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: 11 JUNE 2019

Small Business Optimism Roars Back, Rivaling Historic Highs

No “roar” for the outlook however.

image
image

image

image

U.S. JOLTS: Job Openings Stabilize; Hiring Strengthens

The Bureau of Labor Statistics reported that the total job openings rate held at 4.7% during April, unchanged m/m but up from 4.6% twelve months earlier. It remained on the expansion’s rising trend. The job openings rate is the job openings level as a percent of total employment plus the job openings level. Finding workers to fill openings became easier. The hiring rate rose to a record 3.9%. Employers became somewhat more willing to let people go, as shown by the layoff & discharge rate which increased to 1.2% from the record low of 1.1% in March. Individuals remained ready to find new work. The quits rate held steady at a near-record 2.3% where it’s been since June of last year.

The private-sector job openings rate held steady m/m at 5.0%, but remained below the 5.2% record reached in November. (…)

The level of job openings eased 0.3% (+4.8% y/y) to 7.449 million after a 4.6% w/w rise. Private-sector openings rose 3.5% y/y while government sector job openings surged 18.7% y/y. (…)

Total hiring rose 4.2% (4.3% y/y) to 5.937 million. Hiring in the private sector also rose 4.3% y/y while government sector hiring gained 4.5% y/y. (…)

image

image
China Car Slump Extends to a Year With Few Signs of Reprieve

Retail sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 12.5% to 1.61 million units in May, the China Passenger Car Association said Tuesday. That follows a 16.6% decline in April and a 12% drop in March. (…)

Shoppers have stayed away from showrooms as economic woes and sputtering stock prices weighed on their purchasing power. Meanwhile, the rising popularity and availability of car-sharing and ride-hailing services is reducing the need for individuals to buy vehicles. (…)

Delinquency Rates Rise as Canadian Credit Card Balances Grow

The 90-day delinquency rate gained to 1.12% in the first quarter, up slightly from 1.08% in the same quarter a year earlier, the country’s largest credit reporting firm said Tuesday. Delinquencies rose the most among those 65 years old and over, while British Columbia and Ontario saw the first “significant” increase in arrears in half a decade, the firm said. (…)

Corporate defaults are picking up across Europe
World Economic Leaders Warn of Fallout From Trade War Between U.S. and China

(…) In a closing statement, or communiqué, officials at the G-20 warned that trade tensions have “intensified” and agreed to address the risks. (…)

“I don’t think in any way that the slowdowns you’re seeing in parts of the world are a result of trade tensions at the moment,” Mr. Mnuchin told reporters on the sidelines of the G-20. (…)

[Mnuchin] said he had no plans to return to Beijing before Mr. Trump and Mr. Xi meet and that Chinese officials would not be traveling to Washington. The Treasury secretary, who has shuttled back and forth to China several times in the past year, said he had had no contact with Liu He, the Chinese vice premier and top trade negotiator, since early May. (…)

“We are not far from a real and open trade war between China and the U.S.,” Bruno Le Maire, France’s finance minister, said in an interview on the sidelines of the gathering on Sunday. “I think all the G-20 people are aware that kind of situation would lead to an economic crisis, to a lack of growth and to a slowdown everywhere in the world.” (…)

Trump warns Xi of further tariffs if G20 talks fail to materialise

Where things stand right now, every responsible person needs to plan for the worst. Risk management has to be tilted toward the worst case scenario that can be triggered, or not, by “the orange swan”.

The FOMC meets next week under tremendous pressure from Trump and the market to cut rates and ease financial conditions. If they don’t cut and trade wars erupt, the Fed will get blamed. If they ease preemptively, they may lose credibility.

Since Fed officials last met, the economic outlook has turned bleaker with the worsening of trade tensions with China. Bond markets turned more anxious after Mr. Trump’s unexpected decision to threaten tariffs on Mexico to secure tighter migration curbs.

Rising worry about a pullback in business sentiment and investment from a sustained conflict is giving the Fed new reason to consider rate cuts. Generally speaking, the Fed will want to move more quickly than it has in previous cycles to shore up growth at the first hint of any economic contraction because with its short-term benchmark at a historically low range of between 2.25% and 2.5%, it doesn’t have as much room to cut rates as in previous downturns. (WSJ)

China has been acting preemptively for months now.

