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$ (11 MAR. 2015): Margin squeeze looming; Don’t simply straight line the dollar; China…

JOLTS Confirms Labor Market Momentum

The Bureau of Labor Statistics’ Job Openings and Labor Turnover survey for the month of January showed that despite downward annual revisions, the labor market momentum clear in the monthly Employment Situation Report (especially the headline Nonfarm Payrolls figure) continues at pace.  Below we show monthly job openings and the job openings rate, both of which remain at post-crisis highs.

JOLTS 031015 1

One slightly negative sign this month is that the private quit rate has still not been able to crack 2.2%.  If we don’t see a resumed upward momentum in this data, we’re going to start getting worried about upward pressure on wages materializing.  For now, a 2.2% private quit rate is okay, nothing better.

JOLTS 031015 2

There was good news though.  Despite reports of large layoffs in the oil patch, the private sector discharge rate remains near the lows for the recovery, suggesting that there’s no sign yet of slowing demand for workers across the economy as a whole.

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NFIB POINTS TO MARGIN SQUEEZE:

Fifty-three percent reported hiring or trying to hire (up 5 points), but 47 percent reported few or no qualified applicants for the positions they were trying to fill. (…) A net 12 percent planning to create new jobs, down 2 points but a solid reading. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006.

Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months.

I put much weight to such surveys like the PMIs and the NFIB. They are timely, objective and from the horse’s mouth. The latest NFIB charts reveal that:

  • Sales have weakened in recent months and are much worse than expected.

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  • Yet, employment is accelerating, indicating higher volume of sales.image
  • Tight labor market + rising job openings = rising wages. But prices are deflating due to declining commodity prices and the rising dollar. This looks like a meaningful margin squeeze.image

And this with interest costs through the floor. Financing costs are heading up sometimes in 2015 as the Fed begins to normalize interest rates (chart from Alphanow):

The Strong Dollar Is Weighing On Major U.S. Exporters

dollar since 2014The quarterly Duke University/CFO Magazine Global Business Outlook Survey, released Wednesday, polled about 1,000 business executives–mostly CFOs–around the world.

Two out of three big U.S. exporters–those with at least one-fourth of their total sales overseas–said the appreciation of the dollar has had a negative impact on their businesses. And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result. (…)

Also in the Duke survey:

  • About 70% of U.S. companies said they expect to increase wages by at least 3%. Wage growth should exceed 3% in the tech, services and consulting, manufacturing and health care sectors; wages in the energy, retail and communications sectors are expected to increase less than 2%.
  • On a scale from 0 to 100, U.S. CFOs rate the economic outlook at 65, the most optimistic expectation for the U.S. economy since 2007.
  • Only 23% of European CFOs believe the European Central Bank’s quantitative easing program will actually increase inflation.

(…) “What we are hearing from dealers is Komatsu is being aggressive.” (…)

The dollar is now page one stuff:

There is no end in sight for the global forces pushing the dollar higher. The euro is now hurtling down toward parity as the European Central Bank launches its bond-buying program. Meanwhile, economic weakness in other parts of the world – a disappointing batch of January-February data in China and an unexpected decline in U.K. manufacturing – are underscoring the comparative strength of the U.S. economy. One problem is that with a slump in the U.S. stock market already capturing concerns about earnings growth, this rising dollar is going to keep eating into U.S. corporate returns, with the export lobby likely to start making noise about it. The WSJ dollar index is now up 22.8% since May and is trading close to a 12-year high. And analysts believe the greenback still has a long way to go higher in the months and years ahead.

Hmmm…This chart from Bespoke Investment suggests this is sell high time for the dollar””.

dollarcomchart

Fed Eyes June for Key Rate Decisions The Federal Reserve is strongly considering removing a barrier to raising short-term interest rates, by dropping its promise to be “patient” before acting.
CHINA AT THE CROSSROADS
Fresh Signs of Weakness in China China’s economy showed fresh signs of sluggishness in January and February, with industrial output growth at its slowest pace since the global financial crisis despite efforts to boost growth.

Industrial production, which is seen as a proxy for the country’s economic growth, grew 6.8% in the first two months, its lowest level since the 2008 financial crisis. That is down from 7.9% in December and well-short of a median forecast of 7.6% from a Wall Street Journal survey of 14 economists. Factories were hit by overcapacity, high inventories and tight financing, economists said. (…)

Fixed-asset investment in nonrural areas—long a driver of growth—rose 13.9% over the two-month period from a year ago, after gaining 15.7% in 2014, according to the statistics bureau.

