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 (16 May 2018): Oil’s Tricky Pony.

Climbing Gas Prices Didn’t Keep Consumers From Spring Spending

Retail sales—a measure of spending at stores, online-shopping websites and restaurants—rose a seasonally adjusted 0.3% in April from the prior month, the Commerce Department said Tuesday. That growth was largely broad-based, and held up even when excluding gasoline and autos. (…)

But when excluding gasoline and autos, spending still rose 0.3% from March, suggesting modest wage gains and larger paychecks from the Trump administration’s late-2017 tax reform helped push consumers to make more purchases. (…)

Compared with a year earlier, overall retail sales were up 4.7% in April. Spending continued to outpace inflation, with the Labor Department’s consumer-price index rising 2.5% in April from a year earlier. (…)

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Control sales that feed into GDP had 2 good months after 3 soft ones. On a 3m/3m basis, growth remains timid.

Source: Capital Economics (Via The Daily Shot)

Why the Credit-Card Boom May Have Just Peaked One of the most profitable consumer-lending categories in recent years may become more of a middling player, as rising loan losses and increased rewards expenses put pressure on card lenders’ returns.

(…) Card-balance growth in March was up 4.8% from a year earlier, compared with a 6.1% increase in March 2017 from the year-earlier period. (…)

Credit-card losses have been mostly rising over the past two years after hovering around near-record lows. The average net charge-off rate—the share of outstanding debt that issuers wrote off as a loss—for eight of the largest credit-card issuers reached a nearly five-year high of 3.46% in the first quarter, according to Fitch Ratings. (…)

Another pain point for card issuers is the cost they incur from so-called gamers, who search for the highest rewards on their cards. These consumers sign up for credit cards with rich sign-up bonus offerings and then stop using the card once they have tapped out the early rewards.

U.S. credit-card attrition rates, a measure of how many cards consumers and card issuers close, reached 15% in 2017, up from less than 10% a year earlier, according to Mercator. (…)

A record 516 million personal loan solicitations were mailed out in the first quarter, up 46% from a year ago, according to estimates from market research firm Competiscan. This marked the fifth-consecutive record-breaking quarter.

Trump’s Goal for Nafta Rewrite Looks Unattainable in 2018 President Donald Trump’s plans to rewrite the North American Free Trade Agreement looked out of reach after negotiators appeared too far apart to strike a deal.
OIL
  • Global Oil Stocks Fall to Three-Year Low Commercial oil stocks in industrialized economies have fallen to their lowest level in three years, the International Energy Agency said, in the latest sign that the global supply glut has been mopped up and the market rebalanced.
  • Some key charts on oil:

1. Despite OPEC’s successful efforts to cut production, total oil supply has increased since mid-2017.

2. The U.S. has provided all of the increase in non-OPEC production.

Source: @aeberman12 (via The Daily Shot)

3. All of the recent increase in U.S. production has come from the Permian shale basin. Production from other shale fields has been flat for a while in spite of rising prices.

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4. “If the Permian was part of OPEC, it would be the fourth-largest OPEC member, right behind Saudi Arabia, Iran and Iraq,” Thummel said. “By the end of the year, the Permian probably overtakes Iran.”

5. Mark Papa could be the most credible expert on shale oil.

  • Last January:

In a January speech, Mr. Papa told executives and investors that most of the best drilling locations in North Dakota and South Texas have already been tapped. He has lately called out rivals for being too optimistic about their prospects. And he points to recent operational challenges as a harbinger, including shortages of sand used to hydraulically fracture shale wells. Companies have said they face the shortages in the Permian Basin in West Texas and New Mexico, the hottest U.S. drilling region.

  • Last March:

“There are good geological spots in shale plays and weaker geological spots, and a lot of the good geological spots have already been drilled,” he said during the panel.

“My theory is that you’ve got basically resource exhaustion that is beginning to take place. It’s no secret that you’ve only got three shale oil plays in the U.S. of any consequence,” Papa said. “The rest of them don’t amount to a hill of beans.” (…)

Drillers in the Eagle Ford and the Bakken will soon have to start plumbing lower-quality acreage, in Papa’s view. That will leave the burden of meeting growing global demand on the Permian.

While the prospects there are much better, said Papa, recent earnings have shown some companies missing targets. Papa believes Permian production will not be able to satisfy the world’s growing appetite for oil, and he warns the underinvestment in new oil projects could lead to undersupply.

This is coming at a time when shareholders are demanding financial discipline and a better return on investment from shale drillers, another development that Papa believes will hold back production growth. (…) (CNBC)

If this is a one trick pony, the pony better keep delivering.

EMERGING SUBMERGING
In Emerging Turmoil, What Links Argentina and Turkey? Who’s next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it.

