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$ (18 MAY 2015): Q2 Bounce?

U.S. Industrial Production Falls for Fifth Straight Month U.S. industrial production fell for the fifth consecutive month in April, suggesting weak global demand, a stronger dollar and lower oil prices continue to limit output.

Industrial production decreased a seasonally adjusted 0.3% from the prior month, the Federal Reserve said Friday. It was the fifth consecutive monthly decline.

Capacity utilization, a measure of slack in the industrial sector, fell four-tenths of a percentage point to 78.2% in April. Lower capacity utilization could reflect businesses holding off on investment and consumers avoiding major purchases, damping economic growth. At its current level, capacity utilization was slightly below its long-run average recorded since 1972.

Overall industrial output in April was up just 1.9% from a year earlier. (…)

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U.S. industrial production had been mixed through the second half of last year, before dropping off in December. In the first quarter of 2015, industrial production posted the first quarterly decline since the recession ended, the Fed said last month. (…)

March’s industrial production reading was revised to a 0.3% decline from a 0.6% fall. But February’s gain of 0.1% was revised lower to a 0.1% decline.

Manufacturing output, which accounts for about three-quarters of overall industrial production, was unchanged in April. A small increase in the production of long-lasting durable goods, including wood products, motor vehicles and appliances, was offset by a small decrease in nondurable goods like food, beverages and tobacco products, the Fed said.

March’s manufacturing figure was raised to 0.3%, from a previously reported gain of 0.1%. (…)

Mining output, the second-biggest component of industrial production, fell by 0.8%, the fourth straight monthly decline. The drop off largely reflected a sharp decline in oil and gas drilling, which fell by 14.5% last month and is down 46.5% from a year ago. (…) (Chart from Haver Analytics)

Last 4 months (last 2 month) at annual rates:

  • Total output: –3.0% (-3.7%)
  • Manufacturing: –1.5% (+1.8%)
  •   Consumer Goods: +1.2% (-2.4%)
  •   Business Equipment: –0.6% (0.0%)
  •   Construction Supplies: –7.8% (-7.3%)

This is happening while U.S. manufacturing is said to be going through a renaissance…

U.S. MANUFACTURING EMPLOYMENTimage

AVERAGE HOURLY EARNINGS- MANUFACTURING image

Q2 BOUNCE WATCH

(…) The production data show that re-acceleration in the economy in the current quarter is modest, particularly compared to the sharp snap-back that occurred last year following a disappointing first quarter.

While last year’s weakness could be explained by numerous “polar vortexes” spanning January through March, the weather story is much less compelling this year, with the exception of February. There are different factors contributing to first-quarter weakness this time, and so the profile of the re-acceleration looks different, and milder. (…)

The first-quarter average for industrial production is now down 0.7 percent annualized relative to the previous quarter, and April is down 2 percent relative to the first quarter. Until 2015, industrial production had not posted a quarterly decline since the recovery from the last recession in late-2009. (…)

The slump in capacity utilization bodes poorly for any meaningful pickup in business fixed investment in the near term, as capacity constraints tend to drive private sector capital investment. As a result, non-residential fixed investment in the GDP accounts is unlikely to be a meaningful driver of the economy over the next few quarters. Similarly, productivity is unlikely to improve significantly until businesses invest in productivity-enhancing infrastructure.

The tepid industrial production data followed a weak report on April retail sales from earlier last week. Analysts who were looking to these two major data points for guidance on the underlying momentum in the domestic economy got a cool read to be sure. The good news is that the slump in the first quarter is not extending into the second quarter. The bad news is that the second-quarter rebound is setting up to be quite mild. (BloombergBriefs)

U.S. HOUSING: Rent vs. Buy

Homeownership remains cheaper than renting in all 100 largest U.S. metro areas. In fact, buying is 35% cheaper than renting now, compared with 33% cheaper one year ago. Paradoxically, home price growth nationally has outpaced rents over the past year. So what gives? Two things. First, the 30-year fixed-rate mortgage rate has fallen from 4.5% in 2014 to 3.87% today (as of April 15). Second, the 3.9% home price gain wasn’t much larger than the 3.7% gain in rents. In the past year, these two trends have made homeownership even more affordable compared with renting.

