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: 4 DECEMBER 2019

Thumbs up Thumbs down U.S., China Move Closer to Trade Deal Despite Harsh Rhetoric

(…) U.S. negotiators expect a phase-one deal with China to be completed before American tariffs are set to rise on Dec. 15, the people said. Outstanding issues in the talks include how to guarantee China’s purchases of U.S. agricultural goods and exactly which tariffs to roll back, they added. (…) Clock

COMPOSITE PMIs

November’s final IHS Markit Eurozone PMI®
Composite Output Index continued to signal
marginal growth of the euro area’s private sector.
Posting 50.6, unchanged on October and slightly
better than the earlier flash reading of 50.3, the
index remained amongst the lowest levels in the
past six-and-a-half years.

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The services economy again remained the primary
driver of overall growth, despite its positive
contribution waning slightly since October. In
contrast, manufacturing output fell again, extending
the current period of contraction to ten months.
However, the drag on overall economic activity from
manufacturing continued to ease as goods
producers indicated their slowest fall in production
since August. (…)

imageLevels of incoming new work to euro area private
sector companies were unchanged during
November, following two successive months of
decline. Weakness again emanated from foreign
demand sources, with latest data showing that new
export business was down for a fourteenth
successive month. Although the rate of contraction
softened to its lowest since June, it nonetheless
remained marked.

With no change in overall new work enabled
companies to again comfortably keep on top of
existing workloads. Levels of work outstanding
were reduced in November for a ninth successive
month, albeit modestly.

An increase in capacity via another round of
employment growth was also reported by
companies. Payroll numbers have now increased continuously for over five years, with all countries
registering a rise in employment since October.

Prices data indicated another increase in operating
expenses, although with ongoing falls in
manufacturing input costs signalled, the rate of
inflation was close to September’s three-year low.
Competitive pressures meanwhile weighed on
company pricing power, with November’s survey
data again signaling only a marginal increase in
prices charged.

Finally, confidence about the future improved
during November to its highest level since July,
though remained well below par. With the exception
of Italy, sentiment was higher across the eurozone.

The IHS Markit Eurozone PMI® Services
Business Activity Index moved slightly lower in
November, posting 51.9, compared to 52.2 in the
previous month. The latest reading was the second lowest
recorded by the survey since January,
although all nations covered recorded some
expansion of activity.

Modest growth of the service sector was
underpinned by a similarly muted increase in new
business volumes. Gains in new work continued to
be undermined by ongoing falls in services exports.
Job creation was sustained in November at a solid
rate that was the fastest since August. This
additional capacity again enabled companies to
keep on top of their existing workloads, as indicated
by a fourth successive monthly decline in work
outstanding.

Additional employment helped explain another rise
in company operating expenses, which increased at
a notable pace in November. Output charges in
contrast continued to rise only modestly.

Looking ahead to the coming 12 months, service
providers were on balance confident of an increase
in activity from present levels. Sentiment was at its
highest level since July, though remained well down
on the historical series average.

Chris Williamson, Chief Business Economist at IHS
Markit

“The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread. (…)

“The near-stalling of the economy has been
accompanied by some of the weakest price
pressures we’ve seen in recent years, which
threatens to keep inflation well below the ECB’s
target in coming months and adds to the likelihood
of further policy stimulus early next year.”

The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a solid increase in total business activity across China in November. The Composite Output Index rose from 52.0 in October to 53.2, to indicate the steepest rate of growth for 21 months.

image

The upturn was driven by strong performances across both the manufacturing and service sectors. Notably, service providers registered a solid and accelerated increase in activity midway through the final quarter of 2019. This was highlighted by the seasonally adjusted Chinese Services Business Activity Index rising from 51.1 October to a seven-month high of 53.5 in November. Companies widely commented on planned company expansions, new projects and an improvement in overall demand conditions. At the same time, goods producers noted a marked increase in production, with the rate of growth little-changed from October’s recent high.

The stronger increase in composite business activity reflected a further marked rise in new orders received by Chinese companies in November. In the service sector, new business expanded solidly overall, with the rate of growth picking up since October. A steep increase in new work was also seen across the manufacturing sector, albeit one that was softer than seen in the previous month. At the composite level, new orders expanded at the fastest rate since February 2018.

