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$ (17 SEPTEMBER 2014)

Today: German economy rebounds. Fedex  delivers more thanks to buybacks.
U.S. Producer Prices Unchanged in August A gauge of U.S. inflation was unchanged in August, a sign that price pressures remain tame amid subdued economic growth.

August producer prices rose 1.8% over the same period a year earlier. Prices rose at an 1.7% annual rate in July and by 1.9% in June. Tuesday’s report showed energy prices falling by 1.5% in August from July and food prices down 0.5%. Services prices rose 0.3%.

U.S. Incomes End 6-Year Decline, Just Barely

The median annual household income—the level at which half are above and half below—rose 0.3% in 2013, or a total of $180, to an inflation-adjusted $51,939, the Census Bureau’s latest snapshot of U.S. living standards showed Tuesday. The increase, which wasn’t statistically significant, leaves incomes around 8% below their level of 2007, when the recession officially started. (…)

Since the recession ended in 2009, median incomes are down 4%, back to levels last seen in 1996. By contrast, incomes grew 13% during the expansion that ran from 1991 through 2000. Since 2009, incomes have risen only for the top 5% of earners. (…)

German industrial production rebounds in July

German industrial production rose 1.9% in July, according to the Federal Statistical Office (Destatis). Economists polled by Reuters had expected a mere 0.3% increase. The solid rise in industrial production was the sharpest in over two years and follows a revised 0.4% increase in June (previously reported as +0.3%).

Even more encouraging was a sign that business investment picked up. Destatis reported that capital goods manufacturers saw the steepest rise, with production in the sector up 5.0%. Intermediate goods output meanwhile rose 0.8% and the production of consumer goods increased 0.1%. Energy production fell 3.7% on the month, however, but construction was up 1.7%.

With the exclusion of construction and energy, manufacturing output was up 2.6%, the largest monthly rise in three years.

The upturn in production followed a surge in new orders. Official data released on Thursday showed that factory orders rebounded by 4.6%, having dropped 2.7% in June. The increase was the steepest since June 2013. While domestic orders increased 1.7%, new export work jumped by 6.9%, showing resilience to the geopolitical tensions in Ukraine and the Middle East.

Both PMI results and official data therefore now bode well for a rebound in gross domestic product in the third quarter, after GDP contracted 0.2% in the three months to June.

German Bond Sale Secures Record Low Funding Investors paid a hefty price for German government debt on Wednesday–a fresh sign of how the ECB’s monetary easing policies are upending the region’s bond markets.

The German Finance Agency sold €3.341 billion ($4.33 billion) of a September 2016-dated treasury note at a record low average yield of -0.07%, the Bundesbank said. That effectively means investors have paid to buy the debt for the first time since December 2012. At its previous similar sale in August, Germany sold debt for a 0% yield.

PBOC Pumps $81 Billion Into China’s Top State-Owned Banks China’s central bank is injecting $81 billion into major state-owned banks to counter a worse-than-expected slowdown. But economists warned the move may not be enough.

(…) While there are no explicit conditions attached to this targeted lending, the PBOC is expected to guide the big banks to channel credit into areas the government has deemed as important to the economy, such as public housing and private and small businesses, the executive said.

The move has a similar impact as a 0.5-percentage-point cut in the amount of reserves China’s commercial banks set aside with the People’s Bank of China. But a reserve-rate cut would be seen as a broader-based, longer-lasting move, and Chinese officials would have less say in where the money ended up. (…)

A credit official from Bank of China said loan demand has been sagging over the past two months given the cooling economy. The official said the injection was unlikely to boost lending significantly because of weak demand from borrowers. (…)

But FT’s Lex column warns:

(…) So maybe the market is wrong. In two weeks, China celebrates national holidays. Its citizens get on the road for one of the largest annual human migrations. Shops have Golden Week sales. The demand for cash jumps. So the PBOC’s move may just be as short-term as the three-month tenor implies. Craftily, with this manoeuvre, China does not need to commit either way.

Fed Dims Emerging Markets’ Allure Fears of higher U.S. interest rates are prompting fund managers to cut back on investments in emerging markets.

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How FedEx Just Beat EPS By A Whopping 14 Cents

Moments ago FedEx reported first quarter earnings ended August 31, which blew expectations out of the water, because instead of the consensus EPS print of $1.96, EPS reported a whopping $2.10 for Q1, a massive 14 cent beat, and up 37% from last year’s $1.53 reported EPS.