Trulia’s Rent vs. Buy Report assumes a traditional 30-year fixed rate mortgage with a 20% down payment. But for those looking to buy a home, apartment, or condo with homeowner association (HOA) fees, the extra cost could make renting a more attractive option. (…)

RentvsBuy_Map

Strong Dollar Makes U.S. Real Estate Less Attractive to Foreigners Buyers paying in rubles, euros or Canadian dollars see much higher prices in key markets

(…) “Foreign buyers have been a big part of the rebound in home prices in the U.S.,” said Stan Humphries, chief economist at real-estate website Zillow. “The recent strength of the U.S. dollar has significant implications for the attractiveness of the market for foreign buyers.”

(…) But while Canadian snowbirds are having a harder time finding easy bargains in sun-splashed locales, some real-estate agents say wealthy South Americans and Chinese are still seeking to secure U.S. properties, even those they intend to leave vacant, as safe places to store wealth. Agents say that perception has only been reinforced by the dollar’s recent rise.

Canadian buyers, who are a relatively short flight from U.S. vacation hotspots, are of particular importance to the domestic housing market. In 2014, they accounted for 19% of all international transactions, according to the National Association of Realtors. That figure is down from 23% in 2011, when the Canadian dollar’s exchange rate was more favorable.

Peter Terracciano, owner of the RE/MAX Consultants agency in Palm Desert, Calif., said western Canadians represent the bulk of his clients for seasonal vacation properties. That segment of his business is down 30% from a year ago, he said. The drop-off is even larger among properties priced at $1 million or more.

(…) In March 2011, Canadians accounted for 5% of all home sales in the Phoenix area, according to the W.P. Carey School of Business at Arizona State University. That represented a larger fraction of buyers than from any single state other than Arizona. In March of this year, Canadians accounted for just 1% of sales.

In some Arizona retirement communities, Canadians made a quarter of all purchases from 2008 through 2012, said Mike Orr, director of the university’s Center for Real Estate Theory and Practice. (…)

Currency rates have less influence on Chinese buyers because the yuan closely tracks the dollar. But escalating real-estate values, especially in California, and the dollar’s strength against other currencies make U.S. investments attractive for Chinese buyers, said Li Li Hwang, an agent with Century 21 Beachside in Rancho Cucamonga, Calif. She frequently works with Chinese buyers and actively advertises that she is bilingual.

Two Chinese clients recently closed on a property during a one-week visit to Southern California, Ms. Hwang said. Purchasers are often seeking property to improve their chances to obtain a U.S. visa or as housing for children attending a local university.

For Chinese buyers, the “stronger dollar will indicate that the U.S. is the most safe country” for investors concerned about a slowing economy at home, Ms. Hwang said. “It will give them much more confidence and protection.”

China’s Improving Property Scene Still a Drag Property prices may be rising in China’s biggest cities, but huge swaths of the country are mired in unsold inventory.

Official government data released Monday showed nationwide property prices falling in April, but more slowly than before. The trend is clearly toward a leveling out and possibly a rebound in prices. In China’s four so-called tier-one cities — Beijing, Shanghai, Guangzhou and Shenzhen—prices are actually rising again.

(…) the central government data show a nationwide inventory-to-sales ratio of four months, while the local data put the figure as high as 24 months in the middle of 2014.

The most serious inventory problems are concentrated in a handful of provinces in the industrial northeast, which has been hit particularly hard in the slowdown. Inventory-to-sales ratios in this region were over 40 months in 2013, the most recent data available show, and before the worst of the inventory buildup last year. That compares to less than 12 months of inventory in China’s richest cities.

It is hard to dismiss these areas as unimportant. Together, the provinces Hebei, Heilongjiang, Jilin, Liaoning and Shandong make up nearly a quarter of China’s gross domestic product. (…)

Russia economy declines 1.9% in first quarter

The contraction was much narrower than expected. Economists’ forecasts for the first quarter had ranged from -2 per cent to -4.5 per cent, and even Russia’s ministry of economic development had expected a 2.2 per cent drop. (…)

According to monthly data released by Rosstat, the government statistics agency, earlier in the year, the drop in retail sales, which started in January, was still gaining pace with a 8.7 per cent drop in March. A continued slide in fixed asset investment, which has been sluggish since 2013, appeared to have slowed in March. (…)

Industrial production contracted 1.6 per cent in February and by just 0.6 per cent in March. But some industry sectors have performed markedly better. The weak rouble has helped companies in the chemical industry and in food production, boosting their competitiveness versus foreign rivals. (…)

Thai Economy Struggles to Grow as Exports Wilt Thailand’s modest economic growth in the first quarter of 2015 is casting a shadow on the recovery of Southeast Asia’s second-largest economy.