The amount of new work received from abroad continued to increase across China during November. Service providers recorded a steep and accelerated rise in new export sales, with the pace of expansion picking up to a four-month high. Manufacturing firms meanwhile registered a further marginal rise in new business from overseas. Measured across both monitored sectors, the amount of new work received from foreign clients rose at a modest pace that was identical to that seen in October.

After a modest drop in October, manufacturing firms saw staffing levels broadly stabilise in November. In the service sector, workforce numbers rose marginally, with the rate of job creation edging down to a four-month low. Employment at the composite level nonetheless increased slightly midway through the fourth quarter, offsetting a fractional decline in October.

Sector data for outstanding workloads showed divergent trends, with backlogs rising at manufacturers but falling at services companies. In the manufacturing sector, the rate of accumulation was solid overall, despite easing to a three-month low. In contrast, service providers registered the first decline in unfinished business since August, albeit only slight. Consequently, composite outstanding business rose at a marginal pace that was the weakest for three months.

The rate of input price inflation remained more marked across the service sector than the manufacturing sector in November. Services companies saw a solid increase in operating expenses overall, despite the pace of inflation easing for the second month in a row. Goods producers meanwhile registered only a slight increase in costs. Input prices at the composite level therefore rose at only a modest pace.

Prices charged by service providers rose modestly in November, with the rate of increase little-changed from the prior three months. At the same time, manufacturing firms recorded a fractional decline in selling prices amid reports of a general drop in market prices. As a result, output charges at the composite level rose only slightly for the third successive month.

Business confidence across China regarding output over the next year remained subdued in November, with the overall level of positive sentiment edging down since October. Weaker optimism was driven by the manufacturing sector, which saw expectations soften to a five-month low. Although services companies expressed a stronger level of confidence compared to October, sentiment was still notably softer than the historical trend.

NARRATIVES

The divergence between the ISM and Markit manufacturing PMIs has been much wider than normal for 3 years now. Throughout 2017-18, the ISM continually clocked much above Markit, before falling well below recently as Markit’s has bounced back in positive territory.

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Here’s the close-up with November data, courtesy of Horan Capital Advisors:

Key differences between these 2 surveys:

  • “IHS Markit surveys just under 800 manufacturing companies (approximately double the size of the ISM panel size) from which an 80% response rate is typically received. However, unlike IHS Markit, ISM does not disclose actual numbers of questionnaires received.”
  • “ISM data are based only on ISM members, and as such are likely to only reflect business conditions in larger companies, with small and medium-sized firms under-represented. In contrast, IHS Markit’s survey includes an appropriate mix of companies of all sizes (based on official data showing the true composition of manufacturing output).”

  • “Survey responses may relate to different markets: ISM also does not ask respondents to confine their reporting to US facilities/factories whereas IHS Markit specifies that all responses must relate only to metrics from US factories. ISM data could therefore be more heavily influenced by conditions of US-owned factories in China, for example, than the IHS Markit data.”

Another factor might also relate to ISM’s larger exposure to companies operating in the U.S. Midwest., creating a kind of perfect storm for this indicator: larger companies, more impacted by the economies in the U.S. Midwest (farming, automotive) and potentially influenced by weak manufacturing in Europe and China.

Obviously, anyone’s narrative on the economy or financial markets can pick the survey better fitting his viewpoint or his book. David Rosenberg did just that yesterday:

All those projections of a “bottoming out” in U.S. manufacturing activity were blown out of the water by the November ISM report. (…) That the equity market could even contemplate hitting new highs in such a moribund economic backdrop is just further evidence that there is absolutely nothing fundamental about this latest leg of the rally. (…)

It looks like Mr. Market is currently more inclined to focus on the ISM. But the reality is that Markit has proven to be more accurate, long, mid and short term.

Where David might prove right is that the larger cap manufacturing segment of the market could be in for a tough time. Trends in ISM New Orders are as weak as they get outside of recessions. They declined from 49.1 in October to 47.2 in November. New export orders dropped from 50.4 to 47.9. Backlogs are at 43.0 from 44.1 in October and 45.1 in September.

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SENTIMENT WATCH

TrimTabs Research @TrimTabsIR Dec 2

Corporate insiders still dumping their own #stocks while buying back huge sums with shareholder #cash. #Insiderselling tops $100 billion for the first time in a calendar year since 2007.

