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$ (4 MAR. 2015): Autos Break; Currency Wars Break U.S. Exports; Equity Sentiment Soars…

SUV Sales Plow Through February Poor weather modestly dented the pace of U.S. auto sales in February, but did little to stem America’s increasing thirst for pricey trucks and SUVs.

While several auto makers posted lower-than-expected volumes for the month, light-vehicle sales rose 5.3% from a year earlier. The annualized sales pace eased to a 16.23 million adjusted rate, from 16.66 million in January.

In February, sales of light trucks—buoyed by low fuel prices—represented 54.4% of the market, a level the segment hasn’t reached on an annual basis since 2005.

High five Nonetheless, vehicle sales keep failing to rise through their previous cyclical peaks, in spite of rising employment, record low financing costs and low oil prices (charts from CalculatedRisk)

Along with what has been a steady drumbeat of weaker than expected data, this morning’s release of auto sales was generally weaker than expected.  Within the monthly release of auto sales, we pay special attention to sales of Ford trucks.  The reason for this is that sales of pickup trucks are often a sign of strength or weakness in the small business and construction sectors as these types of businesses are the most common users of these vehicles.  After a strong January, where sales of F-series trucks rose by more than 16%, sales unexpectedly declined in the month of February.  Compared to last year’s February total of 55,882, sales of F-Series trucks declined 1.2% this February to a total of 55,236.  Weather is surely to blame for at least some of this month’s weakness, but 2014 wasn’t exactly a mild winter, so it is not as if Ford was working with tough comps.  The fact that economic data has been missing consensus expectations at such a high rate coupled with the weak truck sales from Ford suggests that the US economy is having some trouble living up to expectations.

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While sales declined this February compared to last year, year to date sales are still up 7% in 2015 versus 2014, which is owed in large part to January’s 17% increase as sales of the new F-150 boosted results.  While February’s y/y decline ended a five-year streak of increases, YTD sales through February have now increased for six straight years.

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Mug German retail sales jumped 2.9 percent month on month in January, smashing a forecast for 0.4 percent growth in a Bloomberg poll. Year-to-year sales growth climbed to 5.3 percent from 4.8 percent.

China Cuts Rates on Special Lending Tools

The People’s Bank of China has lowered interest rates that it charges commercial lenders on a special short-term lending tool, known as the standing lending facility, two people with direct knowledge of the matter told The Wall Street Journal.

The central bank cut the overnight interest rate on the instrument to 4.5% from 5% previously and the seven-day rate to 5.5% from 7%, said the people who requested anonymity.

India Cuts Rate for Second Time in 2015  India’s central bank surprised markets with a cut to its key lending rate for the second time this year, as it joined a world-wide trend of monetary easing.

The Reserve Bank of India cut its main repurchase rate by 0.25 percentage point to 7.5%, citing weakness in parts of the economy as well as favorable inflation figures and structural overhauls included in the government’s proposed budget. (…)

On Wednesday, the governor said an “excessively strong rupee is undesirable.” But he said the bank “doesn’t target a level” for exchange rates. (…)

In his statement Wednesday, Mr. Rajan reiterated his skepticism about the sharply revised GDP figures released recently by government statisticians. The new numbers indicate India’s economy has been growing faster than previously thought, and are at odds with other measures showing continued weakness.

Based on the new data, the government said it expects GDP to expand 7.4% for the year ending March 31. That puts India’s growth rate on par with China’s. (…)

BloombergBriefs illustrates the currency war underway. The chart does not include India’s latest move nor the ones likely to occur pretty soon:

By the end of this week, the list will probably include Poland. Some economists also forecast Australia and Canada will act for the second time this year.

Norway, Hungary and Thailand will all join the party this month, followed by South Korea in April, according to JPMorgan Chase economists led by Bruce Kasman. Out of room on rates, the European Central Bank is set to begin its 1.1 trillion euro ($1.2 trillion) bond-buying program. (…)

Meanwhile, as I have been warning:

(…) In the domestic economy, consumer preferences are shifting toward cheaper imported goods, and exporters are facing diminished demand due to a confluence of tepid external economic activity and reduced competitiveness on pricing. Case in point: given the 18 percent decline in the value of the euro versus the dollar during the past year, a domestic producer would need to reduce costs significantly to remain competitive with a European counterpart, all else being equal.

