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$ (20 NOVEMBER 2015): U.S. Manufacturing Turning?

Conference Board Leading Economic Index Rose in October

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6 percent in October to 124.1 (2010 = 100), following a 0.1 percent decline in September, and a 0.1 percent decline in August.

The U.S. LEI rose sharply in October, with the yield spread, stock prices, and building permits driving the increase. Despite lackluster third quarter growth, the economic outlook now appears to be improving. While the U.S. LEI’s six-month growth rate has moderated, the U.S. economy remains on track for continued expansion heading into 2016.

Smoothed LEI

Smile As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.

Official data confirm US manufacturing rebound at start of fourth quarter

US industrial production fell 0.2% for a second successive month in October, but the decline clouds a more upbeat picture of the health of the country’s factories.

(…) While mining saw a 1.5% drop in production, and output of the utilities sector slumped 2.5%, manufacturers saw a 0.4% rise.

The upturn in manufacturing, with October seeing the largest monthly gain for six months, contrasts with 0.1% declines in each of the prior two months, and leaves factory output up 0.6% in the latest three month period compared with the prior three months. This matches the solid trend seen in the Markit US Manufacturing PMI survey, where the Output Index rose from 54.5 in September to a seven-month high of 55.6 in October, which is broadly in line with the survey’s average of 55.7 seen over the past six years.

Pointing up A divergence between the Markit and ISM surveys in recent months sends strikingly different signals to policymakers mulling over whether the US economy is ready for interest rates to start rising. While both the Markit PMI and official data signal a strong start to the fourth quarter for US manufacturing, the ISM survey data signalled one of the weakest increases in manufacturing output since the recession. The ISM Output Index registered 52.9, well below the past six years’ survey average of 57.5.

The recent divergence also enhances the Markit survey’s track record in accurately anticipating official data. At 92%, the correlation between the Markit US Manufacturing PMI Output Index and official output data (as measured by the three month growth rate) exceeds the 86% correlation observed for the equivalent ISM index.

PHILLY FED BIZ OUTLOOK TURNS POSITIVE

imageThe diffusion index for current activity edged higher this month, from -4.5 to 1.9, its first positive reading in three months. The indexes for current new orders and
shipments approached zero this month, increasing 7 points and 4 points, respectively. Both indexes remained negative, however, suggesting continued weakness.
The survey’s indicators for labor market conditions were mixed this month. The percentage of firms reporting increases in employment (14 percent) was slightly greater than the percentage reporting decreases (11 percent). The employment index increased 4 points, from -1.7 to 2.6. Firms, however, reported overall declines in average work hours in November. The workweek index registered its second consecutive negative reading and declined 9 points.

The surveyed firms reported near-steady prices for their own manufactured goods this month. Most firms (70 percent) reported no changes in prices received, while the percentage of firms reporting lower prices (14 percent) was slightly greater than the percentage reporting higher prices (13 percent). Firms reported, on balance, declines in input prices.

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Household re-leveraging a boon to auto industry

Household re-leveraging is in full swing in the US. Latest data from the New York Fed show debt rising in Q3 for an eighth time in nine quarters taking the total increase over the period to US$912 bn. Increased borrowing has helped boost spending on big-ticket items such as autos. In the last nine quarters, auto loans represented 25% of the flow of debt despite accounting for just 8% of the total stock of debt. That explains why auto sales have been so strong in the last couple of years ─ this year’s sales are on track to average roughly 17.5 million units, the highest ever.

Pointing up But not all is rosy. While consumer releveraging has worked wonders for the auto industry, its impact on the housing market has been more subdued. That’s
partly because banks have significantly tightened lending standards after being burnt by the subprime crisis. As today’s Hot Charts show, more than half of new mortgage originations are going to borrowers with scores 780 and above. So, it shouldn’t be surprising that home sales and prices (for both resales and new construction) as well as housing starts, all remain well below the peak reached about a decade ago. (NBF)

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  • Surge in Subprime Auto Lending Draws Attention Subprime auto lending is shifting into higher gear, raising some concerns in Washington where a top financial regulator has been sounding alarms about this category of loans, as overall household borrowing hit the highest level in more than five years.

Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered “good,” according to a report Thursday from the Federal Reserve Bank of New York. Of that sum, about $70 billion went to borrowers with credit scores below 620, scored that are considered “bad.” (…)

The vast majority of subprime auto lending is concentrated within auto finance companies, according to the New York Fed. (…)

Delinquency rates in both auto and home loans remain low, according to the New York Fed’s report, pointing to improvement in the overall economy.

Just over 3% of auto loans were more than 90 days delinquent in the third quarter, a share that’s little changed over the course of the year, and down from over 5% as recently as 2011. Foreclosures on mortgages fell to a new low in the 17-year history of this data, the New York Fed said.

Oil trades near three-month low as excess supply takes toll 

Saudi Arabia and its Gulf Opec allies have lined up to try and quell mounting fears of a prolonged supply glut in the oil market, warning of future shortages in the sector if investments fall further. (…)

But Mr Naimi’s remarks — alongside those of other Gulf officials in recent weeks — show he is still trying to win over a sceptical market that has adopted the mantra of “lower for longer”. (…)

A poll at the conference showed more than 90 per cent of attendees do not expect oil prices to rise significantly next year, with a quarter expecting them to remain at current levels or lower.

Just 7 per cent saw the prices trading back above $70 a barrel, the level many major oil producing countries need to get closer to balancing their budgets. (…)

The International Energy Agency said last week oil inventories have reached record levels, approaching 3bn barrels in developed countries — the equivalent of a month’s global demand.

Physical oil cargoes are trading at large discounts as oil has started to strain ports and storage, with vessels queueing to unload at some major hubs. (…)

Meanwhile, Russia is doing its part:

But Americans are also contributing:

The Department of Transportation (DOT) reported:

Travel on all roads and streets changed by 2.3% (6.3 billion vehicle miles) for August 2015 as compared with August 2014. The seasonally adjusted vehicle miles traveled for August 2015 is 263.3 billion miles, a 3.6% (9.1 billion vehicle miles) increase over August 2014.

Biggest Insurer Threatens to Abandon Health Law UnitedHealth cuts earnings outlook, citing losses from health-exchange products

The biggest U.S. health insurer said it has suffered major losses on policies sold on theAffordable Care Act’s exchanges and will consider withdrawing from them, adding to worries about the future of the marketplaces at the heart of the Obama administration’s signature health law.

The disclosure by UnitedHealth Group Inc., which had just last month sounded optimistic notes about the segment’s prospects, is the latest sign that many insurers are finding the new business unprofitable, despite an influx of customers that has helped swell revenues.

The industry’s woes, and broad rate increases aimed at stanching the red ink, are putting pressure on the Obama administration to tweak aspects of the law; the issues also risk pulling the ACA back into the political spotlight. (…)

UnitedHealth Group Chief Executive Stephen J. Hemsley said the company isn’t willing to continue its losses into 2017. UnitedHealth has already locked in its exchange offerings for 2016, but it is pulling back on marketing them during the current open-enrollment period to limit membership, which it said last month totaled around 550,000.

The company will make market-by-market determinations in the first half of next year about whether it will continue selling products on the exchanges.

“We can’t sustain these losses,” he said. “We can’t subsidize a market that doesn’t appear at this point to be sustaining itself.” (…)

NEW$ & VIEW$ (19 NOVEMBER 2015): Fed Up! Oil Up?

Fed Tipping Toward December Rate Hike, Minutes Show Federal Reserve officials meeting last month anticipated it “could well be” time to raise short-term interest rates at a December policy meeting after keeping them pinned near zero for seven years.

(…) “Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting,” the October meeting minutes said. (…)

Futures markets are pricing a 68% probability of a quarter-percentage-point increase in rates at the December meeting, up from near 50% right after the October meeting.

The minutes stated “some” Fed officials felt in October it was already time to raise rates. “Some others” believed the economy wasn’t ready. The wording meant that minorities on both sides of the Fed’s rate debate are pulling in different directions, with a large center inside the central bank inclined to move. (…)

At the same time, the Fed minutes included several new signals that after the Fed does move rates higher, the subsequent path of rate increases is likely to be exceptionally shallow and gradual. (…)

“It is probable that the return to ‘normal’ interest rates will be gradual. As a business manager or as an investor, I think these are key messages I would be taking from our Fed statements,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, said Wednesday in comments in Houston. (…)

U.S. Housing Starts Fall 11% in October  New-home construction sank in October, as builders dialed back construction of apartments and condominiums that drove demand through much of the summer.