Thailand’s gross domestic product expanded 3.0% from a year earlier in the first quarter, the National Economic and Social Development Board said Monday. The latest figure was an improvement from the revised 2.1% year-over-year growth recorded in the fourth quarter of 2014 but was below the median 3.41% growth forecast by economists polled by The Wall Street Journal.

Thailand’s exports, which account for around two-thirds of GDP, look less likely to help propel the recovery after data showed a 4.3% on-year contraction in the first quarter. Exports have been hit by an economic slowdown in the country’s key trading partners—particularly Japan and China—the end of the European Union’s tax privileges for Thai products from Jan. 1, and a stronger baht.

On a quarterly basis, Thailand’s economy expanded 0.3% in seasonally adjusted terms in the first quarter. The official figure is better than the poll’s median forecast of a 0.5% contraction, but is below the revised 1.1% on-quarter growth in 4Q14.

Oil Rises on Mideast Tensions

Over the weekend, Islamic State militants seized control of Ramadi, the capital of Iraq’s largest province, located around 110 kilometers from the capital Baghdad.

Meanwhile, Saudi-led airstrikes have resumed in Yemen as a five-day cease-fire between a Saudi-led military coalition and Yemen’s Houthi rebels expired on Sunday night.

Iran deputy oil min says OPEC unlikely to cut output The Organisation of the Petroleum Exporting Countries (OPEC) is unlikely to implement a production cut at its next meeting in June, a senior Iranian official said on Monday.

(…) Iran hopes its crude oil exports will return to pre-sanctions levels within three months once a deal with major powers to lift an oil embargo is finalised, he said.

“We hope we can come back to the export levels that we had before the sanctions,” Javadi, who is also the managing director of the National Iranian Oil Company, told Reuters.

“Yes, 2.5 (million barrels per day), around,” he said, adding that this could possibly be achieved in three to six months. (…)

Iran currently has less than 10 million barrels of crude stored onboard tankers that could be released post-sanctions depending on market conditions, Javadi said.

He said the OPEC producer expected to claw back lost market share in Asia and Europe.

“It depends on market situation and price level, but we will come back to the traditional trade that we had before,” he said, adding that Asia could take more than 50 percent of Iran’s exports. (…)

Iran says that an increase of its oil production will not cause a price crash. It expects other OPEC members to make way for extra barrels, but so far there is no sign that other OPEC members are willing to cut supply. (…)

Saudi oil sales to US lowest since 2009 Fall shows impact of shale boom and growing imports from Canada

(…) Saudi Arabia remains the second-biggest oil exporter to the US after Canada, and owns stakes in refineries and petrochemical plants in the country.

Oil exports to the US this year have been almost a third lower than during the same period last year, and have declined by about 400,000 b/d since 2012.

But they have strengthened since late March, weekly US government data show, indicating that the kingdom may not be prepared to give up on its share of the US market. (…)

The kingdom has been compensating for the loss of sales by accelerating its pivot towards Asia, with China vying with the US as one of the biggest buyers of Saudi crude. (…)

But China is a tough market:

BEARNOBULL’S WEEKENDER

FactSet StreetAccount Summary – US Weekly Recap: Dow +0.45%, S&P +0.31%, Nasdaq +0.89%, Russell 2000 +0.73%

SENTIMENT WATCH
Value of the global art market hits record €51bn in 2014

ChartsWhen Pablo Picasso’s “Women of Algiers (Version O)” fetched $179.4m at Christie’s on Monday it became the most expensive artwork to be sold at auction.

In the same sale, Alberto Giacometti’s life-sized sculpture “Pointing Man” sold for $141.3m making it the most expensive sculpture sold at auction.

