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 NOVEMBER 2018

U.S. Oil Falls for 8th Day in a Row as Supplies Surge

(…) The Energy Information Administration said Wednesday that inventories of crude oil in the U.S. surged by 5.8 million barrels last week to 432 million barrels, the highest total since early June. The report also said U.S. oil production exploded to a record 11.6 million barrels a day last week, from 11.2 million barrels a day a week earlier. (…)

“Saudi Arabia has indicated several times that they intend to preserve market stability, so the last increase in oil inventories has triggered it to put a supply cut on the agenda of the meeting,” said Giovanni Staunovo, commodities analyst at UBS Wealth Management.

President Trump, speaking at a press conference Wednesday, said his decision to soften the oil sanctions against Iran was directly responsible for driving down market prices for crude oil.

“I’m driving them down. If you look at oil prices, they’ve come down very substantially,” Mr. Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly. I don’t like it.”

Mr. Trump said the softened oil sanctions on Iran “will get tougher as time goes by, maybe,” but added he has to be careful because “I don’t want to drive the oil prices up to $100 or $150 a barrel.” (…)

Just in time for a merry end of year:

  • Morgan Stanley’s retail sales tracker shows an improvement in October.

Source: Morgan Stanley Research (via The Daily Shot)

China Car Sales Drop for Fifth Month to Leave Carmakers Reeling
  • Retail sales of sedans, multi-purpose vehicles and sport utility vehicles dropped 13.2 percent to 1.98 million units last month, the China Passenger Car Association said on Thursday. Sales in the first ten months of 2018 fell 2.5 percent to 18.4 million units. (…)
  • Total vehicle sales this year will remain under 30 million units and could drop from 2017, Wu Wei, a National Development and Reform Commission official, said Wednesday. Deliveries of vehicles to dealerships amounted to 28.9 million units last year, rising 3 percent from 2016.
  • To stimulate demand, China’s top economic planning body has submitted a proposal to halve the tax on purchases of vehicles with engines no bigger than 1.6 liters, people familiar with the matter said last month. No decision has been made, they said.
POLITICS
Democrats’ House Victory Complicates Trade Deals The Trump administration is facing a heated trade battle with Congress after the Democratic Party retook the House of Representatives, posing a significant challenge to President Trump’s deal with Mexico and Canada.

(…) Most Democrats, backed by unions, have voiced skepticism about liberalizing trade unless the deals allow workers in the other countries to take advantage of higher labor standards and wages. Passage “will depend on whether unions will want to push it,” a senior White House official said.

The AFL-CIO, a large federation of labor unions, said in official comments that it has “serious doubts that the improved rules will make a meaningful difference to North American working families without additional provisions.” Several environmental groups have rejected the new agreement as well. (…)

Democratic lawmakers complain the new deal doesn’t have strong enough enforcement mechanisms to ensure that Mexico implements tougher the labor rules, which include requirements for allowing fully independent unions with collective bargaining rights to help boost wages. (…)

Mr. Trump still holds leverage. He has repeatedly warned he would withdraw from the current version of Nafta if he doesn’t get a new one. Faced with a choice between Mr. Trump’s USMCA or a withdrawal from the deal, many lawmakers would hesitate to take a hard line. (…)

Republicans Weaponized the House. Now, Democrats Will Use It Against Trump 
US midterm elections: Is gridlock good?

(…) Conventional wisdom has it that a gridlocked Congress is good for markets as it prevents politicians from interfering in the economy. However, US markets have received a considerable boost from the president’s tax cuts and deregulation measures.

Going forward, gridlock means less fiscal support for the economy as Democrats are unlikely to back further tax cuts. This could create a problem for US growth in 2020 when the existing package fades and is not replaced by further measures. It is possible that the president and the Democrats could strike a deal on infrastructure spending, but they may hesitate to take measures that could help get Trump re-elected as president.

Faced with a potential block on fiscal policy, the president may turn to trade policy and look to strike a deal with China and so prevent a further damaging escalation in the trade war. From an economic perspective, that would be the logical step. However, Trump will have to weigh up whether the economic costs outweigh the political benefits of playing to his base support – many of whom see tariffs as an essential part of putting America first. (…)

In the House, a number of Republican moderates lost or chose not to stand for re-election. This means the Republican House caucus will become more conservative and more Trump-like. The new House Democratic majority will be more challenging to the president on a number of issues. Consider the possibility of a House committee issuing a subpoena for him to release his tax returns. (…)

Gavekal has a more positive view:

In short, the US investment environment remains positive for growth and equity markets. While the exceptional growth of economic output and corporate profits seen this year will likely soon moderate, financial conditions remain favorable. There are risks to the status quo—chief among them being rising trade barriers, higher labor costs and rising interest rates. The trade war is little affected by this election, and remains a concern. On the margin, this election result probably reduces the risk that labor costs and bond yields rise rapidly from here on. Both are likely to keep trending upward, but if they do so gradually then this growth period and equity bull market probably have a while longer to run.