Housing starts fell 11% from a month earlier to a seasonally adjusted annual rate of 1.06 million in October, the Commerce Department said Wednesday. Starts of single-family homes, which make up nearly two-thirds of the market, fell 2.4%. Construction of multifamily units, including apartments and condominiums, plunged 25.1%.

New applications for building permits, a bellwether for future home construction, rose 4.1% to a seasonally adjusted annual rate of 1.15 million. Single-family permits rose to their highest level since December 2007, and were up in every region but the Northeast. (…)

Starts have averaged 1.12 million over the past three months, versus an average 1 million in 2014. (…) (Charts from Bespoke Investment)

Auto Ford Wage Deal Is at Risk of Failing More than half of the 75% of Ford’s union members who voted have rejected the deal

(…) The lack of support is unexpected given the economics of the deal. The Ford contract is the richest of the three UAW contracts drawn up with Detroit auto makers this year, and offers a $10,000 in upfront signing and profit-sharing bonuses, $9 billion in new U.S. investments and pay raises that will be phased in over time. (…)

The union negotiated twice with Fiat Chrysler Automobiles NV before getting an agreement its membership would approve. A ratification vote at General Motors Co. for a separate labor pact has been on hold for two weeks because a smaller group of skilled trade workers voted against the proposal. (…)

The union’s efforts to ratify the contract suffered a setback Tuesday when workers at two large plants in Kentucky rejected the deal. Combined, the two plants have 4,900 Ford workers, enough to cast doubt over whether the union will have enough support to get the contract approved. (…)

Several workers interviewed by The Wall Street Journal say the labor proposal doesn’t go far enough to roll back concessions made by the union to help the No. 2 U.S. auto maker survive during periods of financial distress. (…)

Japan Exports Fall for First Time in Over a Year Exports slide 2.1% from a year earlier in October, the first decline since August 2014

(…) Exports to China dropped 3.6%, the third straight month of decrease. Shipments of auto parts and electronic components both suffered double-digit declines. Exports to the wider Asia region, including China, also fell 3.6%, the sharpest drop in more than a year.

Export volumes also slid 4.6%, offering another worrying sign of weakness, falling for the fourth straight month, according to the Ministry of Finance.

Japan’s trade balance—the amount by which exports exceed imports—came to a ¥111.5 billion surplus in October, the ministry said. This was the first surplus in seven months, with a 13.4% drop in imports the main factor helping push the balance into the black. Economists polled by the Nikkei and The Wall Street Journal had forecast a ¥270 billion deficit.

China Cuts Small Bank Funding Costs in Step Toward Rate Corridor

(…) The People’s Bank of China cut its seven-day Standing Lending Facility interest rate to 3.25 percent for local financial institutions, according to a statement posted Thursday on the central bank’s social media account. The overnight SLF rate was reduced to 2.75 percent for some local financial institutions. (…)

China Hopes to Fire Up Economy With Cheaper Gas China’s steep cuts to domestic natural gas prices are the latest sign of Beijing’s desire to prop up the country’s economic growth, even if that comes at the expense of major state-owned enterprises.

(…) The NDRC said Wednesday it was cutting benchmark city-gate prices by 0.70 yuan (11 cents) per cubic meter for nonresidential users of gas—such as factories—beginning Friday.

Though a price cut had been on the cards for months, the nearly 30% reduction in average city-gate benchmark prices for gas announced Wednesday by the National Development and Reform Commission—China’s top economic planner—was deeper than some analysts had forecast.

