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: 2 OCTOBER 2019

Airplane Travelling day. Actually, they will all be travelling days for a few weeks. Will post when possible.

THE MANUFACTURING PMIs

September PMI data indicated a marginally faster rate of improvement in the health of U.S manufacturing, though the overall picture remained one of a struggling goods producing sector that has suffered its worst quarter since 2009. Expansions in production and new orders remained only modest, meaning firms were encouraged to increase their workforce numbers only tentatively. Business confidence remained relatively gloomy due to muted demand conditions. Although rates of both input cost and selling price inflation quickened, they remained historically subdued following a drop in demand for inputs and widespread efforts to stay competitive.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 51.1 in September, broadly in line with the earlier flash reading of 51.0, and up from 50.3 in August to signal a slightly stronger end to the third quarter for the U.S manufacturing sector. That said, the quarterly average indicated the worst performance across the sector since the same period in 2009. Moreover, the latest data signalled only a slight improvement in operating conditions across the sector.

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Driving the headline PMI figure higher was a quicker rise in production in September. The modest upturn was the fastest since April following reports of slightly stronger client demand and efforts to clear backlogs. Nonetheless, the rate of expansion was below the series trend.

The upturn in new business accelerated from August’s recent low. New order growth was attributed to an increase in domestic client demand and efforts to price competitively. That said, the upturn was only moderate as a fall in foreign client demand weighed on total sales. The decline in export sales was the second-fastest for nearly five years. Ongoing trade wars also reportedly exacerbated difficult external demand conditions.

Subsequently, firms increased employment marginally in response to greater production requirements. The rise in staffing levels also came alongside a faster fall in backlogs of work. Although tentative towards their output expectations for the coming 12 months, firms expressed a greater degree of confidence in September. The level of optimism reached a three-month high but remained relatively subdued overall.

Meanwhile, cost burdens increased moderately. The faster pace of inflation was linked to the impact of tariffs, although a drop in demand for inputs kept cost rises relatively muted. Similarly, output charges rose modestly, as firms sought to pass on higher costs, whilst maintaining efforts to be competitive.

In line with subdued demand conditions, input buying fell for a third month running. Firms also stated that weak demand had led to greater efforts to run down stocks. Despite a decline in purchasing, supplier performance deteriorated further as firms increasingly reported a change to domestic suppliers, due to tariffs, with vendors struggling to deliver goods to manufacturers amid capacity issues.

The US ISM survey was more downbeat and totally spooked investors:

The September PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. The New Orders Index registered 47.3 percent, an increase of 0.1 percentage point from the August reading of 47.2 percent. The Production Index registered 47.3 percent, a 2.2-percentage point decrease compared to the August reading of 49.5 percent. The Employment Index registered 46.3 percent, a decrease of 1.1 percentage points from the August reading of 47.4 percent. The Supplier Deliveries Index registered 51.1 percent, a 0.3-percentage point decrease from the August reading of 51.4 percent. The Inventories Index registered 46.9 percent, a decrease of 3 percentage points from the August reading of 49.9 percent. The Prices Index registered 49.7 percent, a 3.7-percentage point increase from the August reading of 46 percent. The New Export Orders Index registered 41 percent, a 2.3-percentage point decrease from the August reading of 43.3 percent. The Imports Index registered 48.1 percent, a 2.1-percentage point increase from the August reading of 46 percent. (…)

Of the 18 manufacturing industries, three reported growth in September: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The 15 industries reporting contraction in September — in the following order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Textile Mills; Paper Products; Fabricated Metal Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; Transportation Equipment; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; and Computer & Electronic Products.

National Bank Financial:

(…) The last time the ISM manufacturing sank that low, outside of a recession, was in 2003. While we acknowledge the ongoing trade war is wreaking havoc and weighing significantly on factories worldwide, we advise caution in interpreting September’s U.S. ISM manufacturing index. Note that another survey released this morning, Markit’s purchasing managers index, suggested that U.S. manufacturing was not only in expansion in September but also growing at the fastest pace in five months! Why are those two surveys saying different things? For starters, they have different panel sizes, with Markit surveying more companies than the ISM. The ISM index also tends to cover larger companies and would therefore have been more impacted than Markit’s measure by the strike at General Motors during September, a temporary event in any case. But even assuming manufacturing is as bad as the ISM is suggesting, that would not necessarily mean the U.S. economy as a whole is in recession. As today’s Hot Chart shows, we’re still well above the 42.9 mark which even the ISM says “generally indicates an expansion of the overall economy”. So, while manufacturing woes are not good news, they do not preclude continued expansion of the U.S. economy.

