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: 12 DECEMBER 2019

Federal Reserve Keeps Interest Rates Steady, Sees Long Pause Officials indicate comfort with leaving policy on hold through next year, while keeping eye on economy

(…) “Our economic outlook remains a favorable one,” said Fed Chairman Jerome Powell. The rate-setting committee voted 10-0 to leave the central bank’s benchmark rate in a range between 1.5% and 1.75%, the first unanimous vote since May.

New projections released after the meeting showed most officials think rates are low enough to stimulate growth. If their favorable outlook holds, most expect they could leave rates unchanged through 2020. In that scenario, most see the Fed raising rates once or twice after that. (…)

“As you can see, inflation is barely moving, notwithstanding that employment is at 50-year lows—and expected to remain there,” Mr. Powell said. “And so the need for rate increases is less.” (…)

“I would want to see a…significant move up in inflation that’s also persistent before raising rates to address inflation,” he said. (…)

The FOMC’s official forecast is for core personal consumption expenditures (PCE) at +1.6% in 2019, 1.9% in 2020 and 2% by 2021.

Inflation Isn’t Likely to Take Off Anytime Soon

Consumer prices rose at a 2.1% annual pace in November, from 1.8% in October, mainly due to higher energy and shelter costs, the Labor Department said Wednesday.

Meanwhile, U.S. unit labor costs—a measure of labor costs and production output—were revised down sharply for the second and third quarters in a Tuesday productivity report.

The readings suggest that companies have less pricing power because of factors including globalization and consumers’ growing tendency toward comparison shopping, say economists, who expect these trends to continue even though U.S. unemployment is at historic lows and companies face higher prices for some products tied to tariffs. (…)

The Cleveland Fed’s Median CPI measure is steady at +2.4% annualized but the 16% trimmed-mean CPI is stuck in the 3.0-3.5% range:

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The Atlanta Fed’s sticky/flexible CPI provides another perspective on inflation trends: Sticky Prices (total is same as core) are now up 2.8% YoY, up from 2.1% one year ago and 2.4% last June. Flexible Prices have decelerated from the 2.0-3.0% range of 2017-18 to –0.5-+0.5% in 2019 while Flexible Core prices have slowly accelerated from negative to between 0% and 1.0% in the last 12 months.

fredgraph (22)

Given the FOMC’s focus on inflation expectations, the Atlanta Fed’s analysis is interesting:

(…) because sticky
prices are slow to change, it seems reasonable to assume
that when these prices are set, they incorporate expectations
about future inflation to a greater degree than prices that
change on a frequent basis. (…) the evidence
indicates that the flexible-price measure is, in fact, much
more responsive to changes in the economic environment—
slack—while the sticky-price variant appears to be more
forward looking. (…)

In terms of the overall, or “headline”
CPI, we judge that about 70 percent of it is composed of
sticky-price goods and 30 percent of flexible-price goods.
About half of the flexible-price CPI comprises food and
energy goods, the remainder being largely autos, apparel,
and lodging away from home. The sticky-price CPI includes
many service-based categories, including medical services,
education, and personal care services, as well as most of
the housing categories which, by construction, change only
infrequently. (…)

We find that forecasts of the headline CPI that are based
on the sticky-price data tend to be more accurate than the
forecasts based on headline inflation. Further, CPI predictions
using sticky-price data perform pretty well relative to
CPI forecasts using core CPI data. (…)

So we have 70% of the CPI, the sticky part, rising 2.8% YoY in November and trending up, muted down to the 2.0% range by Flexible Prices hovering around zero.

Conclusion: total inflation is not accelerating but one should be flexible on that…

For the Rule of 20 Valuation Barometer, the inflation component declined from 2.4% to 2.3% in November but, based on the above, it seems unlikely to provide much upside to P/E ratios in the near future. This is happening when trailing EPS are flat to down, creating a widening gap between Fair Value (yellow line) and the Index (blue) with valuation into the “Rising Risk” area. With little or no backwind, the ship must stay away from reefs and unamicable environments…

image

  • The 13/34–Week EMA Trend Chart (CMG Wealth) remains positive:

THE DAILY EDGE: 11 DECEMBER 2019

CPI for all items increases 0.3% in November

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.3 percent in November on a
seasonally adjusted basis, after rising 0.4 percent in October, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index increased 2.1 percent before seasonal adjustment. (…)

The index for all items less food and energy rose 0.2 percent in November, the same increase as in October. Along with the indexes for shelter, for medical care, and for recreation, the indexes for used cars and trucks and for apparel also rose in November. The new vehicles index fell in November, as did the index for airline fares.

The index for all items less food and energy rose 2.3 percent over the last 12 months. The food index rose 2.0 percent over the last l2 months, while the energy index declined 0.6 percent over the last year.

image

U.S. and Chinese Negotiators Planning for Delay of Tariffs U.S. and Chinese trade negotiators are laying the groundwork for a delay of a fresh round of tariffs set to kick in Dec. 15, though President Trump hasn’t yet decided and has overridden his advisers on trade several times to add tariffs.

(…) With both sides hinting that negotiations could be extended beyond Dec. 15, Mr. Trump has gone back and forth in his public remarks between threatening a prolonged trade battle and trying to calm jittery investors. (…)

The talks are dragging on. Working-level negotiators talk on most days, but as of Friday, lead negotiators on both sides hadn’t spoken for 10 days. U.S. Trade Representative Robert Lighthizer has been tied up trying to get Mexico to agree to terms on the U.S.-Mexico-Canada Agreement.