(…) Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations. (…)

A further rise in the dollar and U.S. Treasury yields—with the 10-year yield now decisively above 3%—will put more pressure on emerging markets in general. For now, though, Turkey and Argentina are being singled out because they are different from other emerging-market nations. Investors are right to be nervous that these are the first cracks in a broader crisis, but contagion may only be an issue for those with pre-existing conditions.

Ninja Rising risk. Will discuss in more details in coming days.

EARNINGS WATCH
FLAKE NEWS

David Rosenberg, who I consider among the best economists out there, succumbed again to the need to twist the facts towards his views. In his widely read daily piece yesterday, he wrote

  • that the analysts have not raised their Q2 estimates , “which is very interesting and speaks to the lack of a multiplier impact on the fiscal stimulus.” David and his staff no doubt, like me, read Factset’s weekly earnings recap and thus know that EPS estimates typically fall about 2.0% in the first month of a quarter. The fact that they have not declined so far is thus positive;
  • that he finds it “intriguing that there is very little mention anywhere that of the 86 companies thus far that have provided any guidance, 50 were negative.” Rosenberg omitted the next sentence in Factset’s piece which reads:

At this point in time, 86 companies in the index have issued EPS guidance for Q2 2018. Of these 86 companies, 50 have issued negative EPS guidance and 36 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 58% (50 out of 86), which is well below the 5-year average of 72%.

We now have 457 earnings reports in and the beat rate is holding at 79% with a +6.8% surprise factor (+1.1% on revenues).

Thomson Reuters IBES’ own compilation of earnings pre-announcements shows 44 negative guidance out of 85, which does not look good …until you also consider that it compares with 51 at the same time during Q1’18 and 62 at the same time during Q2’17.

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European Companies Report Slower Earnings Growth Unfavorable currency swings, rising commodity prices squeeze profits at European companies

As of Monday, 58% of the 363 companies in the Stoxx Europe 600 that have reported quarterly results beat analysts’ earnings expectations, according to JPMorgan ChaseJPM -0.76% & Co.

A year ago, 66% of all companies listed on the index exceeded forecasts. Earnings per share are up 10% year-over-year, also a smaller advance than in the first quarter of 2017 when earnings per share rose 25%, according to JPMorgan. (…)

From Thomson Reuters yesterday:

  • First quarter earnings are expected to increase 3.7% from Q1 2017. Excluding the Energy sector, earnings are expected to increase 2.8%.
  • First quarter revenue is expected to decrease 0.8% from Q1 2017. Excluding the Energy sector, revenues are expected to decrease 2.8%.
  • 253 companies in the STOXX 600 have reported earnings to date for Q1 2018. Of these, 49.0% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
  • 291 companies in the STOXX 600 have reported revenue to date for Q1 2018. Of these, 47.1% reported revenue exceeding analyst estimates. In a typical quarter 54% beat analyst revenue estimates.

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U.S. Bond Yields Jump to Fresh Highs

The yield on the 10-year Treasury note, used as a reference rate for everything from mortgages to auto loans to corporate debt, settled Tuesday at 3.082%, compared with 2.995% Monday, marking its biggest one-day advance since March 2017. (…)

  • The U.S. dollar surged after strong retail-sales data boosted expectations for continued economic growth.
The Kochs Helped Slash State Taxes. Now Teachers Are in the Streets The wave of strikes in the past three months is just the latest sign that Tea Party-style austerity is losing favor.

(…) The walkout states are among 12 in which per-pupil formula funding, the primary form of spending on education, is still below the level of a decade ago, adjusted for inflation, according to the Center on Budget and Policy Priorities. (…)

So far, all the walkouts have ended with concessions to teachers. (…)

THE DAILY EDGE (15 May 2018)

Sad smile Note: technical difficulties at Mailchimp prevented the mailing of yesterday’s post to subscribers (EMERGING SUBMERGING). Apologies.

U.S. April Retail Sales Gain Points to Healthier Second Quarter

The value of sales increased 0.3 percent, matching the median forecast, after a 0.8 percent advance in the prior month that was stronger than initially reported, Commerce Department figures showed Tuesday.

So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain. (…)

Retail sales data for February were also revised up to unchanged from a previously estimated 0.1 percent decrease. (…)

Excluding automobiles and gasoline, retail sales also rose 0.3 percent, after an upwardly revised 0.4 percent gain in the previous month. (…)

STILL MORE ON INFLATION
IHS Markit PMI surveys indicate price pressures at highest since mid-2011

(…) To gauge consumer price developments, a useful construct is an index based on both input costs and suppliers’ delivery times. This “price pressures” index exhibits a 77% correlation with CPI inflation, and a 78% correlation with inflation as measured by the annual change in official PCE prices. In April, this price pressures gauge rose to its highest since June 2011.

