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$ (2 APRIL 2014)

Auto Auto Sales Return to Lively Pace A Gain of 5.7% Overall Reflected Strong Demand After Harsh Winter Passed

U.S. light-vehicle sales rose 5.7% last month to 1.54 million, exceeding many analysts’ expectations, and pushing the industry’s annualized selling rate to 16.4 million, according to research firm Autodata Corp.

Industry discounts climbed 7.9% in March to $2,773, while the average price paid for a vehicle rose only 1.2% to $30,986 in March over last year and was down from February, estimates car-shopping website TrueCar.com.

Smoothing out the monthly volatility, Q1’s average rate of 15.7 million units was just about equal to that of the last two quarters of 2013 as per this Ed Yardeni chart:So the jury is still out on the cyclical peak:

Keep on trucking! ‘cause car sales are weak. (Charts from Haver Analytics)

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Apartment Rents Climb as Vacancies Drop Apartment landlords continued to push through hefty rent increases at the start of the year, although the pace of the rises was slightly weaker.

Rental rates increased 0.6% during the first quarter, according to data from 79 U.S. metro areas that was released Tuesday by Reis Inc., a real-estate research firm. While that was a little slower than the 0.8% rise in last year’s fourth quarter, rents were up a hefty 3.2% from a year earlier and have risen 13% since rents began their upward trajectory in 2009.

And with vacancy levels falling, rents appear poised for further growth, according to Reis, which said the rental vacancy rate fell to 4% in the first quarter, down from 4.2% in the fourth quarter and half the level in 2009.

“Rents are at a higher base and still growing,” said Ryan Severino, an economist at Reis. “They will likely keep growing for the next few years.”

U.S. mortgage applications fell last week: MBA

The MBA’s seasonally adjusted index of refinancing applications fell 2.9 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, rose 0.9 percent.

The 4-week average of the purchase index is now down about 19% from a year ago. (CalculatedRisk with chart)

U.S. Construction Spending Growth Pulled Down by Severe Winter Weather

The value of construction put-in-place eked out a 0.1% rise (8.7% y/y) during February following a revised 0.2% January slip, initially reported as a 0.1% gain. Recently weak performance lowered three-month growth in construction to 7.7% (AR), roughly half its earlier high.

SPRING THAW:

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(…) All North Sea indicators point to an extremely weak market at present. The Brent market structure is in deep contango as refiners are in maintenance and arb opportunities to the Far East are scant ahead of peak Asian maintenance and thereafter terminal maintenance at the Forties VLCC loading point over May and June. Greater availability of Forties has coincided with weaker Urals differentials in NWE, triggering more intense competition and lower Forties prices, which were last assessed at discounts to the Brent forward strip.

As we have seen before in the US, it is predominantly light Brent-related crudes such as from Nigeria and Algeria that are being squeezed out of the Canadian import slate as US imports now make up almost one-third of inflows (see chart).The combined share of Nigerian and Algerian exports to Canada was last seen at only 13% in December, down from 26% a year before that. In barrel terms, this has seen imports from Nigeria and Algeria average 100,000 b/d over H2-2013, down 90,000 b/d y-o-y. While the continuing replacement of these African and North Sea light volumes should see US exports to Canada increasing, eventually these volumes will hit a limit and this will lead to the so-called “crude wall” – the point at which availability of light tight oil (LTO) on the USGC exceeds LTO processing capacity. LTO on the USGC will then begin amassing faster, leading to a blowout in crude differentials. This is a major factor behind the debate about lifting the US ban on crude exports.

So, summer is coming, and there’s a “crude wall” emerging.

Once the North American refining market is saturated with light sweet crude, two things could very likely happen.

1) There won’t be a home for foreign light sweet crude in the US at all, which will put pressure on the Brent complex.

2) The WTI discount will re-appear on a major level unless… exports are allowed, which could put further pressure on the Brent complex, if not the entire oil market, encourage US production shut-ins , or lead to even greater inventory accumulation in the US than we’ve already had.

Global PMI signals strongest quarter for nearly three years, but slowing momentum

The JPMorgan Global PMI™, compiled by Markit from its 24 national surveys, fell from 53.2 in February to 52.4 in March. PMIs fell in 16 countries and rose in only eight. The US, Czech Republic and Ireland led the worldwide PMI rankings, followed by the UK. Only three countries saw business conditions deteriorate, as signalled by sub-50 PMI readings. China saw the steepest decline, followed by Russia and then Greece, the latter slipping back in to decline after two months of growth at the start of the year.

Weakness was evident across the so called ‘BRIC’ emerging market economies. While China contracted for a third month running the Russian PMI has now
signalled contraction in eight of the past nine months. Brazil and India meanwhile showed only modest growth, meaning a GDP-weighted BRIC PMI fell from 49.0 to 48.5, signalling the largest decline since last July and the third successive monthly deterioration in business conditions.

