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$ (7 MAY 2015): Spiking: labor costs, oil, mortgage demand spike, bond yields, earnings;

U.S. Worker Productivity Declines Again

    

Nonfarm productivity fell at a 1.9% annual rate last quarter (+0.6% y/y), about the same as during a little-revised Q4. Harsh winter weather and the strike at West coast ports constrained real output. It slipped at a 0.2% rate (+3.5% y/y), after rising 2.6%, while hours worked gained 1.7% (2.9% y/y) following a 4.9% rise. Compensation per hour increased a 3.1% rate (1.7% y/y), the strongest rise in a year. When adjusted for lower prices it improved at a 6.2% rate (1.3% y/y), the largest increase since Q4 2012. The decline in productivity caused unit labor costs to rise at a 5.0% rate (1.1% y/y), the firmest increase in a year.

Manufacturing sector worker productivity declined at a 1.1% rate last quarter (+1.4% y/y) after an unrevised 0.1% dip. Output fell 1.2% (+3.8% y/y), with the weather and the strike, following a 4.3% gain. Hours worked edged 0.1% lower (+2.3% y/y) following a 4.4% Q4 increase. Worker compensation per hour increased a steady 1.5% (0.8% y/y). Adjusted for price deflation, compensation gained 4.6% (0.8% y/y) after a 2.2% rise. Unit labor costs increased 2.7% (-0.7% y/y), the strongest gain in a year.

YoY unit labor costs remain tame at +1.1% but their recent sequential 9.2% acceleration during the last 2 quarters will begin to bite YoY in coming quarters. labor costs are up 4.2% sequentially since Q3’14.

April ADP Shows U.S. Goods-Producing Jobs Petering Out

While recent claims data and ISM surveys suggested the labor market retains considerable momentum outside the factory sector, the ADP report could lower expectations for April nonfarm payrolls. This report was yet another sign of weakness in the U.S. manufacturing sector, probably related to a stronger dollar and lower, if more stable, oil prices. Consistent with the “weak factories” story, jobs at goods-producing firms fell 1k, the first outright drop since September 2010. Jobs at service-producing firms rose by a reported 170k, the slowest since August. The outsized proportional decline at large firms — down to 5k from 67k in December — is likely related to the slowdown in the manufacturing and energy sectors.

My point for a while: the strong USD combined with world deflation is making imported goods so cheap in the U.S. that U.S. goods producers can’t compete anymore.

U.S. Mortgage Loan Applications Move Lower As Interest Rates Tick Higher

The Mortgage Bankers Association reported that its total Mortgage Market Volume Index declined 4.6% last week (+21.8% y/y), the third decline in four weeks. Refinance applications fell 8.3% (+30.8% y/y) to the lowest level in four months. Purchase applications gained 0.8% (11.8% y/y) to the highest level since June 2013.image

China Car Sales Hit Speed Bump Some car makers reported anemic sales growth in April in China, where competition continues to intensify as the economy cools.

Some car makers reported anemic sales growth in April in China, where competition continues to intensify amid a cooling domestic economy.

General Motors Co. said Thursday that it and its Chinese joint-venture partners sold 258,484 vehicles in April, down 0.4% from a year earlier. Ford Motor Co. said it sold 96,889 vehicles in China, only 60 more vehicles sold compared with the year-earlier period. Nissan Motor Co.’s China sales were down 19% from a year earlier to 95,500 vehicles.

Oil Prices Rise Oil prices rose in volatile trade as latest supply data suggested crude oil glut might be starting to abate.

The Energy Information Administration reported on Wednesday that U.S. oil inventories fell 3.9 million barrels last week, the first weekly decline since Dec. 26.

However, at 487.0 million barrels, crude oil inventories are at the highest level for this time of year in at least the last 80 years, the EIA said.

Oil production in the U.S. remained stable, at 9.3 million barrels a day, despite the continued drop in oil drilling rigs since October last year.

Canadian crude exports see first drop in four months in February

Exports of Canadian crude oil declined by a modest 57,000 b/d in February to average 3.046 million b/d, data released late Monday by the National Energy Board showed.

The drop stemmed entirely from a sharp decline in light crude exports, down 89,000 b/d from January’s record-setting levels to 938,000 b/d.

Light Canadian crude oil exports have proven somewhat more variable than heavier grades, falling six times in the past 12 months.

In contrast, heavy crude exports resumed their steady rise, increasing by 32,000 b/d to a new record-high of 2.107 million b/d, surpassing last September’s average of 2.095 million b/d.

February’s dip nonetheless left total exports above 3 million b/d for just the third time in history, and marked a 325,000 b/d increase from the same time last year. Heavy crudes accounted for 275,000 b/d of that growth, but light crudes also increased 49,000 b/d from last February.

