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$ (22 OCTOBER 2015):

U.S. Consumers’ Holiday Spending Intentions Best Since 2007

Gallup’s initial measure of Americans’ 2015 Christmas spending intentions finds consumers planning to spend an average $812 on gifts this season, up from $781 at the same time a year ago, and the highest estimate since 2007.

Americans' Estimated Christmas Spending, 2002-2015

The poll also finds consumers a bit less cautious than last year when asked about how their Christmas spending will compare with the year prior. Although the majority of Americans routinely say they will spend about the same as they did the previous year, the 20% saying they will spend less is down from 24% in October 2014, and is the lowest Gallup has recorded for any October since 2007. It is also markedly lower than the 35% and 33% figures recorded in 2008-2009 during the last recession. Instead, consumers’ current mindset about holiday spending appears to be finally restored to the non-recessionary levels seen prior to 2008. (…)

Together, these findings point to improved holiday sales this year compared with 2014. But a cautionary note is in order, as Americans’ estimate of the total amount they will spend on gifts can change as the holiday season progresses.

In 2008, consumers’ spending estimate plunged nearly $200 between October and November, precipitated by the Wall Street financial crisis, and retail sales wound up falling nearly 5% compared with the year prior. Even in less turbulent times, Gallup has typically found consumers shrinking their spending estimate between October and November. (…) 

Strong Rebound for Architecture Billings Index

The Architecture Billings Index (ABI) returned to positive territory after a slight dip in August, and has seen growth in six of the nine months of the year so far. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending.

The American Institute of Architects (AIA) reported the September ABI score was 53.7, up from a mark of 49.1 in August. This score reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 61.0, down from a reading of 61.8 the previous month.

“Aside from uneven demand for design services in the Northeast, all regions are project sectors are in good shape,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Areas of concern are shifting to supply issues for the industry, including volatility in building materials costs, a lack of a deep enough talent pool to keep up with demand, as well as a lack of contractors to execute design work.” (Chart from CalculatedRisk)

CHINA?
  • Are China’s GDP Data Biased?

The service sector has become a key growth driver in China, with its share in GDP climbing from 44.8% in early 2012 to 50.9% in 2015Q3. However, it is surprising to see that shares of wholesale & retail trades and transport, storage & post industries, which account for 30% of total service output, remained largely flat during
the same time period, despite the fact that ecommerce transactions in the country grew at an average annual pace of 30% over the last three years.

The under-estimated spillover effects of the rapid e-commerce expansion might be related to government statistics that don’t include untaxed small businesses and the existing sampling system that under-weights online service providers. This is more evidence of China’s economic data deficiencies, but, in this case, working to underestimate GDP. (NBF)image

(…) why do the skeptics accept the truth of dismal government figures for construction and steel output – down 15% and 4%, respectively, in the year to August – and then dismiss official data showing 10.8% retail sales growth? (…)

In mid-­‐September, for example, when the private sector Purchasing Managers’ Index came out at 47.0, the result was generally reported along these lines: “The index has now indicated contraction in the [manufacturing] sector for seven consecutive months.”

In fact, Chinese manufacturing was growing by 5-7% throughout that period. The supposed evidence was wrong because 50 is the PMI’s dividing line not between growth and recession, but between accelerating and slowing growth. Indeed, for 19 out of the PMI’s 36 months of existence, the value has been below 50, while Chinese manufacturing growth has averaged 7.5%. (…)

The renminbi, however, has recently stabilized, and capital flight has dwindled, as evidenced by the better-than-expected reserve figures released by the People’s Bank of China on October 7. This suggests that the government’s policy of shifting gradually to a market-based exchange rate may have been better executed than generally believed; even the measures to support the stock market now look less futile than they did in July.

In short, Chinese economic management seems less incompetent than it did a few months ago. Indeed, China can probably avoid the financial meltdown widely feared in the summer. If so, other emerging economies tied to perceptions about China’s economic health should also stabilize.

