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

THE DAILY EDGE: 28 APRIL 2021

U.S. Durable Goods Orders Disappoint in March

Manufacturers’ orders for durable goods rose 0.5% in March (25.0% y/y) after falling 0.9% during February due to winter storms, revised from -1.1%. A 2.4% jump had been expected in the Action Economics Forecast Survey.

Last month’s disappointment owed largely to a 1.7% decline (+62.5% y/y) in transportation orders as it followed a 2.0% February weakening. A 5.5% increase (26.6% y/y) in motor vehicle & parts bookings was offset by a 38.2% falloff in aircraft & parts orders.

Orders for nondefense capital goods excluding aircraft improved 0.9% last month (11.6% y/y) as it followed a 0.8% February weakening.

In the major categories of the report, primary metals orders rose 1.2% (15.1% y/y) while fabricated metals orders strengthened 3.6% (16.6% y/y). Machinery orders rose 1.0% (9.7% y/y) while computer & electronic product orders edged 0.5% higher (10.1% y/y) following two months of decline. These increases were offset by a 1.5% falloff (+7.4% y/y) in orders for electrical equipment and appliances.

Shipments of durable goods increased 2.5% (10.0% y/y) following a 3.6% decline. Shipments of core capital goods rose 1.3% (10.4% y/y). Shipments of transportation products rebounded 4.8% (11.7% y/y) as auto and aircraft shipments improved. Shipments excluding transportation rebounded 1.5% (9.3% y/y) after and reversed February’s weakening.

Unfilled orders for durable goods improved 0.4% (-3.3% y/y) last month after a 0.9% increase. Order backlogs, excluding transportation, rose 1.2% (7.7% y/y) for a second consecutive month.

Inventories of durable goods jumped 1.0% (1.7% y/y) in March, the strongest increase since July 2018. Excluding transportation, inventories increased 0.8% (0.3% y/y) and have been rising for seven consecutive months. (…) (Haver)

But Non-def ex-air orders are up 10.1% YoY in Q1, +9.6% over Q1’19. March ‘21 is up 8.7% over March ‘19.

fredgraph - 2021-04-28T070535.245

(…) “It’s not getting better. It’s getting worse,” he told American Shipper in an interview on Monday.

“What I’m seeing is unprecedented. We are seeing a tsunami of freight,” he reported.

“For the month of May, everything on the trans-Pacific is basically sold out. We had one client who needed something loaded in May that was extremely urgent and who was ready to pay $15,000 per container. I couldn’t get it loaded — and we are a growing company that ships a lot of TEUs [twenty-foot equivalent units]. Price doesn’t always even matter anymore.” (…)

He noted that January trans-Pacific imports were up 10% versus 2019 (comparisons to 2020 numbers are skewed by COVID) and 13.5% in February, then jumped 51% in March. “So, we’re now at 1.5 times pre-pandemic levels.”

With imports far outpacing retail sales growth, he attributed volumes to inventory restocking. “The restocking is actually affecting the trade even more than growth in demand. That tells me that this will last even longer. Let’s say U.S. consumer demand slows down in Q3 and Q4. That’s not expected, but even if it does, [capacity availability and rates] shouldn’t improve quickly, simply because of the huge restocking demand.” (…)

As a result of the backlog and restocking demand, he thinks “prices will remain high and shipping will probably remain difficult for the rest of this year. And then after that, you have the peak for Chinese New Year in 2022.” (…)

“Buckle up. The month of May will be the worst people have ever seen,” he predicted. Because some shippers will have to wait in line behind the growing backlog in Asia, he expects “what’s going to happen soon is that some importers won’t even be able to get on the boat. For them, it will almost feel like trade is coming to a halt.” (…)

U.S. Home Prices Continued to Climb in February Home-price growth accelerated to new 15-year high, according to Case-Shiller index

The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 12% in the year that ended in February, up from an 11.2% annual rate the prior month. February marked the highest annual rate of price growth since February 2006.

The Case-Shiller 10-city index gained 11.7% over the year ended in February, compared with a 10.9% increase in January. The 20-city index rose 11.9%, after an annual gain of 11.1% in January. Price growth accelerated in 19 of the 20 cities. (…)

A separate measure of home-price growth by the Federal Housing Finance Agency also released Tuesday found a 12.2% increase in home prices in February from a year earlier, a record in data going back to 1991.

Also on Tuesday, the Commerce Department reported that the homeownership rate inched higher to 65.6% in the first quarter, up from 65.3% a year earlier and slightly down from 65.8% in the fourth quarter. For households headed by someone under 35 years old, a key source of homebuying demand, the homeownership rate rose to 38.1% from 37.3% a year earlier.

