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$ (11 NOVEMBER 2015): China Bottoming Out.

New York’s Cuomo Increases Minimum Wage for State Workers New York Gov. Andrew Cuomo announced plans to give all state workers a minimum wage of $15 an hour, making New York the first state in the nation to set pay for its public-sector employees that high.

The wage increase will be phased in by the end of 2018 for state workers in New York City and by the end of 2021 for state workers elsewhere. (…)

Mr. Cuomo boosted minimum wages for fast-food workers earlier this year. The state’s minimum wage is $8.75 and is set to increase to $9 at the end of December.

Several U.S. cities, including Los Angeles, have passed measures to increase their minimum wages to $15 an hour in the coming years, and California and Oregon are considering similar statewide measures.

(…) The prospects of building a bloc of voters around the push for a $15 minimum wage “are huge,” SEIU President Mary Kay Henry said in an interview Tuesday morning.  “I think it’s quite possible to inspire the 64 million workers earning under $15.”

Low-wage workers could have a bearing on national politics, mostly because their numbers are so large. The SEIU’s estimate is roughly in line with Labor Departmentdata showing that 50% of U.S. workers earned less than $17.09 an hour last year.

More than 12 million Americans work in the food-service industry, according the Labor Department. Their median wage last year was $9.20 an hour. (…)

U.S. Import Price Decline Is Broad-Based

Import prices declined 0.5% during October (-10.5% y/y) following a 0.6% shortfall in September, revised from -0.1%. Nonpetroleum import prices fell 0.4% (-3.4% y/y). Prices have not risen m/m since March of last year.

Export prices fell 0.2% (-6.7% y/y) following a 0.6% drop.  A 0.8% shortfall (-15.9% y/y) in industrial supplies & materials prices led the way lower. This decline reflected lower fuels & building materials prices, without which prices fell 0.5% (-8.4% y/y).

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Non-petroleum import prices have dropped at a 4.1% annualized pace in the last 3 months.

China shoppers pick up economic baton Fixed-asset investment near 15-year low amid painful rebalancing

Chart: China key activity indicators, Oct 2015(…) Urban fixed-asset investment grew at an annual rate of 10.2 per cent in the first 10 months of the year, the slowest pace since 2000 and the 17th straight month of declines, according to the statistics bureau. Industrial production, a gauge of the manufacturing sector, matched the six-year low of 5.6 per cent annual growth touched in April. (…)

Retail sales grew 11 per cent in October, the swiftest annual rate this year. Passenger car sales also grew strongly, rising by 13.3 per cent to 1.9m units in October, the fastest pace in 17 months, according to the China Association of Automobile Manufacturers. (…)

Property was the biggest drag on fixed-asset investment, with real estate investment dipping to 2 per cent, the slowest pace since data began in 2004. Home sales and prices have begun to creep higher in recent months following a year of declines, but developers are delaying new construction in the face of unsold inventory gluts. (…)

Beijing has ramped up fiscal spending to fill the gap. Fixed-asset investment by local governments rose 10.6 per cent in the year to October. (…)

Bloomberg’s monthly GDP estimator has flattened out:

FYI: Numbers that Explain the World’s Largest Shopping Holiday

Below are 11 such numbers that help tell the story of Singles Day, the holiday that Jack Ma built.

11.11 The date Chinese university students selected back in the mid-1990s as a sort of anti-Valentine’s Day for single people. What started as a joke has become the world’s largest shopping holiday.

$1 Billion How much merchandise Alibaba sold last Singles Day within the first three minutes of the sale.

Over $9.3 Billion Total sales within 24 hours. This amount far exceeds the combined sales revenue of Black Friday and Cyber Monday, the two largest American shopping holidays. (…)

China's Singles Day Bigger Than Black Friday and Cyber MOnday Combined

$277 The average amount each shopper is expected to spend.

760 Million The number of packages China’s postal service estimates will be needed to ship Singles Day orders. This is up 40 percent from the 540 million used last year.