Trump on a CNBC show yesterday where he called to berate the EVP of the U.S. Chamber of Commerce who was criticizing his trade tariffs:

The head of the Fed in China is President Xi. He can do whatever he wants. They devalue. They loosen.

On the Fed:

They made a big mistake. They raised interest rates far too fast. It’s more than just Jay Powell. We have people on the Fed that really weren’t—you know, they’re not my people.

Bloomberg, for the record:

Trump has nominated four of the five current members of the Fed Board of Governors in Washington, having nominated Randal Quarles and Michelle Bowman in addition to Powell and Clarida. All voted for the rate hike in December, together with Governor Lael Brainard, who was appointed by President Barack Obama, plus five regional Fed presidents who also vote on monetary policy decisions but aren’t picked by the White House.

Confused smile Trump’s Softer Stance on Huawei Is ‘New Nuance,’ Canada Says

The U.S. is pressing allies like the U.K. and Canada to ban Huawei from new 5G telecommunications networks, including by threatening to limit intelligence-sharing — only for Trump to say last week the step wouldn’t be necessary with Britain.

Canadian Public Safety Minister Ralph Goodale told reporters Monday in Washington that Ottawa continues to weigh whether to ban Huawei, but noted Trump’s comments in a news conference with British Prime Minister Theresa May and said he was seeking more detail. Goodale was scheduled to speak with Acting Secretary of Homeland Security Kevin McAleenan later Monday.

“Just last week there was another new nuance in this discussion,” Goodale said. The president, he said, “indicated that he thought whatever difference of view could be easily worked out.”

Asked what he thought Trump meant, the Canadian replied: “I’m anxious to examine that question.”

The U.S. has been leaning on allied nations to ban or restrict the use of Huawei — and Secretary of State Michael Pompeo has threatened to choke off intelligence sharing otherwise. (…)

The president said he was confident that the U.K. and U.S. would agree eventually on how to treat the Chinese telecommunications firm. “We’re going to have absolutely an agreement on Huawei and everything else. We have an incredible intelligence relationship, and we will be able to work out any differences,” he said.

The president answered “no” after he was asked whether the U.K. could be cut off from U.S. intelligence over the dispute. (…)

Vice President Mike Pence said in an interview with Fox News on Monday that the U.S. continues to regard Huawei as a national security threat because of the Chinese government’s alleged power to access its data.

Huawei “represents a fundamental compromise of our national security and of the national security of our allies,” Pence said, adding the administration has “said that to our allies very consistently.”

“I do see it as a threat. At the same time, it could be very well that we do something with respect to Huawei as part of our trade negotiation with China,” Trump said during a phone interview with CNBC on Monday morning. “China very much wants to make a deal. They want to make a deal much more than I do, but we’ll see what happens.” (…)

U.S. Corporate Cash Piles Drop to Three-Year Low

Companies funneled record amounts of cash to stock buybacks, dividends, capital spending and acquisitions last year. As a result, U.S. corporate cash holdings fell to a three-year low of $1.685 trillion in 2018, according to a report from Moody’s Investors Service Inc.

The drop in corporate cash hoards, the first since 2015, came as companies rushed to take advantage of lower taxes on foreign income.

Apple Inc., again the top cash holder, saw its cash pile drop 14% to $245 billion. Rounding up the top five were: Microsoft Corp. , Alphabet Inc. and newcomers Amazon.com Inc. andFacebook Inc., which replaced Cisco Systems Inc. and Oracle Corp. in the top five.

Combined, the five companies held $564 billion, or 33% of the total nonfinancial corporate cash balance, down from $675 billion, or 34% in 2017, according to the report, which looked at 928 U.S.-based, nonfinancial companies. (…)

The Moody’s report found that share repurchases, net of stock issuance, nearly doubled in 2018 to a record $467 billion, driven by strong cash generation and supported by the tax overhaul.

This year, it will still be a “healthy number,” albeit likely not a record, as companies err on the side of caution, given apprehensions about the economic outlook, said Richard Lane, senior vice president at Moody’s and the report’s lead author.

