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$ (28 OCTOBER 2015): Housing and Millenials; Good Earnings Season.

U.S. Durable Goods Orders Decline Is Broad-Based

New orders for durable goods fell 1.2% during September (-3.0% y/y) following a 3.0% August drop, revised from -2.0%. Expectations had been for a 1.0% decline in the Action Economics Forecast Survey. During the last ten years, there has been an 88% correlation between the y/y change in durable goods orders and the change in real GDP. Weakness in durable goods bookings was pervasive during both Q3 and Q2.

Last month’s decline was paced by a 7.6% drop (-13.2% y/y) in orders for nondefense capital goods. A 35.7% drop (-37.2% y/y) in aircraft & parts led the decline. Nondefense capital goods orders excluding aircraft & parts eased 0.3% (-7.3% y/y) after a 1.6% shortfall. Elsewhere in the transportation sector, motor vehicle & parts orders increased 1.8% (13.1% y/y). Overall orders excluding the transportation sector eased 0.4% (-5.3% y/y). They improved 0.2% during all of last quarter after a 0.6% dip in Q2. (…)

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Call me Here’s What Companies Are Saying About Wage Growth in Their Earnings Calls
HOUSING AND MILLENIALS

(…) The seasonally adjusted homeownership rate remained at 63.5% in the third quarter, according to estimates published by the Commerce Department on Tuesday, unchanged from the quarter earlier.

The number of homeowner households increased by 123,000 in the third quarter from a year earlier, while the number of renter households increased by 1.3 million. (…)

The numbers underscore a worrying trend, according to economists, as the housing market is strengthening but leaving many renter households behind. Home prices grew 4.7% in the year ended in August, according to a report released Tuesday by S&P/Case-Shiller Home Price Index.

But while strong price growth is good news for current homeowners, because prices are growing more quickly than incomes it is making it difficult for renter households to afford homes. A lack new home buyers making the transition from renting poses a long-term challenge to the strength of the housing market.

The vacancy rate for rental housing rose to 7.3% from 6.8% in the second quarter. It was still slightly lower than 7.4% the same time last year. (…)

The real problem is new house prices which jumped by nearly $100k or 40% since 2011. Builders need to address the lower end segment.

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Employers say they plan to hire 11% more fresh college graduates for U.S. jobs this year than last, according to a survey of 201 employers from the National Association of Colleges and Employers, which tracks college hiring.

Those projections align with a recent Michigan State University survey of more than 4,700 employers that projected a 15% increase in hiring for new graduates across all degree programs, including associate’s, bachelor’s, master’s, doctorate and professional degrees. The strong outlook reflects an economy on the rebound from the recession, the report said.

The new NACE report also dovetails with a recent study from Georgetown University’s Center on Education and the Workforce, which found that job growth since the recession has been led by high-wage occupations, many of which require bachelor’s degrees.

The NACE numbers suggest prospects for the class of 2016 could surpass those of this past summer’s graduates, who entered one of the best hiring marketsin recent memory. A majority of employers told NACE last spring that they planned to increase hires from the class of 2015, posting an average of 148 openings, up nearly 50% from the previous year. Pay for new grads has been on a rising trend, too, with average starting salaries for 2015 grads reaching $50,651, up 5.2% from 2014.

Employers have a positive view of the college-hiring market overall, NACE found. This year, 42% of respondents characterized the job market for class of 2016 as “very good” or “excellent,” according to NACE. That’s up from two years ago, when 18% characterized it that way, NACE said. (…)

Five million more Americans can join a program to lower student-debt bills, part of a broad campaign by the Obama administration that has provided relief for some households but done little to reduce underlying college costs.

Under rules effective Tuesday, any American who borrowed directly from the federal government for college or graduate school can enroll in a program called Pay As You Earn. The program—previously open to only newer borrowers—sets the monthly payment at 10% of a borrower’s discretionary income, defined as adjusted gross income minus 150% of the federal poverty level.

Monthly payments typically drop by hundreds of dollars under the program but extend beyond the standard 10 years—to a maximum 20 years for those with undergraduate loans and 25 years for those with graduate loans. Any remaining balances at that point are forgiven. (…)

The expanded program will cost an estimated $15.4 billion over 10 years. (…)

More than 1 in 5 Americans with student loans—excluding those still in school—are at least three months behind on a payment, Federal Reserve Bank of New York figures show. About 7 million had gone at least a year without making a payment as of July, Education Department data show. (…)

Among the 69% of last year’s college seniors who owed student loans, the average debt burden upon graduation was $28,950, 2% higher than the previous class, the group said. (…)

(…) According to a new survey by Bank of America and USA Today, millennials ages 18 to 34 say they have a clear understanding of their financial situation and 44% are prepared for a rainy day, with three months of living expenses saved up. But 75% say they worry about their finances “often” or at least “sometimes,” with 39% saying they are “chronically stressed” about money. (…)

The bad news is that according to the BofA survey, the top financial priorities of Millennials are the following:

  • 70% said being debt-free was a top priority
  • 63% said having an emergency savings fund was a top priority
  • 62% said spending less than they earn was a top priority

(…) In a separate survey conducted by BlackRock, WSJ reports that the Millennial generation is not only likely to be frugal, it is almost certainly not going to be investing in the so-called HFT-rigged, Fed-manipulated casino known as the “market.”

Nearly four in 10 people surveyed said they want to make sure they have enough cash saved as a security blanket for an emergency before they save for retirement. And the vast majority said they find it difficult to keep up with bills and save for retirement at the same time.

That squares with other recent data from U.S. Financial Diaries, a project of the New York University Financial Access Initiative and Center for Financial Services Innovation, which found many households are saving regularly for small, short-term emergencies, such as an unexpected dip in income or a spike in expenses. But those emergencies happen so often it prevents them from building up larger amounts to put toward long-term goals.

More than a third of respondents in the BlackRock survey also said investing money felt risky, and they were afraid of losing money–even though only 7% said they had actually lost money on a past investment. And a full 72% said they did not see investing as a way to help them reach their financial goals.

Pointing up The punchline: nearly half of people ages 25 to 34 agreed that “what you might earn investing isn’t worth the risk of losing your money,” the most of any other generation.

Two out of three agreed that “investing is like gambling.” And despite having decades to save for retirement, 70% of their portfolios are in cash or cashlike investments, according to BlackRock. (…)

There Are Hardly Any One-Bedroom Rentals for Less Than $2,000 in San Fran and NY
China Steel Demand Slumps at ‘Unprecedented Speed’

Demand is collapsing along with prices, banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday.

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

China’s mills — which produce about half of worldwide output — are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown.(…)

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.” (…)

Steel demand in China shrank 8.7 percent in September on-year, it said. (…)

Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low. (…)

(…) Prices will probably average $45 a metric ton next year and in 2017, said Carol Cowan, Moody’s senior vice president in New York. So far this year, they have averaged about $58. The glut may expand as the majors boost low-cost output and Gina Rinehart’s Roy Hill mine in Australia begins shipments, Cowan said in an interview on Tuesday. (…)

“New supplies continue to come on, certainly through this year and then to 2016.” (…)

Faltering demand and slumping prices won’t prevent the largest iron ore producers from expanding because they’re low cost, Cowan said. Some less-efficient competitors in China and elsewhere can also tolerate lower prices for longer as weaker producers’ currencies combine with cheaper energy prices to cut mining costs, she said.

“That gives a little bit more breathing room, if you will, to some higher-cost production that would otherwise come out,” Cowan said. “Our expectations are certainly the big ones are not going to pull back production. The question is whether iron ore producers in China, which are probably higher cost, cut production, by how much and when.”

Japan’s retail sales fall piles pressure on BOJ

This is CNBC’s headline which is similar to most other media reports I have seen this morning

Retail sales fell 0.2 percent in September from a year earlier, compared with economists’ median estimate for a 0.4 percent rise, the Ministry of Economy, Trade and Industry said on Wednesday.

The decline, which followed five straight months of gains, was largely due to sluggish demand for cars and fuel, according to the data.

This is the WSJ headline today: Japanese Retail Sales Fall Unexpectedly. And the full article is behind a new paywall!

Pointing up But here’s the reality:

On a seasonally adjusted basis, retail sales rose 0.7 percent in September from the previous month.

Only Reuters seems to read the stats correctly:

Retail sales fell 0.2 percent in September from a year earlier but rose 0.7 percent from the previous month after flat growth in August, data from the Ministry of Economy, Trade and Industry showed on Wednesday.

On a quarterly basis, retail sales increased 1.8 percent in July-September after a feeble 0.2 percent gain in April-June, a sign household spending was emerging from the doldrums.

EARNINGS WATCH

More than half way and results are pretty good so far.