A stronger dollar may reduce some input costs, but given that labor is typically one of the largest inputs, there is limited flexibility for domestic industries to compete on price without materially eroding margins.

This is a troubling development, because the manufacturing ISM headline is closely correlated with GDP growth. If a dwindling ISM translates into diminished growth momentum, this could in turn diminish policy makers’ confidence that the economy can endure the initiation of policy normalization later this year.

The most glaring development in the survey was the fact that new export orders sank deeper into contractionary territory. This subcomponent is a useful leading indicator of exports in the GDP accounts, so it is a stark warning that the export sector is indeed foundering as a growth engine.

Some analysts attributed the dip in the ISM (and the Chicago PMI) to bottlenecks on the West Coast resulting from protracted labor negotiations. There were hints of this in the modest backup in supplier deliveries, but the series remained well below its fourth-quarter average, so it appears that the more substantive change is the deterioration in export orders.(…)

Saudi Arabia no longer talking oil down:
Oil above $60 as Saudi Arabia sees steady market  Brent crude oil steadied above $60 a barrel on Wednesday after Saudi Arabia’s oil minister said he expected the oil market to balance itself.

Oil Minister Ali al-Naimi said he hoped and expected the oil market to balance and prices, which hit a nearly six-year low around $45 in January, to stabilize, adding to signs OPEC’s largest exporter is confident that demand is growing.

“I hope and expect supply and demand to balance and for prices to stabilize,” Naimi said in a speech in Berlin. “Global economic growth seems more robust.” (…)

The speech followed news that Saudi Arabia had raised its official selling prices (OSPs) for oil deliveries to Asia and the United States on Tuesday. (…)

Any sign of a lasting agreement between Tehran and six world powers, the so-called P5+1 group, could result in a flood of Iranian crude. (…)

SENTIMENT WATCH
“YOU’VE COME A LONG WAY, BABY”

I generally don’t care much of consumer surveys but this one is important as equity valuations have also gone full cycle (chart from Gluskin Sheff):

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Winking smile AMBITION

This is from Lars Syll (Real-World Economics Review Blog)

pretend

But remember,

NEW$ & VIEW$ (3 MAR. 2015): U.S. Consumer + and – ; U.S. Investors + and –

U.S. Personal Income Increase Continues to Outpace Spending

Personal income rose an expected 0.3% during January (4.6% y/y) following an unrevised 0.3% December increase. Wages & salaries strengthened 0.6% (4.9% y/y) following a 0.1% uptick. (…)

Personal consumption expenditures declined 0.2% (+3.6% y/y) following an unrevised 0.3% decline. Personal spending has fallen at a 0.1% annual rate during the last three months. 

The PCE chain price index fell 0.5% (+0.2% y/y) following two months of 0.2% decline. As a result, the y/y gain of 0.2% was the weakest since October 2009.

Real disposable income increased 0.9% (4.2% y/y) following two months of 0.5% rise. Real personal spending gained 0.3% (3.4% y/y) after a 0.1% slip.

The strength in income accompanied by the weakness in spending lifted the personal savings rate to 5.5%, the highest level since December 2012. Personal saving rose 18.0% during the last twelve months.

The 0.5% decline in the chain price index reflected a 10.4% drop (-21.2% y/y) in energy prices while food prices edged 0.2% lower (+2.7% y/y). Durable goods prices were off 0.3% (-2.8% y/y) and nondurable goods prices fell 2.3% (-3.7% y/y) with lower gasoline costs. Services prices ticked 0.1% higher (2.0% y/y) for the second straight month. The price index excluding food & energy edged up 0.1% m/m (1.3% y/y) following no change.

(WSJ)

Lots of interesting stuff in this report:

  • Nominal Personal income has risen at a 4.0% annualized rate in the last 3 months.
  • Wages & salaries have exploded at a 6.5% annualized rate.
  • After tax, nominal disposable income is up 4.0% annualized since November (+4.8% in January).
  • Declining prices (-3.6% annualized in last 3 months) are boosting all the above numbers in real terms.
  • Yet, Consumption expenditures have actually declined 0.1% in nominal terms in the last 3 months (+3.2% annualized in real terms).
  • All this stuff about the newly frugal consumer now saving most of the the oil windfall is exaggerated by many media:
    • Real expenditures on automobiles is up 10.6% YoY;
    • Real expenditures on Furnishings and Appliances is up 9.2% YoY;
    • Real expenditures on Recreational goods and vehicles is up 12.9% YoY;
    • Real expenditures on Restaurants and hotels is up 6.2% YoY, +9.0% annualized in last 2 months.

imageTo be sure, indebted Americans are using the windfall to catch up. Statistically, debt reduction is a rise in savings. The reality is that the oil dividend trickles in incrementally in small amounts. The large annualized saving is but a statistic, useful for economists, but largely immaterial for most people in the early months, until it has accumulated at the bank or has helped pay down credit card balances.