Wow: it must be a great operating environment, with logistics and global trade humming for FDX to beat so impressively, right? Wrong.

Here’s how it happened, from the company’s own press release:

During the quarter, the company acquired 5.3 million shares of FedEx  common stock. As of August 31, 2014, no shares remained under the existing share repurchase authorizations. Share repurchases benefited earnings in the quarter by $0.15 per diluted share.

And BTW,

As previously announced, FedEx Express, FedEx Ground and FedEx Freight  will increase shipping rates effective January 5, 2015.

FedEx Express will increase shipping rates by an average of 4.9% for U.S.  domestic, U.S. export and U.S. import services. 

FedEx Ground and FedEx Home Delivery will increase shipping rates by an  average of 4.9%. In addition, as announced in May, FedEx Ground will also  begin applying dimensional weight pricing to all shipments. 

FedEx Freight will increase shipping rates by an average of 4.9%. This rate  change applies to eligible FedEx Freight shipments within the U.S. (including  Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands), between the  contiguous U.S. and Canada, within Canada, between the contiguous U.S.  and Mexico, and within Mexico

Calpers Shows Masters of Hedge-Fund Universe Have No Clothes Calpers’s decision to get out of hedge funds underscores that the rapid growth of alternative investment managers hasn’t been matched by stellar performance.

NEW$ & VIEW$ (16 SEPTEMBER 2014)

Today: The 90% back in shape? How buybacks are boosting this market.
Industrial Production Falls in August U.S. industrial production fell in August for the first time since January, the latest sign of uneven improvement in the economy.

Industrial production, which measures the output of U.S. manufacturers, utilities and mines, fell 0.1% in August from the prior month, the Federal Reserve said Monday. Economists surveyed by The Wall Street Journal had forecast a 0.3% gain. July’s increase was revised down to 0.2% from 0.4% and August capacity utilization fell 0.3 percentage point to a 78.8% rate.

Manufacturing production, the biggest and most closely watched component of the overall figure, fell 0.4% last month after jumping 0.7% in July thanks to strong output from the automobile factories. Auto production can be volatile this time of year because of the shifting timing of summer shutdowns. Output for the smaller mining and utilities sectors expanded by 0.5% and by 1%, respectively.

Excluding autos, factory output rose by 0.1% in both July and August. It had expanded by 0.3% in the prior three months. (Chart from Haver Analytics)

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Empire Manufacturing Beats Expectations
Oil Prices Sink as Global Supplies Rise

Benchmark U.S. oil-futures prices approached a 16-month low for the second time in three trading sessions on Monday before recovering. Oil for October delivery ended at $92.92 a barrel, down more than 13% from highs for the year hit in June.

Both U.S. and world prices have tumbled over the past few months, as weak demand and robust global production left extra crude sloshing around the market. The glut is having ripple effects in the U.S. Stockpiles in one of the nation’s biggest storage hubs are rising, reinforcing the downward pressure on U.S. prices, analysts say.

Gasoline prices fell to a national average of $3.39 a gallon Monday, according to AAA, and are running nearly 4% below year-ago levels. (Charts from Ed Yardeni)

The Return of the Currency Wars

(…) when individual countries lean heavily on pushing their currencies down, that tends to shift demand from one place to another rather than increasing the total.  That is a “currency war.”  And we may be on the verge of one. Last time, the emerging markets were doing the complaining; this time, it may be the U.S.  (OK, I’m oversimplifying, but only a bit.)

Japan has already managed to depreciate its currency. The yen is at a six-year low against the dollar.  There is a fine line between pursuing expansionary monetary policy which works (in part) by reducing a country’s currency, and making currency depreciation a primary goal. The U.S. and Europe have tolerated the sinking yen largely because they saw it as part of Prime Minister Shinzo Abe’s broader effort to resuscitate the Japanese economy.

Now the spotlight is shifting to Europe.  Europe is growing painfully slowly, if at all.  Unemployment in the countries that share the euro is 11.5%. Among the under-25 crowd, nearly one in four is out of work. (…)

But what appears to be economically necessary is not politically possible. (…)

So what’s the ECB to do? Push down the euro to try to juice the eurozone’s exports.  That appears to be one of ECB President Mario Draghi’s current objectives, and it’s one he can achieve with words even if he can’t get his policy council to agree on printing a lot of euros.  It certainly is appealing to the French, who’ve long seen the currency as a useful economic instrument.