Investment in upstream oil production down 20% on year in 2015

Global investment in upstream oil production this year is down around $100 billion, almost 20% lower than in 2014 and the largest drop ever seen, the International Energy Agency’s chief economist Fatih Birol said Wednesday, May 6. The biggest portion of this is in the US, Canada and Brazil, Birol told journalists in Doha.
“Especially for shale oil, the decline rates are very steep. Investment decisions have to be taken in a very short time, as they are much more price sensitive”, Birol said.

“At the price level seen at the beginning of this year [around $45/barrel], there will not be many projects in North America that will be profitable,” he said.

This is despite declining supply chain costs which have made US shale producers significantly more efficient. (…)

However, Birol warned that at current prices there were even more risks to investments. Iraq in particular is struggling to meet its obligations to international oil companies, which now form a major portion of its government spending. The country boosted its exports to a record high of more than 3 million b/d in April, but with oil prices averaging $51.7/b for the month, Iraq earned only $4.8 billion, Platts has reported. In July last year, with oil prices at more than $100/b, Iraq earned almost $8 billion. At the same time, payments to oil companies have remained stable, and have taken an unsustainable share in the country’s budget, Platts has reported.
Sustained lower budgets and spending on oil could be a broader problem for the region. “It’s not just Iraq. I am concerned about spending in the whole Middle East,” Birol said.

Ghost Global Markets Roiled By Yellen Comments The selloff in European equity and debt markets picked up pace, partly fueled by comments from Fed Chairwoman Janet Yellen who suggested the yearslong stock rally may have driven prices too high…

…and exposed debt investors to too much risk.

“I would highlight that equity-market valuations at this point generally are quite high,” Ms. Yellen said. “Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there.” (…)

Broadly, Ms. Yellen said Wednesday that “risks to financial stability are moderated, not elevated at this point.”

“There was a great deal that we missed before the crisis. I believe we are better prepared,” Ms. Yellen said.

BUY LOW, SELL HIGH

The mother of all “buy-low,sell-high” chart from David Rosenberg:

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EARNINGS WATCH
  • 424 companies (89.1% of the S&P 500’s market cap) have reported. Earnings are beating by 7.4% while revenues have met expectations.
  • Expectations are for revenue, earnings, and EPS of -3.1%, +1.3%, and +3.2%. Excluding Energy, growth would be 2.2%, 8.6%, and 10.7%, respectively. This excludes the likelihood of beats for unreported companies.

NEW$ & VIEW$ (6 MAY 2015): Dollar bites; Oil bite? Cat bites?

U.S. Trade Gap Widens

The nation’s trade deficit expanded by 43.1% in March from February, the largest monthly widening since 1996, the Commerce Department said Tuesday. A record level of non-petroleum imports flowed into the U.S. after a labor dispute at West Coast ports ended, causing the seasonally adjusted trade gap to widen to $51.37 billion.

That was significantly larger than economists had forecast, even with pressure from a strong dollar and weak global growth. As a result, revisions could push the official reading for first-quarter gross domestic product into negative territory from the paltry 0.2% annualized gain initially reported last week. (…)

“It’s really a global challenge right now,” said Marc Skalla, president of Atlanta-based SASCO Chemical Group Inc., which makes chemicals for tires and other industries. The firm expects sales to grow by 20% this year, but the stronger dollar is squeezing export profits.

A stronger dollar has “taken contracts that we worked on last year and completely changed them,” Mr. Skalla said. “We’ll feel it on the margins.” (…)

From Haver Analytics:

Overall exports improved 0.9% (-3.3% y/y) following four straight months of decline. Auto exports recovered 6.9% (-4.4% y/y) after an 8.4% drop. Capital goods exports rebounded 3.3% (-1.3% y/y) making up most of a 3.6% decline and auto exports rose 6.9% (-4.4% y/y) following an 8.4% shortfall. Foods, feeds & beverage exports gained 3.1% (-11.8% y/y) after a 1.8% drop while nonauto consumer goods exports declined 9.5% (-1.6% y/y) after a 7.9% rise. Industrial supplies & materials exports gained 0.9% (-12.9% y/y) following a 3.7% drop. Services exports improved 0.3% (4.2% y/y) but travel exports were off 0.7% (+1.8% y/y).

Overall in Q1, exports are down 3.7% (-15.6% SAAR).

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From Ed Yardeni:

More significantly, real merchandise exports edged up just 1.1% m/m and are showing a flattening tendency over the past year. On a y/y basis, imports are up 10.1%, while exports are up only 0.3%. The slowdown in exports probably reflects secular stagnation in the global economy as well as the negative impacts of the strong dollar and the port strikes.

From BloombergBriefs:

A number of surveys have noted concern from domestic producers that demand for their goods is being squelched by a flood of cheap imports.

Q2 BOUNCE WATCH: ATLANTA FED DOES NOT SEE ANY BOUNCE YET

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.8 percent on May 1, down slightly from 0.9 percent on April 30.