#Buybacks disappoint in #earnings season, averaging just $2.2 billion daily. Volume is second-lowest in last eight earnings seasons.

Trump Risks Further Isolation as Macron Relationship Sours The deterioration of President Trump’s relationship with his French counterpart risks leaving the U.S. leader further isolated.

(…) He has also struggled to forge lasting personal partnerships with the leaders of the U.K. and Germany. (…) Mr. Trump, who frequently refers to Chinese President Xi Jinping as a friend, noted on Tuesday that “he doesn’t like me as much lately, but that’s OK. He’ll be back.” (…)

THE DAILY EDGE: 3 DECEMBER 2019: “Mount Tariff Erupts Again”

U.S. Construction Spending Declines Again

The value of construction put-in-place fell 0.8% (+1.1% y/y) during October following a 0.3% September decline, revised from +0.5%. August’s 1.1% increase was revised from -0.3%. A 0.4% October rise had been expected in the Action Economics Forecast Survey.

Private construction declined 1.0% (-1.8% y/y) after falling 1.1% in September. Residential building activity fell 0.9% (+0.5% y/y). A 4.5% decline (+8.2% y/y) in home improvements dragged residential building activity lower. It followed a 4.7% September drop, Single-family building increased 1.6% (-3.1% y/y) while multi-family construction fell 1.6% (-2.1% y/y), down significantly for the third straight month.

Nonresidential construction declined 1.2% (-4.3% y/y) with commercial building off 2.4% (-17.7% y/y). (…) Public construction eased 0.2% (+10.2% y/y) in October. (…)

fredgraph (14)

France Promises EU Retaliation After U.S. Trade Threats French Finance Minister Bruno Le Maire said the European Union would strike back against the U.S. if President Trump follows through on a plan to impose tariffs on French imports, in what could develop into trans-Atlantic tit-for-tat on trade.

French Finance Minister Bruno Le Maire said the European Union would strike back against the U.S. if President Trump follows through on a plan to impose tariffs on French imports, in what could develop into a trans-Atlantic tit-for-tat on trade.

On Monday, the Trump administration proposed tariffs of up to 100% against $2.4 billion of French imports—ranging from cheese and wine to handbags and porcelain—saying the nation’s new digital-services tax unfairly targets U.S. tech companies such as Apple Inc. and Alphabet Inc.’s Google unit.

Mr. Trump, in a news conference in London on Tuesday where he is attending the NATO summit, said “They are American companies, I don’t want France taxing American companies.”

The $2.4 billion in imports threatened with tariffs is slightly less than 5% of the $52 billion worth of goods imported from France in 2018. (…)

Mr. Le Maire said OECD members had come up with a good proposal that took into account U.S. concerns and that they were waiting for a response from the Trump administration. He called on the U.S. to honor its commitment in August, during a Group of Seven summit in Biarritz, to work with OECD members to develop a new tax framework for tech giants. (…)

The French tax applies a 3% levy on revenue that big tech companies reap in France from such activities as undertaking targeted advertising or running a digital marketplace.

In August, President Emmanuel Macron said U.S. and French officials had agreed on a proposal stipulating that France will reimburse U.S. tech companies if they end up paying more taxes under the French tax than they would under taxation rules that the OECD is currently negotiating.

(…) Currency manipulation occurs when countries purchase U.S. dollars to weaken their own currencies, making goods on international markets artificially cheaper.

Neither Brazil nor Argentina has been featured in the U.S. Treasury Department’s currency report, the official vehicle for designating nations as manipulators.

“Brazil has had a free-floating currency for a long time now and that isn’t changing,” said economist Carlos Kawall, chief researcher at ASA Bank in São Paulo. “The real is weakening because interest rates are going down and the dollar is strengthening against emerging-market currencies.”

In recent months, both Brazil and Argentina have instead taken steps to sell dollars from their reserves to support their plummeting currencies, the opposite of buying dollars as currency manipulators do.

“Of course Brazil doesn’t manipulate the currency,” said Monica de Bolle, senior fellow at the Peterson Institute for International Economics, nor does Argentina, she said. She said that Mr. Trump’s gambit could backfire if Brazilian and Argentine exports are hurt. “Then their currencies will inevitably weaken,” she said. (…)

  • “Mr. Trump has also threatened new tariffs on products from China, Mexico, the European Union, Vietnam and elsewhere.” (NYT)

  • Mount Tariff Erupts Again Trump hurts his re-election chances with more trade uncertainty.

(…) It’s hard to know exactly what motivated Mr. Trump’s tweets, and he didn’t say when the Section 232 tariffs would be restored. But he seems to think he can use tariffs as a two-fer to help struggling U.S. steel makers while punishing Argentina and Brazil for displacing U.S. farm exports to China. He’s wrong on every count. (…)

the President can’t use tariffs to punish any country for anything any time he’s in the political mood. Before slapping on new tariffs, his Administration would need to explain how steel imports from Argentina and Brazil are a national security threat. The President’s original Section 232 invocation to protect U.S. steel and aluminum manufacturers was legally dubious, and his new tariffs are more so.

Argentina makes up less than 1% of U.S. steel imports—hardly an economic threat to U.S. steel makers. Imports from Brazil have increased by nearly 50% this year, making up for lower imports from Turkey, Canada and other countries that were hit with the Section 232 tariffs. A weaker real isn’t the culprit.

In any case, the benefit of steel tariffs for U.S. metal manufacturers has largely been offset by the collapse of demand caused in large part by economic uncertainty that his protectionist polices have unleashed. Steel prices have plunged by nearly half since June 2018 amid a global manufacturing recession, ebbing trade flows and less capital investment. (…)

As usual Mr. Trump also sent out contradictory tweets taking credit for a strong U.S. economy while deploring a strong dollar. But the strong U.S. economy attracts capital from around the world, which lifts the dollar. The Fed has already cut interest rates three times this year. No amount of monetary easing is ever enough for Mr. Trump, and no amount of tariffs will satisfy U.S. steel makers.

Pointing up Trump Sees No Deadline for China Deal, Prefers It Post-Election President Donald Trump signaled he would be willing to wait for another year before striking a trade agreement with China, casting doubt on the likelihood of a phase-one accord within weeks between Washington and Beijing.

This followed that:

China expects the U.S. to roll back some tariffs on its exports as part of a trade deal, an official newspaper said Monday, reiterating Beijing’s insistence that President Donald Trump’s administration be “flexible” and “reasonable.”

The Communist Party newspaper Global Times ran several articles Monday that emphasized there would be no deal without a promise to phase out the tariffs imposed by Washington.

It cited officials saying that China will buy American farm products and the amount “could be substantial, but it cannot promise a specific number in the deal because the amount must be based on market demands.” (…)

“Rolling back tariffs is a must. The China-U.S. trade war (was) instigated by the U.S. with tariffs, so the tariffs have to be cut first,” the newspaper quoted Wei Jianguo, a former Chinese commerce minister as saying. (…)

New U.S. tariffs are set to kick in on many Chinese-made products as of Dec. 15. A preliminary deal could avert that. But promising to not implement the next tranche of tariffs would not suffice, the Global Times said.

It said there was a “reasonable choice” for Trump to roll back some tariffs for the first deal and leave others for later, to “save the optics of the deal in the U.S. political climate and save the phase one deal.”

Hmmm…who wants to hold his breadth?

There’s more:

China Hints U.S. Blacklist Imminent in Threat to Trade Talks

Chinese state media said the government would soon publish a list of “unreliable entities” that could lead to sanctions against U.S. companies, signaling trade talks between the two nations are increasingly under threat from disputes over human rights in Hong Kong and Xinjiang.

The Communist Party-backed Global Times said in a tweet early Tuesday that the list was being sped up in response to a bill sponsored by Republican Senator Marco Rubio requiring sanctions against Chinese officials involved in alleged abuses of Uighur Muslims in the far west region of Xinjiang. Beijing has threatened to publish such a list of companies since May, after the U.S. placed restrictions on Huawei Technologies Co. (…)

Meanwhile in the real world:

Two China Firms Miss $526 Million Bond Payments as Woes Grow

Two Chinese companies failed to repay bonds worth a combined half a billion dollars on Monday, underscoring rising debt risks in the highly leveraged nation as the economy slows.