The biggest holdup in the U.S.-China negotiations is Washington’s demand that China guarantee its pledge to buy more American soybeans, poultry and other agricultural products.

For the Americans, purchases are the centerpiece of the limited deal. Mr. Trump has made clear that more farm buys from China are his top priority for a near-term deal with Beijing. The American farmers who would benefit are Mr. Trump’s key supporters in his re-election bid next year. A recent study by Chad Bown of the Peterson Institute for International Economics and Emily Blanchard and Davin Chor of Dartmouth argues that Republicans lost five seats in the 2018 Congressional elections because of the tariff war. Privately, administration officials generally agree with the assessment and are looking for a China deal they can claim as a victory. (…)

Chinese negotiators, led by Vice Premier Liu He, have pushed back against the demand while arguing that any guaranteed purchases would violate the rules of the World Trade Organization and cause friction between China and its other trading partners.

Mr. Liu’s team has also been trying hard to get the U.S. not just to eliminate the December levies but also to relax portions of the existing tariffs on the $360 billion of Chinese imports. But Mr. Lighthizer has so far held firm on not rolling back tariffs—a point of leverage seen as key to keeping the Chinese side engaged in negotiations over knottier issues such as subsidies and forced technology transfers. Other senior officials have indicated they are willing to eliminate the last round of tariffs, on $110 billion of Chinese goods. (…)

In a notable shift, a People’s Daily editorial on Monday called for coolheadedness in dealing with the U.S. And some Chinese officials are saying privately that trade, the issue over which bilateral relations first began to crumble, could now help to put a floor under worsening ties. (…)

Why not Phase 1a, then 1b…all the way to phase 3x.

A lack of trust between Beijing and Washington is hampering the conclusion of an interim trade deal, with China doubting whether it can rely on any agreement made with President Donald Trump and the US unconvinced Beijing will deliver on promised reforms, according to former US government officials. (…)

“If I’m China, I would be concerned whether the deal Trump agrees to is the one he agreed to tomorrow and the next day. If I’m Trump, I would see the big problem for me is to convince China that what I offer is really what I will stand by [and] that is my word,” he said. (…)

Trump’s Nafta Rewrite Gets Signoffs; Senate to Vote in 2020
Huawei Wins Telefonica Deal to Help Build German 5G Network
Small Business Optimism Sees Major Spike in November

The Optimism Index rose 2.3 points in November to 104.7, an
exceptional reading and the largest month-to-month increase since
May 2018. Seven of the 10 Index components advanced, led by a 10-
point improvement in earnings. The NFIB Uncertainty Index fell 6
points in November to 72, adding to the 4-point drop in October and
the lowest reading since May 2018. Reports of higher nominal sales in
the past three months and expansion outlook improved significantly.

The frequency of plans to raise compensation rose 4 points in
November to its highest level since December 1989. Actual job creation
in November exceeded that in October, as small businesses continued
to hire and create new jobs. Reports of higher selling prices remained
subdued, so rising labor costs are still not pushing up inflation on Main
Street. Overall, the Main Street economic machine continued to push
the economy forward.

Small businesses but no small enthusiasm in the headline. The Outlook measure rose 3 to 13 but remains very shy from 20 last July and 48 two years ago.

image

Sales have improved lately against declining expectations.image

Small business people want to raise comp. but actual comp has declined a little.image

Higher sales and lower comp = higher profits:image

Wage growth rates since 1989:

fredgraph (20)

Nearly 80% of the survey participants employ less than 20 employees. This chart plots ADP’s small biz employment trend. The statement that “small businesses continued to hire and create new jobs” remains true…for now.

fredgraph (21)

FYI, employers with less than 20 employees have created 22% of all jobs in the U.S. since January 2008.

U.S. Productivity Weakness Revised Little; Unit Labor Costs Still Firm

Productivity growth in the nonfarm business sector last quarter was revised to -0.2% at an annual rate (+1.5%) y/y from -0.3%, following a 2.5% Q2 rise. It was the first decline in productivity since Q4’15. (…)

Compensation growth was revised significantly to 2.3% (3.7% y/y) from 3.3% reported last month. Growth during Q2 also was sharply reduced to 2.5% from 4.9%. The weakness in productivity combined with less compensation growth lessened the rise in unit labor costs to 2.5% from 3.6%. During the second quarter, the revision reduced the gain to 0.1% from 2.4%. (…)

Some revisions! These stats are not very productive when released, are they?

Russia’s Gas Pipeline Faces Sanctions Under U.S. Defense Bill U.S. lawmakers are pushing ahead with enactment of new sanctions meant to prevent the completion of a new pipeline constructed to carry Russian natural gas to Germany.
France Is Increasing Retirement Age From 62 to 64
US banks set the stage for rebound in fourth quarter Citi, JPMorgan and Goldman upbeat following grim end to year before

The FT assembled recent comments from several bankers raising hopes that Q4 looks better than the first 9 months. For instance, JPMorgan finance boss Jenn Piepszak changed her qualification of Q4 revenues to “meaningfully up” from a previous guidance of simply “up”.

S&P 500 earnings are seen down 0.2% in Q4, thanks largely to Financials expected to grow earnings by 12.6%.

Chevron, Facing Fossil Fuels Glut, Takes $10 Billion Charge Chevron is writing down the value of its assets by more than $10 billion, a concession that in an age of abundant oil and gas some of its holdings won’t be profitable anytime soon.