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$ (17 JUNE 2015): Housing; Oil; 20% of S&P in Bear Market.

U.S. Housing Starts Pull Back, but Permits Point to Pickup

Groundbreakings surged to a seven-year high in April before falling 11% last month, the Commerce Department said Tuesday. The level of activity remained stable in May at an annual rate of 1.04 million units, and signs pointed to further gains in coming months.

Permits to build new homes surged 12% last month to an annual rate of 1.275 million, the highest since August 2007. Permits for apartment construction surged, while permits for single-family homes, a much broader segment, rose modestly. (…)

Last month’s pullback in overall home construction may have been driven in part by weather. Unusually wet weather stymied builders in several states in May, especially those in the central and southern U.S. In Texas, which often vies with California as the busiest state for builders, May rainfall amounted to 8.93 inches, far exceeding the previous monthly record of 6.66 inches set in June 2004, according to the National Center for Environmental Information.

May rainfall totals in neighboring states were similarly high, including 8.12 inches in Louisiana, 14.06 inches in Oklahoma, 10.35 inches in Arkansas, 8.15 inches in Kansas and 5.27 inches in Colorado.

Tuesday’s report on housing starts showed that construction fell in all four regions, with the biggest declines occurring in the Northeast and Midwest. (…) (Charts from Bespoke Investment and Haver Analytics)

large image
 
U.S. Birthrate Hits Turning Point Six years after the recession ended, the nation’s birthrate has begun to climb again.

For every 1,000 women of childbearing age last year, there were 62.9 births, up from 62.5 births in 2013, according to data released Wednesday by the Centers for Disease Control and Prevention. That is the first increase since 2007, when the recession began.

The nation’s total fertility rate—a statistical measure of how many children each woman is likely to have over her lifetime—also rose slightly, to 1.862 children, from 1.858. That remains below the 2.1 children needed to keep the U.S. population stable, not counting immigration.

Last year, the number of U.S. births rose 1.4% to 3.99 million from 3.93 million in 2013. The number of births to Asian or Pacific Islander women increased a hefty 6%, compared with 1% for non-Hispanic white, black and Hispanic women.

Birth rates for women in their 30s rose 3% last year. Rates for women ages 25 to 29 were largely unchanged, but that actually masks a slight improvement: In 2013, this rate had declined 1%.

Americans with children may be having more, as well. The rate for second births among women ages 15 to 44 increased 1% last year, and a similar rate for third children rose 2%.

Continuing a long-standing trend, teen births are plunging. The rate for women aged 15 to 19 years old dropped 9% last year to a record low. This rate has fallen more than 60% since its most recent peak in 1991.

Thumbs up OIL Thumbs down
Low oil price hits $200-billion in megaprojects

Deepwater oil projects and complex gas facilities worth around $200-billion (U.S.) have been cancelled or put on hold worldwide in recent months due to the sharp drop in oil prices over the past year, consultancy Ernst and Young said on Tuesday.

Further project cuts and delays are likely as the industry braces for an extended period of lower oil prices as a result of a supply glut.

“The mind set in the industry at the moment is that prices are unlikely to be bouncing up materially in the near term,” the consultancy’s Andy Brogan said in a presentation. (…)

US crude production boost could be near: EIA economist

Stabilizing crude oil prices and falling drilling costs could soon boost US production by hundreds of thousands of barrels per day, an upstream oil and gas economist with the US Energy Information Administration, said Monday.

“We’re starting to see a turn in production,” Grant Nulle said during a panel discussion at EIA’s annual conference. “Conditions are conducive for this to happen.”

While recent EIA data has shown production declines at existing wells have outpaced production from new wells, a rebound is likely as operators focus on the most efficient wells and look to increase well completions amid falling costs and continued availability of capital, Nulle said.

In a recent survey of 85,000 wells drilled between 2012 and 2014, initial production rates have roughly doubled, he said.

