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$ (7 NOVEMBER 2014)

Today: The ECB’s unity: Draghi’s show? U.S. oilmen blinking. Bulls are back bears near extinct.
  • October Nonfarm Payrolls: +214K vs. consensus +231K, +256K previous (revised from 248K).
  • Unemployment rate: 5.8% vs. 5.9% consensus, 5.9% previous.
U.S. Productivity Rises at 2.0% Pace in Third Quarter The productivity of U.S. workers rose modestly in the third quarter, reflecting a steady but unremarkable pace of economic expansion.

Compared to one year earlier, productivity is sluggish, up just 0.9%.

Unit labor costs rose as a 2.3% increase in hourly compensation slightly exceeded the increase in productivity. Adjusted for inflation, hourly compensation rose 1.2% in the quarter and is up 1.4% over the last four quarters. Still, compared to one year earlier, unit labor costs rose 2.4%, a two-year high.

German Industrial Production Rises Less Than Economists Forecast German industrial production rebounded less than analysts forecast in September, signaling that Europe’s largest economy is struggling to recover.

Production, adjusted for seasonal swings, rose 1.4 percent from August, when it contracted a revised 3.1 percent, the biggest decline since January 2009, the Economy Ministry in Berlin said today. Economists surveyed by Bloomberg News predicted a 2 percent increase in output. Production declined 0.4 percent in the third quarter. (…)

Manufacturing output increased 1.7 percent in September after dropping 4.2 percent in August, with production of investment goods up 4.5 percent, according to today’s report. (…)

At the same time, exports surged 5.5 percent in September from the previous month, marking the biggest increase since May 2010, the Federal Statistics Office in Wiesbaden said today. (…)

Snail ECB Unites Over Deflation Threat The European Central Bank sent a strong signal that it is prepared to act more aggressively to combat ultralow inflation by buying large amounts of private-sector debt and perhaps even government bonds.

The central bank’s policy makers are unanimous in their readiness to back more stimulus if needed, ECB President Mario Draghi said at his monthly news conference. He added that officials all expect the central bank’s balance sheet—the amount of assets it holds—to rise toward early 2012 levels, implying an increase of up to €1 trillion ($1.24 trillion).

Mr. Draghi has made similar comments of his own accord on the balance sheet, but its inclusion in the introductory statement to the news conference means the entire 24-member Governing Council approved it. In a sign of the bank’s unity, Bundesbank President Jens Weidmann —a harsh critic at times of ECB policies—played a central role in crafting that language, according to a person familiar with the matter. (…)

High five Wait, wait. Later in the article:

Mr. Weidmann doesn’t see the balance-sheet statement as an explicit target, rather it is an expectation, according to the person familiar with the matter.

Mr. Weidmann is open to new steps, the person said, but this would require a significant erosion in the economic and inflation outlook. (…)

This “precision” on Weidman’s real state of mind was found nowhere else. I tried the FT, Spiegel, Bloomberg, Guardian, Telegraph, nothing in these papers other than this “unanimous unity”. Mario Draghi may be trying to paint the Germans into a corner. Ambrose Evans-Pritchard wrote a very interesting piece Wednesday well worth your time (Mario Draghi’s efforts to save EMU have hit the Berlin Wall). Some extracts:

Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany.

The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. (…)

We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this. (…)

“Whatever it takes” in full swing. If that does not scare you…

Fannie, Freddie See Potential for Thaw in Mortgage Access

(…) During conference calls Thursday with reporters, both companies gave early indications that an October agreement with lenders could lead to expanded mortgage access. The agreement, reached with the companies and their regulator, the Federal Housing Finance Agency, clarifies some of the penalties lenders could face for making loans that end up not meeting the companies’ standards.

Fannie Mae Chief Executive Timothy J. Mayopoulos said in an interview that some lenders, including large ones, have told him “that they will definitely proceed to make the kinds of loans that we want—to more fully deliver to our full credit box” while others expressed continuing concerns about litigation.

Fannie and Freddie have yet to release specific guidelines reflecting the broad agreement. Mr. Mayopoulos said that Fannie planned to release the guidelines soon, while Freddie Mac officials said that the company hoped to release those guidelines this month. (…)

Separately in October, FHFA chief Mel Watt, Fannie and Freddie announced that the companies would soon begin to guarantee some loans on homes with down payments of as little as 3%, something that Fannie Mae had largely abandoned last year and that Freddie had not pursued for several years.

