Canadian banks: maple belief

(…) Direct damage from oil and gas lending has so far been limited. The energy sector represents over a tenth of the nation’s economy, but lending to oil and gas companies is just a few percentage points of the total loan book. That lending is typically secured by the commodity and so provisions, which have increased through the year, are still only around 50 basis points of total oil and gas lending. Those provisions are expected to inch up through 2017 as commodity prices remain low. But Credit Suisse estimates that even in a more stressed scenario, where provisions spike to 67 basis points, earnings would fall by just 13 per cent. And return on equity of 13 per cent would exceed most US banks. (…)

The banking sector has presented a puzzle this year — share prices have fallen while earnings per share have been moving modestly upwards. Capital markets revenue, while slowing in the fourth quarter, has otherwise been strong. Banks such as RBC and BMO also have substantial exposure to US as well as more stable wealth management units.

Optimism does not have to be about feeling great. It can also mean things not being as bad as they seem.

THE RIGHT PRICE?

Dec 2 (ESPN) – Pitcher David Price reaches 7 year deal with Boston Red Sox for $217 million.

NEW$ & VIEW$ (2 DECEMBER 2015): Chinese Green Shoots

Call me Did you miss THAT STINKY BULL

U.S. Light Vehicle Sales Remain Strong Despite Monthly Dip

Total sales of light vehicles eased 0.3% during November to 18.19 million units (SAAR) following a like increase in October. Sales have risen 6.2% since last November and were near the highest level since July 2005.

Passenger car sales led the way lower last month and fell 2.5% to 7.81 million after a 1.3% October rise. Sales were down by 4.0% versus one year earlier. Domestic car sales declined 3.0% to 5.71 million and were down 5.6% from the peak during August 2014. Sales of imported autos eased a lesser 0.9% to 2.10 and have been falling steadily since Q4’13.

Sales of light trucks increased 1.5% to 10.38 million after having been roughly unchanged m/m in October. Light truck sales share of the total new vehicle market rose to 57.1%, the highest level since a spike in July 2005. Purchases were up 15.5% versus a year earlier. Imported light truck sales rose 2.5% to 1.66 million, a record high. Sales of domestically made trucks gained 1.3% to 8.72 million.

(CalculatedRisk)

U.S. Construction Activity Continues to Strengthen

The value of construction put-in-place increased 1.0% during October following an unrevised 0.6% September increase. Three-month growth of 10.4% (AR) was steady with Q3 but down sharply from 29.2% during Q2. A 0.5% October rise had been expected in the Action Economics Forecast Survey.

Building activity in the private sector increased 0.8% following a 0.9% September gain. Activity increased at an 11.3% rate during the last three months. Residential building activity rose 1.0% (18.3% y/y), the seventh consecutive month of strong gain. The gain was led by a 1.6% increase in single-family building (11.3% y/y) which equaled the strongest rise of the year. Multi-family building rose 1.4% (27.2% y/y). Spending on improvements eased 0.3% (+21.5% y/y). Nonresidential building improved 0.6% (14.4% y/y) as factory sector construction rose 3.0% (37.6% y/y).

Public sector building increased 1.4% (5.6% y/y) following three months of little change. Water supply spending rose 2.5% (5.3% y/y) and office construction jumped 1.8% (7.2% y/y). Highway and street construction increased 1.1% (5.2% y/y) but power construction declined 5.2% (-8.7% y/y).

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CHINESE GREEN SHOOTS

Markit added some color to yesterday’s PMI:

The survey signalled the largest monthly rise in new export orders since October of last year, the second consecutive monthly improvement. The data therefore suggest that the downturn in foreign trade seen throughout much of 2015 is starting to reverse, albeit only modestly.

Despite the upturn in export sales, total orders inflows fell at a slightly increased rate in November, highlighting a further deterioration in demand for manufactured goods from domestic customers.