Retail sales grew 10.7%, the statistics bureau said, compared with an 11.9% increase in December. Sales for retail and catering services registered weaker growth during the weeklong Lunar New Year holiday, when they usually flourish, according to the Commerce Ministry. A diminishing inflation rate, the government’s vigorous anticorruption campaign and the property sector’s woes were lowering consumer enthusiasm for banquets, luxury goods and home-related purchases, economists said. (…)

Surprised smile Housing sales were even gloomier, falling 16.7% from a year ago in the January-February period. New construction starts for residential and commercial property, measured on a total square meter basis, were down a whopping 17.7%, according to official data.

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With buyers on the sidelines, developers aren’t building new stock, providing a major drag on the economy, and now it seems on jobs. While official numbers haven’t been released, China’s human resources minister said Tuesday the slowdown has made “job creation more difficult,” a stark reversal from earlier assessments that employment was holding up despite pain in certain sectors. Fiscal tightening on the local government level represents another brake on growth. (…)

Renminbi settles into reverse gear Currency to retreat further as multiyear carry trade fades away

(…) for a currency long seen as lacking a reverse gear, the recent drop to a 28-month low is nonetheless gaining attention, with some predicting far more severe problems down the road. (…)

But since late October, the renminbi has been falling again, losing 2.2 per cent against the dollar. This time the move seems driven by the market, not the PBoC, meaning that few anticipate any imminent change in course. Some analysts expect the trend to accelerate. (…)

Data released last week showed that foreign exchange deposits in China rose at the fastest pace on record in January, a sign that corporations are choosing to hold on to their US dollar earnings in anticipation of a continued slide in the renminbi. Overall forex deposits rose $82.3bn during the month, compared with an increase of $134bn for the whole of 2014. (…)

About a quarter of China’s outstanding corporate debt is denominated in US dollars, according to Morgan Stanley, compared with just 8.5 per cent of revenue. The bank says exposure to the rising dollar in certain sectors is “significant”, picking out China’s real estate developers and material producers in particular. Pending dollar interest payments are another reason to hold or buy greenbacks. (…)

Russia downturn takes toll on car sales

Car sales plunged 38 per cent in Russia last month compared with the same period a year ago in a fresh sign of the economy’s deterioration as it hurtles towards recession.

The decline in February, reported by the Association of European Businesses, was the worst monthly fall since 2009. It follows a 4.4 per cent drop in January retail sales — the first such decline in more than five years — and a collapse in real wages. (…)

The AEB expects a 24 per cent decline this year to about 1.9m vehicles.

Manufacturers have been quickly raising prices in Russia by about a fifth on average to offset the falling rouble.

Draghi says:

Another good “buy-low sell-high” chart from Evercore ISI:image

US shale oil output growth grinding to a halt: EIA data

US shale oil production is expected to see a net gain of just 1,000 b/d in April, according to the US Energy Information Administration’s latest Drilling Productivity Report published Monday.

The data shows net production from the Bakken, Eagle Ford and Niobrara shale plays all falling in April — the first time they will have contracted since the EIA started publishing the DPR in November 2013. Only the Permian region will show a significant projected net gain in April, at 21,000 b/d, compared with the February report’s projection for March growth of 30,000 b/d.

The DPR uses recent data on the total number of drilling rigs in operation, along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells. The projection is based on seven key shale plays — the Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica. These regions accounted for 95% of US oil production growth between 2011-13. (…)

Nevertheless, overall, US crude production continues to rise. As of the week ending February 27, the EIA’s supply projections estimated output at 9.324 million b/d, up from 9.134 million b/d at the beginning of the year.

The four-week moving average for week 4 of each month shows the rate of increase slowing rapidly from September 2014 through January 2015 in line with the projected deceleration in shale output, but jumping again in February.

The month-on-month increase in the four-week moving average dropped steadily from 229,000 b/d in September to 55,000 b/d in January, but rose 98,000 b/d in February. This may reflect the rise in the NYMEX front-month crude contract from $47.71/barrel at the end of January to $53.54/b February 17. The contract had subsided back below $50/b by end-February.

Punch Turbulence Ahead as U.S. Flies Solo By Mohamed A. El-Erian

It is tempting to come up with complicated reasons for the unusual and outsize moves in financial markets in recent days, including a sharp appreciation of the dollar, large volatility in stocks and precipitous drops in European government bond yields.