City gate prices refer to how much local gas distributors pay pipeline operators such as PetroChina Co. Those distributors should be able to pass on the lower prices to industrial gas consumers, in theory helping to stimulate China’s stalling manufacturing sector. The latest move won’t impact residential gas prices. (…)

Getting gas pricing right is important for Beijing, not least because it needs to encourage companies to switch away from using coal as part of efforts to clean up polluting industry. (…)

Pointing up OIL: SAUDIS WANT TO “STABILIZE MARKET”
Saudi Oil Minister Says OPEC With Others to Stabilize Market

Saudi Arabia is working with other OPEC members and producers from outside the group to stabilize the market, Saudi Oil Minister Ali al-Naimi said.

The world economy is going through an unstable situation, al-Naimi said. Crude demand is expected to rise by 1 million barrels a day every year in this decade, and the world requires more investments in oil to compensate for decline rates, he said. The decline rate of recovery at the world’s oil fields is at about 4 million barrels a day, he said.

“Saudi Arabia is a very reliable supplier. We cooperate with OPEC and non-OPEC countries to stabilize the market,” al-Naimi said at a conference in Manama, Bahrain. “We need billions of dollars to continue exploration and producing oil and to invest in spare capacity to stabilize the market.”

(…) OPEC ministers are due to meet Dec. 4 to assess the market and decide on production levels.

Arab countries hold 57 percent of the world’s oil reserves, and that will grow on new discoveries, al-Naimi said. Arab countries need $700 billion of energy investments over the next 10 years, and oil consumption in the region is about 10 percent of the world’s demand, he said.

Punch Sounds like a pretty important statement to me.

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SENTIMENT WATCH
Square IPO Prices at $9 a Share, Less Than Expected Skeptical investors forced Square Inc. to sell shares in its initial public offering for less than the mobile payments startup had hoped, dealing another setback to the battered market for new technology-company stock.

The six-year-old company, founded and run by Twitter Inc. Chief Executive Jack Dorsey,priced at $9 a share late Wednesday, according to people familiar with the matter. That is beneath the projected offering range of $11 to $13 and even further below the $15.46 at which Square raised money last year from private investors. (…)

The number of U.S.-listed tech-company IPOs is down about 53% from this point last year through Wednesday morning, and the number of overall U.S.-listed IPOs had fallen 62%, according to data provider Dealogic. Two other tech IPOs priced Wednesday: online dating-service ownerMatch Group Inc. and email-security firm Mimecast Ltd.

Match priced its IPO at the bottom of its proposed $12 to $14 range, and Mimecast also priced its shares at the low end of its $10 to $12 range, according to people familiar with the deals. (…)

From the FT’s Lex column:

Square: Odd one out

It is all over. Tech bubble 2.0 has burst. Square has priced its initial public offering below the range, at only $9 compared with a proposed $11-$13. Not even Goldman Sachs could sell this thing. Call in the removal trucks. San Francisco is done.

Unless, a faint glimmer of hope: Square is not a tech company at all? It certainly quacks like a duck. It has Jack Dorsey as founder and chief executive — at least, when he is not busy at Twitter. It has cool-looking hardware and software. And all the financial features of a “unicorn”, the hyped private start-ups. It was bid up in a series of private fundraising rounds to $15.46 a share last year, or more than $6bn on a fully-diluted basis. Like other unicorns, late investors demanded serious protections, giving them more stock in the event of a lower IPO. Square, excluding out-of-the-money options, values the listing at $3.2bn. That gives the likes of JPMorgan and fellow late investors a lot more shares.

But despite appearances, Square is a loss-making financial services company, with an unsexy niche in the payments infrastructure. It does other stuff too — it has a food delivery app, for example — but 94 per cent of revenues comes from Square’s role as a “merchant aggregator”. It collates the transactions of 2m sellers and stands between them and the card networks. It is not so much disintermediating and disrupting as adding another layer.

Tech IPOs this year have been mediocre and there is scepticism about private valuations. Institutional investors say they would rather wait and see how a stock performs than take a hefty allocation at the IPO. But Match, the online dating company, which also priced on Wednesday evening, did so in its indicated range, albeit at the bottom. Pure Storage, the flash memory company, priced above its last private round, in the middle of its indicated range and, after a wobbly first day last month, has traded higher.

Uber, Dropbox, Snapchat and the other richly priced private tech companies must hope that Square is perceived as weaker because it is not offering the same prospects for innovation-led growth. Then the party can continue.