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: 20 DECEMBER 2019

RECESSION WATCH
The Conference Board Leading Economic Index® (LEI) for the U.S. was Unchanged in November

The Conference Board Leading Economic Index® (LEI)for theU.S. was unchanged in November, remaining at 111.6 (2016 = 100), following a 0.2 percent decline in both October and September.

“The US LEI was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. (…)

Advisor Perspectives has the important charts:

Conference Board's LEI

The 6-m m.a. of the 6-m change is flashing yellow, but December’s LEI would need to drop 1.0% for the 6m-6m to dip below zero.

Smoothed LEI

The 12m-12m is also not about to get negative. It needs to decline below 109 by April:

Scott Minerd, Global CIO at Guggenheim Partners, asserts that “every US recession has been preceded by 3 negative months of LEI. Since #LEI began in 1959, 3 consecutive monthly declines have resulted in a #recession within 6 months 7 out of 11 times…Three consecutive declines are a necessary but insufficient condition, but 4 negative prints will seal the deal.”

Well, we got the 3 negative months between August and October but November was unchanged! Now what?

To be watched:

image

U.S. Home Sales Pick Up in Second Half of Year Tight supply of homes, especially on the cheaper end of the market, continues to be a limiting factor

Existing-home sales were up 2.7% in November from a year earlier, the fifth straight month of year-over-year gains, the National Association of Realtors said Thursday.

While home sales were down 1.7% compared with October at a seasonally adjusted annual rate of 5.35 million, economists said there are fresh signs that buyers are becoming more confident after a lethargic first half of the year. Sales sputtered through most of the spring selling season, when activity is normally high, falling annually every month until the summer.

Now, historically low mortgage interest rates and an increase in millennials looking to buy their first home are luring more buyers into the market. Millennials account for nearly half of home-purchase mortgage originations, according to data from Realtor.com. (..)

Limited housing stock has contributed to higher home prices this year, with the median sales price for an existing home in November up 5.4% on year at $271,300. (…)

Sales of homes priced at $250,000 and below declined in November from a year ago, while sales of those in the $500,000-to-$750,000 range posted the strongest gains, rising 8.0%. (…)

Housing related charts from Haver Analytics and The Daily Shot:

 image image

image

SENTIMENT WATCH

Back to bullish (bearish?) via The Daily Shot:

SentimenTrader says that it has been 41 weeks since more than two thirds of investors said they were optimistic,  one of the longest streaks in the last 30 years. “After the ends of other long streaks with subdued sentiment, the S&P 500 most often carried higher over the next week, but then ran into some issues. Over the next 2-3 months, its returns suffered. They were not only below random, but the median was negative, and the risk/reward was poor. Granted, many of those negative returns were prior to the last decade, but even over the past 5 years, the 3-month returns were not great.”

From CMG Wealth’s Steve Blumenthal:

  • NDR Crowd Sentiment Poll: Extreme Optimism (S/T Bearish for Equities).

The current weekly sentiment reading is 68.8. It was 65.3 last week.  The current regime is highlighted in yellow.

NDR measured 92 incidences of Crowd Sentiment extremes since 1996.  There have been 92 extremes since 1996. The crowd was right just one time and wrong 91 times. Had one followed the crowd at the time at those extremes, one would have lost over 12,000 S&P 500 points (according to NDR).  The last Extreme Pessimistic was reached on December 24, 2018 and the last Extreme Optimistic was reached in early April 2019.

It is important to note, the most attractive Extreme Pessimism buy signals have historically occurred with readings below 47.  The most attractive sell signals have historically occurred with readings above 70. Call them super extreme “extremes.”  These are the most important levels I am keeping my eye on when it comes to investor sentiment.

Source: Ned Davis Research

  • NDR Daily Trading Sentiment Composite: Extreme Optimism (S/T Bearish for Equities).

Current regime is highlighted in yellow below.

  • Current daily sentiment reading is 73.33. It was 55.56 last week.
  • Buying opportunities occur at “Extreme Pessimism” readings below 41.5.  Selling/trading opportunities occur at “Extreme Optimism” readings above 62.5.
  • Note: The most attractive buying opportunities have historically occurred with readings below 25 (faded red arrow).  While the strongest sell signals have occurred with readings above 75.

Source: Ned Davis Research

  • 13/34–Week EMA Trend Chart:

At yesterday’s close:

image

THE DAILY EDGE: 19 DECEMBER 2019

Cass Transportation Index Report November 2019

(…) Shipment volumes, which have been negative y/y all year, fell 3.3% y/y in November. We’ve been talking for several quarters now about how we’re in another freight recession (the other being 2015-2016) during this long-tenured economic expansion in the U.S., which shows most clearly in the rail carload, LTL tonnage, and Cass shipment data. Some of this is due to an inventory destock (primarily at the retail level), while much is due to the softening industrial economy (where we believe inventories are still elevated). Moving into 2020, we expect volumes to flatten out but not surge much, and a turn to positive y/y comps in the shipments index could be seen as soon as January 2020.

Cass Shipments Index November 2019

(…) we show in the graph below that the Cass TL Linehaul Index has a strong correlation to the quarterly yield metrics reported by the publicly traded TL carriers. This index should be watched intra-quarter to see any changes to trends that may impact the stocks. Presently, going off this data and from conversations we’ve had with several carriers this past week, we see 4Q19 as a soft quarter for both pricing and volumes among trucking companies.

Cass Truckload Index w Carrier Data November 2019
Trump Administration Weighs Plans to Reduce Student Debt President Trump has asked advisers for a plan to help Americans with their student-loan debt, according to senior administration officials. Proposals being discussed would aim to counter Democrats’ debt-forgiveness plans.
Chinese State Investors Extend Help to Troubled Lender China’s sovereign-wealth fund is bailing out troubled lender Hengfeng Bank, the latest show of government support for the banking sector, which has come under intensifying financial stress as the economy slows.
Negative-Rates Pioneer Goes to Zero Sweden’s central bank, one of the pioneers in wielding negative interest rates, became the first to end that policy, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure.

(…) On Thursday, the Riksbank raised the key rate to zero from minus 0.25%. The bank moved because a majority of its policy makers expect inflation to be close to its 2% target over the coming years. Some policy makers have also become more concerned that a longer period of negative interest rates could lead businesses and households to take on too much debt, or force banks to charge to accept deposits, which could lead to a rush into cash.

But it signaled caution, indicating it has no plans to raise its key rate further in the coming year. Underlining that caution, two of the six members of the executive board— Anna Breman and Per Jansson —opposed the move, preferring to wait until it’s clear that inflation will remain around target. (…)

In the eurozone, negative rates are exceedingly controversial in countries like Germany, where many fear they keep unproductive companies alive, hurt bank profits and subsidize profligate governments by making debt extremely cheap. (…)

By discouraging commercial banks from parking their money at central banks, negative rates prod financial institutions to lend at low cost to other banks, businesses and consumers, in turn pushing people to borrow more, spend more and save less. Negative rates can also weaken the national currency, delivering a boost to exports and increasing prices of imported goods to fuel inflation.

That dynamic has partly worked in Sweden, helping to boost growth and employment. Swedish economic growth surged in 2015, and remained above that of the neighboring eurozone in most subsequent years, while its jobless rate has edged lower. (…)

Subzero rates have also pushed more money into equities and bonds, with holdings in mutual fund reaching all-time highs since rates went negative, said Gustav Sjöholm, savings economist at the Swedish Investment Fund Association. (…)

(…) “If the ECB would also make this move, Denmark would move automatically as it’s pegged, the Swiss would also be likely to follow through and we would see a move away from negative rates in the Eurozone. This is basically our bet.’’ (…)

Might also push U.S. yields higher and the USD lower…

Sanctions-hit Huawei plans components plant in Europe

(…) The chairman added: “In the area of 5G technology, we are already no longer dependent on the supply of chips and other components from American companies.” (…)

THE “TRADE DEAL”

Mike Pillsbury, Hudson Institute, interviewed by Lou Dobbs (via China Debate):

DOBBS: ‘I want to establish first whether there is text to all of it.’

PILLSBURY: ‘There are some limited texts. Whether the President wants to announce the whole thing with the long, written agreement, I’m not sure.’

  • ‘There’s a matter here that the Chinese may have given him so much that he doesn’t really want to embarrass them by making it all public.’

Gao Feng, a spokesman at the Chinese commerce ministry (Reuters):

“After the official signing of the deal, the content of the agreement will be made public,” Gao said.