The regulator has yet to finalize details of the low-down-payment programs. Freddie Mac CEO Don Layton said that his company planned to open the guarantees to a broad spectrum of borrowers, rather than limit it to a certain subset. There had been earlier speculation that the programs could be limited to certain groups, such as first-time home buyers. Mr. Mayopoulos said that Fannie wasn’t ready to announce the details of what its program will encompass. (…)

JAPAN WATCH
Japan PMI surveys show economy taking backwards step at start of fourth quarter

Service sector activity fell for the sixth time this year in October, reversing an upturn that had been recorded in September, according to PMI data produced by Markit. The drop in activity was the largest since April, when the economy was hit by the introduction of a higher sales tax.

The disappointing service sector news follow manufacturing results, which showed growth of goods production slowing closer to stagnation in October.

A GDP-weighted average of the two surveys’ output indices slumped from a six-month high of 52.8 in September to 49.5 in October. By dropping below 50, the index signalled a marginal contraction of private sector business activity during the month, the first such deterioration since May.

Having therefore indicated that GDP will have rebounded in the third quarter after the 1.8% decline recorded in the three months to June, the economy is in danger of sliding back into a downturn in the fourth quarter.

The drop in the service sector survey data highlights the weakness of domestic demand in Japan, something which was also revealed in the manufacturing survey. However, one of the major effect of the ‘Abenomics’ stimulus plan has been a striking depreciation of the yen against the US dollar, which has made Japanese goods more competitively priced in many overseas markets. This resulted in goods export orders rising in October at the fastest rate since December of last year.

With the announcement of additional asset purchases in late October, bringing the Bank of Japan’s quantitative easing programme up to ¥80 trillion per annum, the further depreciation of the currency as well as the financial stimulus should help engender stronger economic growth in coming months.

An additional factor is the weather. With Japan having been hit by a series of ‘super typhoons’ in October, business was disrupted to a greater extent than usual for the time of year. The impact of weather disruptions was cited by many domestically-focused companies as having materially affected trading. The return of more normal weather conditions should therefore herald a bounce-back of business activity in November, especially in the service sector.

Other survey indicators also hint at the possibility of growth picking up again. In the manufacturing sector, the amount of goods purchased for use in future production showed the sharpest rise since March. Backlogs of uncompleted orders also rose in the manufacturing sector to the greatest extent since March, suggesting a developing pipeline of work to undertake.

However, any future growth may be disappointingly modest. Employment barely rose in both sectors in October, suggesting limited appetite to take on extra staff to boost capacity, and expectations of business activity in the service sector for the year ahead deteriorated compared to September.

OPEC May Act if Oil Falls to $70 OPEC would likely lower the ceiling on its collective production if oil prices fall to $70 a barrel, a level most of the group’s members don’t expect to see this year, according to several of the group’s officials.

(…) “At $70 a barrel, there will be panic in OPEC. We have become used to living with $100 a barrel,” said one OPEC official, speaking on the sidelines of the meeting. Were prices to fall to “$70 a barrel, there will be action from OPEC,” according to another OPEC official.

(…)  At a news conference in Vienna on Thursday, OPEC Secretary-General Abdalla Salem el-Badri said the group is “concerned, but we are not panicking.” Mr. el-Badri blamed market speculators for the sharp oil-price drop, saying “fundamentals don’t deserve this price decline.”

Both major crude benchmarks fell Thursday. Mr. el-Badri’s statements were overshadowed by reports that Libyan officials expect production at the country’s biggest field, El Sharara, to restart soon, recovering quickly from a rebel attack the day before. (…)

The shutdown of 300,000 barrels a day of Libyan supply Wednesday following an attack by rebel militias on a key oil field there has damped any appetite for an actual production cut.

“Libya has done the cut for us,” said one OPEC official, who had previously advocated a reduction of 500,000 barrels a day.

Even so, OPEC itself expects its output to fall over the medium term as oil supply grows elsewhere, mainly thanks to rising U.S. shale-oil production. In its annual energy outlook, OPEC said its crude production would fall by 1.8 million barrels a day by the end of 2017 to 28.2 million barrels a day from 30 million barrels a day this year.

BLINKING ALREADY
Drillers Cut Expansion Plans as Oil Prices Drop New Rigs in Question From Texas to North Dakota; ‘We’re in a Battle with Saudi Arabia’

Continental Resources Inc., a major oil producer in North Dakota’s Bakken Shale, said Wednesday that the company wouldn’t add drilling rigs next year. ConocoPhillips Co. said that next year’s budget would fall below the $16 billion spent this year, dropping plans for some new wells in places such as Colorado’s Niobrara Shale.

Pioneer Natural Resources Co. signaled that it might delay adding rigs in Texas unless oil prices rebound. (…)

Houston-based EOG Resources Inc., which is considered one of the industry’s most efficient oil companies, said this week that existing wells in its core areas, such as the Eagle Ford Shale of South Texas, can produce a 10% rate of return after taxes even if oil drops to $40 a barrel.

If prices hover around $80, EOG said it could fully fund the drilling it has planned for the Eagle Ford, North Dakota’s Bakken Shale and parts of the Permian Basin in West Texas and New Mexico. But the company might cut back on drilling in less profitable areas of Texas, including the Barnett and Wolfcamp shales. (…)

Many companies have taken on substantial amounts of debt and some are trying to tap expensive, fringe regions in places such as the Tuscaloosa Marine Shale in Louisiana and Mississippi.(…)

Lots of Bull 

With the S&P 500 hitting new all-time highs again this week, the bulls are back out in force.  According to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment rose to 52.69% this week, up from last week’s reading of 49.4%.  This is the highest reading of bullish sentiment we have seen all year. It is also the 6th highest reading of bullish sentiment in the current bull market and only the 17th time it has exceeded 50% since March 2009.

While bullish sentiment is at a lofty level, the decline in bearish sentiment was even more extreme.  In the latest week, bearish sentiment dropped from 21.07% down to 15.05%.  This is the lowest level of bearish sentiment in the entire bull market, and just the 10th time bearish sentiment dropped below 20%.

NEW$ & VIEW$ (6 NOVEMBER 2014)

Today: Employment hopes high. Eurozone retailers’ hopes low. Italy hopeful. Politics hopeless. Earnings watch.
Private Payrolls Increased by 230,000 Jobs in October, ADP Says Private businesses continued to add workers at a healthy clip last month, a positive sign for year-end economic growth, according to an employment survey.

Earlier Wednesday, TrimTabs Investment Research said it estimated the U.S. economy added 314,000 new jobs in October. TrimTabs’ estimates are based on analysis of daily income tax deposits to the U.S. Treasury.

According to ADP, firms employing between one and 49 workers added 102,000 new workers last month. Medium-size businesses with payrolls of 50-499 workers increased payrolls by 122,000 employees. Large firms, businesses with 500 or more employees, hired just 5,000 more workers.

Service-sector payrolls increased by 181,000 workers in October. Manufacturing added 15,000 jobs. Construction payrolls increased by 28,000 slots, a large hiring gain for that sector.

Service Sector, Hiring Continue Expansion The U.S. service sector remained in expansion in October, though less than in September, and hiring hit a cycle-high, according to the Institute for Supply Management.

The ISM’s nonmanufacturing purchasing managers index slowed to 57.1 last month from 58.6 in September. (…) Economists said the slowing in services shows the economy is expanding but not as fast in the fourth quarter as it did in the second and third quarters. (…)

The employment index increased to 59.6 from 58.5. October’s job reading is the highest since August 2005, before the last recession. (…)

The ISM’s new orders index dipped to 59.1 from 61.0 in September. The ISM business activity/production index fell to a still high 60.0 from 62.9. The ISM inventory index fell to 49.5 in October from 52.0. The prices index fell to 52.1 from 55.2 in September.

See also MARKIT U.S. SERVICES PMI EASES TO 57.1

German Factory Orders Point to Third-Quarter Economic Contraction

Factory orders rose 0.8% in September from August, the German Economics Ministry said Thursday—far short of the 2.0% gain expected in a survey of economists conducted by The Wall Street Journal last week. However, August’s figure was revised to show a less pronounced decline.

The report suggests that industrial production for September, due for release Friday, will show a 0.8% drop for the third quarter compared with the second, said BNP Paribas economist Evelyn Herrmann.

As a result, a contraction in gross domestic product of about 0.1% on the quarter between July and September is “likely,” she said. German GDP fell 0.2% on a quarterly basis, or about 0.6% annualized, during the second quarter after a strong start to 2014. (…)

“It will be difficult for the German economy in the winter months,” said Thomas Gitzel, chief economist at VP Bank in Liechtenstein. “Fears of recession are, however, overblown,” he said, adding that the German economy will benefit from the weakening euro. He expects “it will again look better for the German economy in the spring months” of 2015.(…)

Details from Thursday’s report showed that growth momentum in orders came from abroad, with foreign orders growing 3.7% on the month. Domestic orders declined by 2.8%. The Economics Ministry raised the figures for August, saying now that total orders declined by only 4.2% instead of the 5.7% plunge originally reported.