1.7 Million The estimated number of deliverymen and women that will be needed.

200 The estimated number of jets and airplanes that will be deployed to handle the sales volume in China alone.

French and Italian IP Show Fledgling Recovery

France and Italy are the second and third largest economies, respectively, in the EMU. Their recent trends in industrial output make a good summary of what is going on in the EMU as a whole. Neither is particularly strong and yet both are managing increases in output. Both Italy and France have two IP increases in the last two months; for France there are two increases in a row. Both show an IP increase in September and both show an IP increase of about 2% year-over-year (1.8% for France and 2.2% for Italy). Both show some recent weakness in IP growth in their respective consumer sectors.

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U.S. Wholesale Inventory Accumulation Improves

Inventories at the wholesale level rose 0.5% during September (4.5% y/y) following a 0.3% August increase. The rise was paced by a 1.3% jump (8.4% y/y) in furniture and a 0.5% rise (12.8% y/y) in automotive inventories.. Computer & peripherals fell 1.7% (+1.8% y/y) and electrical goods inventories eased 0.3% (+5.4% y/y. Nondurable goods inventories increased 1.9% (7.5% y/y). The gain reflected a 2.3% rise (14.4% y/y) in apparel but petroleum inventories eased 0.6% (-18.2% y/y). Chemical inventories declined 1.6% (+4.0% y/y).

Sales in the wholesale sector improved 0.5% (-3.6% y/y) after two months of decline. Motor vehicle sales jumped 2.3% (5.9% y/y) though furniture purchases were off 2.7% (+4.6% y/y). Machinery equipment sales improved 0.2% (-3.6% y/y). Nondurable goods sales increased 0.3% (-6.1% y/y) as apparel sales gained 1.9% (6.3% y/y). Chemical sales improved 0.5% (-2.9% y/y) but petroleum sales declined 4.6% (-39.1% y/y).

Just kidding Wholesale apparel sales are up 6.3% YoY. Apparel prices are down 1.4% YoY. Volume: +7.7%!! Retail sales of clothing stores were up 4.7% YoY in September. Which explains this:

(…) Nomura and Citi retail analysts on Monday forecast weak third-quarter results at Macy’sInc. and Kohl’s Corp. due to slower-than-expected sales that had left the pair awash in excess merchandise at the end of the period. Executives at Ltd.and Ralph Lauren Corp., which supply the chains with goods, earlier said there has been a buildup of inventory at big department stores.

Chris Peterson, president of global brands at Ralph Lauren, told analysts last week that inventory at department stores is “a little bit” elevated, referring to the broader retail industry.

Specialty stores and apparel manufacturers also are experiencing “a build-up in inventories beyond the natural increase ahead of the holidays,” according to a recent report from analysts at Macquarie Research. (…)

On Tuesday, Cowen and Co. published a report warning “inventory is above sales growth across retail,” and noting that merchandise levels were bloated at DSW Inc., Dicks Sporting Goods Inc. and Skechers U.S.A. Inc., among other chains. Under Armour said accelerated deliveries resulted in its higher inventory levels, but also aided sales. VF said it stocked up since it plans to open more retail stores. DSW said it made more purchases because hard to acquire brands had become available. The other companies weren’t available for immediate comment. On recent calls with investors, some retail executives cited the easing of congestion at West Coast ports, among other reasons. (…)

Retailers also are feeling the effects of a downturn in tourism to the U.S. as a result of the stronger dollar, and unusually warm weather across much of the country that has curbed shoppers’ appetite for sweaters, coats and other cold-weather goods. (…)

Pointing up OPEC Challenges Shale Afresh as Iraq Crude Floods U.S. Market

Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November, ship-tracking and charters compiled by Bloomberg show. Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures. (…)

Iraq, pumping the most since at least 1962 amid competition among OPEC nations to find buyers, is discounting prices to woo customers. The U.S. may increasingly become one of them after its own output dropped by as much as 500,000 barrels a day since June. (…)

Iraq is among the least expensive places in the world to extract crude. Capital costs are about seven times cheaper than for light, tight oil suppliers in the U.S. when measured by fields’ daily plateau capacity, according to the International Energy Agency in Paris. (…)

Iraq sold its Heavy grade at a discount of $5.85 a barrel to the appropriate benchmark for November, the biggest discount since it split the grade from Iraqi Light in May. Saudi Arabia sold at $1.25 below benchmark for November, cutting by a further 20 cents in December. (…)

DEAL TRIVIA:

ISI calculates that over the past 21 months there have been 1,441 M&A deals totalling $8.2T. Incredible!