Large firms are seeing a steeper drop in order books compared to small and medium sized firms, linked to an ongoing deterioration in export performance at these larger firms. Large firms have seen exports slump in recent months at a rate not seen since the first half of 2009, at the height of the global financial crisis.

Large firms suffer in global markets

New export orders seem to be mending in Asia:

Meanwhile, China continues to export deflation:

Average producer selling prices meanwhile fell at the steepest rate for 20 months, indicating that the deflationary trend intensified in November. Input prices also dropped at an increased rate, the steepest seen for nine months. With suppliers’ delivery times improving in November, pointing to a healthy supply of inputs, the survey suggests there is an ongoing lack of inflationary pressures in supply chains.

Deflationary pressures intensify as supply glut continues

In fact all Asia is exporting deflation:

Average selling prices across Asia continued to fall at a rate unchanged on that seen in October, which was in turn the highest for just over one-and-a-half years. Firms in China, Taiwan, South Korea and Vietnam once again cut prices in an effort to boost sales, but prices were hiked in India, Japan, Indonesia and Malaysia, the latter seeing the steepest rate of increase, with selling price inflation hitting a three-and-a-half year survey high.

Manufacturers’ selling prices

Eurozone Inflation Remains Weak

The European Union’s statistics agency Wednesday said its broadest measure of prices for goods and services was 0.1% higher than in November 2014, a rate of increase that was unchanged from October. Economists surveyed by The Wall Street Journal last week had expected to see a rise in the inflation rate to 0.2%.

The core rate slipped to 0.9% from 1.1% in October, as prices for services and manufactured goods rose at a slower pace, indicating a weakening of inflationary pressures coming from within the currency area.

Core CPI declined 0.2% in November after +0.2% in October, +0.5% in September and +0.3% in August. Annualized last 2 months: 0%, last 3 months +2.0%, last 4 months +2.4%.

  • ECB’s Preferred Inflation-Outlook Gauge Climbs to 5-Month High

The five-year, five-year forward break-even rate, which measures the outlook for inflation over the five-year period from 2020, rose to 1.83 percent Tuesday. That’s still below the average of 2.26 percent over the past decade. The measure fell to as low as 1.48 percent in January. ECB officials have said the rate is among key gauges they monitor. (…)

Ghost Watch for U.S. recession, zero interest rates in China next year, Citi says

As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent, Citi’s rates strategists wrote in their 2016 outlook published late on Tuesday. A rapid flattening of the bond yield curve towards inversion would be an key warning sign.

“The cumulative probability of U.S. recession reaches 65 percent next year,” Citi’s rates strategists wrote in their 2016 outlook published late on Tuesday. “Curve inversion will likely come more quickly than the consensus thinks.” (…)

RBC Capital:

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Red rose Zuckerbergs to Give 99% of Facebook Shares to Charity

Facebook Inc. Chief Executive Mark Zuckerberg and his wife, Priscilla Chan, said Tuesday that over the course of their lives they would give away 99% of their Facebook shares, now valued at $45 billion, in what would be one of the world’s largest philanthropic gifts.

Mr. Zuckerberg and his wife, a pediatrician, revealed the donation pledge while announcing the birth of their first child, Maxima Chan Zuckerberg. In a 2,200-word letter to their daughter, Mr. Zuckerberg and Dr. Chan said they had created a new foundation that would initially focus on “personalized learning, curing disease, connecting people and building strong communities.” (…)

By creating a limited liability company to use the money for political activism and for-profit investing, as well as traditional giving, Mr Zuckerberg revealed how a new generation of Silicon Valley entrepreneurs may approach the philanthropic world. (…)

In contrast to traditional foundations, LLCs are able to engage in public policy advocacy and for-profit investments that can also advance their favoured causes. The structure will also allow the Zuckerbergs to keep direct control of the Facebook stock that is contributed to the company, to be called the Chan Zuckerberg Initiative. The couple say all investment profits will be ploughed back into additional philanthropic work.