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$ (5 SEPTEMBER 2014)

Today: Slower jobs growth, contained labor costs, rising U.S. market share, E.U. and Japan stimulating.
U.S. Job Growth Slows U.S. job growth slowed to its lowest level of the year in August, as employers added 142,000 jobs, a stumble for labor markets that had delivered a string of steady gains over the prior six months despite uneven economic growth. The unemployment rate ticked lower to 6.1%

July’s gain was revised up slightly to an increase of 212,000 from an earlier estimate of 209,000, but June’s gain was revised down to 267,000 from an earlier estimate of 298,000. Payroll gains have averaged 207,000 over the past three months.

So far this year, employers have averaged 215,000 jobs every month, the best pace of job growth since hiring averaged 265,000 jobs a month in 1999.

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In August, the average workweek for all employees on private nonfarm payrolls was 
34.5 hours for the sixth consecutive month. The manufacturing workweek edged up by 
0.1 hour to 41.0 hours, and overtime was unchanged at 3.4 hours. The average 
workweek for production and nonsupervisory employees on private nonfarm payrolls 
was 33.7 hours for the sixth consecutive month. 
Average hourly earnings for all employees on private nonfarm payrolls rose by 6 
cents in August to $24.53. Over the year, average hourly earnings have risen by 
2.1 percent. In August, average hourly earnings of private-sector production and 
nonsupervisory employees rose by 6 cents to $20.68. (BLS)
U.S. Productivity Rose 2.3% in 2Q The productivity of U.S. workers improved by less than previously estimated in the second quarter, a new indication the economy’s spring rebound could lose momentum in the months ahead.

Nonfarm labor productivity, or output per hour worked, rose at a 2.3% annual rate from April through June, the Labor Department said Thursday. From the same period last year, second-quarter productivity rose 1.1%, in line with the meager growth of around 1% recorded in 2012 and 2013.

Pointing up Labor-cost data from Thursday’s report showed that unit labor costs, a measure of how much companies are paying for their workers’ output, fell 0.1% in the second quarter. Labor’s initial estimate had pegged a 0.6% increase.

Over the same period a year ago, unit labor costs were up 1.7%. Labor-cost growth, which is watched as a sign of inflationary pressures in the economy, remains far below levels of over 3% prior to the recession.

Canada sheds 11,000 jobs in August, unemployment sticks at 7%
U.S. Trade Gap Narrowed in July The U.S. trade gap narrowed in July, reflecting stronger demand for U.S. goods overseas that could boost the factory sector in the second half of the year.

The trade deficit shrank 0.6% to $40.5 billion in July from June as both exports and imports rose, the Commerce Department said Thursday. Exports climbed 0.9% while imports increased 0.7%.

Forecasting firm Macroeconomic Advisers raised its expectation of third-quarter growth to a 3.1% annual rate from 2.7%.

U.S.-Asia Decoupling Seen in Export Weakness:

Asian nations aren’t getting the bounce that a U.S. manufacturing recovery used to bring, reflecting a weakening link between demand in the world’s largest economy and regional exporters, said Deutsche Bank AG.

The CHART OF THE DAY tracks the widening gap between U.S. manufacturing performance and export growth in the largest economies of north and Southeast Asia. A purchasing managers’ index for the U.S. by the Institute for Supply Management has risen in all but two months in 2014, climbing in August to the highest in more than three years. By contrast, year-on-year growth in Japan’s overseas sales weakened to 3.9 percent in July from 15.3 percent in December, while South Korean shipments declined in August, according to data compiled from each government.

Although China saw a 14.5 percent jump in July shipments, growth probably decelerated to 9 percent in August, according to a Bloomberg survey. Among Southeast Asia’s biggest economies, exports from Indonesia and Thailand fell in five out of seven months. The chart shows the most-recently available period and also the month at the end of each quarter starting with December 2004.

 
Draghi Sees Almost $1 Trillion Stimulus as QE Fight Waits Mario Draghi signaled at least 700 billion euros ($906 billion) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day.
ECB Cuts Rates, Plans Stimulus The European Central Bank unexpectedly lowered all its interest rates and announced two new programs under which it will buy asset-backed securities and covered bonds issued by eurozone banks.

After the rate cut was announced, the euro fell 1.6% against the dollar to $1.29, a 14-month low.

German July Output Beats Forecasts

In adjusted terms, factory output was up by 1.9% on the month, beating expectations of a 0.5% increase in a Dow Jones Newswires survey of analysts conducted last week. It was the sharpest rate of increase since March 2012.

Among major categories, the data showed that output in manufacturing rose by 2.6%, matching an output record reached in January 2008, the ministry said. Meanwhile, construction output increased by 1.7%, and energy output declined by 3.7%.

The data followed a surprisingly positive print for German factory orders Thursday. These increased by 4.6% in monthly terms in July.

China’s Weak Demand for Asia’s Exports Sows Confusion China’s weak demand for electronics parts and other goods made in Asian countries has economists scratching their heads.