In addition, with prices settling at $55/b-$60/b and costs falling, many of the estimated 2,000-4,000 drilled but uncompleted wells in the Bakken, Permian and Eagle Ford could come on line shortly, he said.

The economics of completing these wells has recently gone from “marginal to something that could be very attractive,” Nulle said.

Meanwhile in North Dakota:

Output is still only slightly off its all-time high of 1.2 million barrels per day, which it hit in December 2014. But more declines are expected with drillers pulling their rigs and crews from the field. Rig counts in North Dakota have fallen to just 76, as of June 12, far below the 130 or so that state officials believe is needed to keep production flat. (Oilprice.com)

Surprised smile 20% OF S&P500 IN BEAR MARKET

One hundred of the stocks in the Standard & Poor’s 500, including WalMart, are down 20% or more from their 52-week highs. A drop of 20% or more is the unofficial definition of a bear market. (Tony Sagami, Mauldin Economics)

CHINESE ROULETTE (2)

Yesterday’s segment on Chinese equity valuations reaching stratospheric levels triggered a question from James who astutely related this to a JPM chart included in the June 9 CHARTS FOR THOUGHT post showing Chinese equity valuation near the bottom of their 10-year range.

Two reasons for this apparent dichotomy:

  1. The problem with the Shanghai Composite Index is that 94% of Chinese stocks trade at higher valuations than the index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets. (Bloomberg)
  2. The JPM chart used data as of March 31. The Chinese market is up nearly 40% since then.
Fingers crossed Europe Stock Strategists 100% Bullish in Face of Greece Impasse

Clashes between officials in the Mediterranean nation and its creditors are wreaking havoc on markets, yet none of the 15 forecasters tracked by Bloomberg lowered their year-end estimate for European indexes. All of them see gains. UBS Group AG even raised its projection this month, citing better-than-expected earnings growth and a turn in the economy.

With analysts projecting three straight years of earnings growth surpassing 10 percent and European Central Bank stimulus in force, equity forecasters view Greece jitters as temporary. A Bank of America Corp. survey showed the region is still favored among stock investors. Citigroup Inc., the most bullish firm, sees the Stoxx Europe 600 Index jumping 17 percent through the end of the year. (…)

Red lips VERTICAL INTEGRATION: Botox Owner Allergan to Buy Maker of Double-Chin Treatment Winking smile

NEW$ & VIEW$ (16 JUNE 2015): U.S. IP Down; Chinese Roulette.

U.S. Industrial Production Declines Unexpectedly

Overall industrial output fell 0.2% during May (+1.4% y/y) following a 0.5% drop in April, initially reported as -0.3%. A 0.2% rise in production had been expected in the Action Economics Forecast Survey. Manufacturing sector production eased 0.2% (+1.8% y/y) following a 0.1% uptick, revised from no change. Mining output fell 0.3% (-7.2% y/y), the seventh decline in the last eight months. Utility output improved 0.2% (1.3% y/y) after a 3.7% drop.

large image

Manufacturing production is up only 0.2% in the last 3 months. Manufacturing of consumer goods fell 1.2% in the last 2 months after rising 1.0% in March. The inventory correction has begun.

The capacity utilization rate fell to 78.1% and remained below the recovery high of 79.8% reached in November. Mining sector utilization plunged to 83.3%, the lowest level since early 2011. In the factory sector, the capacity utilization rate slipped to 77.0%, down from 78.1% in November. Total industry capacity rose 2.8% y/y while factory sector capacity increased 2.0% y/y.

large image

Nerd smile Declining capacity utilization is a clear threat to profit margins. Here’s a Scotiabank (dated) chart FYI:

U.S. Home Builders Index Rebounds to September High

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo increased during June to 59 (20.4% y/y) following an unrevised decline to 54 in May. It was the highest level in nine months and exceeded expectations for 56 in the Informa Global Markets Survey. The NAHB figures are seasonally adjusted. During the last ten years, there has been an 80% correlation between the y/y change in the home builders index and the y/y change in single-family housing starts.