Meanwhile, aggregate debt rose 1.4% to $5.655 trillion in 2018, the lowest increase in a decade, Mr. Lane said.

Still, leverage ratios improved on an earnings before interest, taxes, depreciation and amortization basis and as measured by free cash flow.

THE DAILY EDGE: 10 JUNE 2019

A Worrying Jobs Number With Trade Hit Looming May’s jobs data is especially worrying because it comes before any real hit from the latest trade tensions

The economy added just 75,000 jobs last month, the Labor Department reported Friday, less than the 180,000 economists had forecast. Worse, jobs figures for the previous two months were revised down by a combined 75,000 jobs. (…)

One thing that was disconcerting in this report was that the weakness was widespread, with several industries experiencing tepid hiring and some, such as retail, posting job losses.

Another worry is that the jobs figures dovetail with the May weakness reported in the ADP National Employment Report on Wednesday. That report, which is based on data from payroll giant ADP, has a less-than-stellar record of predicting the Labor Department’s jobs figure, but it can be a useful check on the official count. In this case it suggests that Friday’s report was no statistical anomaly, and the weakness is really there. (…)

(…) Forecasting firm Macroeconomic Advisers, for instance, projected Friday—after the employment report was released—that the economy would expand at a 1.4% annual rate in the second quarter, down from a 3.1% pace in the first three months of the year. The firm noted “unexpected weakness in employment, hours and earnings through May” points to lower second-quarter consumer spending than earlier estimated. (…)

The chart below plots a proxy for take-home-pay against nominal expenditures and retail sales. The Payroll Index is up 4.7% YoY, down from 4.9% and 5.2% in April and March respectively. The last 2 months have been particularly weak, up 2.5% annualized after +4.1% in Q1.

image

Total employment growth has slowed from the +2.0% YoY range to +1.5% in May. More worrisome is the sharp slowdown in prime working age employment. The U.S. has shed 204k jobs for 25-54- year olds in the last 3 months compared to a monthly average of +124k in 2018. Prime age employment is up only 0.5% YoY in May, down from +1.7% last October. Manufacturing employment has totally stalled since March (+5k in the last 3 months vs +20k on average in 2018).

image

One ominous sign is that revisions to recent stats have mostly been on the downside. Not a good sign.

  • The recent bounce in the Citi Economic Surprise Index is reversing. (The Daily Shot)

BTW, on June 6:

U.S.-based employers announced plans to cut 58,577 jobs from their payrolls in May, up 46% from the 40,023 cuts announced in April, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc.

May’s cuts are up 86% from the same month last year, when 31,517 cuts were announced. So far this year, employers have announced 289,010 job cuts, 39% higher than the 207,977 cuts announced in the same period last year.

“The Tech sector announced the highest number of job cuts last month. Large Tech firms are finding they need to move workers through the pipeline in order to become more agile. In fact, we’ve seen a number of Tech and Telecom companies offering buyouts to older workers over the last year,” said Andrew Challenger, Vice President of Challenger, Gray & Christmas, Inc.

Companies in the Technology sector announced 12,635 job cuts in May, bringing the year-to-date total to 18,568, 342% higher than the 4,205 announced through this point last year. Telecom companies announced the second-highest number of cuts in May with 6,751, 60% of the 11,202 total cuts announced for the year. (…)

So far this year, Industrial companies have announced 44,552 cuts, the second highest of the year and 671% higher than the 5,782 job cuts announced through May 2018.
Meanwhile, companies in the Automotive industry have cut 21,446 jobs, 211% higher than the 6,905 cuts in that sector in the first five months of 2018. It is the highest five-month total since 2009, when 111,614 cuts were announced through May. In fact, this year’s total for the sector has already surpassed year-end totals for every year since 2009, with the exception of last year, when 30,587 total cuts were announced, and 2012, when 24,092 Auto cuts were announced for the year. (…)

Note that these are announced layoffs which will hit the employment stats in coming months. So, take the next line from The Daily Shot with a grain of salt:

  • The trend doesn’t look promising. However, many economists expect a rebound in June.

