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: 8 AUGUST 2019

Trio of Central Banks Surprise Markets With Aggressive Rate Cuts

Central banks in Malaysia, Indonesia, South Korea and South Africa have also reduced policy rates in recent months.

Fed’s Evans Says Trade Headwinds Could Justify Additional Rate Cuts

Evans said the risks have “gone up”, which can justify “more accommodation”, and acknowledged the other central bank moves: “once a substantial number of central banks consider repositioning their monetary policy, it’s natural that other central banks might be thinking that too”.

US agencies barred from buying Huawei equipment Trump administration rule also covers ZTE, Hikvision, Dahua and Hytera

US government agencies from the Pentagon to Nasa will be banned from buying Huawei equipment after the Trump administration implemented a congressional measure to crack down on Chinese companies seen as security threats. A rule issued by the administration bans Huawei, the Shenzhen-based telecoms company, and other Chinese groups from supplying the federal government. It also covers ZTE, a telecoms company; Hikvision and Dahua, manufacturers of surveillance cameras; and Hytera, which produces two-way radios. (…)

China Exports Stage Surprising Turnaround Chinese data show exports rose 3.3% last month, but economists say the reversal will likely be transient

China’s exports rose 3.3% from a year earlier last month, reversing a 1.3% decline in June, data from the General Administration of Customs showed. A Wall Street Journal poll of 13 economists had forecast a drop of 2%.

Shipments to Europe and Southeast Asia—China’s top two trading partners—also bounced back, while the decline in exports to the U.S. eased after President Trump and Chinese President Xi Jinping struck a conciliatory tone on trade at the Group of 20 summit in Japan in June.

Many Chinese exporters have made an effort to diversify their overseas markets in recent months as trade uncertainties loomed. Exports to the Association of Southeast Asian Nations bloc and EU rose 15.6% and 6.5%, respectively, from a year earlier in July, according to official data. (…)

U.S. Customs and Border Protection said it has identified illegal transshipments of Chinese goods in recent months through several countries, including Vietnam, Malaysia, and the Philippines. Data from China’s customs bureau Thursday showed double-digit export growth to these Southeast Asian countries, higher than the outbound-shipment growth to all trading partners.

China’s exports to the U.S. fell 6.5% in July from a year earlier, compared with a 7.8% decline in June, customs data show. Imports from the U.S. fell 19.1% from a year earlier, compared with a 31% drop the previous month. (…)

China also faces the prospect of slackening demand at home: Overall imports continued to slump in July, sliding 5.6% from a year earlier. (…)

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But Grizzle’s Chris Wood argues that China’s domestic economy is not falling apart:

(…) nominal GDP growth accelerated last quarter, rising from 7.8%YoY in 1Q19 to 8.3%YoY in 2Q19 (…). Nominal and real retail sales growth rose from 8.6%YoY and 6.4%YoY respectively in May to 9.8% and 7.9% in June, the highest level since March 2018. Urban retail sales rose by 9.8%YoY in nominal terms in June while rural retail sales were up 10.1%YoY. (…) The household survey’s consumption expenditure per capita growth, which includes spending on services, rose from 7.3%YoY in 1Q19 to 7.5% in 1H19 in nominal terms (…). Residential real estate investment rose by 14.3%YoY in June and was up 15.8%YoY in 1H19, compared with 13.4% growth in 2018. (…)

CHINA RETAIL SALES GROWTH

ING gets into the details of China’s exports:

(…) Unusual items appeared to be very supportive to exports. China exported more coal (64% month-on-month), which could be due to a surplus in coal mining, as well as more fertiliser (42% MoM). It even exported more crude oil (56% MoM), which is very unusual because China’s crude exports had fallen 61.8% YoY year-to-date. 

It is possible that these exports are going to the Belt and Road economies which, if true, could be the start of a new trend for China’s exports.  

The more typical export items put in a fairly average performance. Handsets grew 9% MoM but were down 15.8% YoY YTD and auto-process computers fell 8.0% MoM. Combining the two, we don’t hold a very positive view of China’s exports because these two items usually comprise much of the growth. (…)

Downturn in global auto sector worsens in July

Latest PMI data signalled a deepening downturn in the global automobiles & auto parts sector at the start of the second half of 2019. Output, new orders and employment all contracted at the fastest rates since the global series began in late-2009. Moreover, indices for new export orders and purchasing activity also hit record lows in July. Overall growth of consumer goods output – also including beverages & food and household & personal use products – was the weakest in over three years in July.

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Other areas of global manufacturing remained weak in July. Industrial goods, metals & mining, forestry & paper products and technology equipment all recorded further declines in output, and all except the latter posted lower new orders.