(…) According to the MBA, purchase activity is up 34% year-over-year unadjusted. (…) Activity is still above year-ago levels, but accelerating home-price growth and low inventory has led to a decline in purchase applications in four of the last five weeks. (…)

Confidence in U.S. Economy Approaches Pre-Pandemic Level Consumers’ outlook on the economy has increased for four straight months as vaccination totals rise, businesses more fully reopen

The consumer confidence index increased to 121.7 in April from a revised 109.0 in March, the Conference Board said Tuesday. Recent improvements led the index to a more than one-year high, with the indicator approaching the pre-pandemic level of 132.6 in February 2020. (…)

The present situation index, which reflects consumers’ assessment of current business and labor market conditions, surged to 139.6 in April from 110.1 in March. This improvement suggests that the economic recovery strengthened further at the beginning of the second quarter, Ms. Franco said.

The expectations index, which gauges short-term outlook for income, business and labor market conditions, also increased, albeit to a lesser degree, to 109.8 in April from 108.3 the prior month. (…)

Recent data points to an uptick in spending from higher-income households after months pulling back even though top earners weren’t eligible for the latest round of stimulus payments. Until March, the increase in spending was mainly driven by low-income consumers, he said. (…)

Haver Analytics has more:

The share of respondents planning to buy a new home held steady at 2.4%, which came after a jump from 1.0% in February. Those planning to buy a major appliance fell to 49.8% and reversed the March increase to 53.6%.

Confidence of individuals in all age brackets improved sharply to roughly twelve-month highs.

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Via Axios:

Morning Consult’s “Tracking the Return to Normal” series reveals all-time highs in consumer comfort across activities including dining, entertainment, sports and more.

  • 60% of the public now feels comfortable dining out, a record high for the series that began record-keeping in March 2020.
  • 53% of Americans feel comfortable going on vacation, a record since tracking began in April 2020.

Progress may be stalling out, according to the data. Though Morning Consult’s surveys on vaccine skepticism have declined for four straight weeks in the United States, progress has stalled, with 34% of respondents saying they won’t get vaccinated.

  • And while 46% of respondents say they are ready to go out to a restaurant now, 17% say they will not be ready for two to three months and another 12% say it will be six months or more before they are comfortable dining in a restaurant.
Biden to Propose $1.8 Trillion Families Plan, Tax Increases In a prime-time address to Congress on Wednesday, President Biden plans to lay out a $1.8 trillion proposal that includes new spending on child care, education and paid leave and extensions of some tax breaks.

(…) The proposal he plans to unveil Wednesday follows a $1.9 trillion Covid-19 relief law and comes as he is also promoting a $2.3 trillion infrastructure package that includes new spending on bridges, roads and broadband internet. (…)

The White House said the proposal includes $1 trillion in new spending over 10 years and $800 billion in tax cuts, largely extensions of breaks created or expanded in this year’s Covid-19 relief law. Mr. Biden will call for a universal preschool program for 3- and 4-year-olds and two years of tuition-free community college for all Americans, including the young immigrants known as Dreamers, who were brought to the U.S. as children and have lived in the country illegally. Those programs would be available to Americans at all income levels, officials said, and would be funded in partnership with states.

Mr. Biden’s proposal would provide money to make child care more affordable for low- and middle-income families and boost federal funding to child-care providers. And it would establish a national paid-leave program for those needing time to care for a child or loved one or to recover from illness, among other reasons. That would provide 12 weeks of leave by the 10th year of the program, and workers would receive up to $4,000 a month, with a minimum of two-thirds of wages replaced. (…)

To pay for the new programs, the administration proposes raising the top income-tax rate to 39.6% from 37%. For households making more than $1 million, Mr. Biden would also raise the top rate on capital-gains and dividends to 39.6% from 20%. Including existing payroll and investment taxes—each 3.8%—the top rates on wages and capital gains would reach 43.4%, up from 23.8%. (…)

Mr. Biden would also adjust how capital gains are taxed at death. Unrealized gains would be treated as sold and taxable, with an exemption of $1 million a person, in addition to the existing exclusion of up to $500,000 for a married couple’s primary residence. Under current law, heirs only owe capital-gains taxes on gains after the original owner’s death and only when they sell. This is separate from the estate tax, which the plan wouldn’t change. (…)

Mr. Biden would permanently extend the expanded tax credit for child care and the expanded earned-income tax credit for childless workers. He would also make the child tax credit permanently fully refundable, which means low-income households could get the money even if they don’t have earned income.