(…) the total value of the global art market surpassed €51bn in 2014, a 7 per cent increase on the previous year and its highest ever level, according to estimates in the 2015 Art Market Report published by the European Fine Art Foundation. Lots sold for more than €1m accounted for 48 per cent of the value of the fine art market. (…)

The volume of sales also rose 6 per cent in 2014, with 39m works sold. This, however, was less than the peak reached in 2007. About 1,530 lots worth more than €1m were sold at auction, a rise of more than 16 per cent on 2013. (…)

But Does Picasso Sale Signal a Top for Stocks?

(…) Whether we’re in a bubble or even an overvalued market is a worthy debate. But these examples are not proof of overvaluation or really much of anything else. They are anecdotal observations, one-off transactions in a ludicrously small market dominated by a ludicrously wealthy clientele. Given the choice between quantifiable data or anecdotal tidbits, you should always choose the data.  So no, these sales are not proof of anything other than the simple truth that some people have very large bank accounts that they are unable to exhaust through normal profligacy or by paying insane prices for a handful of unique objects of art.

There are many ways to understand why these stunning nine-figure transactions are not investment-sentiment indicators.

Anecdotes can tell you about a small subset of investors or even individuals, but they don’t measure the crowd. This is important, because sentiment is a yardstick of the crowd’s emotional state. Collectively, what are the masses thinking, saying and most importantly doing with their money? There are many ways to measure sentiment, and the best of these avoid anecdotes.

Some traders rely on sentiment surveys, especially the American Association of Individual Investors’ bull-bear readings. I have yet to find a whole lot of value in this metric aside from those rare times when the readings are at extremes. Survey responses tend to swing wildly in response to what just happened, and they typically lag behind market cycles.

If you are going to use AAII survey data, I prefer the asset allocation survey. During the past 23 years, individual investors on average have held a portfolio made up of 60 percent stocks. As of April, stocks and stock mutual funds made up 67.9 percent of individual portfolios, according to AAII. That is a somewhat higher than the average, but below the extremes seen in the past. In 1999-2000, equity holdings were 17 percent higher than the mean, while in 2005-07 they were 10 percent more.

There are lots of other ways to measure sentiment: the VIX (sometimes known as the fear index), mutual-fund flows, put-call ratios, the Arms Index (a technical measure of advancing and declining shares), the percentage of stocks reaching new highs and lows, the percentage of New York Stock Exchange shares trading below their (choose one) 50- or 200-day moving averages and so forth. For the most part, these kinds of sentiment readings tend to be quite noisy while offering no definitive insight much of the time.

Back to the artwork: There are more than 7 billion people in the world. There are almost 320 million people in the U.S. How many folks can afford to spend almost $200 million on a Picasso or $150 million on a Giacometti? There are about 2,300 billionaires in the world. That pretty much defines the size of the market for these sorts of collectibles.

That means these record-breaking art auctions may say something about the rarefied world occupied by the super-rich, but their informational value is of little importance to market sentiment. So stay calm and don’t panic just yet.

Fingers crossed Maybe.

BID image

Ghost But let’s consider other investor sentiment gauges, courtesy of Short Side of Long:

Retail investors currently hold least amount of cash since 2000

AAII Cash Allocations

Households equity exposure remains 2nd highest since WW2

Newsletter writers & finance advisors are extremely complacent

Investor Intelligence Bears
Global fund managers continue to be highly overweight equities
Merrill Lynch Fund Managers Global Equity Weighting

Nerd smile Not much fire power left…

Epsilon Theory: More Probable Than Not

The only thing that I ask from this group today and the American people is to judge me from this day forward. That’s all I can ask for.

– Alex Rodriguez press conference, February 17, 2009, regarding his steroid use from 2001 – 2003.

I’m ready to put this chapter behind me and play some ball.

– Alex Rodriguez “apology” letter, February 17, 2015, regarding his steroid use from 2010 – 2012.

Brady:                 I would never do something that was outside of the rules of play. I would never have someone do something that I thought was outside the rules.

Reporter:          So you never knowingly played with a football that was under 12.5 pounds?

Brady:                 No.

– Tom Brady press conference, January 22, 2015.

Now, we all know that air pressure is a function of the atmospheric conditions. If there is activity in the ball relative to the rubbing process I think that explains why when we gave them to the official and the officials put them at let’s say 12.5 … once the ball reached its equilibrium state it’s probably closer to 11.5.

