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 2018): TECHNICALS WATCH

U.S.-Canada Trade Feud Escalates After Fraught G-7 Summit U.S. officials escalated President Donald Trump’s criticisms of Canada’s prime minister and the global trading system, heightening tensions with allies as Washington enters an important stretch of negotiations on several fronts.

David Leonhardt in the NYT:

(…) The meeting’s central disagreements were over tariffs that Trump has imposed for false reasons. He claims that he’s merely responding to other countries. But the average current tariff of the United States, Britain, Germany and France is identical, according to the World Bank: 1.6 percent. Japan’s is 1.4 percent, and Canada’s is 0.8 percent. Yes, every country has a few objectionable tariffs, but they’re small — and the United States is not a victim here. (…)

It finally happened: U.S. President Donald Trump picked a fight with the nicest people on earth. (…)

Mr. Trump is correct that certain Canadian sectors—particularly dairy—enjoy unfair protection that was grandfathered into NAFTA. U.S. farmers, however, have been some of the biggest winners from NAFTA: Agricultural exports to Canada have nearly quadrupled since it launched nearly 25 years ago.

If the broader agricultural sector gets sucked into NAFTA renegotiations, U.S. farm sector investors could get dragged through the mud—and the biggest winner will be China, which will find its leverage with American farmers much-enhanced.

Though you wouldn’t know it from the Twitter-verse, Canada is now the largest export market for U.S. farmers, with total shipments hitting $20.5 billion in 2017. (…)

Ironically, there’s one key sector where Canada represents a real competitive threat to American industry—oil and gas. Ottawa has long been a significant petroleum exporter, and would love to grab a big piece of the rapidly-growing Asian liquefied natural gas market, where China is a dominant buyer.

Mr. Trump’s policy mix is simultaneously raising construction costs for American oil and gas infrastructure by pushing steel prices higher and alienating both of America’s largest trading partners—one of whom is a major energy and agricultural exporter, and the other the world’s largest energy and food consumer.

Don’t be surprised if U.S. energy producers and farmers end up holding the bag.

From the FT: Car bosses round on Trump over threat of tariffs

(…) Trade Partnership Worldwide, an economic consulting firm, calculated that a 25 per cent tariff on cars and parts imports would potentially create 92,000 new jobs in manufacturing but lead to a loss of 250,000 jobs across the rest of the economy. (…)

“We don’t compete regionally,” he said. “We sell regionally, but we compete globally. The ramifications, unintended or intended, of changes to policies and practices, could be significant.” (Joe Hinrichs, Ford’s head of manufacturing) (…)

Canada Sheds Jobs for a Second Month But Wages Are on a Tear

(…) Indeed, the 3.9% year-on-year increase for average hourly earnings is the highest in nine years. As today’s Hot Charts show, investor concerns are warranted because accelerating wages have typically been associated with upward pressures on core inflation.

(…) Another sign the economy remains tight was a separate Statistics Canada report showing industrial capacity utilization climbed to 86.1 percent in the first quarter, the highest since 2006. (…) (NBF)

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BTW:
  • The rate of Germany’s labor cost increases is expected to rise sharply over the next year.(The Daily Shot)

Source: Pantheon Macroeconomics

BTW:
  • The Eurozone’s export growth slumps. (The Daily Shot)

Source: @OxfordEconomics; Read full article

New housing construction falls to lowest level in a year

Housing starts fell 9.8 per cent to an annualized 195,613 units, from 216,775 in April, Canada Mortgage & Housing Corp. said Friday from Ottawa. Multiple-unit starts dropped 15 per cent to 124,957 units. Single-detached homes was the only segment to see a slight rise from April, with a 2 per cent gain to 70,655.