But, resisting pleas from Democrats in Congress, Mr. Biden’s plan stops short of making permanent the Covid-19 relief law’s temporary child tax credit expansion to $3,000 a child and $3,600 for those under age 6. Instead, he would extend that break through 2025. (…)

EQUITY RISK PREMIUM: NOMINAL VS REAL YIELDS

In yesterday’s Market Watch:

“Stock valuations are elevated right now, and a lot of good news is priced in,” says Jeffrey Buchbinder, equity strategist at LPL Financial, to clients in a note. “However, we believe valuations are quite reasonable when considering interest rates are low and we expect inflation to remain largely contained.”

Bloomberg’s David Wilson posted this other viewpoint from Morgan Stanley:

Stock investors stand to receive too little return for the level of risk they take, according to Mike Wilson, chief U.S. equity strategist at Morgan Stanley. Wilson drew the conclusion in a report Monday that compared an earnings-based yield on the S&P 500 Index with an inflation gauge: the 10-year breakeven rate, or the gap in yield between fixed-rate and inflation-indexed Treasury notes. The resulting equity risk premium narrowed this month to 2.06 percentage points, the smallest since May 2000, according to data compiled by Bloomberg. “There’s low probability that it will” fall further, Wilson wrote.

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To help you understand the difference:

fredgraph - 2021-04-28T080305.901

Mind the gaps (Nordea):

Core inflation to prove much more sticky than the Fed anticipates

Mind the gap between long bond yields and the Global Manufacturing PMI?

Markit has more charts:

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The above looks like a margin squeeze to me…

These are diffusion indices but goods prices are up big time and broadly:

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According to the FT, restaurants would be able to choose from three new tiers of commission — 15&, 25% or 30% — with different levels of service, depending on whether they wanted to focus on “profitability or growth”.

In today’s Globe and Mail:

Deliveries are another source of inflation. U.S.-based restaurant chain Chipotle Mexican Grill Inc. has twice raised prices on its delivery menu over the past year. And like many others, MTY has raised prices for orders placed on delivery apps, such as Uber Eats, to account for costs imposed by those parties.

“It’s mostly up to the franchisees to decide what the price difference is going to be for their stores,” Mr. Lefebvre told analysts. “We try to talk to our franchisees that a 15-per-cent price difference is reasonable, but some of them will go lower than that because we want to be more attractive to customers.”

dash

Total bank losses from Archegos implosion exceed $10bn Nomura reported a $2.9bn hit and suspends head of prime brokerage after reporting biggest quarterly loss since 2008 due to debacle

THE DAILY EDGE: 26 APRIL 2021: Technical Warning

U.S. New Home Sales Surge in March

New home sales surged last month to the highest level since August 2006. Sales of new single-family homes surged 20.7% (66.8% y/y) to 1.021 million units (SAAR) during March after declining 16.2% to 846,000 in February, revised from 775,000 units. January sales were revised to 1,010 million units from 948,000. Earlier figures also were revised. The Action Economics Forecast Survey expected 885,000 sales in March. (…)

The median price of a new home fell 4.4% (+0.8% y/y) in March to $330,800, the third consecutive monthly decline. Working 0.9% higher (6.0% y/y) to $397,800 was the average price of a new home, following a 4.3% February drop. These prices are not seasonally adjusted.

The supply of new homes for sale fell to 3.6 months in March and reversed the rise to 4.4 months in February. This equaled the Q3’20 low which was the lowest figure since March 2004. The median number of months a new home stayed on the market after completion held steady at 3.6, after surging to 4.5 months in both August and September of last year. The figure has been trending sideways since 2013. (Haver)

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Strange and totally odd that February and March sales in the West, the second largest region, are below their 2020 average contrary to other regions which are substantially above. The chart below displays quarterly sales, revealing that total new home sales have peaked in Q3 of last year but only because sales in the West have declined 23%. The 3 other regions have seen sales rise 6.4% since Q3’20.

fredgraph - 2021-04-24T075759.016

Meanwhile, permits have soared 15.5% since Q3’20. A similar pattern was seen in 2005. Sales turned down after mortgage rates rose from 5.5% in July 2005 to 6.4% in December and to 6.8% in July 2006. The rest is history.

