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$ (20 MAR. 2015): No recession in sight; Housing rebound?

Conference Board Leading Economic Index Remains in Growth Territory

The Conference Board LEI for the U.S. improved again in February, driven mostly by positive contributions from the financial components and building permits. In the six-month period ending February 2015, the leading economic index increased 2.4 percent (about a 5.0 percent annual rate), slower than the growth of 3.7 percent (about a 7.5 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have remained widespread.

Click to View

Philly Fed Business Outlook: Modest Growth, A Bit Below Expectations

Manufacturing activity in the region increased at a modest pace in March, according to firms responding to this month’s Manufacturing Business Outlook Survey. The survey’s current indicators for general activity and new orders were positive and remained near their low readings in February. Firms reported overall declines in shipments and in work hours, while overall employment increased only slightly. Firms reported more widespread price reductions in March, although most firms continued to report steady prices.

Click to View

Sad smile Components were generally quite weak:

image
U.S. HOUSING
5 Things Lennar’s Results Tell Us About the New-Home Market Lennar Corp.’s quarterly results on Thursday depict a new-home market shifting into a higher gear so far this year, perhaps finally shaking off last year’s doldrums.

(…) “An early read from this spring selling season suggests that the market is continuing to improve at a very steady pace,” Lennar Chief Executive Stuart Miller said Thursday. Less restrained was RBC Capital Markets analyst Robert Wetenhall Jr. “This is the start of the best spring selling season of the past five years,” he said. (…)

Lennar’s increase in its average closing price slowed to a 3.2% year-over-year gain in its first quarter from a 17.5% gain in the previous year. Overall, that might mean buyers are fed up with big price hikes. It likely also signals that builders are constructing a greater number of less-expensive homes. (…)

In its fiscal first quarter, Lennar provided an average of $21,800 per home in freebies, which amounts to 6.3% of home-sales revenue. That’s about the same as the $21,300, or 6.3%, that it provided in incentives a year earlier. And it’s well less than Lennar’s incentives in the more trying times of 2012. (…)

Lennar sold 520 homes in the Houston area in its first quarter, a 7% decline from a year earlier. Its average price there was flat from a year ago at $280,000. TRI Pointe Homes Inc. said this month that its sales in Houston in the first two months of this year are down 10% to 15% from a year earlier. (…)

Now Lennar is experimenting with building single-family homes for rent. (…)

These CalculatedRisk charts are not signalling “the best spring selling season” just yet:

(…) In 21 of the 50 biggest U.S. housing markets, the number of borrowers who owe more on their homes than the homes are worth increased during the fourth quarter, according to a report to be released Friday by Zillow Group Inc., a real-estate information company.

Nationwide, the picture got better, but only marginally so. About 16.9% of all mortgaged homes were underwater in the fourth quarter, down 0.1 percentage point from the third quarter. Zillow said the normal share of underwater borrowers is generally thought to be around 5%. (…)

The problem, Zillow said, is that while average home prices are rising, the low end of the market is seeing values fall. More than 27% of homes with values in the bottom third of their market were underwater in the fourth quarter. In Detroit and Atlanta, about half of such homes were underwater. (…)

CHINA ECONOMY:

Key macroeconomic indicators such as industrial production indicate that economic activity in China experienced a sharp slowdown in the months of January and February. However, CEBM’s proprietary Composite Economic Performance Index synthesizing total social financing (TSF, 36%), electricity generation (30%), railway freight (30%) and securities market transaction volume (4%) indicates that the deterioration in activity was not as bad as that reflected by popular macro indicators.

Among the four sub-indices of the composite index, only railway freight deteriorated significantly during the first two months of the year, most likely reflecting seasonal factors rather than a cyclical decline, while the other three sub-indices all trended up compared to the trough in mid 2014. In addition, as global commodities prices rebounded in February and the Lunar New Year is expected to continue to have a distortive effect on economic activity in March, we expect GDP to grow at around 7.1% in 1Q15 and remain stable at 7.0% in 2Q15.

Beijing Helps Yuan Climb Against Dollar China’s yuan scored its best week in over seven years, as Beijing steps in to the markets to drive the currency higher and kick out speculators betting on losses.

The yuan gained 0.9% against the U.S. dollar since Monday, with the currency touching a three-month high Friday before slipping back to end at 6.2062 per dollar. The central bank has been setting a morning reference rate higher most days while traders say Chinese state banks are also buying the currency to shore up its value.