Peking University Founder Group was unable to secure sufficient funding to repay a 270-day, 2 billion yuan ($285 million) bond, according to a company filing to the National Interbank Funding Center. Tunghsu Optoelectronic Technology Co. failed to deliver repayment on both interest and principal on a 1.7 billion yuan bond, according to Shanghai Clearing House.

The quickening speed of bond defaults in China, especially among ailing private firms, highlights the growing financial strain triggered by the country’s worst economic slowdown in three decades and unabated trade tensions with the U.S. Last week, industrial firm Xiwang Group failed to pay a 1 billion yuan bond, missing a fresh repayment deadline on an already defaulted bond. (…)

The drama is far from ending. Shandong-based Xiwang is slated to repay interest Tuesday on a 1 billion yuan, 7-year bond due 2022. The corn oil and steel processor is among a cluster of private firms from the province where they are well known for vouching for each other’s debt.

  • From Almost Daily Grant’s

The Financial Times reported Thursday that state-owned China Construction Bank Corp. has halted work on a 475 meter skyscraper project in the city of Wuhan, Hubei province after the Greenland Holdings Corp Ltd., one of China’s largest property developers with $60 billion in revenue during the 12-months ended Sept. 30, “failed to make a ‘significant’ project payment.” 

According to the FT, more than a dozen “super” skyscraper projects (at planned heights of 300 meters or more), have fallen behind schedule or been postponed outright due to cash flow trouble. “Demand for office space has weakened considerably due to the slowing economy,” Cherry Hu, analyst at Cushman & Wakefield said. “The situation is not going to improve any time soon.”

Hope Fading Fast for Fourth-Quarter Earnings Rebound in S&P 500

Two months into the quarter, analysts have shaved 4% off their estimates to $41.12 a share, a drop of almost 1% compared with a year ago after a 1.3% decline last quarter. While they almost always lower expectations as a period progresses the current pace has been exceeded only twice since 2015. (…)

And in the unreal world:

‘Peak’ Private-Equity Fears Are Spreading Across Pension World

Investors plowing cash into private assets may recall the words of Wall Street legend Barton Biggs: There’s no asset class that too much money can’t spoil.

The Daily Shot offers these telling charts:

Pointing up Two important facts are missing from the valuation chart: one: Q3 valuations reached 12.9x ebitda; two: according to S&P Global, 49% of recent ebitda calculations were “add-backs” or “expected” future cost savings. Fingers crossed

Let’s leave on a positive note:

Global manufacturing outlook improves as PMIs rise in majority of markets

Global manufacturing activity increased for the first time in seven months in November, according to PMI survey data, albeit improving only fractionally. New orders and output edged higher, showing the strongest gains seen so far this year, helping employment levels stabilise for the first time in seven months.

Moreover, headline PMIs rose in more countries surveyed than at any time seen over the past two years, which augurs well for a further improvement in global business conditions in coming months. (…)

Production rose globally to the greatest extent seen since December 2018, accompanied by a similar improvement in new order inflows, albeit with still-subdued rates of increase seen in both cases. Worldwide goods exports continued to fall, pointing to overall growth of manufacturing being held back by lacklustre worldwide trade flows.

The improvement in orders was nevertheless sufficiently strong to encourage manufacturers to bring a halt to the recent trend of job cutting seen over the prior six months, leaving employment levels unchanged in November.

Signs of recent deflationary pressures easing were also evident, with suppliers raising prices for raw materials very slightly and prices charged for goods by manufacturers up for the first time in five months, albeit by the smallest of margins. (…)

More encouragingly, however, PMIs rose in 18 of the 30 markets surveyed in November, a harbinger of better times to come for the headline global PMI. These improvements included faster rates of increase reported most notably in the US and China, as well as Canada, France, India, Brazil, Colombia and Greece, plus a return to growth in Vietnam.

Easing rates of decline were meanwhile reported in Germany and Spain (in turn playing a key role in helping to moderate the rate of contraction of the Eurozone), as well as in Japan, Turkey, South Korea, Indonesia, Malaysia, Poland and Austria. (…)

High five The analysis therefore hints at a strong link between trade war developments and actual manufacturing growth trends globally, suggesting that the future development of trade discussions could be instrumental in steering the direction of the PMI in coming months.