EUROZONE RETAIL PMI IN SOLID CONTRACTION

Latest PMI® figures from Markit showed a drop in eurozone retail sales in October. The rate of decline was solid, albeit slower than in the previous month as Germany recorded marginal growth and the downturn in France eased notably. Italy was the weakest performer of the big-three at the start of the fourth quarter, registering a marked and accelerated decrease in retail sales.

The headline Markit Eurozone Retail PMI – which tracks month-on-month changes in like-for-like retail sales – signalled a decrease in sales for the fourth straight month in October. At 47.0, up from September’s 44.8, the index was at its highest level in three months, but nevertheless indicative of a solid rate of contraction. (…)

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Employment in the eurozone retail sector fell for the first time in five months in October, reflective of staff shedding in France and Italy, as well as a notable slowdown in the pace of job creation in Germany. The overall drop in employment in the currency bloc was modest.

Retailers’ orders of goods for resale decreased in October, in line with the trend in five of the past six months – June saw no change. The rate of decline in buying levels was the slowest since July, however. Stock levels meanwhile decreased fractionally, thereby ending a ten-month sequence of accumulation.

Falling orders of resale items among retailers continued to subdue suppliers’ pricing power, with wholesale price inflation remaining close to September’s 57-month low. In Italy and Germany purchase prices rose at the slowest rates for 67 and 54 months respectively. A modest rise in purchase prices in France followed reductions in the previous two months.

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OECD Urges ECB to Provide More Stimulus The European Central Bank should engage in an expanded program of asset purchases, or risk a prolonged period of economic stagnation and a slide into deflation across the eurozone, the OECDevelopment said.

(…) “Overall, the euro area is grinding to a standstill and poses a major risk to world growth as unemployment remains high and inflation is persistently far from target,” wrote Catherine Mann, the OECD’s newly arrived chief economist.

The OECD expects the eurozone economy to grow by just 1.1% in 2015 and 1.7% in 2016, but only if governments slow their efforts to cut budget deficits, and the ECB provides further stimulus. Without that support, and fundamental overhauls to the way their economies work in countries such as France and Italy, “the growth performance of the euro area will be much weaker,” the OECD said.

“In the euro area and for the global economy as well, intensified monetary support is critical to growth, otherwise ever lower inflation—even deflation—may be down the track,” Ms. Mann wrote. (…)

ECB policy makers have been reluctant to buy government debt. The policy is deeply unpopular in Germany, where it stirs fears of central banks printing money to finance runaway public spending.

Ms. Mann said that if those reservations were to hold back needed efforts to boost growth, the eurozone’s economy could be permanently weakened, citing very high levels of youth unemployment that indicate the currency area is “losing a generation.” (…)

Italy has ‘atomic bomb’ to revive economy, says Renzi aide

Yoram Gutgeld pulls out a white sheet of paper and starts scribbling, true to his roots as a management consultant. It is just after dusk on the first floor of Palazzo Chigi, the seat of the Italian government in central Rome, and the Israeli-born economist wants to illustrate the size of the tax cuts in Italy’s budget.

A worker earning €20,000 a year would see net pay rise from €1,200 to €1,350 per month, while the cost to the employer would drop from €2,200 to about €1,650, Mr Gutgeld jots down.

“This is a massive reduction in taxes primarily on low to middle range wages. I think you will be hard pressed to find any country in Europe that has done something similar,” Mr Gutgeld says. “This is an atomic bomb,” he adds. (…)

This is Italy’s retail PMI since 2004. image

PBOC Pumps Money to Banks China’s central bank vowed to lower funding costs for corporate borrowers amid increasing pressure on the nation’s slowing economy.

In a report published Thursday on third-quarter monetary policy, the People’s Bank of China also confirmed it had already conducted two rounds of liquidity injections into the country’s banking system in September and October totaling 769.5 billion yuan ($125.9 billion) in a bid to guide interest rates lower and support economic growth.

The central bank said it had pumped the funds with a tenor of 3 months at an interest rate of 3.5% into the country’s state, midsize and smaller lenders, according to the report on the central bank’s website. (…)

The PBOC said in the report that the weighted average lending rate for nonfinancial firms stood at 6.97% in September, down 0.12 percentage point from a month earlier and down 0.23 percentage point from the end of last year. (…)

The central bank also said it would offer support for “reasonable spending” on housing though it vowed to crack down on real-estate speculation. It also promised to step up support for the rail and shipping sectors. In the past week, the government has approved more than 400 billion yuan of investments in railway projects.