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The weakness in the West may have some responsibility in the recent drop in the median house price sold. It may also be a first symptom of eroding affordability; the median price of new houses sold declined 9.4% in Q1’21, back to its level one year ago.

fredgraph - 2021-04-24T081635.411

John Burns Real Estate Consulting observes:

  • Inventories are at all-time lows resulting in massive home price appreciation that is threatening affordability. Public builders have 10% fewer communities to sell from than during this time last year, and the number of inventory homes for sale in actively selling neighborhoods is dwindling. Resale home inventories are down 45%. The result is historic home price appreciation.
  • Land supplies are limited and competition for lots is intense. In JBREC’s newest land survey (1Q2021) 99% of brokers we surveyed rated their markets as “Hot” or “On Fire” and 96% of brokers reported rising lot prices quarter over quarter.
  • Competition for land between for-sale and build-for-rent land buyers will increase significantly.
  • Lot to home price ratios are up everywhere by about 20% (four percentage points), and this is true across all price niches.

John Mauldin’s recent “Tiny Housing Bubbles” piece included interesting charts from David Rosenberg:

  

Apartment Rents Rise, Ending Many Perks for Renters Americans are paying more to rent homes again, ending a stretch during the pandemic when they enjoyed flat or falling rental prices and widespread landlord concessions.

(…) Median asking rent rose 1.1% on an annual basis in March to $1,463 a month across the country’s 50 largest markets, according to a report from Realtor.com. That marked the first month where the pace of rent growth had increased since last summer, the report showed. (…)

Rent accounts for about one-third of the consumer-price index, which economists expect to tick higher in the months ahead. (…)

Rent increases could further strain the one in six American tenants who are in debt because of missed rent payments. (…)

The hottest home-sales market in 15 years is also expected to prop up rents. As more people are priced out of the for-sale market, they will flock to the only other option: renting. (…)

Rent increases now span the income spectrum and blanket much of the country. (…)

Asking rents in traditionally lower-cost, midsize cities like New Orleans, Memphis, Tenn., and Richmond, Va., are up, too. They have risen 10% or more in the past year, according to Realtor.com.

Even in New York City and San Francisco—where rents tumbled by double-digit percentages last year over 2019—there are signs of a turnaround. San Francisco rent rose 3.4% in March over the month prior, according to listings website ApartmentList, the largest monthly rental increase in the city since the pandemic began. And in Manhattan, though there is conflicting data, some reports point to the beginning of a recovery, with rental prices rising modestly since the fall and high vacancy rates slowly starting to reverse, too. (…)

Rent (7.8%) and Owner-Equivalent Rent (24.1%) account for 31.9% of total CPI. Shelter inflation has declined from the 3.5% range to the 2.0% range during the pandemic while house prices (black) exploded.

fredgraph - 2021-04-24T062818.975

These 3 lines will eventually meet again, but likely only after the next recession which Biden and Powell are totally trying to avoid. In the meantime, the odds are that the red and blue lines will try to reach up.

fredgraph - 2021-04-24T070740.439

Also from John Burns Real Estate Consulting:

We also comb through the public single-family rental REIT earnings calls / press releases, and capital interest has not waned during COVID-19. In fact, the SFR REITs have said the following:

  • Tricon Residential (TCN)
    • May 2020: “Single-family (rental) comes out as a winner, and demand for this asset class is absolutely going to explode. We’ll have to duck, there’ll be so much money coming at us. We’re getting inbounds all the time. Even in the last 2 or 3 weeks, people who want to just give us money.”
    • March 2021: “We expect to raise $1.2 billion of third-party equity capital across all our rental businesses in ’21, which would make this the most prolific year of fundraising in Tricon’s 33-year history.”
  • American Homes 4 Rent (AMH)
    • February 2021: “We expect to invest between $1.2 billion and $1.6 billion of total capital into our combined growth programs this year, adding approximately 3,500 homes to our wholly owned and joint-venture portfolios, including 1,900 to 2,200 homes that we expect to deliver through our AMH Development program.”
  • Invitation Homes (INVH)
    • February 2021: “You just keep hearing about more capital wanting single-family rental exposure, which we, quite frankly, view as a positive.”
U.S. Flash PMI: Private sector output growth reaches fresh series high, but supply chain disruption continues to hamper goods production

U.S. private sector businesses registered a survey-record expansion of output during April, as looser COVID-19 restrictions and strong client demand boosted business activity. A steep upturn in manufacturing production occurred despite unprecedented supply chain disruptions, while services activity growth hit a new high.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 62.2 in April, up from 59.7 in March, to reach the highest since data collection began in October 2009. The overall upturn was supported by quicker increases in services and manufacturing output amid looser COVID-19 measures and the reopening of many service sector businesses. The rise in manufacturing production was, however, weighed down by difficulties sourcing raw materials and ongoing supplier delivery delays, which were the most extensive on record.

