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$ (9 JULY 2014)

A Nascent Sign of Faster Wage Growth Ahead Businesses want more labor, but economy wide data show they aren’t pumping up pay just yet. New data, out Tuesday, suggest that tight-fistedness may finally be ending. If so, faster pay growth will add a significant support to consumer spending in the second half and beyond.

(…) According to the June survey of small firm owners by the National Federation of Independent Business, a net 21% of small businesses report lifting compensation in the last few months. That is the highest reading since the end of 2007, right before the Great Recession started.

Small companies are probably lifting wages to attract qualified job applicants and retain valued employees. Historically, a greater willingness among small businesses to dole out pay raises tends to be a leading indicator for rising growth in the average hourly wage for production workers. In turn, that subset of employees’ pay front-runs the growth in all private pay. (The Labor Department’s all-employee data only go back to 2006.)

Even with the time lag, the uptrend in small-firm pay suggests economy-wide wage growth will soon accelerate. As a result, households’ pot of spending money should expand faster than the inflation rate as long as food and gasoline prices don’t suddenly shoot up.

Better buying power for existing workers, coupled with more job seekers finding employment and paychecks, will provide a big boost to personal incomes. That means consumers will be better able to increase spending in the second half.

My point for a while now. And there is more:

U.S. JOLTS: Job Openings Rate Continues to Climb; Hires Rate Fails to Keep Pace

The Bureau of Labor Statistics reported in its Job Openings & Labor Turnover Survey (JOLTS) that the job openings rate increased to 3.2% during May from an unrevised 3.1% in April. The latest  level was the highest since September 2007. The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings. The actual number of job openings rose 19.5% y/y to 4.635 million.

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The private-sector job openings rate surged to 3.5%, its highest level since June 2007 and up from the recession low of 1.7%. The rate in leisure & hospitality businesses increased to a new high of 4.6%. The rate in professional & business services surged to 4.6%, the highest level since January 2006. In the health care & social assistance sector, the job openings rate improved to 3.9%. The rate in construction rose to 2.1%, down versus the 2.7% in November. In manufacturing it edged up to 2.4%. Still lagging was the job openings rate in the government sector which was stable m/m at a low 1.9%.

The hires rate slipped to 3.4% from its recovery high of 3.5%. The hires rate is the number of hires during the month divided by employment. The private sector hires rate remained at 3.8% where it’s been for six months. Amongst leisure & hospitality firms, it slipped to 5.7%. In professional & business services it fell to 5.1% and the hires rate in retail trade slipped to 4.9%. In construction the rate improved to 5.2%, though it remained below the 6.9% pace in early-2011. In education & health services, the hires rate slipped to 2.5%. In the factory sector, the hires rate held at 2.0% and remained below the 2.5% high late in 2010. The government sector hires rate held at a low 1.3%.

The number of hires reversed the prior months’ gain but remained up 3.9% y/y. Private sector hires gained 3.7% y/y as new retail trade jobs surged 17.4% y/y and hiring in professional & business services increased 5.6% y/y. Leisure & hospitality employment rose 5.0% y/y but factory sector hires declined 2.8% y/y. Education & health services jobs fell 4.3% y/y and new hires in construction were off 5.7% y/y. Government sector hiring increased 6.6% y/y but the level of hiring was the lowest since January.

The job separations rate slipped to 3.2% but the actual number of separations increased 2.1% y/y.Separations include quits, layoffs, discharges, and other separations as well as retirements. The private sector separations rate slipped to 3.6%, about where it’s been since December, and the government sector’s rate held at 1.3%. The layoff & discharge rate fell to 1.1% and equaled the series’ low. The private sector layoff rate fell m/m to 1.3% and the government’s rate held at 0.4%.

The JOLT numbers are for May. Tightness will surely have become more evident when the June numbers are released. Consider these charts up to June:

Weekly hours are above their previous peak in many key sectors which implies that labor demand will remain strong. Already, manufacturing overtime hours are at 3.5 hours per week (top right chart). These are all better paying jobs.

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Noisier noise for Ms. Yellen.