Source: FTN Financial

Meanwhile, just north of the U.S. border, jobs are literally booming in an economy one-tenth the size of the U.S.:

image

The economy added 27,700 in May, Statistics Canada said Friday in Ottawa, bringing the gain over the past 12 months to 453,100. The unemployment rate fell to 5.4%, the lowest in data going back to 1976. (…)

Canadian employment is now up 2.4% from the same period in 2018, the largest year-over-year increase since before the 2008-2009 recession. The number of people unemployed is also the lowest in a decade. Over the past two years, Canada’s economy has added almost 700,000 new jobs. (…)

Pointing up “One of the things that I suspect is happening there is that global technology companies that are by and large US-based, the Googles, the Facebooks, the Amazons, etc., are hiring workers to a greater extent in this geography relative to the U.S.,” Neil Selfe, a founding partner at Infor Financial Group Inc., told Bloomberg News on Thursday. That’s “because of the visa issues and the immigration issues of the Trump administration.” (…)

Annual hourly wage gains accelerated to 2.8% in May, from 2.5% in April, bringing it to the fastest since August last year. Pay gains for permanent employees were steady at 2.6%.

China Imports Fall as Trade Conflict Saps Demand China’s imports dropped sharply last month, in a fresh sign of anemic demand in the domestic economy, adding to the pressure on Beijing as it struggles to manage trade tensions with the U.S.

Imports fell 8.5% in May from a year earlier, after rising 4.0% in April, according to data from the national customs agency released Monday. The May drop was sharper than many economists’ expectations, and though weaker prices for commodities such as soybeans played a role, some economists pointed to waning momentum in the broader economy. (…) Exports rose 1.1% from a year earlier, after dropping 2.7% in April, the customs data showed.

Some economists said the rise may have resulted from the yuan’s sharp depreciation against the dollar—nearly 2.5% in May—to offset the higher tariffs the Trump administration imposed on some Chinese goods. Businesses also likely rushed out orders to beat the deadline for those higher tariffs, the economists said. The U.S. last month raised tariffs on $200 billion in Chinese goods to 25% from 10%, effective June.

Exports to the U.S. continued to drop last month, but the 4.2% decline was less steep than April’s. China’s trade surplus with the U.S. widened to $26.9 billion from April’s $21.0 billion, according to the customs data.

Critically, exports of rare earths—minerals used in many high-tech goods—slumped nearly 19% last month from a year earlier, twice the rate of April’s decline. (…)

(…) “I don’t think along this mathematical scale, any number is more important than other numbers,” Yi said when asked if there was a red line for the yuan. He also said that “a little flexibility” in the yuan was good for the economy, as it acts as stabilizer for the balance of payments. (…)

U.S., Mexico Reach Deal to Avoid Tariffs President Trump dropped his threat of tariffs on billions of dollars of Mexican imports after negotiators reached a deal on measures to stem the flow of migrants pouring into the U.S. from Mexico.

The deal to avert tariffs that President Trump announced with great fanfare on Friday night consists largely of actions that Mexico had already promised to take in prior discussions with the United States over the past several months, according to officials from both countries who are familiar with the negotiations. (NYT) (…)

Trump, Xi to Meet at G-20 as Trade Hostilities Persist President Trump and Chinese President Xi Jinping will meet at the Group of 20 leadership summit in Japan at the end of this month, U.S. Treasury Secretary Steven Mnuchin said.

(…) Mr. Mnuchin urged China to return to the terms that the two countries had been negotiating before trade talks fell apart in May. China should come back to the “basis that we were negotiating,” he said. (…)

When asked whether there would be minister-level meetings between the two countries before the G-20 leadership summit, Mr. Mnuchin said “we haven’t gotten to that level of logistics” and that as of now, the U.S. had no plans to visit Beijing or receive Chinese officials in Washington.

Recall that the “basis that we were negotiating” was turned down as unacceptable when last presented to Xi and the Politburo.

Chinese President Xi Jinping told an audience at the annual St. Petersburg International Economic Forum (SPIEF) on Friday that the U.S. isn’t interested in disconnecting with China and that President Donald Trump is his friend. (…)

“It’s hard to imagine a complete break of the United States from China or of China from the United States. We are not interested in this, and our American partners are not interested in this. President Trump is my friend and I am convinced he is also not interested in this,” Xi said in Chinese, interpreted into Russian and then translated into English by Reuters.

