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: 21 NOVEMBER 2019

China Invited U.S. Trade Negotiators for More Talks China’s chief trade negotiator has invited his American counterparts for a new round of face-to-face talks, according to people briefed on the matter, as both sides are struggling to strike a limited deal to help de-escalate tensions.

(…) U.S. negotiators have indicated they would be willing to meet in person, according to the people, but that they would be reluctant to trek across the Pacific unless China makes it clear that it would make commitments on intellectual-property protection, forced technology transfers and agricultural purchases.

Chinese Commerce Ministry spokesman Gao Feng said Thursday that the two sides have been keeping in close touch. Chinese officials hope the in-person negotiations can take place before next Thursday’s Thanksgiving holiday in the U.S., but the U.S. side hasn’t committed to a date. (…)

(…) Asked if he would secure a pact by the end of the year, Mr. Trump said, “China would much rather make a trade deal than I would” and added, “I haven’t wanted to do it yet. Because I don’t think they’re stepping up to the level that I want.”

The president also said he was “looking at” exempting Apple from a coming round of China tariffs. “We have to treat Apple on a somewhat similar basis as we treat Samsung, ” he said. (…)

South Korea-based Samsung Electronics Co. , an Apple competitor, has shifted its smartphone production out of China. Because the devices are produced elsewhere, they aren’t subject to tariffs on China-made imports. (…)

(…) In a dinner speech in Beijing on Wednesday, Chinese Vice Premier Liu He said he was “cautiously optimistic” on a phase one deal, Bloomberg News said, citing people who attended the event ahead of a forum organized by Bloomberg LP.

Liu, China’s chief negotiator at the trade talks, separately told one of the attendees that he was “confused” about the U.S. demands, but was confident the first phase of a deal could be completed nevertheless, Bloomberg added. (…)

On Thursday, the ruling Chinese Communist Party’s main newspaper, the People’s Daily, urged the United States to “rein in the horse at the edge of the precipice” and stop interfering in Hong Kong matters and China’s internal affairs.

“If the U.S. side obstinately clings to its course, the Chinese side will inevitably adopt forceful measures to take resolute revenge, and all consequences will be borne by the United States,” it said in a front-page editorial.

FYI (from the FT):

image
Global Economy to Stagnate if Trade War Persists, OECD Warns The economy is at risk of settling into a low-growth rut without urgent action to roll back recently erected obstacles to trade and greater investment in tackling climate change, the OECD said.

In its quarterly report on the outlook for the global economy, the Paris-based research body said it continues to expect that world output of goods and services will increase this year at the slowest pace since the financial crisis. But it doesn’t now expect any pickup in global economic growth next year, and only a modest acceleration in 2021. (…)

The OECD lowered its forecast for global economic growth in 2020 to 2.9% from the 3% it expected in September. That would mark an unchanged pace of expansion from 2019. This time last year, the OECD had expected growth of 3.5% in each year. The OECD expects U.S. economic growth to slow to 2% next year and in 2021, from 2.3% this year.

That missing growth is largely attributable to trade disputes, Ms. Boone said, noting they would reduce global economic output by between 0.5% and 0.7% in both 2020 and 2021. (…)

The OECD expects the eurozone economy to grow 1.1% in 2020, almost half the U.S. rate, with a slight pickup to 1.2% in 2021. (…)

EARNINGS WATCH

We now have 468 company reports in. Actual earnings growth for the 468 companies having reported so far is –0.5% on revenue growth of +4.0%. The beat rate is 75%, the surprise factor +4.5% and the blended growth rate –0.4% (+2.2% ex-Energy), down from +0.3% on July 1

By comparison, after 468 reports during Q2, the beat rate was 73%, the surprise factor +5.5% and the blended growth rate +3.0%, up from +0.3% on July 1. Actual earnings growth for the 468 companies having reported was +3.2% on revenue growth of +4.9%.

Excluding the effect of buybacks, Refinitiv estimates that Q3 net income declined 2.4% on revenues up 3.8%, a marked deterioration from Q2 when net income rose 2.0% on revenues up 4.7%. Q4 net income is currently expected to decline 2.2% on revenues up 3.9%. This revenue growth estimate looks on the high side given the decelerating GDP growth rate and soft inflation numbers.

Buybacks will boost EPS by 2.3% in Q4 and 2.1% in the first half of 2020 from +2.0% in Q3’19 and +1.2% in Q2’19.

Trailing EPS are now $163.97, down from $164.29 at the same time in Q2 and 0.3% lower than the $164.43 and $164.31 at the end of August and September respectively.