My humble view:

Politicians being what they are, their sight is now totally focused on November 2020. Dems will make sure not to help Trump in any way and Trump will make sure voters are aware of that. As the FT reports, the new Congress, which takes office in January, will be the most ideologically polarised in US history, according to a scoring system developed by Adam Bonica, a professor at Stanford University.

Gridlock means that equity investors will need to assess how corporate profits will behave during 2 years when the economy will be left to its own: no new major fiscal stimulus, no new major tax cuts while corporate costs will keep rising (e.g. wages, logistics, interest rates) while Federal debt will go through the roof following the 2017-18 fiscal largesse.

Best outcome is gridlock brings Goldilock. Good luck!

The NYT:

Exit Polls: How Voting Blocs Have Shifted From the ’80s to Now
  • Women broke hard for Democrats, this year, even more so than usual.
  • In the 2016 presidential election, 55 percent of white women voted for Republicans. And this year, the group backed Democrats and Republicans evenly.
  • This year, voters under age 30 broke for Democrats by a 35-point margin.
  • All racial groups moved left, but white voters remain solidly Republican.
  • This year, Asian voters swung left more than any other voters of color.
  • Lower-income voters remain a core part of the Democratic Party’s base, but this year, the second largest shift left came from voters who make $50,000 to $100,000 annually. The wealthiest voters continue to vote Republican.

I find this chart fascinating: all income groups have shifted left in spite of the strong labor market and tax cuts:

image

EARNINGS WATCH

We now have 419 reports in, 78% beat rate and a continually rising beat factor reaching a record +6.6%:

image

Q3 earnings are now expected to be up an amazing 27.7% from 21.6% expected Oct.1 and 26.6% and 24.9% in Q1 and Q2 respectively.

Trailing EPS are now $157.53 or about $160 pro forma the tax reform for the full 12 months. Future EPS have not changed in recent days.

At 2800 on the S&P 500 Index, the Rule of 20 P/E is 19.7 on pro forma trailing EPS. Maybe, Mr. Market’s main fear before the mid-terms was a loss of both Congress and the Senate. Gridlock bring Goldilocks?

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TECHNICALS WATCH

Not my forte, but I note that

  • the S&P 500 Index jumped back up above its 200dma;
  • the 200dam is still declining but that could reverse quickly with a few more good days.
  • there was never a lower low since the February 9 low.

spy

THE DAILY EDGE: 7 NOVEMBER 2018: Earnings Matter

Job Openings Outnumbered the Unemployed by More Than One Million

There were a seasonally adjusted 7.01 million job openings on the last business day of September, the Labor Department said Tuesday. That compares with 5.96 million jobless Americans actively looking for work during the month that the unemployment rate fell to a 49-year low of 3.7%.

The number of job openings in September fell slightly from an upwardly revised 7.29 million in August, the highest level on record. In August, openings outnumbered the unemployed by 1.06 million.

Before March, job openings had never exceeded unemployed workers in more than 17 years of monthly records. Most of the decline in openings occurred in the South, the region hit by Hurricane Florence in mid-September. (…)

  • While most sectors saw a slight pullback, demand for healthcare workers hit another record high. (The Daily Shot)

large image(Haver Analytics)

Mortgage Applications Decreased in Latest Weekly Survey

Global PMI holds close to two-year low on weak Europe and China growth
  • Growth slows sharply in Europe and China but perks up in US and Japan
  • Steepest prices rises seen in Germany and the US

Global business activity grew at a marginally improved rate in October, suggesting the pace of economic growth accelerated for the first time in four months. However, the improvement in part reflected weather-related rebounds in the US and Japan. Even with these rebounds, the rate of increase was the second-weakest seen over the past two years.

Tariffs were a key factor behind a jump in firms’ costs, alongside higher energy prices and rising wages in some countries. Measured across both sectors, input costs showed the second-largest monthly increase since June 2011.