The index of single-family home sales jumped to 65 (22.6% y/y), the highest level in ten years. The index of expected sales during the next six months firmed to 69 (19.0% y/y), also a ten year high.

Realtors reported that their traffic index rebounded to 44 (22.2% y/y), matching the January high. (Charts from Bespoke Investment)

 

Europe Car Sales Rise at Slowest Pace in 6 Months

Registrations increased 1.4 percent to 1.15 million vehicles from 1.14 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said Tuesday in a statement. That pared the gain in the first five months of the year to 6.7 percent for a total 6 million autos. (…) May’s figures were also reduced in part by the shift of the Pentecost religious holiday to last month from June 2014. (…)

Among Europe’s biggest car markets, sales declines of 6.7 percent in Germany, the largest, and 3.5 percent in France, which ranks third, weighed on regional growth. Registrations rose 14 percent in Spain, 11 percent in Italy and 2.4 percent in the U.K. (…)

Bloomberg says +1.4% growth. Strangely, the ACEA press release shows May registrations up 1.3% to 1.109 million vehicles…

image

China’s May crude stocks post biggest monthly decline since Oct 2013 at 631,000 b/d

China’s volume of net crude oil imports and domestic crude production lagged its overall refinery throughput in May, implying a drawdown of 631,000 b/d of crude stocks during the month, Platts calculations based on recently released data showed.

This is the highest monthly drawn down since October 2013, when there was an implied stock draw of 638,000 b/d, according to Platts data. The drawdown last month was also a reversal from April, when 1.03 million b/d of crude was likely added to storage. (…)

The stock draw was mainly due to crude imports sliding to a 19-month low of 5.5 million b/d in May. In comparison, crude imports in April hit a record high of 7.4 million b/d.

Discounting crude exports of 31,000 b/d, net crude oil imports in May averaged 5.46 million b/d, down 11.4% year on year and 25.1% month on month.

On the other hand, refinery throughput rose 7.4% year on year to an average of 10.39 million b/d. But on a month-on-month basis it was 1.5% lower than April. (…)

From January to May, China saw an overall crude inventory build of 278,000 b/d, a 49.7% drop from the same period of last year, according to Platts calculations.

China has apparently not filled storage so far this year. Based on refinery throughput, May was not a strong month for the economy.

But there is another angle to consider:

China has long been the gorilla on the demand side, accounting for 48% of the increase in global oil consumption in the past decade.

Now China is slowing—and even that earlier, rapid growth wasn’t an unalloyed boon for oil producers.

(…) it is clear that the link between growth in China’s economy and oil demand has loosened fundamentally. In 2011, China added more than double the amount of GDP that it did in 2003, yet oil consumption increased by the same amount—roughly half a million barrels a day—in each.

This year, China is forecast by the International Monetary Fund to add 1.3 trillion yuan (about $209 billion) of GDP, in real terms, in line with the last five years. Yet, at 320,000 barrels a day, its growth in oil demand is projected by the International Energy Agency to be the weakest since the crisis year of 2009.

The big culprit, as Ed Morse of Citigroup highlights in a new essay, is diesel, “the core of China’s oil-demand growth in the 20 years before 2010.” Diesel usage has stagnated as the pace of industrialization has slowed. Chinese drivers are pumping more gasoline—especially as SUV sales have taken off—which will keep consumption of oil growing overall. But the intensity of demand, in terms of barrels burned per dollar of GDP, is declining. (…)

CHINESE ROULETTE

Via FT Alphaville:

When calculated on a free-float adjusted basis, Chinese market’s average holding period is about one week – a hallmark of intense speculative trades in the market. Everyone is busy looking for the greater fool. Note that at the height of the Taiwanese bubble in 1989, every available share on the exchange changed hands close to twenty times per annum. That is, the free-float shares on Taiwanese exchange changed hands every 15 days on average.

And all that churn is done on margin: