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 (21 June 2018): Earnings Watch

BOOM?
Shipments to U.S. Ports Soar on Rising Retail Demand, Trade Worries

In the first half of the year, retail imports shipped to major U.S. ports are expected to reach 10.2 million 20-foot equivalent units, a standard measure for container cargo—an increase of 3.8% over the same period last year, according to the National Retail Federation.

Strong economic growth is pushing more goods through supply chains, straining U.S. logistics providers from truck fleets to warehousing operations. Volume also is surging as companies, anticipating the coming changes to U.S. trade policy, have ramped up orders for parts and products from their overseas manufacturers to reduce the financial impact of new tariffs.

“In the face of uncertainty, people are building up inventories,” said Lora Cecere, an analyst with research firm Supply Chain Insights. “I don’t know in the last two decades when we’ve had this level of nervousness in the supply chain.” (…)

The monthly Global Port Tracker report, released earlier this month by the National Retail Federation and Hackett Associates, projected that imports would continue at a record-setting pace through the summer and fall months. (…)

“Unfortunately, that really translates into costs for our customers—increased rates on the transportation side and increased wages for our associates,” Mr. Carlier said. “Everything that can happen is converging right now.”

Spring Home Sale Season Shows Signs of a Bust A booming economy is providing little boost to the critical spring homebuying season, which is stuck in neutral due to a lack of inventory, high home prices and rising mortgage rates.

Sales of previously owned U.S. homes dropped 0.4% in May from the prior month to a seasonally adjusted annual rate of 5.43 million—the second-consecutive month they declined, the National Association of Realtors said Wednesday. Compared with a year earlier, sales in May were down 3%. (…)

First-time buyers made up 31% of sales in May, down from 33% both the prior month and a year earlier, according to the National Association of Realtors. (…)

Total housing inventory at the end of May climbed 2.8% but is still 6.1% lower than a year earlier and has fallen year-over-year for 36 consecutive months, according to NAR.

(…) the median sale price for an existing home in May was $264,800, up 4.9% from a year earlier and a new all-time high, according to NAR. Prices have risen 71% from the low in January 2012. (…)

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(Haver Analytics)

(CalculatedRisk)

Why such low supply as prices keep rising?

Maybe investment funds’ buy-to-rent drive after the GFC has significantly changed the normal cycle.

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Turned out to be a pretty good biz:

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Demand also has a problem:

U.S. Homes Prices Least Affordable in Almost a Decade The American dream continues to fade for many people.

(…) “Miami real estate luxury sales continue trending upward,” said the Miami Association of Realtors chairman George C. Jalil. “Strong pent-up demand for $1 million-and-above Miami properties, sellers becoming more reasonable with their prices and the federal tax reform leading more home buyers from high-taxed northern states to purchase in Florida, which has no state income tax, are several key factors.” (…)

Meanwhile, sales of overall Miami homes dropped 3.9% year over year, from 2,728 to 2,622. The decrease is due to a lack of inventory in lower price points, according to the report. (…)

CHINA SLOWING

CHARTS THAT BOTHER

The charts below show the gap between the unemployment rate and the inflation rate (CPI) closing as each economy nears or enters a recession (the grey shaded areas). Fortunately, each of them show that while the gap has been closing, it has not yet closed—signaling there may be more time left in the economic cycle before a recession.

The above chart of the “Misery Ratio” from Charles Schwab’s excellent Liz Ann Sonders suggests a close watch of this trend. This longer term chart says don’t bother too much:

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This next chart from LPL Research wants to lure us into industrial stocks to play the Capex Theme, showing that Industrials are lagging the ISM Index:

But the also excellent Dan Russo at Chaikin Analytics shows the positive correlation between Industrials (XLI) and emerging markets stocks (EEM) and the recent lag of the former over the latter…

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…while warning that the latter is displaying dangerous signs of breaking down:

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Also, keep in mind that the stronger USD is not helping industrial exports, nor EMs, as a matter of fact.

U.S. Commerce Secretary says Canada is not a national-security threat  Wilbur Ross also acknowledged that the U.S. does not have a trade deficit on steel with Canada

German Auto Makers Back Scrapping EU-U.S. Car Import Tariffs

Germany’s leading auto makers have thrown their support behind the abolition of all import tariffs for cars between the European Union and the U.S. in an effort to find a peaceful solution to the brewing trade war.

The U.S. ambassador to Germany, Richard Grenell, brought the proposal for a broader industry trade pact to the Trump administration on Wednesday, according to people familiar with the situation. (…)

During these talks, which the ambassador initiated, the managers said they would back the scrapping of all import tariffs on trans-Atlantic trade in automotive products as the keystone of a broader deal covering industrial goods. The German government is on board and Mr. Grenell promised to support the idea, according to U.S. and German officials. (…)

Getting France on board may be almost as difficult as convincing Mr. Trump to play ball. (…)

High five One catch is that the Europeans also want a 25% U.S. tax on imports of light trucks—pickup trucks, sport-utility vehicles, and big vans—scrapped. Abolishing this relic of the Johnson administration could alienate U.S. auto workers, a core constituency for Mr. Trump in the midterms this fall. (…)

EARNINGS WATCH

First of many?

Daimler Issues Profit Warning as Chinese Tariffs Hit U.S.-Built SUVs Daimler shares fell sharply after the car maker issued a surprise profit warning, saying Chinese retaliatory import duties on vehicles built in the U.S. would hit sales and profits of the SUVs it builds at its Alabama factory.

The Stuttgart-based maker of luxury sedans and muscular sport-utility vehicles issued an unexpected profit warning late Wednesday, saying Chinese retaliatory import duties on vehicles built in the U.S. would hit sales and profits of the SUVs it builds at its Alabama factory.

“This effect cannot be fully compensated by the reallocation of vehicles to other markets,” Daimler said in a statement.

Daimler now expects pretax profits at its Mercedes-Benz Cars division to fall slightly below the previous year’s levels.

Shares in Daimler fell 4.5% in early trading on Thursday, with the warning also weighing on BMW AG, down 2.9%, and Volkswagen AG, which fell 2.1%. (…)

German auto makers Daimler, BMW, and Volkswagen operate four manufacturing plants in the U.S. that employ 36,500 American workers. Last year, the German auto makers produced 804,200 vehicles at those plants, but less than half were sold in the U.S. The rest, around 480,911 vehicles, were exported to Canada, Mexico, Europe, China and other markets.

High five But most tariffs are not even in force at present and might not even be implemented. Reuters adds this statement from Daimler:

“Fewer-than-expected SUV sales and higher-than-expected costs, not completely passed on to the customers, must be assumed because of increased import tariffs for U.S. vehicles into the Chinese market,” it said in a regulatory filing.

Lower than expected sales and higher than expected costs not completely passed on to customers. That is the reality: lower sales and squeezed margins. Potential tariff impact might come later but there is no reason to pre-announce on that.

This is also a concern:

  • A strong dollar will be a drag on earnings. (The Daily Shot)

Source: Stifel

  • This is a no brainer for profitable companies with underfunded pension plans. It will likely mess up the Q3 earnings season however and bring confusion to “operating income”.
Companies Race to Top Off Pension Plans to Capitalize on Tax Break Companies with underfunded pensions have a rare opportunity to score a tax break in the coming months.

Pension contributions made through mid-September can be deducted from income on tax returns being filed for 2017—when the U.S. corporate tax rate was still 35%. (…)

This one-time incentive is helping corporations close a pension funding gap that topped $680 billion for S&P 1500 companies after the financial crisis, according to consulting firm Mercer. (…)

Companies in the Russell 3000 index with defined-benefit plans could make more than $90 billion in contributions this year, ahead of the mid-September cutoff, according to an estimate from Chris Senyek, an accounting and tax policy analyst with New York-based Wolfe Research. That is more than the $81 billion they contributed last year, itself a 30% jump from 2016. (…)

That said, Thomson Reuters’ compilation of pre-announcements shows no negative trend so far. Sell side analysts are also displaying no discernable concerns, so far:

(The Blog of HORAN Capital Advisors)

THE DAILY EDGE (20 June 2018)

BOOM?

