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: 10 JANUARY 2020

Payroll employment rises by 145,000 in December; unemployment rate unchanged at 3.5%

The change in total nonfarm payroll employment for October was revised down by 4,000 from +156,000 to +152,000, and the change for November was revised down by 10,000 from +266,000 to +256,000. With these revisions, employment gains in October and November combined were 14,000 lower than previously reported. After revisions, job gains have averaged 184,000 over the last 3 months [175k for all of 2019].

(…) In December, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $28.32. Over the last 12 months, average hourly earnings have increased by 2.9 percent. In December, average hourly earnings of private-sector production and nonsupervisory employees, at $23.79, were little changed (+2 cents) [+3.0% YoY].

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Surprised smile You Can Now Make $100,000 Working at Taco Bell

(…) The Yum! Brands Inc.-owned chain will test the higher salary in select restaurants in the U.S. Midwest and Northeast, and will also try a new role for employees who want leadership experience but don’t want to be in the management position. Current salaries for general managers at company-owned Taco Bell stores are between $50,000 and $80,000, according to the company. (…)

Restaurants including Olive Garden owner Darden Restaurants Inc. and Shake Shack Inc. have recently called out labor inflation that’s hurting margins. (…)

Poloz warns ‘froth’ could return to Canada’s housing market

In remarks at the Greater Vancouver Board of Trade’s Economic Outlook Forum Thursday, Mr. Poloz attributed the return of strength in housing – particularly in B.C., Quebec and Ontario – to a combination of healthy employment and wage growth, and immigration-driven population gains. That is driving “fundamental demand” that, he said, “appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices.”

However, he cautioned, “We will be watching for signs of a re-emergence of extrapolative expectations returning to certain major housing markets – in short, what we call ‘froth.’ ” (…)

In a news conference after his talk, Mr. Poloz said that the B20 mortgage stress-test rules implemented nationally two years ago, combined with other regulatory and tax measures, have been effective in dampening housing speculation in the Toronto and Vancouver areas. “It cooled those expectations, made it less automatic that people were going to profit by investing in more housing. That has given us somewhat more balanced markets in those hot areas,” he said. (…)

“That is not going to distract us from Job One, which is to stabilize the macroeconomy, and through that to achieve our inflation targets,” he said. “We see the implications for certain housing markets as kind of a side effect of that primary mission.” (…)

In the news conference, Mr. Poloz noted that the fourth quarter was hit by rail and auto strikes, as well as some adverse weather, that may have temporarily dampened the economic data. (…)

Clock Confused smile Trump says China trade deal may be signed shortly after Jan. 15

U.S. President Donald Trump, who announced last month that the Phase 1 trade deal with China would be signed on Jan. 15, said on Thursday the agreement could be signed “shortly thereafter.”

In an interview with the ABC affiliate in Toledo, Ohio, Trump said: “We’re going to be signing on January 15th – I think it will be January 15th, but shortly thereafter, but I think January 15th – a big deal with China.”

Trump proposes rolling back environmental impact law Changes meant to make it easier to get approval for major infrastructure projects
BlackRock Joins World’s Largest Investor Group on Climate Change Move follows criticism that the money manager hasn’t done enough to address climate change

BlackRock Inc. said Thursday that it has joined Climate Action 100+, the world’s largest group of investors by assets pressuring companies to act on climate change, following criticism that the money manager hasn’t done enough to move the needle.

“We believe evidence of the impact of climate risk on investment portfolios is building rapidly and we are accelerating our engagement with companies on this critical issue,” a BlackRock spokesperson said.

Launched in 2017, Climate Action 100+ is a group of more than 370 institutional investors, including the money management arms of HSBC Holdings PLC and UBS Group AG , that now represents around $41 trillion in assets thanks to BlackRock’s membership, up from $35 trillion. The group has successfully pressured oil giants Royal Dutch Shell PLC and BP PLC to set targets to reduce emissions and disclose more data.

“BlackRock is responding to the demands of its asset owner clients and other groups globally that they take meaningful action to address climate change,” said Fiona Reynolds, member of the Climate Action 100+ Steering Committee and chief executive of the Principles for Responsible Investment. (…)

EQUITY VALUATION

At 3275 on the S&P 500, the P/E on forward EPS of $176.80 (per Refinitiv/IBES) is 18.5. Other than during bubbles, we have practically never been there since 1957.

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Keep in mind that forward EPS almost always prove too high as Fidelity illustrates:

S&P 500 Earnings Estimates

Using actual trailing EPS provides little comfort, if any:

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The Rule of 20 P/E is currently 22.4. It has reached higher levels in some previous cycles…

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…generally when the Rule of 20 Fair Value was rising, not the case presently:

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The no-recession scenario is more widely accepted.

Analysts are more optimistic. SentimenTrader reveals that

According to Bloomberg data since 2010, they just upgraded the most stocks ever in a single day.
It’s rare to see analysts raise their price targets on more than 100 stocks at a time, but that’s been the case for the past three sessions.

When more than a net +/- 100 stocks are upgraded/downgraded by analysts on the same day, it coincided with extreme sentiment. Just because they work for investment banks on the Street doesn’t mean they’re immune to the animal spirits. In some sense, they help drive it.

When more than a net 100 stocks were upgraded, it didn’t pan out well over the next few months, a minor warning considering it has triggered now.

Investors sense that the Fed has their back:

Momentum remains positive:

  • 13/34–Week EMA Trend Chart (CMG Wealth)

Fortune Poll: Investors See a 2020 Recession Coming—But Think They’ll Make Money

Fortune and Civis Analytics teamed up to survey more than 1,300 investors between December 19-20.

  • 51% of non-retired investors plan to increase their stock holdings in 2020, while 25% plan to decrease their stock holdings.
  • 76% of investors think the stock market will rise in 2020, including 19% who think it will rise more than 10%. Only 5% expect a decline in the stock market. Only 2.3% see stocks declining by more than 5%.
  • 58% of investors say a recession is likely in 2020, compared to 42% who say it’s unlikely.
  • 40% of investors foresee the presidential election increasing volatility in financial markets in 2020.

Obviously, many investors have no clue how devastating recessions can be to equities.

THE END FOR THE “DOUBLE IRISH/DUTCH SANDWICH”

Fortune tells us that

This month marks the end of the so-called ‘Double Irish’—a much-used tax avoidance strategy that involves setting up operations in Ireland to take advantage of its low corporate tax rates. Under pressure from the OECD, the EU, and the U.S., Ireland closed the loophole, while a similar one in the Netherlands—the ‘Dutch sandwich’—has also shut. (…)

Thanks to a change in Irish law, Google in the U.S. will do something it hasn’t in years: own outright its intellectual property, including patents, trademarks, branding, and more.

For years, Google and other companies employed a legal tax avoidance strategy called the Double Irish, Dutch sandwich. Here’s how it works: Using complex multi-national structures, they transferred ownership of intellectual property to wholly owned subsidiaries in low- or no-tax regions and then licensed the material back to the rest of the company. Profits turned into “license fees” and thus avoided taxes.

One of the Irish laws that made the tactic possible expired on Jan. 1, 2020 due to international pressure from many countries—the U.S., France, the U.K., and Spain, for example—that were tired of losing tax revenue to low-tax Ireland, among other havens. (…)

Money-Losing Companies Mushroom Even as Stocks Hit New Highs A combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months close to 40%, its highest level since the late 1990s outside of postrecession periods.

(…) The proportion of U.S.-listed companies losing money for three years reached its highest last year in data stretching back to the late 1990s, according to calculations by Andrew Lapthorne, global head of quantitative research at Société Générale.

Investor tolerance of losses shows up most obviously in new issues, where about three-quarters of IPOs were made by loss-making companies last year, according to University of Florida finance professor Jay Ritter.

What type of companies are losing money? In the U.S., 42% are health-care companies, reflecting the popularity of small, often loss-making biotech stocks. Another 17% are tech stocks, many of them fashionable new ventures. (…)

The shares of three-quarters of the 100 biggest companies that reported losses rose over the past 12 months, because big loss-making companies tend to be growth stories where investors don’t much mind the losses. That’s far above the 41% of all loss-making U.S. companies whose shares rose, because smaller lossmakers really suffered, according to data from S&P Global Market Intelligence.

Among the smallest 80% of companies, there has been a long-term increase in persistent loss makers—those losing money for three years. The proportion of these loss-making companies rose after each of the last two recessions and didn’t come down again afterward. The story should be familiar by now: Many small companies are being dominated by the biggest corporates, squeezing them out of markets and crushing their ability to invest for growth. (…)

Some other facts: looking only at S&P 500 companies, only 3 show negative EPS over the last 4 quarters. Sifting through the 2105 stocks in the CPMS/Morningstar database, 268 (12.7%) lost money during the last 4 quarters, up from 241 (11.4%) three quarters ago. “Money-losing companies mushroom” seems an inappropriate qualification for the majority of U.S. listed companies.

Source: @WSJ; Read full article
Amazon is said to be preparing a luxury fashion platform
Internal Boeing Messages Say 737 Max ‘Designed by Clowns’

(…) “This airplane is designed by clowns, who in turn are supervised by monkeys,” said one company pilot in messages to a colleague in 2016, which Boeing disclosed publicly late Thursday. The company [the clowns] had already provided the documents to lawmakers and the U.S. Federal Aviation Administration [the monkeys], who are investigating the 737 Max and the process that cleared it to fly.” (…)

“Would you put your family on a MAX simulator trained aircraft? I wouldn’t.”

“I’ll be shocked if the FAA passes this turd.”

“This is a joke. This airplane is ridiculous.”

“Best part is we are re-starting this whole thing with the 777X with the same supplier and have signed up to an even more aggressive schedule!”

“Jesus, it’s doomed.”

“I still haven’t been forgiven by God for the covering up I did last year,” an employee wrote in 2018, apparently in reference to the FAA.

Sickening!!! Try to promote capitalism with stuff like that.

THE DAILY EDGE: 9 JANUARY 2020

Happy and Healthy New Year

Recent posts:

U.S. Consumer Credit Usage Eases

Consumer Credit Outstanding increased $12.53 billion (4.5% y/y) during November after an $18.96 billion October gain, revised from $18.90 billion.

Nonrevolving credit usage rose $14.94 billion (5.0% y/y) in November, the strongest increase in three months. (…)

Revolving credit usage declined $2.43 billion (+2.9% y/y) in November after a $7.92 billion October rise. Credit provided by banks, which makes up 90% of revolving balances, rose a greatly reduced 2.9% y/y. It was growing at a 7.5% y/y pace during the summer of last year. (…)

During Q3 2019, student loan debt outstanding rose a greatly lessened 5.0% y/y. Motor vehicle loan debt outstanding increased a steady 4.0% y/y.

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Banks have been tightening consumer credit for 2 years :

fredgraph (34)

Smaller banks are experiencing credit problems normally seen during and right after recessions:

fredgraph (33)

Upending Bankruptcy ‘Myths,’ Judge Erases $220,000 Student Loan Debt A bankruptcy judge excused a U.S. Navy veteran with a law degree from repaying more than $220,000 in student loan debt, the latest court ruling to lower the barriers to discharging educational debt.

Judge Cecelia G. Morris of the U.S. Bankruptcy Court in Poughkeepsie, N.Y., discharged the law school graduate’s unpaid student loans even though he isn’t disabled or unemployable, saying that satisfying his law school debt in full would impose an undue hardship.

In her ruling, Judge Morris said most bankruptcy professionals and laypeople “believe it impossible to discharge student loans.” She said she would not perpetuate those “myths” and would apply a legal test developed in 1987 “as it was originally intended.”

The standard, known as the Brunner test, requires borrowers seeking bankruptcy relief from their student debt to show they cannot maintain a minimal standard of living, their circumstances are likely to continue for a significant period and they have made good-faith efforts at repayment. (…)

The difficulty of erasing student loans in bankruptcy has cropped up in Democratic presidential politics. On Tuesday, Democratic presidential candidate Sen. Elizabeth Warren proposed a sweeping overhaul to the consumer bankruptcy system, including ending the rules on obtaining bankruptcy relief from student loans. (…)

The student loan issue is becoming a campaign matter. Given Trump’s views of credit, he could well take the rug off Dems’ feet…

Speaking of debt:

  • Debt levels in most developing nations hit highest level in 50 years, many in ‘dangerous waters’, World Bank warns

Grant’s Interest Rate Observer reveals that it took 192 years for America to amass the first trillion of government debt and only five months since this past August 1 to tack on the newest trillion to its current $23 trillion.

fredgraph (35)

Corporate America is following the lead:

fredgraph (36)

Expectations for a U.S. downturn have jumped since the beginning of 2019, with 97% of CFOs saying that a downturn (either a slowdown or a recession) has already begun or will occur by the end of 2020. Compare that to 88% who said the same about 2020 in the first quarter of last year.

  • 43% of CFOs say consumer spending will be strong in 2020, down from the 54% who said the same for 2019. Just 22% expect strong business spending (vs. 32% a year ago).
  • CFOs said “trade wars” and “uncertainty” are their 2 top company concerns.

Source: Deloitte (CFO expectations for year-over-year increases.) Chart: Axios Visuals

And yet…

S&P 500 Net Debt vs. Share Buybacks

…but…image

THE DEAL, PHASE ONE…
China to Send Chief Trade Negotiator to U.S. to Sign Phase-One Deal China’s chief trade negotiator will travel to Washington early next week to sign a phase-one trade deal with the U.S., Beijing said, in its first official confirmation over the signing of a agreement that could help ease bilateral tensions.

(…) In the weeks since Christmas, the two sides have been haggling over the Chinese translation of the text of the agreement, according to people with knowledge of the matter. China’s announcement on Thursday of the signing ceremony suggests that Washington and Beijing have resolved most of the remaining translation issues.