– noted physicist and football coach Bill Belichick, January 24, 2015.

That is an allegation [FOMC quashing their own General Counsel’s investigation of leaks] that I don’t believe has any basis in fact. I’m not going to go into any detail but I don’t know where that piece of information could possibly have come from.

– Janet Yellen press conference, March 18, 2015.

The Board’s Inspector General and the Department of Justice are in the midst of an investigation into this matter [FOMC leaks to journalists and market consultants]. We are cooperating fully with them and look forward to the results of their investigation. … I had one meeting with Ms. Regina Schleiger of Medley Global Advisors during the period covered by the staff review. As Vice Chair of the Board, I met with Ms. Schleiger on June 11, 2012, to hear her perspectives on international developments.

– Janet Yellen letter to Rep. Jeb Hensarling, May 4, 2015.

Mr. Bernanke said that he was sensitive to the public’s anxieties about the “revolving door” between Wall Street and Washington and chose to go to Citadel, in part, because “it is not regulated by the Federal Reserve and I won’t be doing any lobbying of any sort.” He added that he had been recruited by banks but declined their offers. “I wanted to avoid the appearance of a conflict of interest,” he said. “I ruled out any firm that was regulated by the Federal Reserve.”

– New York Times, April 16, 2015.

Senator:             Fletcher, there’s an old saying, to the victors belong the spoils.

Fletcher:            There’s another old saying, Senator. Don’t piss down my back and tell me it’s raining.

– “The Outlaw Josey Wales” (1976)

(…) I’ve inherited a lot of my father’s traits, and one of them is his intolerance for this mendacity of language, this intentional failure to call things by their proper names, this linguistic exercise in self-puffery and cover-up. Unfortunately for me and anyone else who shares this peculiar sensitivity, mendacity of language has never been more rampant in all of our social worlds, from sports to politics to markets.

With the advent of always-on mass media that projects the illusion of a one-to-one personal connection with cartoons like “Tom Brady” and “Jim Cramer” – corporate entities that are connected with but distinct from human beings like Tom Brady and Jim Cramer – language intentionally designed to influence rather than inform is now ubiquitous in the business of sports and politics and markets Why? Because it works. It delays sanctions until after you play in the Super Bowl, until after you sign a quarter of a billion dollar contract. It deflects attention until after your term in office is over, until after you cash in with a book deal and hedge fund consultancy.

To use the ponderous, legally parsed language of the NFL’s Wells Report on “deflate-gate”, language which I think wonderfully encapsulates the pinched spirit of our age, here are four things that I believe are “more probable than not”:

1) Alex Rodriguez has routinely used steroids and PED’s of various stripes since he was a sophomore in high school.

2) Tom Brady has routinely bribed equipment managers with autographed jerseys and new shoes in order to receive footballs deflated well below what he knew was the legal limit.

3) Janet Yellen has routinely leaked market-moving information to favored private sector conduits, and has also sought to quash internal investigations of same.

4) Ben Bernanke is for sale to the highest bidder.

But here’s the thing. I’m not that worked up about ANY of these issues. Yes, A-Rod has been juicing for 25 years, and Tom Terrific breaks the rules he thinks he can get away with breaking. Okay. Them and about 5,000 other professional athletes. Janet Yellen, the prime author of Fed “communication policy” (the intentional use of words to influence market expectations), leaks her viewpoint as part of that communication policy and then tries to kill an internal investigation. Okay. Her and every other senior politician and bureaucrat in the history of human civilization. As for Bernanke … a former President of the United States and the leading candidate to be the next President of the United States have personally received more than $100 million in “donations” from mega-corporations and foreign governments, and I’m supposed to be outraged about Ben Bernanke cashing a big check from Ken Griffin?

What I AM worked up about, though, is the mendacity … the utter lack of character and authenticity … on full display in ALL of these cases. All of these cases and so many, many more.