Yet the simplest explanation may well be the best one: The U.S. jobs report Friday confirmed the multidimensional decoupling taking hold in the global economy. The resulting divergence in prospects for economic performance and monetary policy — in the U.S. and across countries — has consequences for prices in the bond, equity and foreign-exchange markets, both in relative and absolute terms. (…)

Related: LONESOME COWBOY

NEW$ & VIEW$ (10 MAR. 2015): China, Equities: Curb Your Enthusiasm

THE RACE TO THE BOTTOM
  • Euro’s Fall Accelerates The fall in the euro accelerated and bond yields in the eurozone hit fresh lows, showing how the effects of the European Central Bank’s bond-buying program continue to grip the region’s markets.

The euro fell over 1% to trade at $1.0735, one day after the ECB began buying government debt in an effort to drive up inflation and boost a fragile economy.

The single currency had already fallen sharply this year as investors geared up for the ECB’s $1 trillion quantitative easing program, which was first announced in January. But the decline resumed on Tuesday as the onset of the ECB buying pushed bond yields to new lows. (…)

Yields on a broad swath of eurozone government bonds touched all-time lows as demand from the central bank continued to drive up prices. Germany’s 10-year yield touched 0.28%, its lowest on record. German yields are now negative on maturities of up to eight years, meaning investors effectively pay to hold the debt. In Spain and Italy, 10-year yields hit their lowest on record at 1.17% and 1.24% respectively. (…)

China Car Sales Get a Tap on The Brakes China’s car sales growth at the start of the year slowed from a year ago, weighed by the cooling economy.

In the first two months of this year, a total of 3.43 million passenger vehicles including sedans, sport-utility vehicles and minivans were sold in China, up 8.7% from the same period in 2014, the government-backed industry group China Association of Automobile Manufacturers said on Tuesday.

The growth compared with an 11% year-over-year rise in January-February 2014.

The overall auto industry, which includes both passenger and commercial vehicles, saw a 4.3% sales increase to 3.91 million vehicles in the first two months of this year, said the auto-manufacturers’ group. (…)

GM’s sales in China were almost flat compared with the year-earlier period. Audi AG saw its China car sales growth slow to 10.5% from 13% in the year-earlier period. Honda Motor Co. reported a 7.6% decline in its China sales from a year earlier.

By contrast, some of Chinese domestic manufacturers posted stronger year-over-year growth thanks to low sales in the same period last year. For the first two months of this year, Geely Automobile Holdings Ltd. , a sister company of Swedish brand Volvo Car, recorded a 77% surge in car sales while Great Wall Motor Co. posted a 22% rise in sales of sedans and crossovers, their statements filed with stock exchanges show.

The combined share of Chinese domestic car brands rose to 43% of China’s passenger-vehicle market in the January to February period, from 38.4% in the same period of last year, according to the auto-manufacturers’ group.

China Inflation Picks Up

China’s consumer-price index rose 1.4% in February from a year earlier, significantly faster than the 0.8% five-year low in January, according to the National Bureau of Statistics. February’s CPI increase exceeded economists’ expectations and remained well below the government’s goal of keeping inflation under 3% for the full year.

According to Premise Data Corp., a database that tracks the cost of food, vegetable prices in China rose 6.2% over the past 30 days, seafood was up 3.7% and processed meat prices were down 4.0%, part of a 1.2% overall increase for food prices over the past month.

Non-food inflation remained subdued with an increase of just 0.9 per cent in February.

The combined consumer inflation rate in January and February, which smoothes out the distortion from the lunar new year holiday, was 1.1 per cent.

China’s producer-price index dropped 4.8% in February from a year earlier, deepening from a 4.3% year-over-year fall in January and marking three full years of price declines at the factory gate.

Why Saudi Arabia chose not to support oil market

(…) The shift in Saudi oil policy that was crystallised between June and October has been the subject of intense speculation. (…) But a close examination of Saudi actions suggests an unexpected series of global political events and — crucially — a misreading of the market were the driving forces behind Riyadh’s gamble. (…)

The Saudis “did not believe the actual potential of the US shale revolution,” says Leonardo Maugeri, a former executive of Italy’s state-owned oil company Eni, who last year briefed Saudi officials on their new rival. “They totally underestimated the resilience of this oil.”

Even so, they were apprehensive. Throughout 2014 the Saudis enlisted analysts from ExxonMobil to investigate the break-even costs, debt financing and the output horizon for US shale, say two people familiar with the study.

As demand fell more than expected in Europe, Riyadh had been slow to pick up on weakness elsewhere: China.