China on Thursday also unveiled a series of measures to encourage imports, including more bank credits and tax support.

It also said it would maintain its prudent monetary policy and look to market ways to solve problems with expanding debts of local governments around the country.

The central bank said it would speed up the plan of bank deposit insurance scheme which is seen as a necessary cushion as China moves to liberalize interest rates. China currently has no deposit insurance system and interest-rate liberalization is widely seen as creating new financial risks for small banks as they compete with big state banks to attract deposits.

World Food Prices Drop a 7th Month in Longest Slide Since 2009

An index of 55 food items fell 0.2 percent month-on-month to 192.3 points, the lowest since August 2010, the UN’s Rome-based Food & Agriculture Organization wrote in an online report today. The index is stabilizing, it said.

Food prices have been falling amid an outlook for bigger grain crops, and rising milk output as well as a recovery in U.S. pork production. That is helping slow global inflation, already aided by a slump in oil prices, with Goldman Sachs forecasting world annual average consumer prices will rise 3.3 percent next year from 3.5 percent in 2014.

The food-price index declined 6.9 percent year on year, falling from the year-earlier period for a 16th month, the longest such slide since 2000. (…)

EARNINGS WATCH

S&P 500 3Q Earnings

From ValueWalk:

As third quarter earnings release period comes to an end, 84% of the S&P 500 (INDEXSP:.INX) have reported earnings (…). on a year over year basis, S&P 500 earnings per share grew 10% and sales rose 4%.  Margin levels continue to hover around 9.3%, but analyst estimates imply further gains, up to 9.9% in 2015 as estimated by Goldman Sachs Group Inc.

However, looking at revisions to 2015 full year estimates, we notice a drop in expectations.  Upon further investigation, analysts continue to post negative revisions to the energy sector, which has been weighing on S&P 500 earnings estimates.  As a sector, energy is forecasted to see earnings per share fall 11.1% next year, sales to fall 4.8% and margins to fall 55 basis points, the largest and most negative revision of all sectors in the S&P 500. (…)

3Q Earnings S&P 500

Overall, looking forward, analysts at Goldman Sachs are predicting continued earnings per share growth for the S&P 500 ex-energy.  Fourth quarter 2014 earnings per share for the S&P 500 are forecasted to reach $30.53 and margins look to continue their uptrend into next year.  (…) In the last week alone, the energy sector saw a 3% negative revision to 2015 earnings per share and further revisions are estimated to push earnings estimates lower.  (…)

SPEAKING OF OIL, HERE’S A CONTRARIAN MOVE
U.S. oil CEO Hamm goes out on a limb, scraps hedges

Harold Hamm, the chief executive of North Dakota oil producer Continental Resources Inc (CLR.N), has stunned a bearish crude market by scrapping all of the company’s hedges – a bold bet that prices will recover soon after sliding some 25 percent.

In so doing, Hamm, who last month called OPEC a “toothless tiger”, appears to be bracing for a price war with the world’s biggest exporter, Saudi Arabia. The OPEC-leader and other key members of the oil exporter group have so far shown no real sign of moving to cut production to lift prices.

Conventional wisdom among oil analysts is that Saudi Arabia, frustrated by a global supply glut caused by soaring output in the United States, is prepared to let prices fall to squeeze U.S. shale oil producers out of the market.

“We have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery,” Hamm said in a statement on Wednesday when the company posted third-quarter results. Continental will hold a conference call on its quarterly earnings with analysts on Thursday.

The move to sell all crude oil hedge positions from October through 2016 netted the oil company a $433 million one-time gain during the most recent quarter.

“We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand,” Hamm said. (…)

WA PO STUFF:
Call me Obama: ‘I hear you’
Left hug Right hug President vows to work with Republicans
Nyah-Nyah Obama seems numb to this latest ‘shellacking’ of Democrats

Yet when Obama fielded questions for an hour Wednesday afternoon, he spoke as if Tuesday had been but a minor irritation. He announced no changes in staff or policy, acknowledged no fault or error and expressed no contrition or regret. Though he had called Democrats’ 2010 losses a “shellacking,” he declined even to label Tuesday’s results.

Obama declared that he would continue with plans for executive orders to expand legal status to undocumented immigrants — even though, minutes before Obama’s news conference, Senate Republican leader Mitch McConnell said that would be “like waving a red flag in front of a bull.” Obama repeated a familiar list of priorities — a minimum-wage hike, infrastructure and education spending, climate-change action — and brushed off various Republican proposals.