Contraction in the major emerging markets contrasted with ongoing robust, albeit slower, growth in the main developed countries.

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The surveys are broadly consistent with global production increasing at an annual rate of 4% in the first quarter, easing to nearer 3% in March. But several key indices suggest that the pace will continue to slow in the second quarter.

New orders rose globally at the slowest pace for five months, the pace weakening in all major developed economies including the US, UK, Eurozone and Japan.
China meanwhile saw new orders fall for a second successive month, registering the largest decline since August 2012 and boding ill for growth in other Asian
economies.

China Q1 GDP Y/Y May Have Slowed to 7.3%

Although there is a slight rebound in the official manufacturing PMI index in March, the reading is substantially lower than it was in March 2013. At the same time, most other indicators showed continued weakness in China’s economy. A weighted sum of the official manufacturing PMI and the HSBC China manufacturing PMI is touching the lowest level of the last 4 years. Based on this evidence, China’s GDP Y/Y may have slowed to 7.3% in Q1.

What makes things more worrisome is the new order sub-index of the official manufacturing PMI. The monthly new order index relative to the average same month reading from 2011- 2013 has been moving range bound for the past three years. This March, the new order index appears to have broken the lower bound of the range, which makes us more cautious on the growth outlook in 2Q14. (CEBM Research)

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Ford Cuts Jobs at Russian Plant

Ford Motor Co.’s Russian joint venture said it is cutting nearly 13% of its staff because of falling sales and a rapid weakening of the ruble, which has accelerated in recent weeks as a result of Western sanctions over Russia’s occupation of Crimea.

Foreign auto manufacturers have invested heavily in Russia in recent years but a 5% decline in overall sales last year because of a slowing Russian economy followed by further economic instability following the events in Ukraine, has cast a shadow over the once fast-growing market. (…)

Ford has been one of the fastest-growing companies in Russia in terms of local manufacturing, boosting production to nine lines from two since the beginning of 2012. But the company saw an 18% drop in sales in Russia last year as demand for compact cars declined sharply, according to the Association of European Businesses in Russia. In the first two months of this year, Ford sales have slipped a further 21% compared with the same period last year.

Sales of the Ford Focus, which is produced at the joint-venture’s St. Petersburg plant, fell 27% in 2013, and have fallen 41% in the first two months of 2014 compared with the same period last year. (…)

SENTIMENT WATCH

(…) the FTSE All-World equity index rise 0.1 per cent to 272.5, a seventh consecutive day of gains that takes the worldwide benchmark to its highest since December 2007. Another 2.6 per cent rise and the All-World will be in record territory.

U.S. MANUFACTURING PMI STEADY AT 55.5

imageMarch data indicated that the U.S. manufacturing sector remained on a solid growth footing, with output levels and new business volumes both rising sharply. The latest increase in new work was slower than in the previous month, but still the second-fastest since May 2010. Meanwhile, the rate of production growth was little-changed from the near three-year high recorded in February. Survey respondents commented on a combination of improving underlying demand and a catch-up effect following the weather-related slowdown seen earlier in the year.

Adjusted for seasonal influences, the final Markit U.S. Manufacturing PMI registered 55.5 in March, unchanged from the earlier ‘flash’ reading. The PMI was down from 57.1 in the previous month, but nonetheless at its second-highest level since January 2013. The main factor behind the drop in the headline index since February was the suppliers’ delivery times component, and to a lesser extent the moderation in new order growth from February’s recent high. Stocks of purchases had a slightly more positive influence on the headline PMI during March, while output and employment growth were little-changed over the month.

A strong overall increase in manufacturing production levels during March was mainly linked to stronger domestic demand. Overall levels of new work rose sharply, but new orders from abroad imagecontinued to expand at a only marginal pace. Higher new order volumes contributed to an accumulation of unfinished work for the second month running, but the latest rise in backlogs was slower than February’s survey-record high.

Manufacturing job creation was recorded for the ninth month running in March, with firms generally attributing the increase in employment to improving confidence about the economic outlook. Meanwhile, rising production requirements also led to a robust expansion of purchasing activity and a further increase in input stocks. There were signs that the worst of the weather-related squeeze on supply chains had started to ease in March, as vendor performance deteriorated at a much slower pace than in February.

Factory gate price inflation slowed for the third month running and was the weakest since September 2013. Meanwhile, input cost inflation was the second-weakest for nine months in March.

March data signalled that large manufacturers (more than 500 employees) were by far the best performing of the three company size categories monitored by the survey. Large manufacturers were also the only company size group to record faster expansions of output and new business than one month previously. Output growth was broad-based across the three market groups monitored by the survey. Intermediate goods producers posted the steepest rate of expansion, followed by consumer goods. In line with the trend for output, solid rates of job creation were recorded across all three market groups in March.