Related:

Consumer Credit in U.S. Jumps as Auto Lending Strengthens

The $19.6 billion increase in credit followed a revised $26.1 billion gain in April, Federal Reserve figures showed today in Washington. Non-revolving lending, which includes auto and school loans, advanced by the most in a year. (…)

Revolving debt, including credit-card balances, rose $1.79 billion in May following an $8.85 billion April advance that was the biggest since November 2007.

Non-revolving credit, which includes car and education loans, gained $17.8 billion in May, the biggest increase since February 2013, after climbing $17.3 billion in the previous month.

BloombergBriefs highlights a chart similar to mine yesterday although they use a 13-wk m.a. vs 4-wk in my chart.

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Shale boom confounds forecasts as U.S. set to pass Russia, Saudi Arabia  Four years into the shale revolution, the U.S. is on track to pass Russia and Saudi Arabia as the world’s largest producer of crude oil, most analysts agree. When that happens and by how much, though, has produced disparate estimates that depend on uncertain factors ranging from progress in drilling technology to the availability of financing and the price of oil itself.

Forecasts for U.S. shale oil production vary from an increase of 7.5 million barrels per day by 2020 – almost doubling current domestic output of 8.5 bpd — to a gain of 1.5 million bpd, or less than half of what Iraq now produces.

The disparities are a function of the novelty of the shale boom, which has consistently confounded forecasts. In 2012, the U.S. Energy Information Administration (EIA) estimated that production from eight selected shale oil fields would range from 700,000 bpd of so-called tight oil to 2.8 million bpd by 2035. A year later, those predictions had been surpassed. (…)

Shale production from the oldest shale patch, the Bakken of Montana and North Dakota, alone may rise to as much as 1.74 million barrels per day in the second half of this decade, according to the highest of six estimates compiled by Reuters. The lowest was 1 million bpd. Even that range belies disagreement over just how fast output will grow — and when it may peak. (Graphic: link.reuters.com/ref32w)

The EIA, the U.S. agency responsible for energy forecasts, predicts that tight oil output will rise 37 percent from about 3.5 million bpd in 2013 to 4.79 million barrels per day by 2020. The forecast includes the Bakken, Three Forks and Sanish, Eagle Ford, Woodford, Austin Chalk, Spraberry, Niobrara, Avalon/Bone Springs and Monterey. (…)

The agency has already made some big adjustments to previous estimates. It recently slashed its forecast recoverable reserves for California’s Monterey shale to just 600 million barrels, 96 percent less than the total amount of oil in place, citing the difficulty in pumping it out economically.

IHS Energy’s projections are higher, with an estimated 6 million bpd from the Bakken, Eagle Ford and sections of the Permian and Niobrara by the end of 2020.

At the low end, Energy Aspects Ltd sees production of 3.5 million barrels a day from shale by 2017, a 1.5-million bpd increase from its current output estimate of 2 million bpd. (…)

McKinsey & Co.’s forecasts illustrate the uncertainty. While the consulting firm uses a reference case that puts tight oil production at the equivalent of 7.1 million bpd by 2020, it said the number could range from 5 million to 9 million bpd.

In its annual outlook released last month, BP estimated that U.S. tight oil production will increase to 4.5 million bpd in 2035. Exxon Mobil Corp. (XOM.N) says global tight oil production, driven by North America, will rise 11-fold from 2010 to 2040, when it will account for 5 percent of global liquids output. Exxon added that in 2015, North American tight oil supply in 2015 will likely surpass any other OPEC nation’s current oil production, with the exception of Saudi Arabia. Iran is the second largest OPEC producer, with about 4.2 million bpd. (…)

China’s Inflation Slows

China’s consumer-price index rose 2.3% in June from a year earlier compared with a 2.5% year-over-year rise in May, the National Bureau of Statistics said Wednesday. The gauge of inflation remains below Beijing’s annual target of 3.5% year for 2014 and slightly undershot the median 2.4% gain forecast by a poll of 21 economists by The Wall Street Journal.

