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 FEB. 2015): Housing Turning? Oil Turning?

HOUSING

An index of builder confidence in the market for new single-family homes fell by two points to a seasonally adjusted level of 55 in February from January’s reading of 57, the National Association of Home Builders said Tuesday. A reading over 50 means a majority of builders see conditions as generally positive.

The trade group attributed this month’s downturn to unusually high snow levels across the country.

The current-sales component of the NAHB index dipped one point to 61. The index measuring expectations for sales over the next six months held steady at 60. A gauge of traffic from prospective buyers decreased five points to 39.

On a regional basis, the three-month moving averages for the index improved the most this month in the West, but slipped in the Northeast, Midwest and South. (Charts from Haver Analytics)

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One of the latest reports to indicate a strong start to the spring season is the monthly survey of home builders conducted by housing research firm Zelman Associates. Respondents in Zelman’s January survey reported that total orders for new homes increased by 32% in January from a year earlier, an improvement from the 27% year-over-year pace in December.

Zelman described January’s seasonally adjusted order pace as “the highest level of the recovery.” In addition, 45% of Zelman’s respondents reported better than expected customer-traffic counts in January, the highest percentage since Zelman began posing that question monthly in January 2014. The Zelman survey covers builders representing 13% of U.S. new-home production. (…)

Meanwhile, yet another survey released recently also showed January gains. Wells Fargo Securities’ monthly survey of 150 home-builder sales managers found that 39% reported better-than-expected orders in January, up from 29% in December and from 37% in January 2014. (…)

Housing research firm Metrostudy, part of Hanley Wood LLC, noted gains in order tallies in January in warm-weather markets such as Southern California and Las Vegas and others like Denver. Brad Hunter, Metrostudy’s chief economist, said it’s possible that sales suffered last month, as they likely are this month, in the Northeast and other regions hit with significant snow. But he added that the improving economy should lift the national results. (…)

Go figure!

As a deep freeze grips parts of America in a typically slow season for housing, first-time buyers are flocking to Redfin Corp.’s property tours and classes, signaling their renewed interest in the market.

“We are really hitting records in early-stage demand, in terms of people going on tours or even writing offers,” said Nela Richardson, the chief economist at Seattle-based Redfin, which has real estate offices in 26 states. “People are like, ok, this is the time to buy.”

They “are stepping a toe in the water in 2015,” said Richardson. (…)

First-time buyers have less competition from institutional investors, whose purchases dropped to a four-year low in the third quarter of last year, making up 4.3 percent of all residential sales, down from 5.3 percent a year earlier, according to data from RealtyTrac.

The share of first-time homebuyers last year dropped to its lowest level in three decades, according to an annual survey released in November by the National Association of Realtors. It fell to 33 percent from 38 percent a year earlier.

Redfin’s boost in tour and class attendance is a sign of renewed interest in the market from these Americans. Redfin, with offices in all regions of the U.S., said its home-buying class registrations for first-time borrowers jumped 31 percent in the first few weeks of January compared with the prior year. The number of customers requesting home tours increased 45 percent from last year. (…)

Mortgage applications decreased 13.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 13, 2015. …

The Refinance Index decreased 16 percent from the previous week. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier.

Americans Add Debt, but Fissures Appear

Household debt—including mortgages, credit cards, auto loans and student loans—rose $117 billion from October to December to $11.8 trillion, according to figures from the Federal Reserve Bank of New York released Tuesday.

But more Americans fell behind on auto and student loans. The share of auto-loan debt 90 or more days overdue jumped to 3.5% last quarter, from 3.1%. A similar rate for student loans rose to 11.3% from 11.1%.

In a good sign, America’s increased borrowing has been broad-based: Mortgage balances—the bulk of U.S. household debt—edged up $39 billion to $8.2 trillion. New mortgage loans, including refinanced mortgages, totaled $355 billion last quarter, up $18 billion from the previous quarter—a sign that, slowly, Americans are borrowing to buy homes again.