South Korea is China’s main source of intermediary goods for computers and other electronics. But Korea’s exports to China declined between May and July. Exports from Taiwan to China also have been subdued.

Officials in Seoul worry that China is moving up the value chain, producing its own higher-end electronic parts, and eating Korea’s lunch in the process.

Aso Signals Japan Prepared to Boost Stimulus for Growth The Abe administration gave its clearest signal yet of concern about damage to the economy from this year’s sales-tax increase, with the finance minister saying that a back-up plan for stimulus will be prepared.
David Tepper: it’s the beginning of the end of the bond market bubble

David Tepper, founder of Appaloosa Management, told Bloomberg Television anchor Stephanie Ruhle in a phone interview today the rally in the bond market is ending after the European Central Bank unexpectedly cut interest rates to spur economic growth and stave off the threat of deflation.

Tepper said, “What the ECB did today was very important. They want growth, an increase in the money supply and inflation. Basically what it all means for the markets is higher equity prices and a beginning of the end of the world bond market bubble…We are done.”

He went on to say, “Draghi wants inflation in the Euro zone. He will not stop.”

Story and video: http://bloom.bg/1vSKKGG

NEW$ & VIEW$ (4 SEPTEMBER 2014)

Today: Car sales hold, Capex revival, E.U. woes.

August Auto Sales Aim for Record

Overall, industry sales rose to an annualized 17.5 million pace, according to researcher Autodata Corp., the fastest since January 2006.

Small Firms Poised to Spend More on Plants, Equipment There are signs that small businesses are moving from slashing costs to spending more on new plants and equipment. Among small private firms, 51% said they planned to increase capital outlays in the next 12 months.

(…) Among 798 small private firms with less than $20 million in revenue, for instance, 51% said in August that they planned to increase their capital outlays in the next 12 months.

That is a record high, and it is also up from 42% a year ago, according to the survey by The Wall Street Journal and Vistage International, a San Diego executive-advisory group.

(…) Those who planned to increase capital outlays were owners and CEOs at firms in a range of industries, including service (17%), manufacturing (10%) and finance and insurance (nearly 5%). (…)

Small firms’ recent pattern of increasing their fixed expenditures is in sync with that of their larger compatriots.

Small publicly listed businesses, with annual sales of less than $25 million, increased their capital spending by 13% from a year earlier, to $8.06 billion for the 12 months ended June 30. In comparison, companies that are part of the S&P 500—an index comprised of some of the largest companies in the U.S. with average sales over $5 billion—increased their fixed investments by 16% in the second quarter, compared with a year earlier, according to a rate calculated by S&P Indices that is based on data from 450 of the 50 companies.

That outpaced the 4.6% growth in spending on share buybacks and the 13% rise in spending on dividend payments among S&P 500 companies. (…)

More evidence? First item in this post: NEW$ & VIEW$ (27 AUGUST 2014)

Fed Survey: Economic Outlook Brightened Economic activity largely picked up during the summer after hitting a soft patch at the start of the year, though the Federal Reserve’s latest survey of regional conditions showed few signs of pressure on wages.

While Wednesday’s report said more employers are voicing concerns about shortages of certain skilled workers, there were few signs of broad-based wage growth. (…)

“Businesses still mentioned difficulties in finding qualified workers, which seem to be both intensifying and broadening across skills and occupations,” the Atlanta Fed reported, pointing to shortages in trucking, engineering, construction and information-technology sectors. (…)

Several regions said that housing demand, which has lagged behind economists’ expectations this year, firmed up a bit during the late-summer period, though mortgage demand was still soft.

The report said that most districts had witnessed stronger consumer spending and tourist spending during the survey period. Auto dealers in Pennsylvania said that car sales had hit record highs in July before easing somewhat in August. Lending was up across nearly all districts, the report said, led by gains in San Francisco.

German Manufacturing Growth Robust in July

Manufacturing orders rose 4.6% on the month in July according to Germany’s economics ministry. June’s decline wasn’t as pronounced as originally estimated, with the decline revised to 2.7%, versus a 3.2% drop. (…) The strongest growth numbers were recorded in the volatile capital goods sector, leading some analysts to suggest that the foundation for renewed growth in German manufacturing remains unsteady. (…)

Orders from other euro-zone members increased just 1.7%, an indication that “downside risks for the German economy do currently not mainly come from geopolitical tensions but rather from longer-than-expected weak demand from eurozone peers,” said ING economist Carsten Brzeski.

Orders in capital goods, generally a volatile category, grew 8.5% on the month, with a particularly strong figure coming from orders from outside of the euro zone, which grew by 14.6%.

But the decline in domestic orders for both intermediate and consumer goods, two less volatile categories, and a foreign order decline in consumer goods are signs of still “underlying weakness,” said Berenberg economist Christian Schulz.