Another factor is that official national accounts stats are likely fooled by the significant cross-currents in inflation rates among various goods and fail to adequately catch the most recent trends.

The important data, in my view, is nominal Wages and salaries which reflect what is happening at work and which is more sustainable for the average American.

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Oups! There is also this minor thing pointed out by Ed Yardeni:

The latest data through January show that the percentage of current-dollar consumption for gasoline plunged from last year’s high of 3.2% to 2.1% in January. Consumers saved $133 billion (saar) on gasoline over this period.

On the other hand, the percentage of their outlays for health care goods and services rose from last year’s low of 20.0% during March to 20.6% during January.(…)Health care consumption includes spending paid for by both insurance and government programs, as well as out-of-pocket costs. Presumably and anecdotally, the latter have risen sharply. However, that wouldn’t necessarily bloat overall spending, though more out-of-pocket outlays would depress spending on other goods and services.

SENTIMENT WATCH
Why Stocks Aren’t Due for a Steep Near-Term Pullback Stocks are staging an impressive run with few immediate roadblocks poised to derail their course.

Yes, an increase in rates is looming. And yes, valuations remain elevated on a price-to-earnings basis. But an initial rise in short-term borrowing costs is expected to be minimal, and other valuation gauges – beyond price-to-earnings – aren’t worrisome for all of Wall Street.

“On Price to Free Cash Flow, Price to Normalized Earnings—a more predictive valuation metric—and EV/EBITDA, the S&P 500 still looks attractive,” wrote Bank of America Equity Strategist Savita Subramanian in a note titled “10 reasons to stay long the S&P 500.”

According to the bank’s data going back nearly three decades, price-to-free cash flow is 22% below its mean, and trailing normalized price-to-earnings is 2% below its average. Enterprise value-to-EBITDA, which accounts for healthy corporate balance sheets and high margins that S&P 500 companies are basking in, is on par with where the ratio has spent the past nearly 30 years. (…)

High five Wait, wait! Zerohedge won’t let you sleep well:

US Macro Weakest Since July 2011 As Goldman Affirms Global Economy In Contraction

Goldman’s Global Leading Indicator (GLI) final print for February affirms the global economy has entered a contraction with accelerating negative growth. Just six months after “expansion”, the Goldman Swirlogram has collapsed into “contraction” with monthly revisions notably ugly and 9 out of 10 components declining in February. Some have suggested, given US equity’s strong February (buyback-driven) performance, that the US economy will decouple from the world… or even drive it.. but that is 100% incorrect. US Macro data has fallen at its fastest pace in 3 years and is at its weakest level since July 2011 as 42 of 48 data items have missed since the start of February.

With 9 of 10 components negative in February, Goldman’s Swirlogram has collapsed from expansion to contraction within just 6 months…

First negative print since 2012 – indicating global industrial production is set to contract…

What is the GLI: The Global Leading Indicator (GLI) is a Goldman Sachs proprietary indicator that is meant to provide an early signal of
the global industrial cycle on a monthly basis. There is an Advanced reading for each month, released mid-month, followed by the Final reading, released on the first business day of the following month.

(…) The Bloomberg US Macro Surprise Index just dropped – after today’s dismal data showing – to its lowest absolute level since July 2011. The last 3 months have seen it fall at the fastest pace sinceJuly 2012. Notice the lower peaks and lower troughs on each cycle since 2012…

Note: this index tracks not just miss/beat but absolute positive or negative data items – key to the cyclical aspect is the over-optimism and over-pessimism of economist’s forecasts. The last 3 years (lower peaks and lower troughs) suggest economists are strongly biased to over-optimistic forecasts and normally this kind of drop would have stopped but economists continue to look for hockey-sticks which, perhaps, in this case will be absent (and have been for a month).

But of course that doesn’t matter…

(…)