The sudden gains have taken traders by surprise after four months of losses, serving as a reminder that Beijing still keeps a firm grip on the tightly-controlled currency and won’t allow heavy losses or one-way speculation. Capital has also been flowing out of China this year as the yuan weakens and worries linger that further currency losses could exacerbate that and destabilize the already fragile financial system. (…)

The surprise intervention is a reversal from last year when China’s central bank engineered an unexpected wave of yuan depreciation, forcing an unwinding of billions of dollars in highly leveraged bets on the currency’s appreciation. Back then, Beijing was also concerned that overseas cash was flooding its economy with excess funds and contributing to asset appreciation, such as in property prices. (…)

The yuan’s gains this week though signal China may not be eager to be part of a trend where central banks around the world are taking moves to weaken their currencies to help boost exports. Severe devaluation would hurt China’s goal of rebalancing the economy away from relying on exporters and more toward domestic consumption, while Beijing is also trying to have the yuan used more broadly abroad. (…)

Iran Talks Stall Over Ending of Sanctions As negotiators press toward an agreement constraining Tehran’s nuclear program by the March 31 deadline, Tehran wants U.N. sanctions lifted right away. The U.S. and Europeans say ‘no way.’

(…) The U.S. and its European allies are demanding the U.N.’s sanctions be suspended or terminated in a phased time-frame over years. (…)

The Iranians “say it’s a deal breaker. They don’t want it at all,” said a senior European diplomat involved in the Lausanne talks, referring to Iran’s position on the U.N. sanctions. “There’s no way that we would give up on that…. No way.”

The official said it would take much more than a year or two for U.N. sanctions to be lifted.

“If you’re talking about the IAEA certifying that the Iranian program is clean, I think it will take years by any measure,” the European official said. U.S. officials on Thursday voiced the same position. (…)

Pointing up There is wide agreement that many of the unilateral sanctions the U.S. and European Union imposed on Iran could start to be suspended within months, if not weeks, of a deal being stuck.

This would boost Iran’s economy as the EU could resume purchasing oil from Iran and restrictions on Iranian banks could be lifted. Iran could also begin repatriating some of the over $100 billion in oil revenue frozen in overseas accounts. (…)

U.S. officials said the diplomacy could continue through the weekend in a bid to make the March 31 deadline. Others warned it may simply be impossible to meet the deadline.

“I don’t think we have made sufficient progress,” the European official said. “A lot of issues remain on the table.” (…)

NEW$ & VIEW$ (19 MAR. 2015): Shifty Fed.

Fed Puts Rate Increases in Play  The Federal Reserve opened a door to raising short-term rates by midyear but offered several reasons it is still in no great rush to act. It said it would move when it is reasonably confident low inflation is on track to return to its 2% target.

The Fed, in a statement Wednesday after its two-day meeting, dropped an assurance that it would remain “patient” before acting on rates. In the odd parlance of central bankers, the shift meant the Fed would consider raising short-term rates at its June 16-17 meeting.

Yet comments by Fed Chairwoman Janet Yellen after the meeting and new central bank forecasts suggested the Fed intends to proceed cautiously. It isn’t yet set on raising rates in June, and once it starts it now sees a smaller succession of increases in coming years than it did just three months ago. That is in part due to low inflation.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Ms. Yellen said in a postmeeting press conference. (…)

Asked at the press conference what would make her and Fed officials confident inflation will rise toward the target, Ms. Yellen said, “I don’t have a mechanical answer for you.” adding officials will be looking at “a wide array of data.” (…)

Officials revised down their projections of economic growth in the coming years, thanks in part to the hit to exports.

In 2015, for example, they said they expected economic output to expand by between 2.3% and 2.7%, a downgrade from their December estimate of 2.6% to 3.0%. Forecasts for 2016 and 2017 were also shaded down, part of a long-running series of growth-estimate downgrades the Fed has confronted in recent years. (…)

Fed’s 2015 Growth Outlook Eroding for Two and a Half Years

The Fed also shaved its estimates of inflation. In 2015 the Fed projects inflation of 0.6% to 0.8%. Officials don’t see it getting near its 2% target until 2017, a potentially important clue on the timing of rate increases. (…)

Importantly, however, the Fed also revised down its estimate of how low the jobless rate can fall before it starts creating inflationary pressure. In December, officials estimated this long-run rate was between 5.2% and 5.5%. Now they say it is 5% to 5.2%. That shift means officials believe they can wait longer before they start to raise rates. (…)

“Export growth has weakened. Probably the strong dollar is one reason for that,” Ms. Yellen said at a news conference in Washington. “On the other hand, the strength of the dollar also in part reflects the strength of the U.S. economy.”