BTW, the Atlanta Fed nailed the low Q1 GDP number on the head.

David Rosenberg, who is in the top 10 range above, lists the evidence of a Q2 bounce:

  • Core capex orders for March have been revised to +0.1% from –0.5%.
  • Jobless claims keep falling.
  • Home prices are accelerating.
  • Pending home sales are rising.
  • ISM Manufacturing new orders are +1.7 to 53.5 in April with export orders +4.0 back above 50.
  • Fully 15 of 18 manufacturing industries reported expansion last month. Rising orders-to-inventories suggest continuation in May.
  • The U. of Michigan consumer sentiment surveys did not validate the Conf. Board slide and remains high.
  • The ECRI LEI reached a 6-month high in April.
  • Copper is up 10% in the past 2 weeks.
  • Borrowing activity is picking up.
  • So are wages and salaries.

Rosenberg’s analysis says that temporary headwinds drained 2-3 GDP points in Q1.

Some no so positive stats Rosenberg omitted:

  • Car sales have stalled.
  • Construction is weakening.
  • Core durable goods orders are falling.
  • New home sales declined in March.
  • Lumber prices are falling during the seasonally strong period.
  • The Conf. Board LEI improved only modestly in March.

This a.m.:

ADP National Employment Report: Private Sector Employment Increased by 169,000 Jobs in April
 

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Pointing up ADP notes that manufacturing employment declined in April.

And now, there is this:

Oil hits 2015 highs as Libya output slows, Saudis raise prices

(…) Protests stopped crude flows to the eastern Libyan oil port of Zueitina on Tuesday. Libyan output is below 500,000 barrels per day (bpd), a third of what the country pumped before 2010.

Saudi Arabia raised official selling prices (OSPs) for its Arab Light grade crude to Northwest Europe to reflect a price rally in rival grades in recent weeks. (…)

Crude has been boosted by production shut-ins in Opec-member Libya, a weaker dollar and signs of growing global demand, but the scale and pace of the rally since prices bottomed near $45 a barrel in January has raised questions about its longevity. (…)

Traders said a surprise fall of 1.5m barrels in US oil inventories reported by the American Petroleum Institute overnight had provided further price momentum.

If confirmed by data later on Wednesday from the US Energy Information Administration, the statistical arm of the Department of Energy, it would mark the first weekly drop in US crude oil inventories since January. Last week US crude oil inventories stood at 490m barrels, the highest since records began. (…)

(…) EOG said that if benchmark US West Texas Intermediate crude rose to $65 per barrel or higher — compared with its price of about $60 on Tuesday — then the company could resume “double-digit” production growth, while covering its capital spending from its operating cash flows. (…)

Timothy Leach, Concho’s chief executive, said: “We expect to deliver higher production growth on a lower capital spend and with fewer rigs.”

Anadarko (…)  said it had cut the average cost of drilling a well in the Eagle Ford shale of south Texas by 14 per cent since the last three months of 2014. (…)

Canada’s energy industry, already buffeted by low oil prices and stalled pipeline projects, is bracing for more setbacks after a New Democratic Party that pledges to raise corporate taxes was swept to power in Alberta.

The NDP, led by Rachel Notley, ended a 44-year Progressive Conservative dynasty by winning a majority of districts in elections Tuesday, according to preliminary results. The NDP promises to boost corporate taxes, review the government’s take on energy revenue, scale back advocacy for pipelines and phase out coal power more quickly. (…)image

States Look to Boost Taxes About a dozen states are considering significant tax increases this year.
SENTIMENT WATCH
Market U-Turn Rams Hedge Funds A broad market reversal is battering hedge funds, spoiling the industry’s strongest annual start since the financial crisis.

  • Are we there yet? The long awaited, much predicted start of the great turning point in bond markets after which yields will rise, prices fall and teeth nash has arrived. Maybe.

Here’s Jen Nordvig of Nomura late on Tuesday:

The size of bond moves today should not be underestimated. For example, the moves in the Italian 30-year bond today were substantially larger than anything seen in the Euro-crisis! (in price terms, which is what matters for PnL).

Importantly, bond weakness is a global phenomenon, and the very largest bond markets are impacted. Hence, the moves certainly have potential to impact sentiment through portfolio contagion.

FYI:image

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Cat face The cat trap could be pretty narrow! Cat face Cat face Cat face …

EARNINGS WATCH
  • 407 companies (87.1% of the S&P 500’s market cap) have reported. Earnings are beating by 7.3% while revenues have met expectations.
  • Expectations are for revenue, earnings, and EPS of -3.1%, +1.1%, and +2.9%. Excluding Energy, growth would be 2.2%, 8.5%, and 10.6%, respectively. This excludes the likelihood of beats for unreported companies.