Auto Lenders Ramp Up Risk

(…) In the first quarter, the average loan term for a new car exceeded 69 months, the second consecutive quarter it had ever been above that level, according to credit-reporting firm Experian. Also in the first quarter, new car loans originated with repayment periods of between 73 and 84 months represented more than a third of total new car loans, up from 7% of loans in late 2009. (…)

Lenders say they typically make the longest loans to prime customers who can afford them and understand the risks. A report last month by Moody’s Investors Service, however, found that borrowers who sign up for loans that last six years or longer have lower credit scores and owe a larger share of the vehicle’s price than consumers with shorter loans. The loan payments also account for a larger share of their income, said Moody’s, which reviewed loans securitized since 2017 and that were mostly comprised of prime borrowers. (…)

Loans with longer repayment periods are more prone to default, according to Moody’s. Loans of five years or longer extended to borrowers in 2015 with high credit scores had a cumulative net loss rate of 1.29% as of spring 2017. For shorter-term loans, the loss rate was 0.28%.

Speaking of banking: From the Mortgage Bankers Association:

Independent mortgage banks and mortgage subsidiaries of chartered banks reported average pre-tax production losses of 8 basis points (a loss of $118 on each loan they originated) in the first quarter of 2018, down from 9 basis points ($237 per loan) in the fourth quarter of 2017, according to the MBA’s Quarterly Mortgage Bankers Performance Report released this week.

The continued drop in overall production volume in the first quarter of 2018 resulted in the highest per-loan production expenses reported since inception of the report in the third quarter of 2008.  Mortgage bankers saw their total loan production expenses increase to 377 bps ($8,957 per loan) in the first quarter of 2018, from 353 bps ($8,475 per loan) in the fourth quarter of 2017.  

Higher production revenues mitigated a portion of the cost increase.  Total production revenue increased to 370 basis points ($8,840 per loan) in the first quarter of 2018, from 362 bps ($8,712 per loan) in the fourth quarter of 2017.  

Saudis Start to Ramp Up Oil Output, Ahead of OPEC Meeting The kingdom began producing 100,000 barrels of oil a day more last month and plans to raise output again by at least that much, in shift from earlier plan.
Emerging-Markets Rout Feeds Contagion Fears A retreat in emerging-market assets has sparked concerns that the turbulence could spread from distant corners of the world to the U.S. and elsewhere.

(…) Many currencies of developing countries are near multiyear lows, despite a boost from strong commodity prices and solid global growth, while investor allocations to emerging-market-focused bond funds are at their lowest level of the year, according to the Institute of International Finance.

The spasms highlight the effects that a stronger dollar and higher U.S. bond yields can have as they amplify the problems of vulnerable countries, threatening assets that investors recently considered to be comparatively safe. (…)

“Rising global real interest rates are the number one predictor of financial problems in vulnerable economies,” said Kenneth Rogoff, a professor at Harvard University and the former chief economist of the International Monetary Fund. “The risks are greater than people realize.”

Dollar strength is a danger for some countries because it weakens their currencies and makes it more difficult to pay back dollar-denominated debt. Higher U.S. rates dim the allure of foreign assets, especially in emerging markets, where investors often take on greater risk in exchange for higher yields and returns. (…)

A record $1.6 trillion of debt issued by governments, financial firms, and other companies in all currencies matures this year and $1.7 trillion matures next year, according to the Institute of International Finance. That debt, concentrated in China, South Korea, India, and other countries, will either need to be paid down or refinanced. (…)

With two-year Treasury yields at 2.5%, the assets of potentially vulnerable countries become much less attractive, said Edward Al-Hussainy, currency strategist at Columbia Threadneedle Investments.

“Is the return high enough to compensate you for the risks? Clearly the answer across the board is ‘no,’” he said.
HMMM…
  • Mommy, what does peaking mean?

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7593c00c-4e59-431f-8da1-2e5c02a88548

(Charts from David Rosenberg, Gluskin Sheff)

  • Mommy, are we prepared for peaking?

Source: @Callum_Thomas

PEAKING? REALLY?
TECHNICALS WATCH

The S&P 500 is clearly out of the wedge, above the rising 100dma and 200dma on volume similar to that of mid-2017.

spy

But wait. There is a new wedge, courtesy of Lance Roberts who also reveals that

This past week the market cleared the 61.8% Fibonacci retracement from the recent lows which removes a major barrier in reaching previous market highs.