And the markets are getting the message. The euro, which was trading above $1.38 for most of the spring, has fallen below $1.30 – and Goldman Sachs economists predict it’ll fall to $1.15 by the end of 2015.

For now this isn’t a big threat to the U.S. economy.  The U.S. dollar has been strengthening for some time, initially because nervous investors were looking for safety and more recently because markets expect the Fed to begin raising interest rates from rock-bottom levels next year, well before the ECB does.

Although there are always manufacturers complaining that the dollar is hurting their exports and there are long-standing complaints about China’s manipulation of its currency to favor its exports, the dollar hasn’t really been a big political or economic issue in the U.S. lately.

Perhaps because there has been so much else to worry about; perhaps because the dollar’s attractiveness has helped the U.S. Treasury lure foreigners to lend billions of dollars at very low rates.   U.S. exports have been growing; they contributed 1.3 percentage points to the 4.2% annualized increase in gross domestic product in the second quarter. But that could change if Japan and Europe continue to nudge their currencies down as a substitute for economic policies more friendly to global economic growth.

CONSUMER SENTIMENT

I don’t care much for consumer sentiment surveys since they are coincident indicators at best. However, the breakdown in the recent U. of Michigan survey is interesting: Families with income under $75k reported a sharp rise in confidence to its best reading since May 2007! Same for the 35-54 age group!

Meaning: maybe the ten-percenters will no longer be alone in supporting the economy.

Now, look at this chart from Alexander Ineichen (via John Mauldin) and try to figure out (1) how bond yields can go much lower and (2) why bond yields should not go much higher as the Fed get his foot off the pedal.

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WOW!

From ISI:image

CHEERLEADING!
Crying face Goldman: Here’s How Stocks Perform Before and After Fed Raises Rates With the focus shifting to when the Federal Reserve will start raising short-term interest rates, Goldman Sachs Group Inc. offers a road map for investors on how stocks perform before and after such a move.

“As in 1994 and 1999, the 2004 experience suggests the S&P 500 will rise during the next 12 months, cyclical sector leadership, and low valuation outperformance relative to high valuation stocks.”

In the three prior instances the Fed started raising rates, the S&P 500 has averaged a 3% gain in the three months prior to the first rate increase, according to Goldman. By comparison, it averaged a 4% drop in the three months following such a move. (…)

But as Goldman puts it, these historical comparisons offer a “relevant guide” to what could happen next. (…)

Sigh! Another very shallow analysis, this one looking at 3 periods, and self-qualified as a “relevant guide”. For a complete and unbiased analysis, see EQUITIES AFTER FIRST RATE HIKES: THE CHARTS SINCE 1954  

Alibaba Raises IPO Price Range
Pointing up Stock Buybacks Buoy Market U.S. corporations are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown.

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

 Ghost The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by BarclaysBARC.LN -0.61% PLC. (…)

According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009. At the end of the second quarter, nonfinancial companies in the S&P 500 index held $1.35 trillion of cash, down from a record of $1.41 trillion at the end of last year, according to FactSet. (…)

Chip Gibbs, a managing director at Bank of America Merrill Lynch and head of the firm’s buyback business, said he gets more phone calls from corporate clients wanting to execute buybacks on days when shares pull back.

When stock prices dip, “companies get more aggressive,” said Mr. Gibbs.

Some companies have been buying large chunks of stock. International Business Machines Corp. IBM +0.28% , long one of the most active corporate share repurchasers, in the first quarter of 2014 spent $8.2 billion repurchasing 45.2 million shares. That means the company was the buyer of more than 13% of all IBM shares that changed hands in the first quarter.

IBM is the No. 2 buyer of its own stock over the past 12 months, scooping up $19.5 billion, according to Barclays. Apple Inc. AAPL +0.07% is first, buying $32.9 billion of its own shares. (…)

During the first quarter, when IBM accounted for one in eight open-market purchases of its stock, shares of the Armonk, N.Y., company rose 2.5%, beating the S&P 500’s 1.3% gain. (…)

Surprised smile  AB InBev Weighs SABMiller Bid Worth Up to $122 Billion AB InBev is talking to banks about financing a potential megadeal, perhaps reaching £75 billion ($122 billion), to buy global beer rival SABMiller, according to a person familiar with the matter.