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$ (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.

U.S. SERVICES PMI POINTS TO WAGES, PRICE ACCELERATION

April data indicated that service sector output growth moderated since March, but was stronger than seen on average during the first quarter of 2015. Rising volumes of incoming new work supported business activity levels in April, which in turn contributed to the fastest increase in payroll numbers since June 2014.
Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index registered 57.4 in April, down from 59.2 in March but still the second-highest reading since last September. Moreover, the index posted above its average for the first quarter of 2015 as a whole (56.8).

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The seasonally adjusted final Markit U.S. Composite PMI™ Output Index (covering manufacturing and services) posted 57.0 in April, down from 59.2 in March and the lowest reading for three months. Slower growth of U.S. private sector output reflected weaker increases in both manufacturing production (index down from 58.8 to 55.3 in April) and service activity.

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The proportion of service providers expecting a rise in business activity over the next 12 months (48%) continued to exceed by a wide margin the number anticipating a fall (2%). Anecdotal evidence from service sector companies pointed to new product launches, greater marketing budgets and confidence regarding the long-term U.S. economic outlook.

Unfinished work continued to rise across the service sector in April, which extended the current period of backlog accumulation to nine months. That said, the latest rise was only marginal and the weakest since January. Meanwhile, sustained new business growth and efforts to boost operating capacity resulted in a robust pace of job creation in April. Latest data indicated that the rate of service employment growth accelerated for the fourth month running and was the strongest since June 2014.

Service providers indicated greater pressure on operating margins in April, with input cost inflation picking up further from the near five-year lows seen at the start of 2015. The latest increase in input prices was the most marked since last October, which some panel members linked to greater salary payments. Steeper cost inflation in turn contributed to the fastest rise in prices charged by service sector companies for seven months in April.

April 2015 Non-Manufacturing ISM

The NMI® registered 57.8 percent in April, 1.3 percentage points higher than the March reading of 56.5 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 61.6 percent, which is 4.1 percentage points higher than the March reading of 57.5 percent, reflecting growth for the 69th consecutive month at a faster rate. The New Orders Index registered 59.2 percent, 1.4 percentage points higher than the reading of 57.8 percent registered in March. The Employment Index increased 0.1 percentage point to 56.7 percent from the March reading of 56.6 percent and indicates growth for the 14th consecutive month. The Prices Index decreased 2.3 percentage points from the March reading of 52.4 percent to 50.1 percent, indicating prices increased in April for the second consecutive month, but at a slower rate. According to the NMI®, 14 non-manufacturing industries reported growth in April. The majority of respondents indicate that there has been an uptick in business activity due to the improved economic climate and prevailing stability in business conditions.”

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(Bespoke Investment)