The world has learned since 2008 how dangerously financial expectations can interact with policy blunders, turning modest economic problems into major catastrophes, first in the US and then in the eurozone. It would be ironic if China’s Communist leaders turned out to have a better understanding of capitalism’s reflexive interactions among finance, the real economy, and government than Western devotees of free markets.

Meanwhile:

Rail freight fell 15.6% YoY in August and is down 11.4% YoY YTD. Worst reading on record.

According to Platts calculations, China’s apparent oil demand rose 10% year on year to 11.19 million b/d in August. For the first eight months of 2015, China has clocked a 8.2% year-on-year rise in its apparent oil demand at an average of 11.14 million b/d, according to Platts data. In its October oil market report, the International Energy Agency said that it expected China’s oil demand to grow by around 500,000 b/d in 2015 to 11.1 million b/d. This growth could ease to around 300,000 b/d next year due to “the exceptionally choppy macroeconomic headwinds, weaker car sales and rising gasoline prices,” the IEA said. Platts China Oil Analytics expects China’s oil demand to rise by 556,000 b/d, or 5.3% year on year, to 11.06 million b/d.

FYI:

Nicola Wealth Management informs us that

  • China only represents ~0.7% of U.S. GDP in terms of exports, not really meaningful (Canada is a 2.5x larger trading partner).
  • Corporate America is not as exposed to China as most people would think. The S&P 500 companies have very low revenue exposure to China at only 1.6%. The sectors most exposed are technology and consumer discretionary names (e.g. gaming names have been hurt, particularly Wynn which has ~70% of revenues tied to China).

EARNINGS WATCH
  • 117 companies (30.2% of the S&P 500’s market cap) have reported. Earnings are beating by 3.6% (2.8% yesterday) while revenues have missed by -0.3%.
  • The beat rate is 67% on EPS (73% ex-Financials) and 35% on revenues.
  • Expectations are for a decline in revenue, earnings, and EPS of -3.8%, -4.6%, and -3.5%. Ex-Energy, these would be +1.7%, +2.6%, and +3.9% (+3.4% yesterday). This excludes the likelihood of beats, which have been above 4% over the past three years. (RBC Capital)

Nearly a third of the way and earnings look fairly good as we exit September-October. Nicola WM adds this:

Since 1896 the Dow Jones, on average, declined 1.06% in the month of September in contrast to an average gain of 0.75% among the remaining months.  If history is on our side, we would expect a bounce back and return to a positive month in October.

image

Also from NWM:

Another sector feeling the pain of a delay in rate hikes is the financial sector, more specifically, banks and asset managers.

Sept MMC 13

Banks and asset managers took it on the chin after the announcement [of no rate hike] as net interest margin expansion will be delayed for the banks (net interest margins have compressed more than 27% since 2010) and the significant amount of assets still sitting in money market funds. The banks and asset managers are basically managing these funds pro-bono as they’ve been waiving fees over the last 6 years in order to offer a positive yield which is currently averaging 0.01% or $1/year on $10,000.  In fact, since 2009, the waivers cost the industry $30-billion in lost revenue.

CANADA: SLOWER FOR LONGER 

The Bank of Canada (BoC) is losing confidence about the outlook for potential GDP growth. Back in July, the BoC was still estimating the economy’s normal cruising speed at 1.8% annually for the years 2015 through 2017. That is no longer the case. Due to continued weakness in commodity prices and lack of business investment, Mr. Poloz’s team estimates that “in the near term, growth in potential output is more likely to be in the lower part of the Bank’s range of estimates”. The problem is that the bottom of the range is quite low, meaning that the “new normal” for economic growth is likely to be close to 1.4% for the next two years – consistent with our own estimate of 1.3%. As today’s Hot Chart shows, there are no precedents for such weak potential growth outside recessions. The Canadian situation differs markedly from that in the U.S. where potential growth is estimated to accelerate to 2% by 2017. This development argues for a significant divergence for estimates of the neutral rate of interest between the two countries. (NBF)

image

Credit Suisse: with just $10 “you’re wealthier than 25% of Americans”
Surprised smile Last week Credit Suisse released its annual Global Wealth Report. The big headline grabber was their analysis showing that the top 1% of people now own 50% of the world’s wealth.

That is true and rather astonishing.

However, the report had another finding that was even more astonishing and largely overlooked.

Surprised smile What they found was that, as a percentage of the world’s population, there are now more poor people in the United States and Europe than there are in China.

creditsuisseweatlhreport Credit Suisse

Shown here, along the left side of the graph you can see that 10% and 20% of the world’s poorest are in North America and Europe.

Here, they aren’t talking about income. They define poor as lacking ‘wealth’, i.e. taking into account assets and liabilities like cash and debt.

Credit Suisse estimates that half of the world has a net worth less than $3,210. And a large chunk of Americans and Europeans can’t make that cut because their net worth is negative.

That’s especially the case for young people these days, who graduate from university with an incredibly expensive degree and an average of $35,000 in student debt.

Of course, plenty of people are in debt up to their eyeballs in the Land of the Free, and not just student debt. (…)

Credit Suisse estimates that 25% of Americans are in this situation of having a negative net-worth.

“If you’ve no debts and have $10 in your pocket you have more wealth than 25% of Americans. More than 25% of Americans have collectively that is.” (…)

NEW$ & VIEW$ (21 OCTOBER 2015): Housing; China; Oil; Earnings Watch.

U.S. Housing Starts Up on Multifamily Construction U.S. home building rebounded in September after two straight months of declines, largely because of a sharp increase in construction of apartments and other multifamily housing.

Housing starts rose 6.5% from a month earlier to a seasonally adjusted annual rate of 1.21 million in September, the Commerce Department said Tuesday. An 18.3% surge in multifamily units, which include apartments and condominiums, led the increase. Starts of single-family homes, which make up nearly two-thirds of the market, barely budged, rising a mere 0.3%. (…)

Tuesday’s report showed new-home starts for August were revised to a 1.7% decline, compared with an initial estimate of a 3% decrease. (…)

And building permits fell 5% between August and September to a seasonally adjusted annual rate of 1.1 million, the report said. Year-to-date, housing starts are up 12% and building permits are up 13%. (…)

Weakness was notable in the multi-family sector where permits fell 12.1% (+1.1% y/y). Declines occurred throughout most of the country. Single-family permits also eased 0.3% (+6.6% y/y), reflecting shortfalls in the Northeast and West.

Slowly but surely, single starts are heading up. (Charts from Haver Analytics)

 large image large image

Low interest rates and home prices knocked down from the housing crisis have made buying a much better deal than renting in virtually all U.S. markets. But good deals notwithstanding, buying is an option only for those who earn enough to afford the homes available on the market.

A report from Trulia on Tuesday offers some hard solace for would-be homebuyers priced out of hotter housing markets. Across the U.S., the report said, it’s 23 percent cheaper for a young household to buy a home than to rent one. But in San Jose and Honolulu the advantage to buying is nonexistent. In New York and other expensive cities, the advantage to buying will likely disappear once mortgage rates finally rise.

Trulia compared the median costs of buying and renting and found that San Jose and Honolulu are the only two U.S. cities where renting is a better deal. (…)

However, the reality for most people is:

(…) Prices for the least expensive previously owned homes — properties at 75 percent or less of the median — were up 10.7 percent in August from a year earlier and now represent the only one of four price tiers to surpass the peak reached during the housing bubble, according to a housing index from CoreLogic Inc. The August pace was 5.9 percent above its pre-recession high in October 2006.

The gap in the the growth rate between the most expensive and cheapest homes is now the widest since 1983, with the latter rising at a pace that’s 5.2 percentage points higher than that of the top tier. “You’ve got the front end of a big wave of first-time homebuyers but the supply of affordable housing is not there to meet that wave,” said Sam Khater, CoreLogic’s deputy chief economist. “What you’re seeing in the housing market is a reflection of the polarization of income. The builders are looking at it from that perspective: ‘If I have a choice of going up- and down-market, I’ve got to go up-market.'” 

The starter-home supply crunch is worsening, adding to the pressure on prices. The bottom third of the market accounted for 24.4 percent of listings in August, according to property website Zillow. That’s down from 25.6 percent a year earlier. In Denver, where the shortage is extreme, the lowest tier accounted for just 16 percent of inventory.

Philadelphia Fed Nonmanufacturing Survey Indicates Improvement

The Federal Reserve Bank of Philadelphia reported that its Index of Nonmanufacturing Sector Activity at the company level rose to 37.5, the highest level since June. Nevertheless, the reading remained below the year-ago level for the ninth month this year.

Improved readings for new and unfilled orders, inventories, full-time permanent employees and capital expenditures on physical plant were behind the rise in the overall October index average. Also rising was the number of part-time employees, the length of the average workweek and prices received. To the downside were sales or revenue as well as capital expenditures on equipment & software.

large image

Japan’s Export Growth Slows as China Stumbles Exports to China fall 3.5%, while total export growth slows to a 13-month low in September

(…) Exports to China—Japan’s second-largest market—fell 3.5% in September from a year earlier, after a 4.6% decline in August, Japanese government data showed. Total export growth slowed to a 13-month low of 0.6%, well below a 3.4% increase expected by economists surveyed by The Wall Street Journal.

(…) export volumes to the U.S. fell 4.7% in September, a fifth straight monthly decline, due to weaker demand for auto parts, visual equipment and semiconductors. The volume of exports to Asia also dropped in September, by 4.2%, a third consecutive monthly decline. (…)

It is possible Japan’s economy shrank again in the third quarter at about the same rate as the 1.2% contraction seen in the second, Mr. Nagahama said. That would be the second technical recession in two years for Japan. (…)

China’s 3Q15 Nominal GDP Growth Rate Lower Than During 08-09 Global Financial Crisis

Good piece from CEBM Research:

Although the real growth rate dropped by just 0.1 percentage points, the nominal growth rate dropped by a much larger magnitude, with Y/Y growth slowing from 7.1% in Q2 to 6.2% in Q3. The third quarter’s nominal growth rate is even lower than during the 2008-2009 global financial crisis and is at about the same level as it was during the 98 Asian Financial Crisis.

Pointing up Many enterprises are experiencing shrinking revenue and profits and are under greater stress than the real GDP figure would suggest, increasing the probability of credit defaults. Even for the property sector that started to see policy loosening back in September 2014, developers have not seen much improvement in terms of cash flows despite the noticeable pickup in sales.

image

One of the leading factors contributing to the current slowdown has been the government’s attempt to slow the rate of debt expansion since the beginning of 2011, i.e., Y/Y growth in the outstanding balance of total social financing (OBTSF) has dropped from 35% to a current 12%. This process was interrupted during the leadership transition in 2012-2013, but resumed by mid 2013. The current 12% Y/Y growth in OBTSF is in line with the government’s target of 12% M2 growth.

Bringing OBTSF growth in line with M2 growth likely marks the end of a 4-year phase to slow the rate of debt expansion. We feel it is unlikely that a substantial pickup in the debt level expansion rate will occur going forward. A further drop in this rate is also unlikely in the short-term. Latest data shows the 12-month difference in the Y/Y growth of OBTSF is still negative, but has narrowed substantially, a sign that policy loosening has started. A return to a positive differential is critical for the stabilization of aggregate demand.

image

Fiscal spending continued as a supporting factor for growth in September, helping to cushion the slowdown in the private sector. The 12-month rolling fiscal deficit topped 2 trillion RMB at the end of September, substantially higher than the 1.65 trillion budget deficit target. Without lifting the deficit target, additional room for fiscal policy will be limited, in which case fiscal spending will be a drag to aggregate demand in 4Q15. In addition, the transmission channel of fiscal spending via local government infrastructure investment no longer works due to the deterioration in local government finances. A new channel could be established in which policy banks would provide equity with PPP funding and seek leverage at commercial banks. Progress through this new channel likely will be much slower than via the old channel.image

Note that with nominal GDP up 6.2% YoY and real GDP up 6.9%, China is deflating at a meaningful rate, something Beijing must not like seeing.