Equally useful is the manufacturing input price index, which exhibits a 79% correlation with both PCE and CPI inflation with a lead of one month. Comparisons of the IHS Markit price gauges clearly signaled a rise in PCE inflation above 2.0% in April, and suggest the rate of inflation has further to climb.

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This last chart suggests rising pressures on U.S. corporate margins, unseen in Q1’18 reports. Interestingly, Markit’s global price indices suggest rising global margins:

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Punch Could it be that margin pressure in the U.S. are being masked by rising margins on foreign sales which account for 40% of S&P 500 company revenues?

Consumers Skip More High-Rate Auto Payments Than During Crisis

German Economy Cools Sharply as Labor Issues Interrupt Boom Europe’s largest economy cooled sharply in the first quarter due to high levels of illness and labor disputes, mirroring similar developments in the region and denting hopes for another year of stellar growth rates.

Germany’s annualized growth rate slowed to 1.2% from 2.5% in the fourth quarter of last year, the Federal Statistical Office said Tuesday. (…)

But a range of temporary factors, such as the country’s flu season and a series of strikes in the metals and engineering sectors, likely contributed to the slowdown, and most private-sector economists expect economic activity to revive in the second quarter and beyond. (…)

Economists said that weak exports signal that the stronger euro—which has gained about 8% versus the greenback in the past 12 months—and the U.S.-led push towards greater protectionism is already leaving its marks on the export-dependent German economy. (…)

But economic indicators show that other European economies were affected by similar factors. The European Union’s statistics agency is expected to confirm later Tuesday that eurozone gross domestic product—the most comprehensive measure of the output of goods and services in an economy—increased at an annualized rate of 1.7% in the first quarter, down from 2.7% in the fourth quarter of last year.

The “similar factors” referred to above are not the flu or the metals strikes. Weak exports are the culprit as Markit’s PMI reports revealed two weeks ago:

Intakes of new work expanded to the least marked extent since November 2016, in part reflecting a slowdown in the pace of increase in new export orders (also to a 17-month low). Some firms linked this to the recent strengthening of the euro exchange rate, especially against the US dollar. Growth of new export orders slowed in almost all of the nations covered, the only exceptions being slight improvements in Germany and France.

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The other problem is German’s frugality. German retail sales have declined MoM each of the last 3 months and are up only 1.3% YoY in March.

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China Data Shows a Hint of Slowdown While Factories Still Hum

Industrial output rose 7 percent in April from a year earlier, the statistics bureau said Tuesday, versus a projected 6.4 percent in a Bloomberg survey and 6 percent in March. Retail sales expanded 9.4 percent from a year earlier, versus a forecast 10 percent, Fixed-asset investment rose 7 percent year-on-year in the first four months, compared with an estimated 7.4 percent. (…)

Property development investment in the first four months expanded 10.3 percent from the same period a year earlier. (…)

Shale Drillers Look Beyond Texas as Prices Rise As Permian Basin experiences bottlenecks, companies look to fields in Colorado, North Dakota, Oklahoma and Wyoming

While the Permian Basin in Texas and New Mexico remains the fastest-growing shale spot, congested pipelines and shortages of labor and materials there are crimping profits, making other fields attractive alternatives. (…)

Oil in Midland, Texas—where the local price of crude is set—recently sold for $12 to $15 below the price of crude elsewhere in the U.S., according to Citi Research, part of CitigroupInc. The discount reflects the added cost some face getting oil to refineries and export facilities out of the region using trucks and trains. (…)

Chinese Stocks Aren’t Normal—Whatever MSCI Thinks Mainland-listed Chinese shares will enter MSCI’s key benchmarks from June. That doesn’t mean all problems with the country’s stock markets are resolved.

Any sentient market-watcher has known for about a year that index provider MSCI will include stocks listed in mainland China in its benchmarks starting June 1. On Tuesday, it published a roster of the more than 200 Chinese companies listed in Shanghai and Shenzhen that will be the first to enter these hallowed portals.

Mainland Chinese stocks—known as A-shares—will account for around just 0.4% of the MSCI Emerging Markets index from June, rising to 0.8% in September. (…)

There’s already no lack of Chinese stocks in MSCI indexes. Chinese firms listed abroad, mainly in Hong Kong and the U.S., make up nearly a third of the MSCI EM index.

Seven of the index’s top 10 constituents are Chinese—including tech behemoths Alibaba and Tencent, and financial firms ICBC and Ping An Insurance . South Africa’s Naspers , whose value comes almost entirely from its 31% stake in Tencent, is also among the top 10. (…)

One of the reasons MSCI held back from admitting China-listed stocks to its indexes for years was companies’ penchant for suspending their shares from trading when hit by bad news. That problem hasn’t gone away. (…)

The worry is that the sort of mass trading halts seen during the Chinese market selloff in the summer of 2015—when half of its stocks were suspended—could happen again. (…)