Fidelity Marks Down Value of Snapchat Stake by 25% Revised estimate comes amid growing uncertainty around the soaring valuations of private tech startups

The change was the first by Fidelity since it invested in Snapchat in May at a valuation of $16 billion. (…)

Snapchat expects to generate about $50 million in revenue this year, a person familiar with the matter said in August.

On Friday, payment processor Square Inc. proposed to value itself at $3.9 billion in a planned initial public offering, down from $6 billion last year. Startups including e-commerce site Jet.com Inc., local-services website Thumbtack Inc., secondhand-good marketplace OfferUp Inc. and used-car seller Beepi Inc. have scaled back their expected valuations from private investors. (…)

Earlier this year, BlackRock Inc., an investor in cloud-storage startup Dropbox Inc., cut its estimate of the company’s per-share value by 24%, securities filings show.

NEW$ & VIEW$ (10 NOVEMBER 2015): China Bottoming; Earnings; Oil.

Ford UAW Workers to Vote on Pact With $30,000 More in Pay, Bonus

Ford Motor Co. employees represented by the United Auto Workers will begin voting on a proposed four-year contract that includes $30,000 in additional wages and bonuses and $9 billion in factory investments expected to create or secure 8,500 jobs, the union said. (…)

Wage increases of $10,633, plus a variety of bonuses guaranteed payouts, will boost the average production worker’s pay by a total of $32,513 over the life of the contract, according to the union. Skilled trade workers’ total compensation will grow an average or $35,098 over four years, the union said. Those calculations don’t include profit sharing. (…)

The Ford deal, though, is richer. Upon approving the contract, workers will get $10,000 in combined bonuses, including the payment for approval and $1,500 in profit sharing that has been pulled forward. They also annually will receive $1,750 in inflation protection and competitiveness payouts. (…)

OECD Sees Growth in Member Countries Expansion will help to offset the impact of a slowdown in emerging economies

The Organization for Economic Cooperation and Development said on Monday that lower oil prices and falling unemployment will bolster economic growth in the 34-nation group of developed economies, helping to offset the impact of a slowdown in emerging economies.

The forecasts underscore how the U.S. in particular is expected to remain an island of stability within the global economy, shrugging off an anemic recovery in Europe, weak growth in Japan and turmoil in China and other developing nations.

In its semiannual economic forecasts, the OECD said that growth in the U.S. would continue to be among the most robust in the group of nations, hitting 2.4% in 2017. It predicted the 19-nation eurozone would continue to lag behind the U.S., with growth at 1.5% this year, 1.8% next year and 1.9% in 2017. (…)

Growth throughout the OECD is forecast to hit 2% this year, 2.2% next and 2.3% in 2017. (…)

Japan, the OECD’s second-largest economy after the U.S., has been hit more significantly by the slowdown in China, the OECD wrote. Growth is expected to hit 1% next year but then slow to 0.5% in 2017, in part because of a consumption tax increase planned for that year. (…)

CHINA ECONOMY HAS BOTTOMED

Beijing has been quietly stimulating using all available tools.

  • House prices have resumed a rising trend.
  • Automobile sales have jumped in the last 2 months.

Now this from CEBM Research:

The CEBM Sales vs. Expectations Composite Index jumped from -30.5% in October to 26.8% in November. The rebound in this month’s index reading was driven by upstream activity in Central China in response to infrastructure project demand, a strong boost in auto sales, and better-than expected container freight export shipments. This month’s survey results display that despite continued weakness in aggregate demand some areas of the economy have begun to respond
positively to continued policy easing and stronger government spending in 3Q15.

