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: 15 JANUARY 2020

Target Says Holiday Sales Missed Its Forecasts Holiday sales were sluggish at Target, raising questions about the strength of the retailer’s turnaround plans and the health of the U.S. consumer.

Target’s sales rose 1.4% between Nov. 1 and Dec. 31 in stores and through digital channels operating for at least 12 months, the company said. It warned that growth for the full quarter, which includes January, would likely come in less than half the 3% to 4% growth it had predicted. (…)

While other traditional retailers have reported lackluster holiday results, Target has been held up as one of the chains that adapted to shifting consumer habits by ramping up its e-commerce operations and remodeling its stores.

Digital sales rose 19% in November and December compared with a year ago, down from 31% growth in the third quarter. (…)

The company had boasted a streak of eight consecutive quarters of at least 3% sales growth, including a 4.5% jump in the quarter ended Nov. 3. In November, Mr. Cornell said the company was gaining market share in the apparel, home and beauty categories. “We are starting to see the bifurcation of winners and losers” in retail, he told analysts a week before Black Friday. (…)

The company is maintaining its profit targets, in part because the categories with stronger sales earn high margins. (…)

Thus far Costco Wholesale Corp. is a lone bright spot, reporting comparable sales up 9% in the five weeks ended Jan. 5, including e-commerce and international sales. (…)

On Tuesday, market researcher NPD Group said holiday results were lackluster, estimating that total sales rose 0.2% compared with the previous year. The decline in the number of items sold was greater than the drop in dollars spent, NPD said, a sign that consumers gave higher-priced gifts this holiday. (…)

U.S. December retail sales will be released this Friday.

U.S. CPI Increases Moderately; Core Prices Rise Negligibly

The Consumer Price Index increased 0.2% (2.3% y/y) during December following a 0.3% November rise and a 0.4% October gain. The CPI excluding food & energy edged 0.1% higher (2.3% y/y), the weakest increase in three months. A 0.2% rise had been expected. (…)

Services prices rose 0.2%. The 3.0% y/y increase remained elevated from 2.7% early last year. (…) Medical care service prices rose 0.4% (5.1% y/y) for a second month and the cost of education & communications gained 0.2% (2.0% y/y). Shelter prices improved 0.2% (3.2% y/y) as rents of primary residences rose 0.2% (3.7% y/y). The owners equivalent rent of primary residences also improved 0.2% (3.3% y/y), but hotel costs fell 1.8% (-0.2% y/y). (…)

Goods prices excluding food & energy held steady (0.1% y/y) for the second consecutive month. (…) Used car & truck prices fell 0.8% (-0.7% y/y) but new vehicle prices edged 0.1% higher both m/m and y/y. Showing strength were medical care goods prices which increased 1.5% (2.5% y/y) after nudging 0.1% higher. Apparel prices rose 0.4% (-1.2% y/y) after a 0.1% uptick. (…)

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It is curious to see core PCE inflation (red) trend down when most other measures of core inflation have been trending up and stand above the Fed’s 2.0% target:

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Unlike the trends between CPI and PCE total inflation:

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  • Slower increases in hourly wages (chart) and fewer hours worked (chart) sent the growth in inflation-adjusted weekly wages to zero. (The Daily Shot)
U.S. Small Business Optimism Weakens

The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index declined 1.9% (-1.6% y/y) to 102.7 during December and mostly reversed its November rise. The reading was 5.6% below the high in August 2018.

Optimism declined last month as the percentage of firms indicating that now was a good time to expand the business fell to 25% from 29%. The labor market has softened. The percentage of firms planning to increase employment declined to 19% from 21%. A lessened 50% of businesses were finding few or no qualified candidates to fill job openings, down from 57% in August. The percentage of firms planning to make capital outlays also backed away from its November high. A weakened 28% planned to make capital outlays, reversing two months of increase.

Offsetting these declines, an improved 16% of respondents expected the economy to improve, the most since July, but it remained below the 48% high in January 2017. A slightly higher 16% of firms expected higher real sales, still significantly below the November 2017 high of 34%.

A slightly lessened 24% of firms planned to raise worker earnings, but that remained up from 22% in October. A reduced 29% of firms raised worker compensation, down from the August 2018 high of 37%.

Current pricing improved, as 14% of firms were raising prices now, the most in five months but below the 19% in May of last year. A lessened 20% of firms were planning to raise average selling prices.

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German Growth Falls to Six-Year Low, Hit by Manufacturing Recession Economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe’s export powerhouse to tensions in the global economy.

The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone’s debt crisis. Output in the manufacturing sector excluding construction, which accounts for around a quarter of the overall economy, fell by 3.6%. Private consumption rose robustly, helping support growth. (…)

German car production fell to its lowest level in almost a quarter of a century last year, according to the VDA auto lobby group. Weakness in the auto sector likely trimmed German growth by 0.75 percentage points in 2019, according to the Ifo economic think tank. (…)

German exports fell 2.3% on the year in November, hurt by a fall in exports to China. (…)

  • Markit’s PMI showing green shoots?

imageGermany’s manufacturing sector ended 2019 deep in contraction, recording further marked decreases in output and employment, latest PMI® data from IHS Markit and BME showed. De-stocking remained prevalent, while the slowdown in the sector continued to translate into lower prices. More positively, however, December’s decrease in new orders was the slowest in the whole of 2019 and manufacturers’ output expectations showed a further – albeit marginal – improvement. (…)

Data showed inflows of new business at German manufacturers falling for the fifteenth month in a row in December. Reports from panellists highlighted that demand, and particularly investment, continued to be undermined by lingering uncertainties around trade and the global economic outlook. However, the rate of decline in new orders eased for the third month in a row to the weakest since December 2018, helped by export sales posting the smallest drop since last January.

Buoyed somewhat by tentative signs of stabilisation in new orders and hopes for a pickup in economic conditions in 2020, manufacturers recorded their strongest confidence for 15 months in December.

Markit also publishes a Europe Sector PMI which might temper hopes for now:

(…) The bottom end of the European sector league table told a similar story in terms of December performance versus 2019 trends. The bottom-six sectors in the final month of the year also fared the worst in terms of annual performance. (…) automobiles & auto parts registered the sharpest decline over the year as a whole. Moreover, the latter registered a faster drop in output in December, following a four-month period where the rate of  decline had continually eased.

Tech Tensions Simmer in Washington as U.S., China Near Trade Truce White House efforts to crack down on technology exports while easing tariffs reflects differing policy views within agencies

The Trump administration’s immediate focus is tightening restrictions on Huawei Technologies Co., the giant Chinese telecommunications company that the White House and Congress view as a national-security threat. The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said. (…)

At the same time, a team of senior U.S. officials, including deputy national security adviser Matt Pottinger, lobbied the U.K. earlier this week to block local network operators from using equipment from Huawei and other Chinese vendors in their 5G networks. A British decision is expected shortly.

More broadly, the National Security Council asked the Commerce Department last week to suggest regulations to restrict sales of any U.S. technology to China, according to people tracking the early-stage discussions.

Should all the efforts bear fruit, nearly any technology exports to Huawei in particular, and China in general, would require export licenses. While Commerce could grant such licenses, U.S. companies fear their Chinese customers would turn to other suppliers. In 2018, about 36% of U.S. semiconductor company revenues, or $75 billion, came from sales to China, the Semiconductor Industry Association estimated. (…)

T-Mobile-Sprint Deal Concern Mounts on Wall Street Shares of Sprint are trading at a more than 40% discount to the value of T-Mobile’s proposed all-stock deal. The companies are preparing to make final arguments in a court battle with states led by California and New York.

(…) “The market’s getting more pessimistic,” said Ric Prentiss, an analyst at investment bank Raymond James. He said investors are waking up to the risk that “if this deal doesn’t go through, Sprint’s going to go down pretty hard.” (…)

Japan’s SoftBank Group Corp. owns more than 80% of Sprint’s shares (…).

THE DAILY EDGE: 14 JANUARY 2020

The Conference Board Employment Trends Indexâ„¢ (ETI) Declined in December

The Conference Board Employment Trends Indexâ„¢ (ETI) declined in December, following an increase in November. The index now stands at 109.68, down from 110.51 (an upward revision) in November. The decrease marks a 1.2 percent decline in the ETI over the past 12 months.

“The Employment Trends Index decreased in December and continues to be on a flat trend since the summer of 2018. In the current state of the labor market, a flat index is consistent with an ongoing labor market expansion. We expect job growth to remain solid and the labor market to continue tightening,” said Gad Levanon, Head of The Conference Board Labor Markets Institute. “In Friday’s job report, the broadest measure of labor market slack, known as the U6 rate, fell to 6.7 percent, the lowest level on record. Such a tight labor market is a growing obstacle for further economic growth, but not a big enough obstacle to derail the US economy from its two percent growth trajectory.” (…)

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Ned Davis Research says that economic contraction signals are generated when the index falls by 4.8% from a high point. The high point this cycle is 111.13 (August 2018), meaning a recession signal would occur at 105.8 on the ETI.

China posts strong December exports as world awaits Sino-U.S. trade deal signing 

China’s exports rose for the first time in five months in December and by more than expected, signaling a modest recovery in demand as Beijing and Washington agreed to defuse their prolonged trade war.

After a rough year, China’s exports ended 2019 on an upbeat note, rising 7.6% in December from a year earlier, customs data showed on Tuesday. The median forecast from a Reuters poll of analysts had been for a 3.2% rise in shipments, following November’s 1.3% drop.

Imports also beat expectations, jumping 16.3% from a year earlier, though boosted in part by higher commodity prices. The Reuters poll had forecast 9.6% growth versus 0.5% in November. (…)

For all of 2019, its total exports proved remarkably resilient to trade tensions, rising 0.5%, though that was well off a near 10% gain in 2018, reflecting weaker U.S. sales.

Imports fell 2.8% last year as China’s economic growth cooled to near 30-year lows, after rising 15.8% in 2018. (…)

China exports to the United States fell 12.5% in 2019, compared with a rise of 11.3% in 2018. Imports from the United States fell 20.9%, versus a 0.7% rise in the previous year. (…)

U.S. Removes China’s Currency Manipulator Label Ahead of Deal The U.S. ended its designation of China as a currency manipulator just two days before negotiators from Beijing and Washington are set to sign the first phase of the trade deal between the two countries.

(…) “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” Treasury Secretary Steven Mnuchin said in a statement Monday. (…)

As part of the agreement, China will commit not to depress its exchange rate and will make additional disclosures about its foreign-exchange practices. The Treasury also noted that the Chinese currency had strengthened in recent months, a development that helps address U.S. concerns that the yuan is too weak.

The currency component has been a focus of Mr. Mnuchin in talks with China, and the administration has said it was one of the trade deal’s most significant parts. (…)

The Treasury Department refrained from branding China a manipulator until August, the first time it did so since 1994. (…)

IMF research, however, didn’t support the conclusion that China had manipulated its currency. (…)

In case you wonder, the yuan was 6.895 to the USD on Aug. 2, the last trading day before the “currency manipulator” designation was made on Aug. 5.
It closed at 6.893 yuan per dollar on Monday when the label was removed.

How the U.S. and China Settled on a Trade Deal Neither Wanted

The WSJ gives us the back story of the deal to be announced tomorrow. Some excerpts:

Looking for a direct route to the president, Chinese Ambassador Cui Tiankai spoke with President Trump’s son-in-law and adviser, Jared Kushner, say people familiar with the episode. The U.S. offer didn’t roll back enough tariffs, he told Mr. Kushner.

It was time to settle, Mr. Kushner responded. If not, on Dec. 15 the president was ready to proceed with new tariffs on about $156 billion in Chinese imports, including smartphones and toys. “Don’t think in terms of tariff reduction,” he advised. “Think in terms of what will happen if you don’t make a deal.”

To Chinese negotiators dealing with a president they considered erratic, Mr. Kushner’s words at least offered certainty, say the people familiar with episode. They also recognized an opportunity: The agreement wouldn’t force them to make economic-policy changes Washington had long insisted on.

(…) the deal isn’t what either side said it had wanted. The U.S. doesn’t get the fundamental reforms in Chinese economic policy it sought to help American businesses. And levies remain on about $370 billion of China’s exports. (…)

[In August], Sheldon Adelson, the Las Vegas Sands Corp. CEO who contributed $20 million to Mr. Trump’s presidential campaign and whose Macau casinos depend on Chinese goodwill, warned the president new tariffs would hurt the economy and Mr. Trump’s re-election chances by increasing consumer prices.

Mr. Trump had long claimed China was paying the cost of tariffs. Executives from Best Buy Co. were among those pointing out the burden falls on U.S. businesses and customers. (…)

Mr. Trump had long instructed his chief negotiator, U.S. Trade Representative Robert Lighthizer, to get a “great deal.” Now, Mr. Lighthizer was after the best deal available. (…)

Negotiators on both sides started exploring a settlement with different phases, the first focused on agriculture purchases and other less contentious issues. That had long been China’s strategy. Since 2018, Chinese negotiators had pushed what they called a 40-40-20 plan: They said 40% of American demands were doable because they involved reforms China planned anyway, 40% were negotiable and 20% were off-limits, impinging on national security.

Mr. Lighthizer and other negotiators had earlier privately derided the effort because Beijing categorized as off-limits issues the U.S. considered priorities. That included further opening China’s cloud-computing market. Now the U.S. essentially was ready to accept China’s framework. (…)

After listening to Mr. Kushner’s counsel, the Chinese side was ready to settle if Mr. Lighthizer approved one more compromise—reduce the 15% tariffs to 7.5% instead of 10%. Both sides could live with that and worked to clear remaining issues. (…)

The U.S. is counting on remaining tariffs to compel Beijing to continue negotiating and agree to economic-policy changes. Failing that, Washington could use other pressure points, such as limiting the ability of Chinese firms to list shares in U.S. markets.

Still, Chinese officials feel they have little to gain from a phase-two deal forcing Beijing to ease state control of the economy, and Mr. Trump recently said that a phase-two agreement probably wouldn’t conclude until after the Nov. 3 election. The Chinese government continues to plan for a future where the two economies would be less intertwined and China would develop technology rather than rely on American imports. (…)

China to ramp up U.S. car, aircraft, energy purchases in trade deal: source China has pledged to buy almost $80 billion of additional manufactured goods from the United States over the next two years as part of a trade war truce, according to a source, likely giving a much-needed boost for planemaker Boeing.

Under the terms of the trade deal to be signed on Wednesday in Washington, China would also buy over $50 billion more in energy supplies, and boost purchases of U.S. services by about $35 billion over the same two-year period, the source told Reuters on Monday.

The Phase 1 agreement calls for Chinese purchases of U.S. agricultural goods to increase by some $32 billion over two years, or roughly $16 billion a year, said the source, who was briefed on the deal.

When combined with the $24 billion U.S. agricultural export baseline in 2017, the total gets close to the $40 billion annual goal touted by U.S. President Donald Trump. (…)

BlackRock Puts Climate at Center of $7 Trillion Strategy

BlackRock Inc. will ditch investments with high sustainability-related risk as climate concerns drive a sweeping change in the way the world’s largest asset manager invests its $7 trillion in assets.

“Climate change has become a defining factor in companies’ long-term prospects,” Chief Executive Officer Larry Fink wrote in his annual letter to corporate executives on Tuesday. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.” (…)

Fink outlined a number of initiatives, including: making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening the firm’s commitment to sustainability and transparency in its investment stewardship activities. (…)

The company also listed environment and climate risk among its top priorities for meetings and discussions with the public companies it owns, according to its 2019 investment stewardship report. (…)

Bank of Canada says business outlook ‘broadly positive’, labour market tightening

The central bank said its closely watched Business Outlook Survey suggested that the small amount of slack that had remained in the economy in the third quarter “has been absorbed,” as companies reported rising pressures in production capacity and labour shortages in much of the country, with the exception of the Prairies.

For the first time, the bank also published its Canadian Survey of Consumer Expectations, which showed that consumers remain buoyant about spending plans over the next year, despite a mixed outlook for employment and modest wage growth expectations. The survey showed that consumers generally expect house prices to accelerate, although overall inflation expectations eased slightly from the third quarter. (…)

SENTIMENT WATCH

SentimenTrader:

Primarily because of a large, sudden uptick in these speculative bullish strategies, and a continued lack of interest in anything that smacks of protecting the downside, the Options Speculation Index jumped again, this time to a 19-year extreme.

imageBecause the bubble years distort the scale, if we only look at data since the end of the financial crisis, we can see just how much speculation has jumped in the past few weeks, and how extreme it is relative to any other week during this tremendous bull run.

Fewer in U.S. Continue to See Vaccines as Important

Widespread public support for childhood vaccines creates a wall preventing contagious diseases like measles and polio from spreading in the U.S., but a breach in that wall appeared in 2015 and it has not been repaired. A recent Gallup survey finds 84% of Americans saying it is extremely or very important that parents vaccinate their children. That matches Gallup’s prior reading in 2015 but is down from 94% in 2001.

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