China’s producer-price index, a gauge of prices at the factory gate, fell 1.1% in June from a year earlier, slower than a 1.4% year-over-year decline in May. The index has remained in negative territory for 28 straight months.

House Plans to Vote on Bonus Depreciation This Week

The U.S. House of Representatives is scheduled to vote Wednesday on a plan to permanently extend a lucrative business tax break aimed at spurring investment.

Known as bonus depreciation, the tax break lets companies deduct half the cost of some capital equipment purchases immediately, instead of slowly deducting the depreciation over many years.

The House Ways and Means Committee sent bill H.R. 4718 to the floor in May. A yes-vote is expected from the Republican-controlled House, but it’s unclear when or how the bill might move toward a vote in the Senate.

Rep. Pat Tiberi (R., Ohio) sponsored the House bill and said making bonus depreciation permanent “helps grow the economy and encourages job growth.” The extension of the tax deduction could cost about $262.9 billion in lost tax revenue over the next decade, according to estimates from The Joint Committee on Taxation. (…)

Winking smile “Making a Market Call”

Actually, making two calls: This is on July 3rd via Barron’s:

“The jobs report was pretty darn good,” Jeff Saut, the St. Petersburg, Florida-based chief investment strategist at Raymond James Financial Inc., said in a phone interview. He helps oversee about $450 billion. “We’re going to get a multiple expansion. Earnings are going to continue to come in better than expected. We’re in a secular market that has years left to run.”

This Saut again is on July 7 via GreenLight Advisors:

(…) I have revisited the summer of 2011 because I have been getting similar readings for a pickup in volatility arriving in mid-July 2014, very much like what we saw in June of 2011. Moreover, the stock market’s internal energy readings are likewise at levels last seen during the summer of 2011. Now history doesn’t necessarily repeat itself, but it does indeed sometimes rhyme. Accordingly, I am making a “call” for the potential of the first decent pullback of the year to begin in mid-July or early August; and am recommending culling non-performing stocks from portfolios to raise cash. If said decline fails to materialize, we can always recommit the cash to more favorable situations because longer-term I believe this secular bull market has years left to run.

But, in truth, what is exactly a “call for a potential pullback…”? Fully hedged!

NEW$ & VIEW$ (8 JULY 2014)

CHAIN STORE SALES SURGE

Better employment growth seems to rapidly translate into increased consumption if weekly chain store sales are a reasonable proxy. Weekly sales began to really accelerate at the end of May. The 4-wk moving average troughed at +1.3% in mid-April and has risen steadily since to reach +3.6% in the past 2 weeks. Given that brick & mortar chain stores are losing share to online retailers, we can assume that total retail sales were pretty strong in June with rising momentum at the end of the month continuing into July.

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JULY NFIB

The Optimism Index can’t seem to muster a run longer than 3 months. After a promising first half run, the Index fell 1.6 points to 95.0, ending another false start for the Index’s “road to recovery”. The Index did manage to stay above 95, which seemed to be a ceiling on the Index since the recovery started. The good news is that the job components improved again, reaching levels seen only in strong private sector economic times. The bad news is that capital outlays and planned spending
faded along with expectations for improving business conditions.

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Seasonally adjusted, 12 percent of the owners (up 1 point) reported adding an average of 3.3 workers per firm over the past few months. Offsetting that, 13 percent reduced employment (up 1 point) an average of 3.1 workers, producing the seasonally adjusted net gain of 0.05 workers per firm overall. The rather substantial dent in first quarter growth did not have much of an impact on Main Street employment.

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Fifty-three percent of the owners hired or tried to hire in the last three months and 43 percent reported few or no qualified applicants for open positions. Twenty-six
percent of all owners reported job openings they could not easily fill in the current period (up 2 points), suggesting more downward pressure on the unemployment rate. Fourteen percent reported using temporary workers, unchanged for several months.

imageThirteen percent cite weak sales as their top business problem, one of the lowest readings since December 2007, the peak of the expansion.