Markit’s August German PMI manufacturing survey revealed that

In line with the weaker trend for output, new orders rose at the slowest pace in the current 14-month period of continuous expansion. New export orders also increased at a lower rate, which some companies linked to the Russian sanctions. Increased demand from Asian markets meanwhile resulted in the overall rise in new export work.

imageFurthermore, Markit’s German Retail PMI today showed that

August data signalled a decline in German retail sales, ending a 15-month period of continuous growth. This was highlighted by the seasonally adjusted Germany Retail PMI – which measures month-on-month sales on a like-for-like basis – dropping below the neutral mark of 50.0. At 49.4, down from 52.1 in July however, the reading was indicative of only a marginal drop in sales. Surveyed companies partly linked the decline to increased competition, poor weather and a weakening economic environment.

Sales also fell on an annual basis in August, and for the first time in 2014 so far. The pace of contraction was the sharpest in nearly one-and-a-half years, with more than one third of the survey panel signalling a contraction.

E.U. RETAIL SALES WEAKEN

EU retail sales declined 0.4% in July, erasing more than half the 0.7% gains between March and June. Core sales declined 0.2% and are essentially flat (+0.1%) since March.

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Pointing up The above was for July. Here’s a preview of August:

August Eurozone Retail PMI® figures from Markit pointed to a deepening downturn in consumer spending within the currency union. Retail sales decreased for the second month running and at the fastest rate since April 2013 as Germany posted its first, albeit marginal, reduction in trade for 16 months.

The headline Markit Eurozone Retail PMI – which tracks month-on-month changes in like-for-like retail sales – registered 45.8 in August, down from 47.6 in July and its third sub-50 reading in the past four months. Sales were also down sharply on an annual basis, the rate of decline likewise a 16-month record.

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August saw decreases in retail sales in each of the big-three eurozone economies covered by the survey, the most marked of which was recorded in Italy. France meanwhile posted a solid contraction in trade that was its third in successive months and the fastest since May 2013. Germany’s retail sales also fell in August for the first time in 16 months, albeit only marginally. (…)

Retailers’ buying levels on the other hand followed patterns more consistent with the trends in sales, falling at a solid and accelerated pace that was the fastest in nine months. Furthermore, the decrease in purchasing activity was broad-based by country. (…)

Finally, August data showed a further sharp reduction in eurozone retailers’ gross margins, and one that was more marked than in the preceding survey period.

ECB cuts rates to record low Euro tumbles after central bank’s surprise decision
Euro Sinks to 14-Month Low

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SENTIMENT WATCH

“The stock market is at an all-time, but economic activity is not at an all-time,” explains billionaire investor Sam Zell to CNBC this morning, adding that, “every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue; and when you got a demand issue it’s hard to imagine the stock market at an all-time high.” Zell said he is being very cautious adding to stocks and cutting some positions because “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking.” Zell also discussed his view on Obama’s Fed encouraging disparity and on tax inversions, but concludes, rather ominously, “this is the first time I ever remember where having cash isn’t such a terrible thing.” Zell’s calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn’s warnings that there is trouble ahead. (…)

Geopolitics is on the lips of every investor.

Use of the term in Bloomberg News stories reached the highest last month since the height of the financial crisis in 2008. Bank of America Corp. analysts reckon 11 percent of the world’s population is now affected by conflicts; 86 percent of investors cited geopolitics as the top market risk, according to a survey by the Charlotte, North Carolina-based bank.

Less worried about the impact of Ukraine, Syria and Gaza on returns is Mouhammed Choukeir, who helps manage 5.7 billion pounds ($9.4 billion) as chief investment officer at Kleinwort Benson in London. He argues history is on his side.

“It’s easy to draw the conclusion that one’s asset positioning should be defensive during times of heightened conflict or stress,” Choukeir said in a report this week. “However, financial history teaches a different lesson: geopolitics rarely impact equity markets over the medium to long term.”

Of 16 geopolitical crises since 1950 that Choukeir reviewed, four left the Standard & Poor’s 500 Index (SPX) lower a year after they began.

Take the Cuban missile crisis in October 1962. An investor in the S&P 500 would have been up 34 percent a year later.

Investing in the index at the start of the 1967 Six-Day War between Israel and its neighbors would have returned 13 percent in the next year; a wager in December 1979 when the Soviet Union invaded Afghanistan would have returned 30 percent in the subsequent 12 months. In the year after the U.S. went into Iraq in 2003, the S&P 500 added 35 percent.

That’s not to say conflicts are a buy signal. The Arab-Israeli war of 1973 triggered a 35 percent slump in the U.S. benchmark as an oil embargo spurred inflation. The Sept. 11, 2001, attacks saw investors lose 16 percent in the following year.

To Choukeir, the main reason to worry now is if the tensions spark a run of faster inflation. He sees that risk as low; the price of crude fell 5 percent this year.

“Geopolitical tensions are likely to continue dominating the headlines in the coming months,” he said. “While they will undoubtedly create jitters in markets in the short run, their impact on medium- and longer-term performance is likely to be minimal.”