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Markit vs ISM: the former is generally a better reflection of actual trends.

U.S. Markit Manufacturing PMI vs. U.S. ISM Manufacturing PMI

Picture source: Renaissance Macro (via Isabelnet)

  • China PMI signals modest improvement in operating conditions

China’s manufacturing sector saw a modest improvement in overall operating conditions during September. Production and total new orders both expanded at quicker rates than in August, despite a further reduction in new export business. Staffing levels were broadly unchanged, however, leading to a stronger increase in backlogs of work. At the same time, firms expanded their buying activity and inventories, albeit at marginal rates. Currency movements meanwhile contributed to a renewed rise in average input costs, while prices charged were broadly stable after a two-month sequence of discounting.

Chinese goods producers continued to express a relatively subdued level of confidence towards future output, as worries persisted over the outcome of the ongoing China-US trade negotiations.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) posted 51.4 in September, up from 50.4 in August, to signal an improvement in the health of the sector for the second month running. Though modest overall, the pace of improvement was the quickest seen since February 2018.

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The increase in the headline figure was partly driven by a faster rise in overall new work. The latest upturn in new orders, though modest, was the quickest since March 2018. Underlying data continued to signal that the increase was supported by firmer domestic demand, as new work from abroad continued to decline. That said, the latest reduction in new export orders was only slight. Companies often commented that the ongoing China-US trade dispute had continued to dampen foreign sales.Higher volumes of total new work led firms to expand production again in September. The rate of growth was the fastest seen since August 2018.

Employment across China’s manufacturing sector was broadly unchanged for the second month running. Stagnant payrolls and rising orders contributed to a further increase in the amount of outstanding business at Chinese goods producers. Notably, the rate of accumulation was the steepest seen since the start of 2018.

Latest data indicated that firms were relatively cautious towards buying activity and inventories. Although input buying rose for the third month running, the rate of growth remained marginal overall. As a result, stocks of purchased items also expanded only slightly. Stocks of finished goods rose marginally for the second month running.

After declining in August, average input costs rose at the end of the third quarter. The rate of increase was modest overall, with a number of panel members blaming the rise on unfavourable exchange rate movements and higher raw material costs. Output charges were meanwhile broadly unchanged compared to the previous month.

Optimism towards the one-year outlook for output remained relatively weak in September, with concerns over future trade conditions commonly cited by panel members.

(…) China’s official manufacturing purchasing managers index rose to 49.8 in September from 49.5 in August, the National Bureau of Statistics said Monday. This is the fifth straight month that the index has stayed below the 50-mark, indicating a contraction in activity. (…)

A subindex measuring total new orders rose above the 50-mark for the first time since May as domestic demand increased. New export orders improved, but remained in contraction territory. (…)

Meanwhile, a pullback in China’s property sector appears to be under way, with construction activity cooling sharply in September. China’s official nonmanufacturing PMI edged down to 53.7 in September from 53.8 in August, the National Bureau of Statistics said Monday. Its subindex measuring construction activity fell sharply to 57.6 in September from 61.2 in August, while the service subindex held up well.

The property sector, including home sales and investment, has been a lone bright spot in the economy. But it has come under pressure after Chinese leaders said they wouldn’t resort to property easing as a stimulus measure. Financial regulators in recent months also have tightened financing for both property developers and home buyers to rein in speculation. (…)

  • Japan PMI finishes third quarter at a seven-month low

This is Markit’s summary. Full pdf from the headline.

PMI data suggest that the Japanese manufacturing sector ended the third quarter on a negative footing, with the headline index at its lowest mark since February. Crucially, the stronger deterioration comes ahead of the consumption tax hike, and suggests that manufacturing and exports are both likely to have been drags on third quarter GDP.

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Japan continues to suffer from the trade-led global growth slowdown. While new product launches, particularly in the tech and capital goods space, provide some mild reason for optimism, concern of trade frictions being drawn out further are underpinning a cautious approach.

Strength in the trade-weighted yen so far this year has also meant that the currency has not been able to mitigate the impact of the global trade slowdown. To that end, the service sector’s ability to weather the sales tax hike in the fourth quarter will be crucial to keeping the economy afloat into the year-end.