Auto-loan balances grew $21 billion to $955 billion, and credit-card balances increased $20 billion to $700 billion. Student-loan debt—the fastest-growing category—rose $31 billion to $1.2 trillion.

(…) unlike auto loans, seriously late payments on credit cards are at their lowest levels in years, even though credit-card borrowings have risen substantially. (…)

Meanwhile, student-loan debt balances rose $77 billion just last year. Nearly $30 billion in student loans were newly delinquent last quarter, up from $27 billion in the second quarter. (…)

The Good News on Capex It’s not all bad news for capital expenditures this year.

Excluding energy and financials, capital expenditure budgets are anticipated to expand almost 5% this year, according to Citi. That’s based on data collected from nearly 670 non-financial U.S. publicly-traded companies that Citi’s U.S. equity research team follows.

Sectors expected to increase capital spending include consumer discretionary, tech, industrials and consumer staples. The consumer discretionary companies Citi surveyed are pointing to spending growth of 10% across the sector. The same budgets are anticipated to rise by 9% for tech firms, almost 7% for industrials and 6% for consumer staples.

The bank is particularly upbeat on the tech sector where capital expenditures are showing signs of sustained growth into 2016 after rising about 15% last year.

From Bespoke Investment:

Euro plummets to seven-year low as Greece blinks in debt negotiations Athens will submit a request for a loan extension breaking temporary deadlock in negotiations with Europe’s creditors
Pressure Builds to Weaken Yuan Investors see more pain ahead for the Chinese yuan, as pressure mounts for Beijing to address slowing growth by devaluing its currency.

The central bank sets a daily reference rate for the yuan’s value against the dollar, then allows it to trade within 2% of that fixing. Lately, traders have pushed the yuan to the weak end of its official range. In recent weeks, the offshore yuan has been pushed outside this limit.

(…) Many investors also believe China will need to nudge the yuan lower as a global race among central banks to reduce the value of their currencies intensifies. (…)

Falling Oil Prices Spur Indonesia’s Rate Cut Indonesia’s surprise rate cut late yesterday shows just how far oil’s fall this year has changed the equation for central banks, even one saddled with typically high inflation.

Indonesia’s central bank unexpectedly cut its policy rate 25 basis points to 7.5% on Tuesday. The bank also cut its deposit facility rate (that is, the rate it pays commercial banks to hold cash) by a quarter percentage point to 5.5%.

Is This A Game-Changer For Oil Prices?

(…) News out of Libya shows that the security situation is rapidly worsening. Islamic militants attacked a key pipeline, detonating explosives that cut off production from the El Sarir field, the country’s largest oil field by production. The pipeline moves oil to the Hariga port, and from there it is exported. For now, it is unclear if exports will be interrupted due to the backlog of oil sitting in storage at the port. (…)

The North African OPEC member is now producing less than 200,000 barrels per day, closing in on its lowest level of output in years. (…)

The situation is deteriorating rather quickly, with Libya looking increasingly like a failed state. Libya’s Prime Minister, who runs a semi-exiled government in eastern Libya after being ousted by militants from Tripoli last year, called on western countries to intervene on Libya’s behalf to root out extremists. Similarly, Egypt called on the U.S.-led coalition fighting the Islamic State in Iraq and Syria to add Libyan militants to their list of targets. Libya’s National Oil Corporation said that it would consider shutting down all oil fields in all locations in order to protect the lives of its workers if security cannot be assured. (…)

After months and months of bearish oil reports, the chaos in Libya is one of the first major geopolitical flashpoints that have affected global oil supplies. OPEC’s Secretary-General said on January 26 that the excess oil production was in the neighborhood of about 1.5 million barrels per day. With Libyan oil production now down below 200,000 barrels per day – a major reduction from the nearly 1 million barrels per day of output last October – excess global supplies just shrank by a nontrivial amount. If Libya’s output does not recover, this could force a rebound in global oil prices quicker than many market analysts had anticipated.