  • 226 companies (58.3% of the S&P 500’s market cap) have reported. Earnings are beating by 4.3% (best so far this season) while revenues have missed by -0.4%.
  • The beat rate for EPS is 69% (73% ex-Financials). The revenue beat rate is 34%
  • Expectations are for a decline in revenue, earnings, and EPS of -4.0%, -3.4%, and -2.3% (-3.0% yesterday). EPS growth is on pace for -0.5% (-0.9% yesterday), assuming the current beat rate for the remainder of the season. This would be 7.1% excluding Energy (+6.6% yesterday and +4.5% last week).
HSBC: The Fed’s Dot Plot Is Destructively Deceptive Lies, damned lies and dot plots.

The Federal Reserve’s economic forecasts and much discussed dot plot might be a source of more confusion than clarity, according to HSBC Strategist Lawrence Dyer.

The central bank’s Summary of Economic Projections haven’t proven too accurate — but that’s not the primary basis of his gripe. Rather, Dyer has a more fundamental qualm with the assumptions underlying the construction of the numbers as well as how they are interpreted and reported.

“Mark Twain’s description of the three types of lies may be of use to bond investors looking to interpret the FOMC’s rate guidance – statistics can deceive,” quipped the strategist. (…)

NEW$ & VIEW$ (27 OCTOBER 2015): Housing; Earnings.

U.S. New-Home Sales Tumble in September Decline suggests a highly volatile segment of the housing market could be cooling

Purchases of new single-family homes fell to a seasonally adjusted annual rate of 468,000in September, the Commerce Department said Monday, down 11.5% from August’s downwardly revised rate of 529,000.

September’s pace of newly built home sales is up 2% from September a year ago.

The number of homes for sale at the end of September stood at 225,000, the most since March 2010, although most of the 9,000-home uptick was in homes that weren’t yet started or still under construction. (…)

Edwin Woods, a division president of Dan Ryan Builders, which operates in six East Coast states, said inventories are tight in his region in North Carolina because supply isn’t keeping up with demand. He hasn’t been able to keep speculative homes—those that go under construction without a buyer lined up—in stock.

“We barely have any homes currently available that will deliver in the next 60 days,” Mr. Woods said.

The rate of home sales in the Northeast region fell by 61.8% in September from August, and is down 56.7% from September a year ago. The South and West regions are still up from September 2014, despite a downward tick last month. (Chart from Doug Short)

New Home Sales

CalculatedRisk says no worries:

Even though the September report was disappointing, sales are still up solidly year-to-date.  The Census Bureau reported that new home sales this year, through September, were 392,000, not seasonally adjusted (NSA). That is up 17.6% from 333,000 sales during the same period of 2014 (NSA). That is a strong year-over-year gain for the first nine months of 2015!

Fed Strives for a Clear Signal on Interest Rates As 2016 approaches, pressure is on the central bank and Janet Yellen to better manage expectations for rates and the U.S. economy.

(…) Officials have their work cut out, as illustrated in this recent exchange:

“I don’t really understand what is unclear right now,” said William Dudley, president of the Federal Reserve Bank of New York, during an appearance at a panel in Washington this month.

“Are you kidding?” Stanford University economist and Fed critic John Taylor said. “No one knows what you’re doing.” (…)

Ms. Yellen’s own inner circle of advisers has at times been out of sync in the long-running debate. Fed governors in Washington, meantime, want to delay a rate increase while pushing back against regional bank presidents eager to get started.

“I’m scratching my head about why so much of this is going on outside of the building,” said Princeton University professor Alan Blinder, a former Fed vice chairman.

The Fed’s uncertainty is contagious. A Wall Street Journal survey of market economists this month found that 64% believe the Fed will raise rates by December. Futures markets put the odds at 35%. (…)

The responsibility of managing the various viewpoints inside the central bank falls to Ms. Yellen, who is supposed to forge consensus. She meets regularly with other Fed governors and schedules calls with every regional bank president before meetings. More social than her predecessor, Ben Bernanke, she mills about at Fed dinners after policy meetings, according to officials. (…)

Ms. Yellen, who won a 9-1 vote to hold rates steady at the September meeting, must bring together three different camps inside the Fed.

One group, which includes several regional bank presidents, is ready to act on rates. Another, which includes Ms. Yellen and her core leadership, is poised for a rate increase if hiring and economic output keep growing at a healthy clip.

The third group of presidents and governors is called by some the “show-me camp.” They want to see concrete signs that inflation or wages are going up before raising rates. This group could help Ms. Yellen build a consensus around her centrist stance by counterbalancing the eager-to-move group. (…)

Ms. Yellen believes inflation will rise as slack in the economy diminishes and a falling jobless rate is central to her case. (…)

The Fed’s favorite measure of slack is the unemployment rate. (…)

If the Fed can’t make a persuasive argument that inflation is set to rise, it has little case for raising rates.