Global Manufacturing PMI signals further deterioration in September

The global manufacturing sector deteriorated further in September, but edged closer to stabilisation. This was signalled by the J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – rising for the second month running to 49.7. Although still below the neutral mark of 50.0 that separates improvement from deterioration, it was the highest reading since May.

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Downturns continued in the intermediate and investment goods sub-industries during September, with both seeing contractions in production and new order intakes. The consumer goods industry fared better, as output and new business both moved higher.

National PMI data signalled deteriorations in overall business conditions in 15 of the countries covered. Among the larger industrial regions, growth was registered in both the US and China. In contrast, Japan saw further contraction while the downturn in the euro area deepened. The rate of decline in the eurozone was the fastest in almost seven years, mainly due to a sharp deterioration in the performance of Germany.

Global manufacturing production was broadly stagnant in September, as reduced intakes of new business discouraged any meaningful expansion of output volumes. The trend in international trade flows also remained weak, as new export orders declined for the thirteenth consecutive month. The US, China, Germany and Japan were among the many nations to report a decrease in new export business.

September saw a further mild decrease in global manufacturing employment. Job losses have now been registered for five successive months. Reductions in the intermediate and investment goods sectors more than offset marginal jobs growth at consumer goods producers.

Price pressures remained broadly contained in the global manufacturing sector during September. Although input costs rose at a faster pace, the rate of inflation remained below its long-run survey average for the ninth successive month. Average selling prices were unchanged, following a mild decrease in August.

Business optimism was unchanged from August’s series record low in September. Consumer goods producers were the most optimistic about the future, followed by the intermediate goods category. Positive sentiment was lowest in the investment goods industry.

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Deere to lay off 163 U.S. workers as U.S.-China trade war dents equipment demand

UAW rejects new GM offer as strike forces 6,000 Mexico layoffs The United Auto Workers union said on Tuesday it rejected a new comprehensive offer from General Motors Co to end a two-week-old strike, saying the automaker came up short on several fronts including wages, healthcare and temporary workers.
Manhattan apartment price slump worsens Third quarter decline was worst in almost a decade, with luxury market hit hardest
Auto U.S. Light Vehicle Sales Remain Healthy

The Autodata Corporation reported that sales of light vehicles during September improved 0.9% (-0.6% y/y) to 17.23 million units (SAAR) from 17.07 million during August. The increase left the average level of sales during Q3’19 at 17.06 million units. That equaled Q2 but remained below the Q3’15 peak of 17.96 million units.

Sales of light truck sales rose 1.1% last month (4.0% y/y) to 12.43 million units. (…) Auto sales edged 0.2% higher (-11.0% y/y) to 4.79 million. (…)

Trucks’ share of the U.S. light vehicle market increased to a record 72.1%, up from a low of 48.8% during all of 2012.

Imports’ share of the U.S. vehicle market declined to 21.7%, the lowest since December. Imports’ share of the passenger car market fell sharply to 28.2%. Imports share of the light truck market eased to 19.3%, but remained up from the 12.1% low in April 2014.

(…) About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%. (…)

For many Americans, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five- or even six-year loans. (…)

Just 18% of U.S. households had enough liquid assets to cover the cost of a new car, according to a Wall Street Journal analysis of 2016 data from the Fed’s triennial Survey of Consumer Finances, a proportion that hasn’t changed much in recent years.

Even a conservative car loan often won’t do it. The median-income U.S. household with a four-year loan, 20% down and a payment under 10% of gross income—a standard budget—could afford a car worth $18,390, excluding taxes, according to an analysis by personal-finance website Bankrate.com.

But the size of the average auto loan has grown by about a third over the past decade to $32,119 for a new car, according to Experian. To keep payments manageable, the car industry has taken to adding more months to the end of the loan.

The average loan stretches for roughly 69 months, a record. Some last much longer. In the first half of the year, 1.5% of auto loans for new vehicles had terms of 85 months or longer, according to Experian. Five years ago, these eight- and nine-year loans were practically nonexistent. (…)

EARNINGS WATCH

I/B/E/S data from Refinitiv:

S&P 600:

S&P 600 earnings are expected to decrease 58.1% from 18Q2. Excluding the energy sector, the expected growth rate for the index is -54.8%. Excluding Frontier Communications (FTR.O), the expected growth rate is -10.0%.