Mr. Liu will lead a 10-member delegation to Washington, the people familiar with the matter said. (…)

President Trump has said he will travel to Beijing at some point to begin negotiations on the second phase of a broader trade pact. Beijing so far hasn’t confirmed such a plan. Instead, Chinese officials have said that any future negotiations would depend on how the phase-one deal is implemented. (…)

Mr. Gao didn’t provide details on China’s commitment to increase its American imports. Instead, he sought to dispel concerns that more U.S. imports would divert China’s purchases from other trading partners.

China will “improve its tariff policy on wheat, corn and other farm products based on the rules of the World Trade Organization,” he said.

That last sentence is key as the WSJ explained on Dec. 31:

Both sides say that any purchases must conform to WTO rules—a requirement that could give China a way to argue that it can’t meet purchase goals. For instance, soybean purchases diverted from Brazil to the U.S. could violate WTO rules.

“The trick is for the agreement to be crafted in a manner that’s ambiguous enough so as not to raise WTO challenges, but is clear enough to satisfy the U.S. that the Chinese government will use the tools available to it to direct farm purchases to the U.S.,” said Mark Wu, a WTO expert at Harvard Law School.

(…) Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase.

“These are global quotas. We will not adjust them just for one country,” Han told Caixin, according to a CNBC translation of his Chinese-language quotes in an article published Tuesday. (…)

In a lengthy article (The Future of America’s Contest with China) in the January 2020 New Yorker, investigative journalist Evan Osnos wrote :

(…) With a Presidential election a year away, Trump’s trade war was becoming a political liability. The Chinese side was in no rush to resolve it. In September, an American billionaire investor told me that he had advised the President to show progress, if he wanted a strong economy on Election Day. “You have to have a deal done by the end of the year,” the investor said. “If you get a deal in March or April, by then the economy’s already gone.”

The next month, negotiators abruptly announced what they called “phase one” of a trade deal. The terms, finalized in December, called for both sides to cut tariffs; China also agreed to buy more farm exports, energy, and manufactured goods from the U.S., in return for which Trump would suspend upcoming tariffs. On Twitter, Trump had hailed it as “the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country.”

But the truce did not resolve the core disputes, such as technology transfer, and, outside the White House, it was mostly seen as the end of a wasteful stunt. “Trump was looking for any possible excuse not to put on the tariffs that he had threatened,” [Arthur] Kroeber [the managing director of Gavekal Dragonomics] said, “so he got a promise from the Chinese to buy soybeans and some other stuff, and he packaged this.”

In China, the deal was greeted warily, with no expectation that it would relieve the standoff. Chinese analysts have described their side’s approach as da da, tan tan—“fight fight, talk talk”—a pointed expression that Mao used in the nineteen-forties to describe his strategy when Americans pressured him to stop fighting the rival Nationalist Army. Mao always assented to their requests for talks, even as he steadily gained ground on the battlefield. In the end, he won.

Chris Johnson, a former C.I.A. analyst who is now a senior fellow at the Center for Strategic and International Studies, asked a group of Chinese contacts what their government got from Trump’s push for a deal at any price. “Their response was ‘Time,’ ” he said. “Reading between the lines, they meant time without new tariffs in the near term, and time to prepare for what they presume is an inevitable larger confrontation.”

China’s Auto-Sales Slump Continues A total of 20.7 million passenger vehicles were sold in China last year, down 7.4% from 2018

That exceeded the 5.8% drop in 2018.

December was the 18th down month out of the past 19, the group said, with sales off 3.4% from a year earlier.

The slide is likely to continue this month, said Cui Dongshu, the secretary-general of CPCA, with sales down much as 15% from a year earlier. But full-year sales will improve, he predicted, adding that the easing of U.S.-China trade tensions could help consumer confidence recover.

In 2020, the CPCA expects a 1% rebound for the overall auto market. Others are less optimistic—the state-backed China Association of Automobile Manufacturers sees a fall of least 2%. (…)

A measure of inventory levels tracked by the state-backed China Automobile Dealers Association has been above its “warning” level of 50% since January 2018, including 59% last month.

Electric vehicles, which had been a rare bright spot, have been a drag since July, following the expiration of most government subsidies. Sales of new-energy passenger cars, which include electrics, were down for a sixth consecutive month in December, off 15.1%.

For the full year, electric-vehicle sales were still positive, up 5.1% from 2018, partly because of a rush to buy before the subsidies expired. (…)

Trump sees sharp rise in support for economic policies Exclusive FT-Peterson poll shows more than half of US voters believe agenda has helped economy

The FT says that 51% of Americans believe Trump’s policies have either “strongly” or “somewhat” helped the economy, up from 44% in November. Importantly, 43% of independents agreed with 33% were in disagreement.

Trump backs away from military action against Iran US president says Tehran ‘standing down’ and reports no casualties in Iranian strikes on Iraq bases

In Iran, the government says that as many as 80 Americans were killed…”All is good”. But Iranian militias could strike anywhere, anytime, without Tehran knowing about it.