Cement demand and pricing has improved noticeably in Central China in response to infrastructure project demand and seasonal factors. Auto sales were a particular bright spot in this month’s survey as sales were boosted by the government’s decision to halve the 10% purchase tax on small automobiles. Container freight export shipment survey respondents reported better-than-anticipated shipment volume and upbeat expectations for shipments November.

Other sectors remain weak but things must begin to turn up somewhere…Slow grind, but grind nonetheless.

China’s Inflation Slows in October

China’s consumer-price index rose 1.3% in October last month from a year earlier, according to the government’s statistics bureau. The pace was slower than the 1.6% year-over-year rise in September and a tick down from the median 1.4% gain forecast by 11 economists in a survey by The Wall Street Journal. Prices of goods at the factory gate fell 5.9% in October from a year earlier, matching September’s decline.

On a monthly basis, consumer prices edged down 0.3%.

Food prices rose 1.9% YoY, from 2.7% in September. Non-food prices climbed 0.9%. Prices of consumer goods increased 1%, while services increased 1.9%. Core CPI (ex-food, ex-energy) are up 1.5% YoY, in line with the last 10 month average.

QUESTIONS

Let’s assume the following environment for the next 12 months:

  • World GDP will grow some 3.0%, China +6.5% and the USA +2.5%.
  • Inflation will be close to zero.
  • Oil prices will decline 40%.
  • The USD will appreciate 20%.
  • U.S. manufacturing will be in recession dragged by weak exports and depressed oil markets.

S&P 500 EPS in that environment?

Few would have thought flat. Yet, they are flat YoY in Q315 with precisely that environment!

The earnings season is almost over and frankly, these earnings are remarkable:

  • Telecom:                   +14.7%
  • Cons. Discretionary: +14.6%
  • Health Care:              +12.7%
  • Financials:                 +  8.8%
  • Technology:               +  5.3%
  • Industrials:                 +  0.3%
  • Cons. Staples:           –  1.3%
  • Utilities:                      –   2.2%
  • Materials:                   – 15.3%
  • Energy:                       -57.1%

With 2 important sectors down big time, total EPS are essentially unchanged.

With exports down and the USD up 20%, industrial earnings are flat! From RBC Capital global equity team on Industrials’ earnings:

3Q15 earnings results not as bad as feared: We had been braced for a rocky 3Q15 earnings season thanks to the scorched-earth declaration by Fastenal on Oct-13 that the sector had entered an “Industrial Recession” along with negative preannouncements from Colfax and Eaton. That said, results have not played out quite as weak as anticipated, albeit against much lower expectations.

3Q15 earnings scorecard: Of the 24 companies that reported, we had 16 beats, 6 misses, and 2 in-lines. Organic revenue growth has been weaker, declining -2.0% vs. our estimate for -0.8%. Guidance has been broadly weaker with 12 out of 19 companies cutting their 2015 outlooks. In contrast, operating margins have come in better than expected, falling -35 bps YoY vs. our estimate for -70 bps.

Signs of stabilizing oil & gas declines: The most impactful read across from 3Q15 earnings season, in our view, was that oil & gas related cuts to earnings seem to be stabilizing for the first time since oil began its plummet back in Sept-2014. WESCO, Honeywell, Pentair, Roper, and General Electric all largely reiterated their 2015 views, and Dover only modestly tweaked its forecast lower.

Nerd smile Second question:

Assume the USD and Brent are unchanged from their current levels and everything else is trend lined. S&P 500 EPS 12 months out?

Some clues:

  • Ex-Energy, EPS are up 6.5% YoY. And ex-Materials, probably +7.2%. What can Industrials, Materials and Energy contribute without the USD and Oil headwinds?
  • Factset digs deeper:

For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 10.1%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the blended earnings decline is -2.1%.