Seasonally adjusted, the net percent of owners raising selling prices was a net 14 percent, up 2 points from May and 15 percentage points from December. Twenty-two percent plan on raising average prices in the next few months (unchanged). Only 3 percent plan reductions (up 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 21 percent plan price hikes (unchanged and the fourth highest level since 2008). If successful, the economy will see a bit more “inflation” as the price indices seem to be suggesting.

imageEarnings trends deteriorated 1 point to a net negative 18 percent (net percent reporting quarter to quarter earnings trending higher or lower), still one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place, even if not historically strong. This is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy posted decent growth rates for several quarters.

A seasonally adjusted net 21 percent reporting higher worker compensation, up 1 point and among the best readings since 2008. A net seasonally adjusted 13 percent plan to raise compensation in the coming months (down 2 points), still one of the strongest reading since 2008.

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Prices rise on rising demand…or reduced supply:

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Case in point:

Help Wanted: Trucking Jobs Go Unfilled The latest jobs report shows a slowly healing labor market but doesn’t fully capture the mismatch between many jobs and job-seekers. The problem is acute in long-distance trucking, where the driver shortage is getting worse just as business is heating up.

(…) Businesses with openings across the pay and education spectrum are struggling to hire house cleaners, registered nurses, engineers, software developers and other workers. Employers say suitable candidates aren’t raising their hands and individuals who do apply lack the right skills and experience.

Such a mismatch reflects “the fundamental transformation in the job market” during the recession and the lackluster recovery, said Bernard Baumohl, chief global economist at Economic Outlook Group LLC. The downturn prodded some laid-off workers to train for new careers, Mr. Baumohl said, while sending others into the off-the-books economy and marooning those with obsolete skills in long-term unemployment. (…)

The problem is acute in the trucking industry, where the worker shortage reflects not only a skills gap but also economic shifts such as the energy boom and changing demographics.

Operators across the country are short 30,000 long-distance drivers, the American Trucking Associations estimates. The group projects the shortage could top 200,000 in the next decade. Average annual pay for long-distance drivers was $49,540 in 2013, according to ATA estimates. Hiring and wages in truck transportation have inched up this year, according to the Labor Department. (…)

Indeed, the improving economy has been a mixed blessing by increasing demand from companies with goods to move but also spurring drivers to jump to jobs in construction or the energy business that pay more and don’t require travel.

Trucking firms, while accustomed to high driver turnover, say hiring is tougher than ever. “It’s probably the most difficult recruiting environment…I’ve seen in my 26 years in the business,” said Scott McLaughlin, president of Stagecoach Cartage & Distribution LP, a family-owned firm in El Paso, Texas.

About 100 of Stagecoach’s 250 employees are long-distance drivers—and retaining them is as hard as recruiting. “Every driver I’ve got could leave here today and have any number of jobs,” Mr. McLaughlin said.

Demographics have also stepped up the pressure. Retirements are draining the pool of long-haul drivers, whose average age is about 50, with no younger cohorts to replace them. (…)

Exit interviews with drivers at Tennant Truck Lines reveal the pull of home outweighs earnings for many. Drivers “want to be home and sleep in their bed every night,” Mr. Tennant said. More stringent regulations about drivers’ schedules have prompted some to exit the long-distance life and dissuaded others from entering, several carriers said.

To keep drivers from being poached, operators are fattening health benefits, investing in new trucks and offering more flexible schedules that minimize time away from home. Some companies are asking lawmakers in Washington to revisit federal requirements that interstate commercial drivers be at least 21 years old. (…)

Case in point:

Freight Index Points to Strong Demand, Prices

The freight logistics sector continued to strengthen in June, with both shipment volumes and expenditures rising once again. Both indexes have increased every month since January. Although some measures of the overall economy indicate weakness, the freight sector has gained momentum throughout 2014.

June shipment volumes increased 2.4 percent to the highest level since November 2007, just before the recession. Volumes were 6.0 percent higher than a year ago and are up 15.8 percent since the beginning of 2014. Despite record levels of new equipment orders, a lack of drivers is restricting growth in truck capacity. In
tonnage terms, truck volume has been rising consistently in 2014 (according to the American Trucking Association). Railroad carload and intermodal traffic have posted solid gains..