There were indications that the market had been softening, but the data were hard to read. “If you are a refiner in China and you don’t need as much crude, you will drop other peoples’ cargoes first. Saudi Arabia has priority status,” explains one Gulf oil consultant.

But refiners in China as well as Vietnam and India began telling Saudi Aramco, the state oil company, that they needed less than their full crude oil allocations and wanted lower prices, say people familiar with the talks.

A series of steep cuts to export prices for Asian buyers followed. Yasser Elguindi, oil analyst at Medley Global Advisors, says the aggressive pricing was a sign of how seriously Riyadh was fighting for market share as it sought to be Asia’s supplier of choice.

“Saudi Arabia has been concerned about its exports to China. [It] has been losing market share to Venezuela, west African producers and others,” he says. With exports to the US reduced by the shale boom, these producers, alongside Opec peers, had been pushing for customers in China.

Chinese imports from Saudi Arabia, which stood at 1.3m b/d in January 2013, fell to around 900,000 b/d by August 2014. Although imports and prices have since picked up, the drop illuminated a festering concern.

If the US loosens its crude oil export ban, as many expect, “this is a trend that will only accelerate,” Mr Elguindi says. Riyadh had no choice but to “protect its market share against competitors inside and outside Opec,” he adds. (…)

“By October a policy was in place,” says a western diplomat in Riyadh. (…)

“Naimi has been around for a while and he knew that this is an impossible situation for Opec to resolve [alone],” says Sadad al-Husseini, an ex-Saudi Aramco executive. “To try and police this kind of market was not possible.” (…)

The Saudi oil minister is said to have told the Russians that with both countries producing roughly 10m b/d, any potential cuts should be equal. The Russians refused. (…)

“If the Saudis had cut they would have been the idiot at the party. They would have done what everyone wanted, but they would also have been the one that everyone else laughed at,” says one long-time Opec analyst. “Ultimately, Naimi has told the world the Saudis would not be the ones to mop up everyone else’s mess.”

China’s Feb crude oil imports rise 11% on year to 6.69 mil b/d

The volume was a 1.1% increase from January’s average of 6.62 million b/d. China’s crude imports hit a record high of 7.18 million b/d in December last year.

Over the first two months of this year, overall crude imports rose 4.5% to 53.53 million mt, or an average 6.65 million b/d. This is less than half the year-on-year growth rate of 11.5% witnessed over January-February last year.

SENTIMENT WATCH
As Bulls Romp, Advisers Temper Expectations Some financial advisers say they have to counter views by clients for stock-market returns that are well above long-term averages.

(…) On average, the S&P 500 has returned 18% a year since 2009, including dividends, and from the start of 2012 the index’s total return has averaged 21% a year. That is the S&P 500’s best three-year period since the tech bubble era of 1997 through 1999.

In 2014, shares of large U.S. companies outperformed nearly all other investment classes, with the S&P 500’s total return 14%, a year in which the index closed at an all-time high 53 times. (…)

Some advisers said the grumbling among some investors over not owning enough U.S. stocks heated up in January after investors received their 2014 portfolio statements. (…)

Some advisers said they have already lost clients unsatisfied with what they view as lackluster portfolio returns. Bob Jazwinski, founder of JFS Wealth Advisors with $1.4 billion of assets under management, said a client withdrew his money from the Hermitage, Pa.-based firm in January because he said he wanted to take the funds invested across international stocks and put it all in U.S. companies.

Other money managers echo Messrs. Abusaid and Jazwinski.

“All they [clients] hear is stocks, stocks, stocks, stocks and higher, higher, higher, higher. I call it investment pornography,” said Gary Ran, founder of wealth-management firm Telemus Capital in Southfield, Mich., which oversees $2.4 billion.

He said clients who have portfolios diversified across different kinds of investments, ended up with returns last year below that of the S&P 500. “That’s why clients come in and say, ‘I heard it was such a great year in the stock market. What happened?’ ”

France Casts Fate With Ex-Banker French President François Hollande’s shift away from tax-the-rich policies is heavily influenced by Economy Minister Emmanuel Macron, who vows to be “more confrontational.”

Good, hopeful article in the WSJ.

(…) By backing Mr. Macron, Mr. Hollande is turning away from his past as an apparatchik who focused on appeasing the Socialist Party’s left with tax-the-rich policies and employment programs that stretched France’s finances, such as job subsidies for more than 150,000 young people.

It is increasingly clear that the French leader has decided to cast his political fate with European governments, led by Germany, that view entitlements and job protection as causes of economic inertia. (…)