Regarding the 200dma, Steve Blumenthal warns:

However, it would be nice to see the number of stocks in the S&P 100 Index above the 65% line.  Bull markets are strongest when a majority of stocks are sending the averages higher.  One rule some traders use is to de-risk from stocks when the percentage of stocks above the 200-day MA line drops below 65% and move the balance of stock exposure to cash when less than 50% of stocks are above their 200-day MA lines.

Lowry’s Research findings continue to impress amid much bearishness from many smart people. Lowry’s indices reveal a continued widening gap between its rising Buying Power and diminishing Selling Pressures, the latter lately reaching levels last seen in 1949! Nobody’s selling!

Ned Davis Research also tracks Volume Demand vs Volume Supply, shared by Steve Blumenthal:

Yellow highlight shows the current signal.  Currently in a buy signal.  Here is the model’s data 1981 to present (which includes the great bull market and the two bear markets since 2000):

Peaking? Hmmm…

Chinese battery maker CATL jumps 44% on trading debut World leader in electric vehicle batteries hits $12.3bn valuation as it looks to boost output

(…) CATL said it planned to use most of the Rmb5.46bn ($853m) raised through its IPO to build a 24GWh factory with the aim of attaining production capacity of 50GWh a year by 2020. (…)

THE DAILY EDGE (8 June 2018):

U.S. Consumer Credit Usage Slows Broadly

Slowing but still rising faster than income

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U.S. Monthly Auto Payments Reach Record High in First Quarter

Consumers are lengthening loan terms, with six years being the most common, to adjust to the higher costs and rising interest rates. (…)

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More Than Half Of American Homes Are Overvalued, CoreLogic Warns

(…) CoreLogic Market Condition Indicators showed that 40 percent of the 100 largest metropolitan areas were overvalued in April, compared to 28 percent undervalued, and 32 percent in line with valuations.

The report uncovers a shocking discovery that of the nation’s top 50 largest residential real estate markets, 52 percent were overvalued in April. (…)

EUROZONE SLOWDOWN

Some ECB board members blamed Europe’s slower Q1 on “transitory factors”. It now appears the transition might be more painful and longer lasting as German new orders suggest:

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in April 2018 a seasonally and calendar adjusted 2.5% on the previous month. For March 2018, revision of the preliminary outcome resulted in a decrease of 1.1% compared with February 2018 (primary –0.9%). Price-adjusted new orders without major orders in manufacturing had decreased in April 2018 a seasonally and calendar adjusted 1.7% on the previous month.

Domestic orders decreased by 4.8% and foreign orders decreased by 0.8% in April 2018 on the previous month. New orders from the euro area were down 9.9%, new orders from other countries increased 5.4% compared to March 2018. 

In April 2018 the manufacturers of intermediate goods saw new orders rise by 2.5% compared with March 2018. The manufacturers of capital goods showed decreases of 5.6% on the previous month. For consumer goods, a decrease in new orders of 2.2% was recorded.

Larger view of graphic "Index of new orders"

Haver Analytics’ Robert Brusca:

(…) German orders are uncharacteristically weak. The weakness is severe and it is broad encompassing both domestic and foreign orders. Real domestic sales are weak and on declining as well as decelerating growth rates. The degree of weakness in German real orders and real sales is a surprisingly sweeping phenomenon. (…)

Despite the unusual nature of these events four month strings of order declines are NOT closely associated with the presence of either a current recent or coming recession in Germany.(…) the current string of declines seems to mark another period of a slowdown following a spurt of growth that was well-marked by PMI strength. (…)

The slowing global PMI indices from Markit give us reason to believe that the German signal of slowdown has merit. US consumption has slowed and that is particularly evident from slowing in unit vehicle sales that have fallen back below 17mln units in the wake of hurricane replacement buying ending. Spending related to hurricane damage replacement may have fooled some into thinking that the US economy was accelerating. I do not think it is or was. Higher oil prices have diverted part of what was supposed to be an influx of funds to consumers from tax cuts in the US and rejiggered withholding tax tables. That was supposed to send more money to consumer bank accounts instead of to oil companies.

Now, we are on a slowdown watch as the G7 meets. And as key allies bump heads over geopolitical differences, tariff and trade policies and as the US prepares for a historic meeting with North Korea over peace and nuclear disarmament. Europe has its own special demons as it is already embroiled in conflict over the UK decision to leave the EU and as Europe ponders the future intent of Spain with a new socialist government. Italy has a new government that might prove to be separatist. Angela Merkel’s grip on power in Germany is less than it was and she has angered the US over Germany’s ‘choice’ to run a budget surplus instead make its fair payments to NATO as it is obligated. Italy is getting ready to break is budget rules as it has social welfare spending plans that will put it at odds with the EU rules and with the EU Commission. There is a lot in flux that could go right or wrong. That makes this an especially vulnerable period for markets.

Recent PMI surveys were suggesting weak exports but the above data also show a weak domestic economy. The huge 9.9% drop in new orders from the euro area is particularly worrisome. How transitory is this?

France’s retail sales declined 1.2% MoM in April and are up only 1.8% annualized YtD. German retail sales have decelerated every month this year and were up only 1.2% YoY in April.

Only a few months ago, the world seemed in synchronized growth! No more.

Only a few quarters ago, world leaders seemed in reasonable harmony. No more!

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(…) On June 7, the Federal Reserve released its first-quarter 2018 estimates of outstanding private and public nonfinancial-sector debt via the Financial Accounts of the United States. In a manner that helps to explain 2018’s upswing by interest rates, the year-to-year growth rate of the U.S.’ private and public nonfinancial-sector debt quickened from Q1-2017’s 3.7% to Q1-2018’s 5.1%. However, that acceleration was the offshoot of a jump by the annual increase of U.S. government debt from Q1-2017’s 3.3% to Q1-2018’s 7.4%. The remaining nonfinancial-sector debt grew by 3.9% yearly for both Q1-2017 and Q1-2018.

The year-to-year growth rate for U.S. nonfinancial-corporate debt edged higher from Q1-2017 5.0% to Q1-2018’s 5.2%. (…)

The much faster growth of Treasury debt vis-a-vis corporate bonds helps to explain why the average 10-year Treasury yield jumped up from Q1-2017’s 2.44% to Q1-2018’s 2.76%, while corporate bond yield spreads over Treasuries narrowed from 167 bp to 153 bp for the long-term Baa industrial company bonds and from 397 bp to 353 bp for high-yield bonds.

High yield bond spreads are at their historical cyclical lows which generally coincide, with a lag, with equity highs:

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While high yield spreads remain low, investment grade industrials are behaving bearishly…

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EARNINGS, INFLATION WATCH
Smucker Forced to Raise Some Retail Prices to Counter Higher Costs

Shares in J.M. Smucker Co. SJM -5.37% fell sharply Thursday after the maker of Folgers coffee and Jif peanut butter said higher costs hurt profitability and the company needed to raise retail prices on some foods. (…)

“There are moments in our history and in the industry’s history where our retail partners push harder than others, and this happens to be one of those times,” Mr. Smucker said. He said it is taking longer to get grocers on board with price increases. (…)

He said some of the challenges Smucker faces are industrywide problems, but that he’s confident Smucker can navigate them. (…)

Oil Trades Near $66 Amid Signs OPEC to Clash Over Supply Policy
Brazil Selloff Feeds Global Emerging-Markets Retreat A sharp drop in Brazilian stocks and its currency stoked a decline in emerging-market assets Thursday, as concerns over trade tensions and a rising dollar reverberated around the world.

Money Markets See Biggest Inflows Since 2013 in Dash for Cash

At $45 billion, U.S. funds were the biggest beneficiaries of the $55 billion inflow in the week through June 6 — the second-highest on record — according to EPFR Global. Allocations into U.S. inflation-protected bond vehicles also hit their highest since the fourth quarter of 2016, according to the data provider.

“With the global growth story losing some of its shine, tariff-related rhetoric increasing in volume and a populist government taking office in Italy, investors opted for liquidity in early June,” Cameron Brandt, director of research, wrote in a note. European equity and emerging-market fixed income were big losers. (…)