The distance between Ms. Yellen and the two governors actually wasn’t as great as it appeared, as she revealed in her long-planned speech on inflation that she delivered after the Fed’s September meeting.

Ms. Yellen acknowledged in the speech that despite the long-held economic theory, the connection between the unemployment rate and inflation was tenuous. If it were strong, inflation would have tumbled when unemployment soared to 10% in 2009 and rebounded as joblessness fell. Instead, the inflation rate drifted lower and then got stuck below 2%.

“The theoretical underpinnings of the model are still a subject of controversy among economists,” Ms. Yellen said in the Sept. 24 speech. “The validity of forecasts from this model must be continuously evaluated in response to incoming data.”

To observers, it served as a meaningful clue. If, in the weeks ahead, the data don’t confirm to the Fed’s projections of solid growth and hiring—and if the numbers don’t hint at a gradual rise in inflation—she and her colleagues won’t be moving interest rates much, if at all. (Chart from Bespoke Investment)

Confused smile This wait-and-see attitude is contagious:

A Frustrated Koch Brother Decides It’s Time to ‘Spout Off’  Charles Koch, who presides over a network of major conservative donors, has been frustrated by the tone of the 2016 campaign and said he will wait until year-end to determine how much he’ll spend on the race Winking smile
US natural gas crashes to lowest since 2012 Warm weather and record stocks put pressure on producers

(…) The front-month Nymex contract for November delivery hit a low of $1.997 per mBtu in early trading on Tuesday, dropping below $2 per mBtu for only the fourth time since 1999.

The US Energy Information Administration projects that gas in storage will total 3.956tn cubic feet by the end of this week, the most on record for the time of year. (…)

While lower heating bills may provide a boost for consumers already benefiting from a sharp drop in oil prices, US energy producers face a testing time. (…) (Chart from Bloomberg)

U.S. gas supplies are on track to reach a record this year.

Auto More info on automakers labor deals:

GM to Boost Its U.S. Workers’ Pay General Motors, which has been delivering some of the richest operating profits in its 107-year history, has decided to do something it hasn’t done in nearly a decade: give its veteran U.S. factory workers a raise.

(…) GM lost $7,360 a car in 2009. Through September, it made $3,784 a car this year, the most in recent history.

For GM, Mexico offers an attractive alternative to U.S. plants as it girds for an eventual downturn and U.S. market share at 17%, more than six percentage points lower than in 2007. Not only does Mexico have trade deals with most other nations, labor costs are between $1,000 and $1,300 a car lower than in the U.S., according to people familiar with the Detroit Three’s finances, due mainly to auto factories’ $7.50-an-hour pay.

GM’s U.S. wage tab of $58 an hour, including benefits, is 20% lower than the 2007 figure, but still the richest in the industry and 20% higher than at Toyota Motor Corp., according to the Center for Auto Research. Even Ford, which unlike GM avoided bankruptcy in 2009, has a lower hourly rate. (…)

Union workers aren’t happy with the industry’s two-tier wage system that was created in 2007. Modified in 2011 so GM and its rivals hired new workers at about $15.78 an hour and gradually increased their hourly wage to $19.28, UAW members saw the structure as unfair and pushed UAW President Dennis Williams to close the gap and get a raise for all 140,000 factory workers.

Mr. Williams achieved both through a Fiat Chrysler Automobiles NV wage deal ratified last week. Entry-level workers will graduate to the top rate over eight years, and more experienced workers will move to nearly $30 an hour from about $28 an hour.

That deal, which GM was pushed to at least match by the UAW, will raise Fiat Chrysler’s hourly wage costs—including all benefits—by 12% to nearly $54 an hour

from $48, according to people familiar with the financial details of the contract. (…)
EARNINGS WATCH
  • 184 companies (46.0% of the S&P 500’s market cap) have reported. Earnings are beating by 3.9% (4.1% last Thursday) while revenues have missed by -0.6%.
  • Results for Financials have been lackluster, missing by –0.1%, while the rest of the market has surpassed expectations by 5.5% (5.7% last Thursday).
  • The beat rate is 68% on EPS (74% ex-Financials), 33% on revenues.
  • Expectations are for a decline in revenue, earnings, and EPS of -4.0%, -4.1%, and -3.0%. EPS growth is on pace for -0.9%, assuming the current beat rate for the remainder of the season. This would be 6.6% excluding Energy (+4.5% last Thursday).