A strong dollar also “is holding down import prices and, at least on a transitory basis, at this point pushing inflation down,” she said.

Related reading:

Meanwhile, in the real world:

In the latest weekly measure, Smith Travel Research (STR) today reported that U.S. industrywide hotel RevPAR grew by 3.8% last week (the week ended March 14) from year-ago levels (the prior five weeks saw RevPAR growth of 2.5%, 5.1%, 6.2%, 9.6%, and 5.5%, respectively). The calendar comparison was clean. The year-ago comp was +5.8%.

Over the last 28 days, RevPAR is up by an average of 4.5%, a pace that has been slowed by weakness in New York.

New York City hotels last week reported a 5.2% RevPAR decline (reflecting an 6.2% ADR decrease and a 1.0% increase in occupancy to 83.5%, up 580 bp sequentially); this came against an easy year-ago comp of -13.4%. During the past four weeks, RevPAR in New York City is down 2.0%. (Raymond James)

Target to Raise Minimum Wage Target plans to boost pay of all its workers to at least $9 an hour starting next month, following similar moves by rivals Wal-Mart Stores and TJX as competition for lower wage workers heats up.
Pickens says US must cut oil output Saudi’s refusal to trim production dismissed by legendary trader

The legendary trader and corporate raider said US producers must adjust to the plunge in the crude price caused by a US oil glut and predicted that shale production would stop rising in May or June. (…)

Mr Pickens, an industry maverick since the 1950s, predicted that more such cuts would help bring the crude price back up to $70 per barrel by December and said he had placed bets in the market to profit from such a rise. (…)

(…) The Canadian Association of Oilwell Drilling Contractors, which closely tracks drilling activity, said in February that up to 23,000 jobs could be lost as the number of rigs fall. Since the price started dropping last September, about 13,000 positions in the Alberta natural resources sector, mostly oil and gas, have been eliminated, according to Statistics Canada.

The bloodletting among the oil majors and their vast web of ancillary services has of course extended to the United States – which appears to be taking far more casualties than Saudi Arabia in the battle for market share. In January oilfield services giant Baker Hughes said it will lay off 7,000 employees, about 11 percent of its workforce; that number was rivalled only by its competitor, Schlumberger, which let go 9,000 workers. Shell, Apache, Pemex and Halliburton are among major oil companies to issue recent pink slips to the growing army of unemployed oil workers. In the U.S., the worst pain is, not shockingly, expected to be felt in Houston. Assuming a one-third reduction in oil company capital expenditures this year and 5 percent in 2016, the hydrocarbon capital of the world could lose 75,000 jobs, in a city that has added 100,000 new positions every year since 2011, said a professor at the University of Houston.

The oil jobs nightmare is in fact spreading like a cancer. According to Swift Worldwide Resources, “the number of energy jobs cut globally has climbed well above 100,000 as once-bustling oil hubs in Scotland, Australia and Brazil, among other countries, empty out,” Bloomberg reported recently. Examples include foreign-trained engineers whose promise of employment at LNG plants in Australia have evaporated as projects get delayed; development projects halted in Brazil resulting in the closure of international schools and the relocation of workers; and 8,000 Mexican workers left without paycheques after Petroleos Mexicanos slashed contracts and purchases, Bloomberg said. (…)

Investors Raise Alarm Over Liquidity Shortage Regulators also worried falling trading volumes could disrupt markets

(…) On Wednesday, the Bank for International Settlements became the latest major authority to sound the alarm, warning that it is becoming harder to trade in bond markets and that the problem could spill over into the real economy. Those comments echo concerns recently aired by the Bank of England, as well as the views of a slew of major bond-market investors and analysts.

Bond markets are “significantly less liquid than they used to be,” said Wolfgang Kuhn, head of pan-European credit at Aberdeen Asset Management Ltd. “The risks are becoming bigger with central banks pushing everyone [in the same direction]. You don’t want to be in a situation where this unwinds.” (…)

Global debt issuance has exploded since the financial crisis, with borrowers taking advantage of low interest rates. Bond funds have lapped up this supply, causing them to mushroom in size. As they have grown, their moves are more likely to cause ripples, or waves, as markets grow shallower.

BIS data show that in the U.S., broker-dealers who match buyers with sellers have seen their holdings as a share of the total bond market decline from 3.63% to 1.22%, indicating liquidity has fallen. While equivalent figures for Europe weren’t available, traders said a similar trend is playing out. (…)

The BIS also said in its report that many market participants say trading large amounts of corporate bonds has become more difficult and that market liquidity more widely could come to “depend on the portfolio allocation decision of only a few large institutions.” (…)