Of the 581 companies in the S&P 600 that have reported earnings to date for 19Q2, 62.5% have reported earnings above analyst expectations.

19Q2 revenue is expected to increase 3.2% from 18Q2. Excluding the energy sector, the expected growth rate for the index is 3.0%. Excluding Frontier Communications (FTR.O), the expected growth rate is 3.3%.

51.4% of companies have reported 19Q2 revenue above analyst expectations.

S&P 400:

Second quarter earnings are expected to decrease 6.2% from 18Q2. Excluding the energy sector, the expected growth rate for the index is -3.4%.

Of the 395 companies in the S&P 400 that have reported earnings to date for 19Q2, 61.3% have reported earnings above analyst expectations.

The 19Q2 blended revenue growth estimate is 1.5%. Excluding the energy sector, the revenue growth estimate is 2.1%.

52.4% of companies have reported 19Q2 revenue above analyst expectations.

Banks Struggle to Sell About $2 Billion Debt for Apollo Shutterfly Buyout Barclays, Citi and others agreed to buy up to $280 million of the loans amid tepid demand for junk debt.

Fitch downgrades WeWork after aborted IPO leaves financing hole

THE DAILY EDGE: 30 SEPTEMBER 2019

Airplane Travelling day. Actually, they will all be travelling days for a few weeks. Will post when possible.

Global Slowdown Spreads Across U.S. Economy  Economists lower third-quarter growth estimates after household spending nudged up 0.1% in August

Consumers slowed spending and businesses cut back on investment in August, signs that a wobbling global economy and rising tariffs are sapping U.S. economic momentum.

Personal-consumption expenditures, or household spending, edged up a seasonally adjusted 0.1% in August from July, the Commerce Department said Friday. The modest growth marked a sharp pullback from the first seven months of the year, when spending rose an average of 0.5% a month. (…)

Another key source of demand in the economy, business investment, continued a stretch of weakness in August, according to a separate report Friday. Orders for long-lasting equipment and machinery, a proxy for business investment, fell 0.2% last month from July and 1.7% from August 2018. (…)

Macroeconomic Advisers’ closely watched model for gross domestic product showed growth slowing to 1.7% in the third quarter, down from a previous estimate of 2.2%. Pantheon Macroeconomics, meanwhile, cut its forecast for third-quarter consumer-spending growth to 2.9% from 3.6%. (…)

Much of the slowdown in consumer outlays in August could be traced to lower energy prices, which magnified a pullback in spending on gasoline and other energy goods. Expenditures on services slowed only modestly, while outlays on long-lasting consumer goods such as cars and furniture picked up. (…)

Incomes grew 0.4% in August from a month earlier, led by a 0.6% jump in employee compensation. Annual inflation also remained low, undershooting the Federal Reserve’s 2% target.

Consumer sentiment, a measure of household sentiment released Friday by the University of Michigan, rose to 93.2 in September, up from August’s 89.8, though it was down 6.9% from September 2018. That represents the largest year-over-year drop since April 2016. (…)

Haver Analytics’ table provides a good summary of the consumer economy. Wages and salaries jumped 0.6% MoM in August and are up 5.3% annualized in the last 3 months and YoY. American consumers have money. They also have real money as core PCE inflation slowed to 0.14% in August and is up 1.8% YoY, boosting real disposable income growth to +2.8% a.r. in the last 3 months and +3.0% YoY in August.

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The risk to consumer spending is thus currently (see below re: jobs) limited to swings in the savings rate which jumped to 8.1% in August from 7.5% on year ago. The foundation is solid but a spending strike is always possible (remember last December).

U.S. Inflation Decelerated in August Sluggish price gains kept inflation well below Fed’s annual target of 2%

The Federal Reserve’s preferred inflation gauge, the personal-consumption-expenditures price index, rose a seasonally adjusted 0.03% last month from July, the Commerce Department said Friday, its smallest gain since January. The so-called core index, which strips out volatile food and energy components, rose 0.14% in August.