ECB sees signs of thaw in bank lending Growth in business loans boosts eurozone recovery hopes

A closely watched survey of the eurozone’s banks shows they are relaxing their loan standards for businesses, in a sign of growing confidence about economic prospects in the European currency area. (…)

Companies and households across the eurozone demanded more loans in the third quarter of 2015 compared with the previous three months.

“[QE] had a net easing impact on credit standards and particularly credit terms and conditions . . . The easing impact was greatest for loans to enterprises,” the ECB said.

But the quarterly lending survey also found that banks had toughened their requirements for loans to households. (…)

OIL
Global Demand Growth for Oil May Fall by a Third in 2016

(… 0A 40% decline in the price of oil since last year has boosted demand, encouraging motorists, consumers and companies to top up. But the economic slowdown in China and elsewhere in Asia could sap that demand, according to analysts and big energy watchdogs. (…)

The International Energy Agency, an energy watchdog, forecasts global oil demand growthfalling from 1.8 million barrels a day this year to 1.2 million next year. The Organization of the Petroleum Exporting Countries, the 12-nation oil cartel, expects demand growth to fall to 1.25 million barrels a day, and some analysts see demand dropping even lower. (…)

The U.S. Energy Information Administration pegs demand in 2016 at 1.41 million barrels a day, up from 1.31 million this year. (…)

There is a difference of 210,000 barrels a day between where the IEA and the EIA energy watchdogs see average oil demand growth next year, while Swiss bank UBS says it will finish even lower, at 1.1 million barrels a day—some 300,000 barrels a day lower than EIA’s estimate. (…) Confused smile

IMF warns on Gulf states growth Big spending cuts needed to balance budgets, fund says

Chart: Budget outlook worsens for Gulf states(…) In its latest regional economic outlook for the Middle East, north Africa and Central Asia, published on Wednesday, the IMF forecast that the six-member Gulf Co-operation Council will see gross domestic product growth slow from 3.25 per cent this year to 2.75 per cent next year.

Council members’ average fiscal deficits are expected to reach 13 per cent of GDP this year, with the region’s largest economy, Saudi Arabia, facing a deficit of 21.6 per cent in 2015 and 19.4 per cent in 2016.

All regional oil exporters, having lost $360bn over the past year in export revenues, will have to deal with a cumulative fiscal deficit of more than $1tn over the next five years. (…)

“Yes, they have financial buffers, but addressing these issues is a matter of time urgency,” Masood Ahmed, the IMF’s regional director, said at a press conference in Dubai. “Difficult choices have to be made in ways to cut back on spending or to raise other forms of revenue, such as taxes.” (…)

Most countries’ fiscal measures are unlikely to achieve balanced budgets in the medium term, the fund warned. All regional exporters — apart from Kuwait, Qatar and the United Arab Emirates — are on course to run out of financial reserves within five years, it noted, adding that GCC states need to rebuild surpluses to deal with future oil shocks. (…)

To balance their budgets, Middle Eastern countries would have to reduce spending by 12-13 per cent of GDP over the year, the IMF said. (…)

EARNINGS WATCH
  • 86 companies (24.3% of the S&P 500’s market cap) have reported. Earnings are beating by 2.8% while revenues have missed by -0.6%.
  • The beat rate is 64% on EPS (71% ex-Financials) and 34% on revenues.
  • Expectations are for a decline in revenue, earnings, and EPS of -3.9%, -5.1%, and -4.0%. Ex-Energy, these would be +1.6%, +2.2%, and +3.4%. This excludes the likelihood of beats, which have been above 4% over the past three years. (RBC Capital)