The freight expenditures index rose 4.2 percent in June to 2.76, a record high. June 2014 freight spending was 12.1 percent higher than a year ago and is up 15.6 percent since the beginning of 2014. When you look at the truckload sector, the Cass Truckload Linehaul Index also shows that rates have been higher in each month of this year than last year. Rail rates have been on the rise since the beginning of the year, also pushing up transportation costs. The combination of tight capacity and higher shipment volumes will push expenditures up faster in the remainder of 2014. (Cass)

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Incidentally, ISI’s Trucking Survey (highest correlation with Real GDP at 88%) improved last week strengthening from 63.1 to 63.7, the highest survey reading since December 2005.

Composite leading indicators continue to point to stable growth momentum in the OECD area

The CLIs for the United States and Canada continue to indicate stable growth momentum. This is also the case for the United Kingdom, where the growth momentum is stabilising at above-trend rates. The CLI for Japan points to an interruption in the growth momentum although this probably reflects one-off factors.

In the Euro Area as a whole and in Italy, the CLIs continue to indicate a positive change in momentum. In France,theCLI points to stable growth momentum. In Germany, the CLI suggests that growth is losing some of its momentum, but from a high level.

Concerning the major emerging economies, the CLIs point to growth below trend in Brazil and to growth around trend in China andRussia. The CLI indicates a positive turning point in India, suggesting a return to faster growth.

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CHINA: Early Signals of Economic Stabilization Observed in June

The Industrial Sales vs. Expectations Index rebound was primarily driven by improving sales conditions in the steel industry, real estate industry, and certain areas of the export sector. Feedback from real estate developers this month reveals a hint of optimism as sales started to recover in Beijing, Shanghai, and Guangzhou. However, the recent improvement in sales was mainly driven by a large volume of new homes for sale coming on the market along with deeper price discounts, whereas sales in Tier-2 and Tier-3 cities remained weak. Looking at credit conditions, our commercial bank survey indicates that credit demand increased in June after several months of sluggish demand for financing. There are still respondents from some industries who give us negative feedback. Cement and construction machinery sales remain weak. Consumption is also sluggish except for home appliance stores. (CEBM Research)

Bankers warn over US business loans rise Lenders say funds are financing acquisitions and investor payouts

(…) Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth.

“Loan growth doesn’t seem to be driven by the underpinning of an economic recovery in terms of new warehouses and [capital expenditure],” said one senior corporate banking executive at a large US bank. “You don’t see the foundation, the real strong demand.”

Commercial and industrial (C & I) lending, which runs the gamut of loans to sectors from energy to healthcare and excludes consumer or real estate loans, rose to a record $1.7tn in May from a post-crisis trough of $1.2tn nearly four years ago, according to data from the Federal Reserve Bank of St Louis.

For the top 25 US commercial banks by assets, C & I lending grew by 10.5 per cent in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve. (…)

A second corporate banking executive at a large regional lender said: “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.” He added: “They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that.” (…)

Samsung Warns of Profit Drop Samsung Electronics said its operating profit fell for a third consecutive quarter, due partly to weaker-than-expected demand in key markets.

The world’s largest smartphone maker by shipments said Tuesday that its second-quarter operating profit likely fell by 22.3%-26.5% from a year earlier, to between 7.0 trillion won ($6.9 billion) and 7.4 trillion won. A year earlier, Samsung reported an operating profit of 9.53 trillion won for the quarter.

In a first for the company, Samsung included a one-page explanation for the poor numbers, citing weaker-than-expected demand for its products in China and Europe, and South Korea’s strengthening currency. Smartphone adoption is slowing in advanced markets, while the rise of low-cost producers threatens Samsung’s competitiveness in emerging markets. (…)

The disappointing results follow a 3.3% decline in operating profit in the first quarter compared with a year ago, and mark its first decline by a double-digit percentage since the third quarter of 2011. The company estimated its sales fell 7.8% to 11.2% from a year ago to a range of 51 trillion won to 53 trillion won. (…)