The sluggish gains last month kept inflation well below the Fed’s annual target of 2%. Compared with August 2018, the main index was up 1.44%—the same as in July—although core inflation stood at 1.77%, its highest level since January. (…)

Friday’s figures contrast with other data showing that inflationary pressures are building in the U.S. after a very weak start to the year. The core consumer-price index, a separate inflation measure published by the Labor Department, rose 0.3% a month between June and August, the largest three-month increase since 2006. (…)

However, last 6 months annualized, core PCE inflation was +2.1%, last 3 months: +2.5%. Core CPI: +2.5% last 6 months, +3.4% last 3 months.

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SLOW AND SLOWER

I am watching various indicators curious to se whether the current soft patch is getting worse than the oil-collapse induced slowdown of 2015-16. New orders are the life blood of real demand while profits and corporate sentiment are the needed ingredients for rising capex and employment. Markit’s September Flash PMI shows

inflows of new business down to the lowest since 2009 and firms’ expectations of growth over the coming year stuck at one of the most subdued levels since 2012. Inflows of new service sector business almost stalled in September to register the smallest rise since the survey began in 2009.

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Disappointing inflows of new work and gloomy prospects for the year ahead took their toll on hiring again. Firms have become more risk averse and increasingly eager to cut costs, resulting in the September PMI showing jobs being cut across the surveyed companies for the first time since January 2010. At current levels, the survey employment index is indicative of non-farm payroll growth falling below 100,000. That compares with signals of an average of 200,000 in the first quarter and 150,000 in the second quarter.

U.S. Pending Home Sales Rebound in August

The National Association of Realtors (NAR) reported that U.S. pending home sales rose a larger-than-expected 1.6% m/m in August (+2.5% y/y) following a 2.5% m/m decline in July. Meanwhile, mortgage rates continued to decline. The effective rate on a 15-year fixed-rate mortgage fell to 3.40% in August from 3.54% in July, the ninth consecutive monthly decline and the lowest level since November 2016. This declining trend in interest rates has had a positive impact on housing activity. Pending sales are up 8.7% since the four-and-a-half year low reached last December.

The August increase was spread across all major regions with each region experiencing both a monthly and an annual increase. The gains were particularly strong in the West where pending sales increased 3.1% m/m (8.0% y/y) in August. Pending sales rose 1.4% m/m (0.7% y/y) in the Northeast, edged up 0.6% m/m (0.2% y/y) in the Midwest and rose 1.4% m/m (1.8% y/y) in the South.

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U.S. GDP Growth Is Unrevised; The Economy Continues to Increase at a Moderate Pace

Economic growth slowed in the second quarter at an unrevised 2.0% rate. The figure matched expectations in the Action Economics Forecast Survey. Last quarter’s increase compared to a 3.1% rise in the first quarter. GDP growth slowed during the last year to 2.3% from its recent peak of 3.2% during the four quarters ended Q2’18.

Growth in corporate profits before-tax with IVA & CCA adjustments was lessened to 3.8% (1.3% y/y) from 5.3%. The gain followed two quarters of decline. Domestic industry profits declined 1.1% y/y as nonfinancial earnings also fell 1.1% y/y. Earnings in the financial sector declined 3.8% y/y but profits earned abroad rose 8.7% y/y. After-tax earnings rose 3.3% (0.3% y/y), the first rise in three quarters.

Nonresidential fixed investment declined 1.0% (2.6% y/y) after a 4.4% Q1 rise. Growth in structures investment was revised to -11.1% (-4.8% y/y) from -9.4% while equipment investment was revised to 0.7% (+2.7% y/y) from 0.8%. Growth in intellectual property products investment was little-changed at 3.7%, and y/y growth of 7.5% compared to 9.6% in Q1.

Growth in personal spending also was lessened to a 4.6% surge (2.6% y/y) from 4.7%. That strengthening followed two quarters of modest rise. Spending on durable goods remained firm at an unrevised 13.0% (4.4% y/y). Strength was driven by a 16.1% advance (1.9% y/y) in motor vehicle outlays. Nondurable goods outlays were revised lower to 6.5% (3.5% y/y) from 6.8%. Spending on services was unrevised at 2.8% (2.1% y/y). Recreation outlay growth was strong at 6.4% (2.3% y/y).

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U.S.-China trade negotiations set to resume on October 10: CNBC  Trade talks between the United States and China are set to resume on Oct. 10 in Washington, CNBC reported on Thursday, citing three people close to the talks.