You want to go work for Citadel? Fine, go work for Citadel. But OWN IT. Don’t insult my … I’m not even going to say intelligence, because it’s not an assault on intelligence we’re talking about here … don’t insult my 50 years of life as a reasonably self-aware human being by claiming that you’re taking the high road here by working for Citadel instead of, say, JP Morgan. I mean, the notion that access to the Fed’s regulatory authority over big banks is somehow the defining characteristic of why Ben Bernanke is a sought-after commodity, or that any public outrage here is clearly misplaced because, after all, he won’t be a – gasp! – bank lobbyist, per se … it’s all just horrifically insulting to anyone with the common sense to know that the sky is blue, that 2 + 2 = 4, and that you don’t meaningfully change the air pressure in footballs by rubbing them vigorously. It’s mendacity and inauthenticity in the first degree.

You want to embark on a conscious policy of manipulating market expectations (yes, manipulating is a strong word, but it’s exactly accurate) by planting a carefully constructed Narrative with journalists like Jon Hilsenrath at the Wall Street Journal and consultants like Regina Schleiger at Medley, journalists and consultants who you know will be influential precisely because they are trumpeting their exclusive access to you? Fine. I totally get it. Once you’ve hit zero on short rates and pushed your balance sheet up over $4 trillion in LSAP’s, jawboning is the only bullet you’ve got left in the gun. But OWN IT. Don’t tell me that you’re meeting with Regina Schleiger at Medley because you want to hear HER perspectives on monetary policy! I’m sure that Ms. Schleiger is a very smart person. I’m sure that she is an insightful observer of the international economic scene. But – and I’m trying to say this in the kindest possible way – there’s not 1 in 100,000 investors who even knows who Ms. Schleiger is, and fewer still who would be willing to pay money or time to hear her personal opinion about the proper course of monetary policy. The exception, we are told, is the Chair of the Federal Reserve, in many respects the most powerful person on the planet … she, of course, is terribly keen to hear Ms. Schleiger’s views on international economics.

And yes, I know that Fed governors have these consultant meetings all the time. I know that their guests do most of the talking. But I also know, because I’ve done it, that professional investors and allocators are willing to pay tens of thousands of dollars to consultants like Medley, solely to glean a scrap of insight as to what the Fed is thinking, solely to be a willing host of the Narrative virus that the Fed is trying to spread. More to the point, Janet Yellen knows it, too, which is why she has these meetings. The act itself is not a horrible thing … not for A-Rod, not for Brady, not for Yellen, and not for Bernanke. It’s not a crime, or at least not a crime that will shame your children or your fan base. Certainly it’s a difficult and unpleasant thing when you’re revealed, because now you’ve got to deal with the Roger Goodell’s and the Bud Selig’s and the Jeb Hensarling’s and the Elizabeth Warren’s of the world – petty tyrants, all – but you knew there was this chance when you made the decision to break the rules, (or the “rules” in Bernanke’s and 2009 A-Rod’s case). But don’t turn a difficult situation into a personal capitulation to mendacity. Far better to own it.

Believe it or not, I’m not just venting my spleen at the outrageous displays of mendacity that assault us at every turn. I think that there’s an enormous political opportunity today (and I mean political in the broadest sense of the word, a sense that clearly includes the Fed, and arguably includes the NFL and MLB) to embrace authenticity, even if you are authentically an unlikable or – to use the insult du jour – a “polarizing” person. Not only am I convinced that we are each more likely to be successful in our chosen field when acting authentically (don’t you think that if Tiger Woods had embraced his authentically heel-ish nature in 2009, grown a goatee and moved to a casino suite in Vegas, that he’d still be winning majors today?), but also specifically within the chosen field of politics I think there is such a hunger for authenticity that ANY display of honest conviction when confronted with adversity, even if the adversity is well-deserved for breaking a rule, quickly becomes an enormous asset. Maybe this will turn out to be a more interesting election in 2016 than we think. Then again, with the vast campaign coffers already accumulated by Clintonâ„¢ and Bushâ„¢, two profoundly inauthentic corporate entities, maybe not. 

Sigh. I know I’m not going to change anything by writing about this stuff, any more than my father was going to change a sports commentator’s patter by yelling at the TV. Like my father, though, I just can’t help myself. It’s never easy to be authentic. It’s never easy to call things by their proper names. It’s never easy to own it. But here in the Golden Age of the Central Banker, it’s never been more important. Or more politically savvy.

Auto The View from the Front Seat of the Google Self-Driving Car After 1.7 million miles we’ve learned a lot — not just about our system but how humans drive, too.