Q4 estimates keep being ratcheted down to +0.1% (+2.3% ex-Energy from +5.0% 2 weeks ago). This is down from +4.1% on Oct.1.

SENTIMENT WATCH
Stocks are likely to slide in coming weeks because market-timers are too bullish

(…) How bullish are the market timers right now? Consider the average recommended equity exposure among a subset of several dozen short-term stock market timers that my firm monitors on a daily basis. (This average is what’s reported by my Hulbert Stock Newsletter Sentiment index, or HSNSI.) Right now, as you can see from the accompanying chart, this average stands at 65.6%. That’s higher than more than 95% of all daily readings since 2000. (…)

  • NDR Crowd Sentiment Poll (NDR vis CMG Wealth): The current weekly sentiment reading is 69.4. It was 67.7 last week.  The current regime is highlighted in yellow.

  • NDR Daily Trading Sentiment Composite (NDR vis CMG Wealth):
 image image

  • Buy high/sell low chart (Ed Yardeni):

image

TECHNICALS WATCH

Money Money Facing Real Estate Slowdown, Billionaire Regrets Building Megamansion Developer Jeff Greene is planning to relist the property for $129 million amid a glut of ultraluxury properties in Los Angeles.
Surprised smile Investors Lose Their Marbles as MSCI U-Turn Spurs 98% Stock Plunge Stock in marble miner ArtGo crashed 98% in a morning, shedding $5.7 billion of market value, after MSCI Inc. dropped plans to add the Hong Kong-listed company to its indexes.

(…) Two weeks ago, New York-based MSCI said it planned to include ArtGo in its MSCI China Index. But on Wednesday, the index compiler reversed course, saying ArtGo wouldn’t make the cut after “further analysis and feedback from market participants on investability.” (…)

Mr. Webb also said index compilers needed to improve their selection criteria, for example by examining if extremely high valuation multiples were justified. “It is too lazy to just look at market capitalization and turnover,” he said. He said this could lead to index-tracking funds suffering if bubbles burst. (…)

Mr. Webb has also criticized MSCI for including Hong Kong-listed China Ding Yi Feng Holdings Ltd. in its indexes. The company had rallied 8,500% in five years, despite reporting annual losses from 2013 to 2017. Since March, the stock has been suspended, and Hong Kong’s securities regulator has said it is investigating the price spike.

FTSE Russell, the index arm of London Stock Exchange Group PLC, added ArtGo to its FTSE Global Equity Index Series China index in September. (…)

Nerd smile So, indexers don’t do any more research than index investors do…

The U.S.’s Quest for Military Unity on China Comes Up Short in Asia Defense Secretary Mark Esper received a chilly reception this week when he appealed to allies in Asia for a unified response to Chinese aggression, a new sign of potential trouble for the administration’s policy in the region.

THE DAILY EDGE: 20 NOVEMBER 2019

Stalled U.S.-China Trade Talks Raise Threat of Impasse The talks are in danger of hitting a deadlock, threatening to derail the Trump administration’s plan for a limited pact this year as both sides stand firm on key issues including tariffs and agricultural purchases.

(…) “China is going to have to make a deal that I like,” President Trump said Tuesday at a cabinet meeting. “If we don’t make a deal with China, I’ll just raise the tariffs even higher.” (…)

Still, the Trump administration can’t easily abandon the talks and impose more tariffs on China because such a move would risk hurting U.S. farmers further. (…)

Looming now are plans by the Trump administration to impose 15% tariffs on smartphones, toys and other products from China on Dec. 15. The levies are expected to directly hit consumers as Mr. Trump gears up for his 2020 re-election campaign.

Trade negotiators had originally hoped a deal could be signed by Mr. Trump and China’s President Xi Jinping on the sidelines of an economic summit in Chile on Nov. 16-17. But that summit was canceled, effectively removing what had served as a de facto deadline. (…)

(…) Two people briefed on the talks said Trump has decided that rolling back existing tariffs, in addition to canceling a scheduled Dec. 15 imposition of tariffs on some $156 billion in Chinese consumer goods, requires deeper concessions from China.