Meanwhile, the rig count in the United States continues to fall at a very rapid clip. Baker Hughes revealed another week of vanishing rigs, with an eye-popping 98 rigs being pulled from the oil patch for the week ending on February 13. Rig counts have now plummeted by 30% since October. (…)

EARNINGS WATCH

As of last night, 404 companies (87.1% of the S&P 500’s market cap) have reported. So far, EPS ex-Energy are seen up 9.5%. Total S&P 500 EPS are seen up 6.4% excluding the likelihood of continued beats. So far, they are beating by 4.5%. Revenues ex-energy are seen up 4.3%. (RBC)

NEW$ & VIEW$ (17 FEB. 2015): China’s Challenges Grow; Earnings Stall.

Import Data Show Few Inflation Signs

Import prices fell 2.8% from December, the Labor Department said Friday, the biggest decrease more than six years, when the U.S. was still mired in recession. Prices were down 8% compared with a year earlier, the biggest 12-month drop since September 2009. (…)

Excluding petroleum, import prices declined 0.7% from the previous month, the largest decrease since March 2009, and are down 1.2% from a year earlier.

The price of imports from major trade partners, including Canada, the European Union, Mexico, Japan and China, all fell. Europe has been especially weak. For all of 2014, the eurozone’s economy expanded 0.9%. (…)

Export prices tumbled 2% from a month earlier, the biggest fall since October 2011. Industrial supplies, which include petroleum-related products, were the biggest drag. (…)

Meanwhile in China, while everybody devalues…

Maintaining a crawling peg to the USD, the RMB has appreciated significantly against major currencies since 2H14, leading to a spike in the RMB’s real effective exchange rate (REER). This has dealt a hard blow to China’s export sector. China’s exports to countries outside the US have been continuously weakening since 2H14, a situation that mirrors the weak export environment that occurred in 2012. (CEBM Research)

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From Goldman Sachs via FT Alphaville:

The continued FX outflow in January indicated persistent weakness in demand for the CNY, despite a record trade surplus of about $60bn. FX outflow has totaled $37bn in December and January combined. The data suggest that the PBOC probably supported the currency by buying CNY in the market. The FX outflow also partly explains the slow M2 growth in January.

Similarly, according to another set of data released by SAFE yesterday, Chinese non-banks sold a net $16bn in CNY to banks in January through both spot and forward transactions.

As we have discussed recently (see EM Marco Daily: Interpreting China’s FX flows and position, February 11, 2015), we may continue to see FX outflows in the coming months, not only due to Chinese corporates unwinding their previous carry trade position; but also if Chinese residents continue to accumulate fresh foreign assets (including through hidden outflow channels) and/or foreigners continuing to reduce their offshore CNY balance.

China New Home Prices Fall

The average price of new homes in 70 Chinese cities fell at a slightly faster pace on month in January amid sluggish demand from home buyers despite officials’ moves to loosen mortgage rules and ease lending.

The decline in home prices also continued to widen in January on year, according to data issued by the National Bureau of Statistics Tuesday.

Home prices in first-tier cities fared better than prices in smaller cities, as looser mortgage rules and more accommodative monetary measures lure home buyers back to the market.(…)

Prices in January slipped 0.43% on month, compared with a 0.40% fall in December, according to calculations by The Wall Street Journal. The fall in January follows four consecutive months of modest month-on-month improvements.

The average price of new homes declined 5.1% in January on year, compared with a 4.3% fall in December.

Excluding public housing, private-sector home prices fell in 69 of the 70 cities in January from a year earlier, compared the 68 cities that posted declines in December. Home prices fell in 64 of the 70 cities last month on a monthly basis, down from December’s 66.

China Foreign Investment Rises China recorded strong inflows of foreign investment capital in January despite slower economic growth, as services and high-end manufacturing lured investor interest, government data showed.

China attracted $13.92 billion of foreign direct investment in January, up 29.4% from a year earlier, and above December’s $13.32 billion, the Ministry of Commerce said Monday. Foreign direct investments in China were up a modest 1.7% at $119.6 billion last year after a 5.3% rise in 2013.

Port Delays Starting to Damage Businesses As employers at the ports along the West Coast refused to unload ships for the sixth day out of the past 10, their nine-month contract dispute with port workers is becoming a significant business problem.

The delays are causing acute distress to small-business owners with limited inventory to cover sales. Retailers, who had been largely unscathed, are feeling the impact. Levi Strauss & Co. said it was concerned it wouldn’t receive some products in time for spring deliveries.

The port delays also are causing problems for auto makers. As of Monday, Honda MotorCo. was experiencing parts shortages at plants in Ohio, Indiana and Canada that will affect its production on multiple days over the next week.

Japan’s Growth Data Show Signal of Inflation for First Time in 17 Years

(…) For the first time since 1997, “nominal” growth in gross domestic product–growth before adjustment for prices–outpaced real growth.

Granted, much of the increase was caused by a rise in the national sales tax to 8% from 5% in April 2014. (Not coincidentally, 1997 was also a sales-tax increase year.) But many goods, including those that are exported, aren’t affected by the sales tax, and economists say some of the 2014 price rise reflects genuine underlying inflation. (…)

European Auto Sales Rise 6.2% With Economy Helping Renault, VW

Registrations rose 6.2 percent in January from a year earlier to 1.03 million vehicles, the European Automobile Manufacturers’ Association, or ACEA, said today. That compares with increases of 4.9 percent in December and 5.4 percent for all of 2014, the first year of growth after a six-year drop.

All five of Europe’s largest auto markets expanded last month, with increases of 28 percent in Spain, 11 percent in Italy, 6.7 percent in the U.K., 6.2 percent in France and 2.6 percent in Germany.

Putin Lets Consumers Feel Pain as Russian Slump Deepens

(…) For 2015, the Economy Ministry predicts a decline of more than 9 percent in real wages after a 1 percent drop in 2014. That compares with an average annual increase of more than 10 percent in monthly wages in the past 15 years. Disposable incomes will probably shrink more than 6 percent, with retail sales set to slide 8 percent, according to the ministry’s updated forecasts, released last month. (…)

Household consumption accounted for most or all expansion in gross domestic product between 2010 and 2013, according to a World Bank report published last year. It contributed 3.8 percentage points to GDP gains in 2012 and 2.3 percentage points the following year, when the broader economy gained 3.4 percent and 1.3 percent, respectively, the lender estimates. (…)

Russia will report consumption-related statistics this week. The annual drop in real wages accelerated to 6.1 percent last month, the biggest decline since 1999, according to the median estimate of 12 analysts in a Bloomberg survey. Retail sales probably fell 1.9 percent from January 2014, which would be the first negative reading since 2009, a separate poll showed. (…)

Oil rises to $62, near 2015 high as Mideast risks support
Libya Warns of Oil Shutdown as Attacks Escalate

Libya’s state-run oil company warned that it would shut production at all fields if authorities in the divided nation fail to contain an escalation of attacks on facilities that cut crude output to a year-low. (…)

The North African nation’s oil production was reduced by 180,000 barrels a day after a fire at a pipeline that carries crude to the eastern Hariga port, National Oil spokesman Mohamed Elharari said by phone in Tripoli. Hariga, near Tobruk, has oil left in storage for exports and the last ship to load there was the Greek-flagged Minerva Zoe, he said.