Finance-related sectors performed comparatively well in July, occupying three of the top five spots in the growth table, joined by pharmaceuticals & biotechnology and tourism & recreation. The exception was real estate, which posted only a marginal rise in business activity.

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In fact, the whole goods sector is in recession. German industrial production sank 5.2% YoY in June. The weakness has spread to the point where non-auto IP is now falling apart.

imageSource: Goldman Sachs (via The Daily Shot)

And don’t think the U.S. goods sector is spared:

  • The July jobs report showed average weekly hours declining in 7 out of 13 industries. (The Daily Shot)
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EARNINGS WATCH

We have 426 reports in (Thursday night), a slipping 73% beat rate, a +5.5% surprise factor and a blended growth rate of +2.7%, up from +0.3% on July 1. The Goods sectors (56% of the Index) are not performing well:

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Q3’19 estimates are now –1.1%, down from +0.8% on July 1. Q4: +5.5% vs +7.2%.

Trailing EPS are now $164.26. At 2888, the Rule of 20 P/E is 19.7.

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TECHNICALS WATCH

The next several charts are from CMG Wealth updated at the yesterday’s close, except where otherwise noted:

  • 13/34–Week EMA Trend Chart
  • Volume Demand vs. Volume Supply

  

Source: Ned Davis Research

  • But Lowry’s Research’s own analysis of supply/demand suggests caution:

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  • Lowry’s adds that recent market actions have not been supported by strong demand/volume.
  • S&P 500 Index 200-day Moving Average Trend

a sell signal occurs when the 200-day MA price line drops from a high point by 0.5% or more. A buy signal occurs when the 200-day MA price line rises from a low point by 0.5% or more.

The 200dma is still rising. The same is observed for the S&P 500 Equal Weight Index, the NDX and NDXE, the NYSE and the W5000. But definitely not for any of the smaller cap indices which are still falling.

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  • S&P 500 Index 50-day vs. 200-day Moving Average Cross

Sell signals occur when the 50-day shorter-term moving average trend line drops below the longer-term 200-day moving average trend line.  This trend-following process is also in a buy signal.

Emerging-Market Stocks Correct Sharply as Trade Battle Flares Investors are fleeing emerging-market stocks and currencies, fearful that an escalating trade war between the U.S. and China will weigh on global growth.

(…) The sudden flight from the boom-and-bust asset class illustrates how drastically investor views shifted as the conflict between Washington and Beijing intensified in recent days. Many now believe the trade battle will likely weigh on global growth for the long term, undercutting the case for owning assets of emerging-market countries, particularly those with deep economic and trade links to China. (…)

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Devil Rosy Bond Ratings, a Financial Crisis Driver, Are Back

(…) In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share. All six main ratings firms have since 2012 changed some criteria for judging the riskiness of bonds in ways that were followed by jumps in market share, at least temporarily, a Wall Street Journal examination found. These firms compete with one another to rate the debt of borrowers, who pay for the ratings and have an incentive to pick rosier ones. (…)

The Journal’s analysis suggests a key regulatory remedy to improve rating quality—promoting competition—has backfired. The challengers tended to rate bonds higher than the major firms. Across most structured-finance segments, DBRS, Kroll and Morningstar were more likely to give higher grades than Moody’s, S&P and Fitch on the same bonds. Sometimes one firm called a security junk and another gave a triple-A rating deeming it supersafe. (…)

THE DAILY EDGE: 7 AUGUST 2019

World Economy Edges Closer to a Recession as Trade Fears Spread

(…) New Zealand’s central bank on Wednesday stunned investors by dropping its benchmark rate by 50 basis points, double the expected reduction and sending the kiwi tumbling. Thailand also surprised, cutting by 25 basis points. India’s central bank lowered its rate by an unconventional 35 basis points. (…)

Morgan Stanley economists predict that if the U.S. puts 25% tariffs on all Chinese imports for four to six months and the country hits back, a global economic contraction is likely within three quarters. The tensions also extend beyond the U.S and China to include Japan and South Korea as well as Britain’s future relationship with the European Union. (…)

While central banks would likely cut interest rates and perhaps resume quantitative easing, that may no longer be enough to revive animal spirits this time and governments might not be fast enough to loosen fiscal policy.