“The president wants the option of having a bigger deal with China. Bigger than just the little deal” announced in October, said Derek Scissors, a China scholar with the American Enterprise Institute in Washington. (…)

Goldman Sachs provide these insights (!):

Overall, while we think the risks of a tariff cut and a tariff increase have both risen [Confused smile] , the balance of risks now leans toward lower tariffs in our view. (…)

There are two potential complications to this view. First, we note that the Senate has just passed the Hong Kong Human Rights and Democracy Act. That bill, which the House passed in a slightly different form in October, would require the State Department to annually certify that Hong Kong enjoys a “high degree of autonomy” from mainland China, among other provisions. China’s Ministry of Foreign Affairs has said China “will take strong countermeasures” if the bill is enacted into law, and has urged the US to “pull back before it’s too late.” Now that the Senate has approved the bill, the House could pass it fairly quickly. If so, it might reach the President’s desk in the next few weeks, potentially around the same time that US-China trade negotiations might conclude.

Second, congressional approval of the US-Mexico-Canada Agreement (USMCA) might also relieve some of the political pressure on the White House to deliver an accomplishment on trade policy. USMCA passage looks increasingly likely over the next several weeks, though it might not come by the December 15 deadline.

U.S. Housing Starts & Building Permits Strengthen

The housing market remains on a firm footing. Housing starts increased 3.8% (8.5% y/y) during October to 1.314 million (SAAR) after easing to 1.266 million in September, revised from 1.256 million. The Action Economics Forecast Survey expected 1.310 million starts for last month.

Multi-family starts improved 8.6% (9.2% y/y) to 378,000 following a 25.3% drop during September. Single-family starts increased 2.0% in October (8.2% y/y) to 936,000, the fifth consecutive monthly increase.

Starts improved in most regions of the country. Starts in the West rose 17.6% (6.8% y/y) to 361,000. It was the highest level since March 2018. In the Midwest, starts improved 8.7% (-6.4% y/y) to 175,000 and recovered roughly half of September’s decline. Starts edged 0.7% higher (15.6% y/y) in the South to 689,000. Starts tumbled 21.9% (-1.1% y/y) in the Northeast to 89,000, the lowest level since May.

A 5.0% rise (14.1% y/y) in building permits to 1.461 million portends further improvement in new construction activity. It was the highest level since May 2007. Permits to build multi-family homes increased 8.2% (26.9% y/y) while single-family permits rose 3.2% (7.4% y/y).

image

Retail Results Send Mixed Signals on Consumer Spending Retailers gave a mixed read on consumer spending heading into the key holiday season, with Kohl’s and Home Depot reporting weak sales, but discounter TJX continuing to log strong sales

(…) TJX, parent of the TJ Maxx and HomeGoods chains, reported a 4% jump in comparable sales for the quarter ended Nov. 2 and raised its profit forecast for the year.

Executives cited strong traffic to its stores and an abundance of merchandise that the discount chain can buy to fill its shelves. (…)

Amazon Is Planning to Open Cashierless Supermarkets Next Year

Amazon.com Inc. is preparing to open Amazon Go supermarkets and pop-up stores, an expansion of the company’s cashierless ambitions that includes the possibility of licensing the technology to other retailers.

The new store formats and licensing initiative could launch as soon as the first quarter of 2020, according to a person familiar with the project. Amazon is testing a supermarket equipped with Go technology in a 10,400-square-foot retail space in Seattle’s Capitol Hill neighborhood. (…)

The company already operates the Whole Foods Market chain and last week confirmed plans to launch a separate supermarket brand, starting with a location in the upscale Woodland Hills neighborhood of Los Angeles. Those stores will have human cashiers. The previously unreported plan to expand Go revives Amazon’s original vision of creating full-size grocery stores without checkout lines.

Amazon opened the first Go convenience store at its Seattle headquarters almost two years ago and now operates 21 locations around the U.S.  It’s not clear how much money the company has lavished on the project, but some of the 1,000 or so people working on it were recently told their cumulative salaries have totaled more than $1 billion since the project got underway in 2012, the person said. (…)

The Go team, which recently folded previously separate hardware groups and engineering support staff into a new entity called Physical Retail Technologies, has spent the past two years streamlining the technology. The efforts were aimed at making the existing Amazon Go stores more profitable and the guts of the system cheap enough to entice other retailers, said the person, who requested anonymity to discuss an internal project. (…)

Newer versions of Go’s hardware feature fewer backroom servers and more efficient cameras, software and networking capabilities, substantially cutting the cost of setting up a new store, the person said.

Amazon had originally envisioned a larger Go supermarket before abandoning the concept in favor of simpler, smaller convenience stores. Most Go locations are close to 2,000 square feet and stock grab-and-go staples—cold drinks, packaged sandwiches, salads—and a smaller selection of such household items as cold medicine and phone chargers. (…)

Amazon aims to support stores as large as 30,000 square feet, the size of a typical modern supermarket. (…)