Average selling prices for goods and services also rose sharply again as firms passed higher costs on to customers. The monthly rise in prices charged was just below the survey record high seen in September, moderating slightly in both manufacturing and services.

Among the major economies for which comparable data are available, the steepest rise in selling prices was seen in Germany, followed by the US.

EARNINGS WATCH

Earnings matter more than anything else. We now have 405 reports in and the beat rate is 78% and the beat factor is +6.5%. The beat factor on revenues is +1.4%.

Q3 earnings are now set to jump 27.5% (24.1% ex-Energy) an a 8.4% revenue growth (7.3% ex-E).

Trailing EPS are now $157.40 or $160.00 pro forma the tax reform for 12 months. The $162.67 estimate for 2018 will likely prove too low.

The Rule of 20 P/E is now 19.5 on pro forma trailing and 19.3 on $162.67 on today’s pre-opening of 2775.

Split Congress poses new obstacles to Trump during his next two years in office The outcome tests the appetite of both sides—Democrats in the House and Republicans in the Senate and White House—to work together after years of partisan conflict often marked by personal attacks.
What Gridlock Means For The US Economy: Goldman Sachs Explains
  • No major changes on taxes: (…) a proposal making substantial revisions to the 2017 tax reform legislation is very unlikely to attain the 60 votes needed in the Senate, if it even came up for a vote. (…)
  • Spending is likely to be extended around current levels: Under a divided Congress, we expect Congress to approve discretionary caps for defense and non-defense spending for FY2020 and FY2021 that are roughly flat in real terms with the spending caps for 2019 that Congress approved earlier this year. While President Trump has called for a 5% cut in discretionary spending—this would work out to around a $65bn (0.3% of GDP) reduction—we expect that Democratic House leaders will insist on a higher level closer to the current level. Note that whatever is decided is unlikely to influence spending trends until 2020, as the spending caps for FY2019 were already agreed to earlier this year. (…)
  • An infrastructure deal seems unlikely: A divided Congress is unlikely to enact a major infrastructure program, in our view. While President Trump and congressional Democrats have both supported infrastructure programs, the details differ substantially and, more importantly, Democrats might not be motivated to reach an agreement with the White House prior to the 2020 presidential election.
  • Healthcare will be a major issue: Healthcare was listed as a top issue for more voters than any other in exit polling, with 42% listing it as the top issue. The Democratic-majority House is likely to pass drug pricing legislation, but it could be blocked in the Senate. That said, with President Trump also publicly supportive of drug pricing changes, Senate Republicans could come under pressure to reach a compromise on the issue.
  • Trade policy should not be directly affected: A Democratic House poses some risk to passage of the implementing legislation for the US-Mexico-Canada Agreement (USMCA), but we expect that the deal would eventually be approved. However, potential opposition could prompt President Trump to initiate the withdrawal process from the current NAFTA, forcing the House to choose between the new deal or none at all. We do not expect the midterm election outcome to change the Administration’s direction on US-China trade policy, where we think additional tariffs in 2019 are more likely than not.
  • Little impact on the regulatory agenda: Control of the House has little direct impact on the regulatory agenda, since (1) most House-passed legislation would likely be blocked in the Senate, and (2) most regulatory changes under the Trump Administration have been carried out with existing authority and have not needed congressional approval. That said, it is likely that regulatory scrutiny of some regulated industries (health care, financial services) could increase through House committees.
  • Fiscal deadlines become riskier: Fiscal deadlines will become somewhat riskier under a divided Congress, in our view. The next spending deadline is December 7, 2018 (before election results take effect) but this is likely to be pushed to either Q1 2019 or September 30, depending on what Congress decides after the election. Under a divided Congress, there will be a substantial risk of shutdown at the next spending deadline in 2019, though whether it happens will depend on the political environment at that point. The debt limit will be reinstated March 1, 2019 and we expect Congress will need to raise it by August. We note that the two most disruptive debt limit debates in recent memory, in 2011 and 2013, both occurred in a divided Congress.
  • No major signal regarding 2020: We do not believe that the midterm election result sends much of a signal regarding the outlook for the 2020 presidential contest. (…)
Pompeo’s Nuclear Talks With North Korea Canceled The indefinite delay of the high-stakes talks scheduled for Thursday dealt a setback to a rocky diplomatic process and lowered hopes for progress on denuclearization.
France vows to defy US on Iran sanctions Bruno Le Maire seeks to prevent Washington acting as world’s ‘trade policeman’