Libya, holder of Africa’s largest oil reserves, was producing 350,000 barrels a day in January, Elharari said at the time. The nation may be producing less than 200,000 barrels a day after the pipeline fire. The previous lowest daily average was in March 2014, at 150,000 barrels. A member of the Organization of Petroleum Exporting Countries, Libya was producing 1.6 million barrels a day before the 2011 rebellion that ended Muammar Qaddafi’s 42-year rule. (…)

The Number of U.S. Oil Rigs Continues to Tumble

Greek Talks Break Down Talks over how to keep Greece afloat broke down abruptly, demonstrating a wide gulf between Athens and its European creditors and heightening uncertainty over Greece’s future in the eurozone.
Ukraine Truce Fades in Fight for Town Fighting for Debaltseve has become the biggest challenge to the cease-fire that went into effect at midnight Saturday and was supposed to end months of conflict.
S&P 500 Closes At New High U.S. stocks rose Friday, with the Dow climbing above 18,000 for the first time in 2015 and the S&P 500 index closing at a record.
Stock Market Climbs to Record on New Leadership

Stocks are marching to a new beat in February.

Growth-sensitive sectors are leading this month after less risky, defensive stocks outperformed in January. Strong gains in materials, energy, consumer discretionary, techs and financials have lifted the S&P 500 5% in February, taking the index to its first record close of the year Friday.

These growth-oriented names are up mid- to high-single digits on the month after falling low- to mid-single digits last month. Financials, in particular, have staged a sharp rebound, rising more than 6% in February after tumbling 7% in January following disappointing earnings from the largest banks.

EARNINGS WATCH

Factset:

With 391 companies in the S&P 500 reporting actual results for Q4 to date, the percentage of companies reporting actual EPS above estimates (77%) is above the 5-year average, while the percentage of companies reporting actual sales above estimates (58%) is slightly below the 5-year average. In aggregate, companies are surpassing earnings estimates by 4.0%.

As a result of these upside earing surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is now 3.1%. This growth rate is above the estimate of 1.7% at the end of the fourth quarter (December 31).

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 6.1% from 3.1%.

As a result of upside revenue surprises, the blended revenue growth rate for Q4 2014 is 1.7%, which is above the estimate of 1.1% at the end of the fourth quarter (December 31).

If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 4.4% from 1.7%.

For Q1 2015, 63 S&P 500 companies have issued negative EPS guidance and 11 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q1 2015 is 85% (63 out of 74), which is above the 5-year average of 68%.

Looking at the first half of 2015, analysts are now projecting year-over-year declines in both earnings and revenues for both Q1 2015 and Q2 2015, compared to expectations for earnings and revenue growth for both quarters back on December 31. Most of these downward estimate revisions have occurred in the Energy sector. Despite the estimate reductions in the first half of 2015, analysts are looking for record-level EPS in the second half of 2015. Analysts also expect net profit margins to rise (based on per-share estimates) starting in Q2 2015.

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Like many other aggregators, Factset considers pension charges as non-operating expenses which explains its 20.8% growth rate for Telecoms in Q4.

The “official” S&P considers pension charges as operating expenses. Its tally of Telecom companies shows a Q4 loss of $1.56 per share from a $5.58 profit in Q4’13. This reduces total S&P 500 companies EPS by 4% ($1.10/share) in Q4 which is now estimated at $26.78, down a big $1.01 from one week ago!

Actually, last week was not good for S&P company earnings. The estimate for Q4’14 EPS dropped a big 3.6%. Of the 69 companies that reported last week, 21 (30.4%) missed their estimate compared with only 17% of the 321 companies that had already reported. Big misses were in Consumer Discretionary and Staples, Financials, Telecoms and Utilities. As a result, S&P’s beat rate dropped to 69.7% at the end of last week from 72% the previous week and 74% in Q3’14.

Importantly, trailing 12-month EPS are now $113.04, down $1.00 (0.9%) from one week ago. Given estimated EPS for Q1 and Q2’15 ($26.88 and $29.20, down 1.6% and 0.5% YoY respectively), trailing EPS will decline another 0.5% to $112.46 after Q2’15.