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New order growth accelerated again in April, with firms noting the strongest upturn on record. The reopening of large portions of the economy following an easing in lockdown measures led to firmer client demand. At the same time, total new export orders rose at the fastest pace since the composite data series began in September 2014, as many export markets reopened.

As a result of the surge in demand, backlogs of work rose at the joint-fastest pace since September 2014.

Pressure on capacity at manufacturers and service providers led to the sharpest rise in employment since November 2020. Although some firms reported the rehiring of employees let go during the depths of the pandemic, many noted the need for additional new staff.

Unprecedented supply chain disruptions pushed input costs higher once again in April. That said, the rate of inflation eased slightly amid softer increases among service providers. Nonetheless, the rise was the second-fastest on record, with many firms seeking to pass on greater costs to clients. The pace of output price inflation for goods and services accelerated to a series high.

Firms remained strongly upbeat regarding the outlook for output over the coming 12 months in April, albeit less so than in March. Optimism reportedly stemmed from looser COVID-19 restrictions, the continued vaccine roll-out and greater client demand.

The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index registered 63.1 in April, up from 60.4 in March to signal the fastest expansion in service sector activity since data collection for the series began in October 2009. Growth was reportedly driven by stronger client demand and the reopening of many businesses amid the easing of restrictions.

New business growth accelerated notably to the sharpest on record, with total sales supported by a solid increase in new export orders.

Average cost burdens continued to rise markedly in April, as higher fuel, wage, shipping and PPE costs drove inflation. The rate of increase softened slightly, but was still one of the fastest on record. The rate of charge inflation quickened, however, as stronger client demand allowed firms to pass on a greater proportion of hikes in input prices to clients.

In line with an uptick in customer demand, the level of outstanding business rose at the steepest rate since September 2020. In turn, firms raised staffing numbers at the fastest pace since last November.

Business expectations remained optimistic in April, as hopes of an end to COVID-19 measures as 2021 progresses drove confidence in future activity.

Manufacturers registered the strongest improvement in operating conditions since data collection for the series began in May 2007 in April, as highlighted by the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posting 60.6, up from 59.1 in March. The uptick in the headline figure was partially linked to an unprecedented deterioration in vendor performance (ordinarily a signal of improving operating conditions). Capacity issues at suppliers and ongoing port delays reportedly exacerbated supply chain disruptions.

Manufacturers signalled a sharp rise in output during April, but many firms stated that production capacity was hampered by an inability to source raw materials and inputs in a timely manner. Although the rate of expansion quickened, it remained slower than those seen at the turn of the year.

Subsequently, backlogs of work rose markedly. The rate of accumulation in outstanding business eased slightly, however, as firms expanded workforce numbers at a strong pace.

Meanwhile, input costs increased at the sharpest rate since July 2008. Higher input prices were reportedly due to severe supplier shortages and marked rises in transportation fees. In contrast to their service sector counterparts, manufacturers registered a slight softening in the rate of charge inflation. Nevertheless, the increase was the second-fastest on record as firms continued to partially pass-through costs to clients.

Output expectations regarding the year ahead were markedly upbeat in April. Hopes of an end to the COVID-19 crisis and the release of further client demand as markets reopen reportedly drove confidence.

The Grocery Price Shock Is Coming to a Store Near You

This week, the Bloomberg Agriculture Spot Index — which tracks key farm products — surged the most in almost nine years, driven by a rally in crop futures. With global food prices already at the highest since mid-2014, this latest jump is being closely watched because staple crops are a ubiquitous influence on grocery shelves — from bread and pizza dough to meat and even soda. (…)

Gauge of agricultural commodity prices is highest in eight years

Overall, global food costs have surged for 10 straight months, the longest rally in more than a decade, according to a UN gauge. The surge is stirring memories of 2008 and 2011, when spikes led to food riots in more than 30 nations across Africa, Asia and the Middle East, and contributed to political strife and uprisings in the Arab Spring.

CPI-Food-at-Home prices have been stable after their surge last spring. They were up 3.3% YoY in March.

fredgraph - 2021-04-25T072716.235

TECHNICALS WATCH

Warning: my favorite technical analysis service, spot on so far in the past 18 months, has turned cautious over the shorter term. It says no reason to throw the towel, just be more cautious short-term given that the market has narrowed as small caps have not participated in the recent surge led by the more defensive sectors.

 spy sly

Other indicators I follow remain positive, albeit extended.

  • Gold vs USD (The Market Ear)