(Bespoke)

U.S. Housing Starts Rebound in May Residential building permits—potentially signaling amount of construction is in the pipeline—fell 4.6%

Housing starts rose 5% in May from the prior month to a seasonally adjusted annual rate of 1.35 million, the Commerce Department said Tuesday. Compared with a year earlier, starts were up 20.3%.

The strong improvement was spread fairly evenly between single-family and multifamily, despite expectations that builders would pull back on new apartment construction given a flood of new units already hitting the market. Single-family construction increased 3.9% in May compared with a month earlier, while multifamily building increased 11.3%, according to the Commerce Department. (…)

Building permits, which tend to be a more reliable indicator and signal how much construction is in the pipeline, declined 4.6% to an annual pace of 1.301 million last month. Permit declines in the South and West drove May’s permits figure lower. Permits last month fell for both single-family and multifamily housing. (…)

Overall starts grew by 11% in the first five months of 2018 compared with the same period a year earlier. Multifamily starts rose 13.3% during that period, while single-family starts rose 9.8%.

Still, builders face headwinds in the coming months. Rising lumber prices have added nearly $9,000 to the cost of a new home since January 2017, according to the National Association of Home Builders, which reported on Monday that builder confidence ticked down slightly in June. (…)

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(Haver Analytics)

Washington, D.C., Votes to Boost Wages for Waiters, Bartenders Voters in Washington, D.C., cleared the way for the city to more than quadruple the minimum wage for tipped workers to $15 an hour by 2025.
White House Sees Edge in China Talks President Donald Trump’s escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand, administration officials said, adding he is prepared to withstand business pressure.

(…) The nation’s leading import from China is cellphones. In 2017 Americans bought $70.4 billion worth of them from the world’s second largest economy. Also among top U.S. imports from China are computers, at $45.5 billion, various kinds of apparel, totaling $36.4 billion, toys and sporting goods, at $26.8 billion, and furniture at $20.7 billion. Shoes and televisions are also high on the list. (…)

Only about 1% of the first round of tariffs—which was detailed on June 15—included consumer goods, compared with about 52% for capital goods such as industrial machinery and 43% for intermediate goods like semiconductor components, according to calculations from Chad Bown, Euijin Jung and Zhiyao Lu at the Peterson Institute for International Economics. (…)

  • Lloyd Blankfein says Trump’s threats are probably just a bargaining strategy. “I don’t think we’re in a suicide pact on this, so I suspect we’re not going to cause the economies to collapse,” he told Bloomberg Editor-in-Chief John Micklethwait in an interview. Paul Krugman wasn’t so sanguine, tweeting that he’s “amazed at the complacency of markets” given those threats.

(…) China’s tariff threat caught U.S. producers off guard because it had been discussing buying more U.S. energy and agricultural products to reduce its $375 billion trade surplus with the United States. The levies could boost suppliers of West African crude at the expense of U.S. exports. (…)

In coal country, there are worries the trade war could harm exports, said Steve Roberts, president of the West Virginia Chamber of Commerce. “China is an enormously important trading partner,” he said. (…)

Meanwhile
California, Eight States Ready Plan to Boost Zero-Emission Vehicles California and eight other states are preparing to roll out a plan pressuring car companies and others to meet ambitious goals for sales of electric vehicles and other environmentally friendly automobiles.
China Property Price Outlook

(…) The composite leading indicator incorporates money supply growth, government bond yields, swap rates, and property stock relative performance.  The key point is despite some stabilization in the May property price data, the leading indicator is still pointing to a further softening in the Chinese property market.  As the property market drives the broader macro/risk outlook for China (and commodities + EM), this is a key chart.  Where it could be wrong would be if the seemingly over-confident consumer drove the market higher, and in Chinese asset markets we have plenty of case studies where “animal spirits” can surprise!  So it’s a complex and evolving outlook, and one that I am spending a lot of time and focus on as a key driver for global markets this year and next.