Bulls are likely to dismiss the $1.10 per share Q4’14 pension charges, even more so given that many aggregators do, and that when interest rates rise like most investors expect, these charges will be reversed. I am no bear no bull and I expect that the market will look beyond these one-off operating charges.

The Rule of 20 P/E is again bumping against the “20 fair value” level. It has done the same several times since late 2009, in fact 4 times since December 2013, uncharacteristically refusing to traverse into the higher risk area like it traditionally has done in the past.

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Guidance Spread Still Negative

So far this earnings season, the spread between the percentage of companies raising guidance minus lowering guidance is -9.2 percentage points.  As shown below, that’s the lowest reading seen since the two quarters that came right at the end of the financial crisis.  Pretty amazing that the only time this many companies have been this negative over the last 10 years was when the S&P was nearly 1,400 points lower than it is now. 

Using Factset data, guidance is indeed somewhat worse than usual with 85% of total pre-announcements negative compared with 82% at this time last year.

This is nuts. Enjoy your trip to the moon.

Rocket Internet, the German-listed ecommerce investment group, has opportunistically raised about €600m in fresh equity at €49 per share.

In case you had forgotten, the collection of investments in more than 140 loss making businesses is valued by the market at about €7.6bn.

The cash raise comes after Rocket raised €1.4bn from investors at the initial public offering in October, but it has already spent €1bn since floating in Frankfurt. (…)

We have a confession to make, however, we just don’t understand how Rocket can be worth multiples of the values of the stakes it holds. (…)

Rocket started 2013 with €416m of equity investments in associated companies, added €165m but sold €193m worth, to leave it with €370m, although the more recent interim results put the year end figure at €361m . Either way, it had declined to €351m as of the end of June. Yet when it listed it was worth more than €5bn.

It has since invested €1bn, and the market cap has risen by €2bn. Do we assume it doubles the value of all its investments, but what then about the pre-existing investments valued at more than ten times their, er, value?

With a lot of internet nonsense the assumptions might be heroically ambitious, but at least it is fairly clear what they might be — every resident of a major city in the Western world might eventually be an Uber customer, for instance. With Rocket, we don’t even know where to start.

The meaning of the Minsk agreement The devilish detail of this document is highly advantageous to the Russians, writes Niall Ferguson

Niall Ferguson

(…) The Minsk deal was not even a formal agreement, according to some involved; more a to-do list that might (but might not) produce a truce in eastern Ukraine. Although the German chancellor and the French, Russian and Ukrainian presidents were present, they signed nothing. The document was agreed by representatives of the “contact group”, comprising the Organisation for Security and Co-operation in Europe, Ukraine and pro-Russia secessionist rebels fighting in the east. (…)

But read the small print. The original Minsk accords of September 2014 stated that Ukraine would regain full control of its national boundaries immediately — aside, of course, from the one around Crimea, annexed by Russia last year. But the new document delays the transfer of border control in Donbass until late 2015. Moreover, the separatists will gain control of 500 sq km of Ukrainian soil not included in the earlier agreement. Finally, all constitutional changes mandated by this week’s document must be approved by the separatists. (…)

For there is no clear reason why the Russians should be more in­clined to observe this one than the last. To see why, you need to appreciate what Mr Putin is trying to achieve. This is not further annexation of Ukrainian territory but the creation of a “frozen conflict” zone of semi-autonomous regions where the writ of Kiev does not run. (…)

By inviting the chancellor and French President François Hollande to Moscow and then meeting them again in Minsk, Mr Putin has exploited this division to the full. He has significantly reduced the risk of US arms being sent to Ukraine. He has also lent credibility to Mr Obama’s new doctrine of “strategic patience”, unveiled last week.

The reality is that this strategy (also known as “dithering”) has allowed both Syria and Iraq to descend into chaos. Eastern Ukraine is well on its way in the same direction. Sadly, enough people in the west will swallow the fairy story of the Peace of Minsk to enable the harsh realities on the ground, like the small print of the document, to be overlooked.