“With no end in sight, there are significant downside risks to our forecasts for U.S. and global growth,” Bank of America Corp. economists warned clients this week. “If the trade war escalates — this could include a more explicit currency war — uncertainty would be considerably higher and financial conditions much tighter.” (…)

U.S. JOLTS: Job Openings Rate Slips; Hiring Rate Steadies

The Bureau of Labor Statistics reported that the total job openings rate eased to 4.6% during June from 4.7% in May, revised from 4.6%. It remained below the 4.8% record logged early this year. The job openings rate is the job openings level as a percent of total employment plus the job openings level. The ability to find workers to fill openings remained difficult. The hiring rate held steady at 3.8%. It has been below the openings rate since mid-2014. Employers are still reluctant to let people go. The layoff & discharge rate has returned to the record low of 1.1%. Individuals remain ready to find new work. The quits rate in June held steady at a near-record 2.3% where it’s been since last year.

The private-sector job openings rate also held steady m/m at 4.9%. It remained below the 5.2% record reached in November. The rate has increased from 4.6% early last year and from the 2.0% average at the recession low in 2009. (…) The government sector job openings rate improved to a near-record 3.1%, up sharply from the 2009 low of 1.2%.

Job availability fell slightly m/m, but nevertheless remained plentiful. The level of job openings eased a modest 0.5% (-0.6% y/y) to 7.348 million after improving 0.2% to 7.384 million in May. These figures are just below the record high. Private-sector openings fell 1.8% y/y while government sector job openings jumped by one-third y/y.

Hiring activity remained stable. The private-sector hiring rate held at 4.2% and remained below January’s expansion high of 4.4%.(…) The hiring rate in government remained at 1.6%.

Haver Analytics focuses on opening and hiring rates. I prefer to look at the actual number of openings and hires. Openings have dropped 3.6% since peaking at the end of 2018. The decline is worse in the private sector: –4.8%

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The  YoY trends: total non-farm: openings –0.6%, hires –2.2%. Private sector: openings –1.8%, hires –2.0%.

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Hmmm…how tight is this labor market?

China Keeps Official Yuan Rate Just Stronger Than 7 Per Dollar China set a daily anchor for trading in its currency at the weakest since 2008 but again avoided moving that official rate beyond the symbolic 7-yuan-per-dollar level.
China Deals ‘Body Blow’ to Struggling U.S. Farm Belt Farmers, agricultural groups decry retaliatory move to stop buying U.S. crops and livestock

China’s move will affect farmers raising fuzzy green soybean pods in Illinois, milking cows in California and feeding hogs in North Carolina, all of whom have seen business suffer as a result of tariffs that Chinese officials implemented last year. (…)

Feeding China’s growing appetite has meant big business for the U.S. farm economy. China was one of the biggest export destinations for U.S. agricultural commodities from 2009 to 2017 alongside Canada and Mexico, according to the U.S. Department of Agriculture. In 2017, Chinese buyers imported $19.5 billion in farm goods. (…)

That dropped to $9.1 billion last year as China’s tariffs on U.S. soybeans, pork, milk and other products made them more expensive for importers there, prompting some to seek alternatives and scale back imports from the U.S. Over the first six months of this year, China’s agricultural imports from the U.S. were down 20% from the same period last year. (…) Jim Mulhern, chief executive of the National Milk Producers Federation, said dairy exports to China have dropped 54% so far this year.

Given the scale of China’s agricultural imports, it would be hard for U.S. farmers to make up for those sales even with much higher exports to other nations, economists say. (…)

The USDA last week began signing up farmers for a program that will disperse about $14.5 billion to U.S. farms, following a roughly $10 billion program last year. Farmers say the government payments will help but likely won’t make them whole. (…)

Research firm Trade Partnership Worldwide LLC projected in February that tariffs on U.S. exports could cost the country’s agricultural sector 59,000 to 71,000 jobs over the next two years. (…)

Fingers crossed The sheer scale of China’s need for farm commodities including soybeans make it likely that the country would need to turn to the U.S. eventually, said Terry Reilly, senior agriculture futures analyst at brokerage firm Futures International. (…)

High five Archer Daniels Midland Co. , after reporting a 58.5% decline in quarterly earnings last week, warned that China is becoming more comfortable buying food elsewhere, recently approving poultry imports from Russia and pork shipments from Argentina.

“People find alternatives, and eventually, they become a little bit more comfortable with those alternatives,” said Juan Luciano, ADM’s chief executive. “This is not good for the U.S. farmer. This is not good for the percentage of U.S. in the export markets.” (…)

Cautious calm returns as White House softens trade war rhetoric

Confused smile This Reuters’ headline is not supported by any factual “White House rhetoric” in the body of the article. I searched around and really found nothing to support that. Same with this other Reuters’ headline: Trump dismisses fears of long-lasting trade war

Tariff Fears Caused a U.S. Import Surge. Now Warehouses Are Full

A short drive outside Los Angeles lies one of the world’s biggest warehouse complexes. Gene Seroka says its 1.8 billion square feet of capacity — enough room to house 9 million cars — is “bursting at the seams.”