Earlier, and after being asked about a trade war with the United States, Xi said, via translation, that China would remain an “ardent proponent of globalization.” To applause from Russian President Vladimir Putin, Xi added that global integration was still “intact as a trend” and could not be checked by arguments over trade terms.

“It is a small part of a greater wave, which will bring some small changes, but won’t be able to stop globalization overall,” he said.

Xi said global systems and the organizations that set terms were in need of improvement but there was no need to overhaul the system. (…)

On Wednesday, President Xi Jinping had already described Russian President Vladimir Putin as his “best friend.”

“In the past six years, we have met nearly 30 times. Russia is the country that I have visited the most times, and President Putin is my best friend and colleague,” Xi said at a press conference Wednesday afternoon. (…)

Welcoming Xi to the Kremlin on Wednesday, Putin said ties between Russia and China stood at “an unprecedented level.” Xi echoed that sentiment by saying that the countries’ relations had withstood “trials and tribulations” over the years and were now better than ever.

“We’ve managed to take our relationship to the highest level in our history,” Xi said. “We will continue to improve our ties and we are ready to go hand in hand with you,” he told Putin at the leaders’ initial meeting that was broadcast online.

The FT reports that China has handed out commercial 5G licences to its major carriers earlier than expected, accelerating the nation’s rollout of next-generation mobile networks, in spite of the U.S. ban on Huawei. “In a notice issued on Monday, MIIT said that Nokia, Ericsson, Qualcomm and Intel had joined in 5G tests in China and it welcomed foreign and domestic companies to participate in the market.”

Fortune reports that the smartphone giant has been priced out of the market by local competitors and that its market share in China has declined from 20% in 2013 to just 1% now. “Samsung has shifted production to Vietnam and India. However, the South Korean tech firm is still developing a semiconductor plant in China’s Xi’an province, pledging over $14 billion to phase two of its development in May.”

TECHNICALS WATCH

Lowry’s Research’s established protocols triggered 3 buy signals last week as its gauges of Supply/Demand and other technical measures all registered strongly on the June 4th 2.1% rally. “Since these buy signals and signs of market strength follow a very oversold market condition (the most oversold since the Dec. 24th 2018 bottom), the probabilities that the intermediate-term uptrend has resumed appear high.”

This 13/34–Week EMA Trend Chart, courtesy of CMG Wealth, is another measure of the intermediate trend. At the close of Wednesday June 5th at 2830 on the S&P 500 (last point on chart), the March 6 upside signal continues but needs watching.

image

SentimenTrader notes that more than 15% of S&P 500 stocks hit 52-week highs on Thursday, the first time in 18 months. “There have only been 5 other times since 1990 when it took a year or more to achieve this many new highs within the index.” ST shows that in 4 of the 5 episodes, stocks did pretty well over all periods up to a year, except in 2002 when the S&P 500 tanked 28.8% during the next 12 months. Note that 3 of the 5 episodes took place during this last bull market.

For my part, I note that the S&P 500 Index 200d m.a. has turned down on May 23rd but ticked up last Friday. The Index closed 3.9% above its 200d m.a.. Same reading with NDX.

image

With the market snap back, valuation is almost back to Fair Value (19.7 at today’s pre-opening of 2890). FV is 2934 given trailing EPS of $163.95 and 2.1% inflation.

image
Pointing up Stanley Druckenmiller Interview – The Economic Club of New York (2019) 

Ninja China social media: WeChat and the Surveillance State

China’s WeChat is a site for social interaction, a form of currency, a dating app, a tool for sporting teams and deliverer of news: Twitter, Facebook, Googlemaps, Tinder and Apple Pay all rolled into one. But it is also an ever more powerful weapon of social control for the Chinese government.

I’ve just been locked out of WeChat (or Weixin 微信 as it is known in Chinese) and, to get back on, have had to pass through some pretty Orwellian steps – steps which have led others to question why I went along with it.

One reason is that life in Beijing would be extremely difficult without WeChat. The other is that I could not have written this piece without experiencing the stages which have now clearly put my image, and even my voice, on some sort of biometric database of troublemakers. (…)

BTW, WeChat is owned and operated by China’s Tencent Holdings…Makes you wonder…