Its leash lengthened, China’s yuan flirts with trade war role China, having let the yuan cross the once sacred red line of 7 per dollar, will allow its currency to fall further and may even risk U.S. anger by using it as a bargaining chip in already thorny trade talks, market participants believe.
Shale Boom Is Slowing Just When the World Needs Oil Most The U.S. shale boom is slowing, as technology advances that helped unlock record amounts of oil and gas have begun to level off and productivity of even new wells begins to slow

U.S. oil production increased by less than 1% during the first six months of the year, according to the Energy Department, down from nearly 7% growth over the same period last year.

Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.

The challenges raise the prospect that the technological and engineering advances that have allowed shale companies to unlock record amounts of oil and gas from rock formations have begun to level off.

U.S. oil production is on track to hit an average of 12.2 million barrels a day this year, up from last year’s average of 11 million barrels a day, the Energy Department said earlier this month. But because output grew so quickly last year—from an average of 10 million barrels a day in January to 12 million barrels a day in December—that implies limited growth throughout 2019. Activity has slowed recently and employment has fallen in some of the hottest U.S. oil regions, according to a September report by the Dallas Federal Reserve. (…)

U.S. shale oil production now accounts for about 8 million barrels a day, or roughly 10% of oil world-wide, significantly boosting global supplies. (…)

One factor that could lead growth to continue is the increasing shale footprint of major oil companies such as Exxon Mobil Corp. and Chevron Corp. They are now among the fastest-growing producers in the Permian Basin of Texas and New Mexico, investing heavily in factory-style shale production.

But growth also could slow if financial support from Wall Street tightens further and oil prices continue to hover around $60 a barrel—factors that are leading many small and midsize shale producers to pull back and emphasize profitability. (…)

The slower rate of new wells means companies will need to wring more out of each well just to sustain current production, let alone increase it. But a growing body of data indicates the production gains from technological advances that many drillers have touted are leveling off, and older shale fields may have less oil left than originally thought.

Gains in oil production from U.S. onshore drilling rigs are declining rapidly, federal data show. In December, drilling rigs helped extract 25% more oil than they had a year prior. In August, they were producing about 14% more than last year, according to the Energy Information Administration.

Meanwhile, production in the first 90 days of an average shale well, its most productive period, declined by 10% in the first half of the year compared to the 2018 average, according to research by Raymond James. (…)

Now, here’s a potentially highly consequential development:

Pointing up First solid bitumen test shipment on its way from Alberta to China

A test shipment of bitumen oil from Alberta is on its way to China, but it didn’t get to a British Columbia port by pipeline – it was moved by train through Prince Rupert in a semi-solid form commonly known as neatbit.

Melius Energy in Calgary is not the first company to propose moving bitumen through BC in a semi-solid form by train, but it appears to be the first to actually land a potential customer in China and start shipping semi-solid bitumen by train.

It has sent its first container, containing 130 barrels of bitumen, to China in a test shipment, and is currently building a new demonstration plant in Edmonton that turns diluted bitumen into a solid called TrueCrude.

Using existing rail infrastructure, Melius says it could potentially move 120,000 barrels per day of pure bitumen in 100-unit trains through the Port of Prince Rupert. (…)

Should a container of TrueCrude ever crack open and end up in the ocean, it would float in one large block that could easily be recovered, the company says.

Bitumen is a thick, tarry form of oil that has to be diluted with lighter oils – condensate – in order to transport it in liquid form. Melius developed a process, called BitCrude, whereby the diluent is taken back out of the diluted bitumen. The diluent can be recycled back to dilbit producers.

The pure bitumen is heated so it can be poured into modified shipping containers, where it then solidifies when it cools. It is then shipped by train and put onto container ships. When it reaches its destination, the bitumen is heated to allow to flow into a refinery. (…)

He said there is a huge demand in China for bitumen, largely because China’s Belt and Road project will require so much asphalt.

Because of its high asphaltene content, bitumen is a highly desired feedstock for making asphalt. Roughly half of a barrel of bitumen can be turned into asphalt, with the rest being turned into other petroleum products.

“The demand from Asia right now for heavy crude oil is growing and it’s almost insatiable, especially with what’s happening with Venezuela, and Iran and Saudi Arabia,” Butler said. 

“They’re looking for supply, and right now they’re struggling to find it. Whereas here in Alberta we have quite a bit of supply and we’re trying to export it to the U.S., where we’re fighting to get a low dollar. If we can get this to the China, we can get a much better dollar and sell our premium product at a premium price.”