The warehouse district is part of the Inland Empire, serving the port of Long Beach and the twin port of Los Angeles, where Seroka is executive director. Together they handle almost half of American’s maritime trade with China. If you live in the U.S., especially the western half, your toothbrush, television or shoes may well have passed through the Empire. (…)

Now, Seroka says that spare room is down to an unprecedentedly low level of about 1%-2%. Try to squeeze in more stuff, in other words, and it’ll be impossible to drive forklifts around or even walk the aisles. (…)

Reuters’ Exclusive: China warns India of ‘reverse sanctions’ if Huawei is blocked – sources

China has told India not to block its Huawei Technologies [HWT.UL] from doing business in the country, warning there could be consequences for Indian firms operating in China, sources with knowledge of the matter said.

India is due to hold trials for installing a next-generation 5G cellular network in the next few months, but has not yet taken a call on whether it would invite the Chinese telecoms equipment maker to take part, telecoms minister Ravi Shankar Prasad has said. (…)

A high-level group of officials, led by the Principal Scientific Adviser to the Indian government K Vijay Raghavan and including representatives from the departments of telecoms, information technology and the intelligence services, has been looking into whether to open the 5G trials to Huawei.

The committee has found no evidence to suggest Huawei has used “back-door” programs or malware to collect data in its current operations in India, the first source and another official in the federal telecoms ministry said.

The interior ministry, which is responsible for the security of the infrastructure, had issued no directive to curtail Huawei’s entry, the telecoms official said.

“We can’t simply reject them just because they are Chinese,” said the official. (…)

Global Oil Prices Slide Into Bear Market Brent crude has fallen more than 20% from an April high amid fresh concerns that the U.S.-China trade war will hurt the global economy and curb fuel consumption.

(gasbuddy.com)

Heavy-Duty Truck Orders Hit Lowest Level in Nine Years Decline comes as truckers point to excess capacity and dimming industrial shipping demand

(…) FTR, which tracks equipment purchases by freight transportation carriers, said orders for heavy-duty trucks in North America fell to 9,800 in July, down 82% from a year ago. Separately, ACT Research said it counted 10,200 orders last month, the fewest it has measured in a month since February 2010. Figures for both groups were preliminary, with final reports due later this month. (…)

DAT Solutions LLC, which matches available trucks to companies looking to move goods in trucking’s spot market, said its measure of capacity in that arena was up 22.6% in July from a year ago while demand was down 37.3%. Several trucking companies said in their second-quarter earnings reports that increases in contract rates also have pulled back since the start of the year.

Truckers say a big part of the waning demand comes from weakness in the manufacturing sector. (…) FTR now expects factory output of heavy-duty trucks to decline 22% next year to about 275,000 units, down from the 353,000 units forecast for 2019, Mr. Ake said. (…)

America’s Pension Funds Fell Short in 2019 Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016

Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers. (…) Public pension plans project a median long-term return of 7.25%, according to data collected by Wilshire Associates in 2018. (…)

But those returns still haven’t brought pension funding levels close to what is needed to pay for future benefits. State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve, $4.2 trillion less than they need to pay for promised future benefits. Contributing factors include increasing lifespans, overoptimistic return assumptions, and government decisions to skimp on pension payments. (…)

Robots and firms

(…) Figure 1, constructed from the ESEE dataset, provides a clear indication that firm heterogeneity in the adoption of robots matters greatly for the labour market effects of robot technology. It demonstrates that firms that adopted robots between 1990 and 1998 (‘robot adopters’) increased the number of jobs by more than 50% between 1998 and 2016, while firms that did not adopt robots (‘non-adopters’) reduced the number of jobs by more than 20% over the same period. From macro-level information on robot use, as employed in the existing literature, it is impossible to identify and investigate this striking pattern in the data. (…)

Figure 1 Evolution of firm-level employment for robot adopters versus non-adopters

Notes: The figure depicts the evolution of average firm-level employment (measured by the number of workers) in a balanced sample of firms from 1990-2016, separately for robot adopters (solid black line) and non-adopters (dashed grey line). Robot adopters are defined as firms that entered the sample in 1990 and had adopted robots by 1998. Non-adopters are firms that never use robots over the whole sample period.

We provide strong support for a hitherto neglected mechanism, namely, that robot adopters expand their scale of operations and create jobs, while non-adopters experience negative output and employment effects in the face of tougher competition with high-technology firms. Aggregate productivity gains are partly driven by substantial intra-industry reallocation of market shares and resources following a more widespread diffusion of robot technology, and a polarization between high-productivity robot adopters and low-productivity non-adopters.