The blended sales growth rate for the S&P 500 (ex-Energy) for Q3 2015 is 1.4%. For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the blended sales growth rate is 4.7%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the blended sales decline is -4.9%.

So,

  • U.S. centric companies are increasing earnings 10.1% with revenue growth of 4.7% in a zero inflation environment and a 2.5% GDP growth rate.
  • Other non-Energy companies have been able to keep earnings from falling more than 2.1% on a 4.9% sales decline given weak foreign economies, a 20% appreciation of the USD and declining exports.
  • Any which way, margins keep rising! Cost discipline remains strong.

Next 12 months possibilities:

  • U.S. economy improves enough for Fed to raise rates.
  • Draghi keeps pushing.
  • Abe keeps shooting.
  • China keeps stimulating.
  • Brent flat at worst.
  • Copper et al flat at worst.

Current 2016 consensus: +8.6%

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Doable.

SENTIMENT WATCH
Gundlach Says December Rate Increase a Threat to Stocks, Bonds

A December interest rate increase would threaten U.S. stock and bond markets while potentially driving up the value of the dollar to the point where it weakens the economy, according to Jeffrey Gundlach, chief executive officer of DoubleLine Capital.

“I have a hard time believing a Fed tightening will help the economy,” Gundlach, whose Los Angeles-based company manages about $80 billion, said Monday on a conference call with investors. “I think volatility will increase and the economy will weaken.” (…)

“For the time being,” Gundlach said, the threat of higher rates “will hurt the stock market.”

OIL
Oil glut to swamp demand until 2020 IEA says cleaner fuels and greater efficiency will depress prices
$80/Bbl Oil By 2020, Says IEA The oil markets should be rebalanced and prices should be in the $80 a barrel range by 2020, according to a new report issued by the International Energy Agency.
OPEC Rift Exposed as Oman Oil Minister Calls Group ‘Irresponsible’

Discontent with the Organization of the Petroleum Exporting Countries spilled into the open Monday, when Oman’s oil minister called current oil production levels “irresponsible” and blamed the group for contributing to low oil prices.

“This is a commodity that if you have one million barrels a day extra in the market, you just destroy the market,” said Mohammed Bin Hamad Al Rumhy, whose country produces oil but isn’t a member of OPEC. “We are hurting, we are feeling the pain and we’re taking it like a God-driven crisis. Sorry I don’t buy this, I think we’ve created it ourselves.”

Mr. Rumhy’s comments came at a conference in Abu Dhabi as he shared a stage with Suhail al Mazrouei, the United Arab Emirate’s top oil official, who is a top advocate of the producer group’s strategy. (…)

Mr. Mazrouei and other Persian Gulf oil officials said low prices are forcing industrywide spending cuts that won’t be sustainable for a prolonged period. That bodes well for prices soon, they said. (…)

In Doha, Prince Abdulaziz bin Salman, Saudi Arabia’s deputy oil minister, rejected the idea that the current period of low prices represents a fundamental lasting shift.

“A prolonged period of low oil prices is…unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise,” Prince Abdulaziz said.

“Just as the assertions, heard a few years ago—that the oil price would reach $200 a barrel—were proved wrong, so the recent assertion that the oil price has shifted to a new low structural equilibrium—will also turn out to have been wrong,” he added.

Without naming the U.S., Prince Abdulaziz essentially rejected a commonly held theory in the oil industry that production cuts from high-cost producers will “quickly reverse when oil prices start rising again.”

“This is wishful thinking,” he said. “Previous cycles have shown that the impact of low oil prices is long lasting, and that the scars from a sustained period of low oil prices can’t be easily ‘erased.’”

The prince pointed to strong demand for oil in both established and emerging markets as a reason for an eventual rebound in the market.

“Rather than being a commodity in decline, as some would like to portray, supply and demand patterns indicate that the long-term fundamentals of the oil complex remain robust,” he said. (…)

“No one is happy with the current situation,” a Saudi oil industry official said. “The lower oil prices are lasting longer than initially expected and everyone wants the price to bounce back up soon.”