EARNINGS WATCH

Analysts keep marking down earnings as Q3 comes to an end:

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But Q3 estimates still call for –2.2% (-2.3% last week) while Q4 are +4.1% (+4.2%).

Corporate preannouncements did not change last week and remain fairly good compared to Q2.

Trailing EPS have been revised down last week to $164.31 from $164.44 last week. The Rule of 20 P/E is now 20.4. Fair Value [164.31 x (20 – 2.4)] = 2892, down for the third consecutive month from 2951 at the end of June.

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TECHNICALS WATCH
Fewer Stocks Are Participating in the Market’s Rally U.S. stock indexes are hovering near records, but many stocks are struggling to break out of a narrow trading range to hit new highs.

image(…) Last week, 106 firms in the index set new 52-week highs, down from 293 in mid-June, according to FactSet. The lack of breadth in the stock market is concerning to some analysts who note the S&P 500 has broken out to fresh highs three times since early 2018, but each rally was short-lived. That marks a divergence from 2013 and 2017 when stocks notched a series of new highs in the wake of strong bouts of volatility. (…)

Investors have been selling higher growth technology companies including the popular FAANG stocks— Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. —that have propelled the decadelong bull market.

They are opting instead for beaten-down value stocks, often defined as companies whose shares trade at a low multiple of their book value, or net worth. That includes energy and financial stocks that have underperformed the broader market in recent years. (…)

Technical indicators have turned bullish after flashing red this summer. About 68% of the companies in the S&P 500 are now trading above their 50-day moving averages, up from less than 25% when the broad index came under pressure in early August. (…)

Some investors point to signs of improving market breadth as an encouraging sign. The NYSE advance-decline line, a popular indicator that tracks the number of stocks rising minus the number falling each day, hit a fresh high Sept. 23, according to Dow Jones Market Data. (…) (Chart above from Alpine Macro (via The Daily Shot))

Lowry’s Research reminds us that “rather than point to a single factor (time), our analysis evaluates the measurable actions of buyers and sellers in order to draw informed, probabilistic conclusions.” Speaking of breadth, Lowry’s says that “another sign of a robust, lasting market advance has historically been when breadth leads index prices. Since 1940, these positive divergences in the NYSE all-issues Adv-Dec Line subsequent to major drawdowns have led to new price index highs. In the early stages of the recovery from the Dec. 2018 market bottom, the NYSE all-issues Adv-Dec Line was able to achieve a new all-time high on Feb. 15, 2019 along with Lowry’s OCO Adv-Dec Line – ahead of prices. New highs in price and breadth since then reflect broad participation in the intermediate-term advance, reaffirming its viability. Lowry’s OCO Adv-Dec Line reached a new high as recently as Sept. 16.”

It concludes that “evidence of a recently rejuvenated bull market provides calming context to short-term gyrations. As such, investors should continue to view these periodic bouts of volatility as buying opportunities.”

The 13/34–Week EMA Trend Chart, courtesy of CMG Wealth, remains supportive:

But the IPO market looks tired:

Endeavor Pulls IPO After Peloton’s Poor Debut The IPO market took another hit Thursday as Endeavor Group Holdings yanked its planned offering and Peloton’s shares skidded on their first day of trading.
Alibaba unveils self-developed AI chip for cloud computing services

Alibaba Group Holdings Ltd said on Wednesday it has developed a new chip that specializes in machine-learning tasks and which will be used to enhance services for its cloud computing division.

Called Hanguang 800, the company’s first self-developed AI chip is currently being used within Alibaba to power product search, automatic translation, and personalized recommendations on the e-commerce giant’s web sites.

“The launch of Hanguang 800 is an important step in our pursuit of next-generation technologies, boosting computing capabilities that will drive both our current and emerging businesses while improving energy-efficiency,” Alibaba CTO Jeff Zhang said in a statement. (…)

Alibaba also released its first core processor IP in July based on RISC-V open-source chip architecture. RISC-V gives firms a potential alternative to the dominant architecture of Britain’s Arm Holdings Inc. Arm, a unit of Japan’s SoftBank Group Corp, charges licensing fees for its use. (…)

The chip was developed by DAMO Academy, a research institute Alibaba launched in late 2017, and T-Head, the company’s specialized semiconductor division. (…)

Chicago Teachers Union Authorizes a Strike