Authers’ Note: Defensive play is out of favour

(…) The following chart, from Leuthold’s Jim Paulsen, shows the proportion of the S&P 500’s market cap made up by the prime “defensive” sectors of utilities, telecoms, pharmaceuticals and consumer staples:

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Pointing up (…) compositional changes have made the S&P 500 far less defensive than it used to be, even though it is perceived as a diversified investment.

How about that?

Cash is looking increasingly attractive relative to stocks. The spread between the S&P 500 dividend yield and the 1-month T-bill yield is approaching zero for the first time in a decade. (The Daily Shot)

Hmmm…

  • US buyers of Treasuries no longer have foreigners or the Fed competing with them.

Source: The Daily Feather (via The Daily Shot)

Hmmm…

Jefferies’ leap in profits signals boost for Wall St Chief Rich Handler hails ‘excellent’ environment for investment banking

Jefferies on Tuesday flagged a solid second quarter for the big investment banks on Wall Street, reporting a 41 per cent jump in profits for the three months to the end of May.

The Madison Avenue-based investment bank said that net revenues for the period came to $823m, up 6 per cent from a year earlier, boosted in particular by a 42 per cent rise in revenues from investment banking, to $506m. Net income rose to $98m from $70m a year earlier, helped by a drop in the company’s tax rate in effect from 40 per cent to less than 20 per cent. (…)

(…) One reason why banks are selling off is the prospect of significant layoffs and operating losses in the mortgage sector.  Rising costs and tight production spreads have driven the mortgage industry into the red this quarter, with many shops not even meeting minimum production levels to achieve break even.  Rob Chrisman warned in his weekly comment that he expects to see at least one large bank shedding “thousands” of people this summer because of the combination of tight spreads and the over $8,000 per loan cost of new residential originations.

Another, more important reason for fading on the US large cap financials, particularly given the extraordinary run last year, is that the easy growth for the industry is at an end, both in terms of loans and deposits. (…)

“Under QE Fed lent money to Treasury in the form of note and bond purchases,” Adler explains. “By redeeming the notes and bonds as they mature, the Fed is effectively calling in those loans at the pace of $30 billion per month now, going to $40 billion in July, and 50 in October.  Treasury pays the Fed off with cash it raises in additional note and bond sales. Investors bought the bonds with their bank deposits.”  (…)

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What Xiaomi’s Dropped Listing Says About Chinese Markets The saga to do with Xiaomi’s IPO homecoming has highlighted one peculiar, but rather crucial, feature of the Chinese stock market: It isn’t really a market.

(…) Initial public offerings, for example, almost always receive approval in China only if they value companies at no more than 23 times their historic earnings. This unwritten rule has encouraged investors to believe that buying into IPOs is a sure way to riches: Because of their suppressed valuations, newly floated stocks nearly always ‘pop’ in the first few days of trading. Since 2015, Chinese IPOs have on average been close to 3,000 times oversubscribed and delivered nearly 200% gains in their first 20 days of trading, according to Wind Information. (…)

But what if Chinese regulators also want to keep companies listing CDRs to that same valuation threshold—supposedly to ‘protect’ local investors? That is no good for a company like Xiaomi, a tech-related outfit that is hoping for a tech-like valuation. More broadly, what will happen when Alibaba and its ilk look to issue CDRs at home—will they be subject to similar valuation caps?

Chinese regulators appear to have failed to reconcile their desire for tech stocks to list at home with their urge to keep control of markets. (…)

Surprised smile GE Is Dropped From the Dow Industrials General Electric will drop out of the Dow Jones Industrial Average next week, a milestone in the decline of a firm that once ranked among the mightiest of U.S. blue-chips.
Alien IBM’s Debating AI Is Here to Convince You That You’re Wrong

(…) International Business Machines Corp.’s Project Debater faced off in public for the first time Monday, taking on a crack two-person team of humans, which included the 2016 Israeli national debate champion. The robot held its own during two short debates, and at moments, showed more than a little flair. It even convinced people in the audience to change their minds. (…)

So many apps I can think of for that!