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 (25 April 2018): TEMPTING?

U.S. New Home Sales Rose in March

Purchases of newly built single-family homes—a relatively narrow slice of all U.S. home sales—increased 4.0% from the prior month to a seasonally adjusted annual rate of 694,000 in March, the Commerce Department said Tuesday.

March’s rise comes on the back of a 3.6% increase in February [to 667,000, revised from 618,000] and upward revisions for both January and February sales rates. (…) Sales rose 8.8% through the 12 months ended in March.     

The number of homes for sale at the end of March grew about 13% from a year earlier, signaling that home construction is beginning to catch up with buyer demand.

The median sale price for a new home sold in March was $337,200, up 4.8% from a year earlier.

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WEAK RICHMOND FED SURVEY
  • April collapse in manufacturing and services:

  

  • Manufacturing new orders cratered:

  • Manufacturing wages exploding, not in services:

  

  • Manufacturing margins squeezed:

MORE MARGINS SQUEEZE

Pain from the tight trucking market is stretching deeper into shipper supply chains this spring. Consumer packaged-goods companies say higher transportation costs are weighing on their earnings as they scramble to get goods to stores and distribution centers, and some see their concerns persisting through the rest of the year. WSJ Logistics Report’s Jennifer Smith writes that freight costs were up 20% year-over-year at Coca-Cola Co.’s North American division in the first quarter, as unusually strong demand from manufacturers and retailers outstripped the supply of available trucks. That’s making it harder and more expensive for companies like Hasbro Inc. HAS 0.16% and Nestlé SANSRGY -0.08% to keep toys, household chemicals and other products moving. The rising costs to start the year come as analysts forecast contract rates for truck transportation could grow nearly 10% this year, costs companies will eventually pass on to consumers. (WSJ)

SENTIMENT WATCH

With equities almost three months removed from the last record, Americans have grown less optimistic that the market will bounce back. For the first time since Donald Trump’s shock election in November 2016, a majority of consumers expect stocks to be lower 12 months from now, according to the latest sentiment reading from the Conference Board. (…)

April’s Conference Board survey capped three months of deteriorating sentiment toward the stock market, with the latest reading pushing the slide to the biggest since the period ended August 2011. That was the height of the debt-ceiling drama that sparked a downgrade of the U.S. credit rating. (…)

TEMPTING?

Tempting to be a contrarian after excessive expectations have corrected per the Conf. Board survey above. But, in reality, expectations have only retreated to zero and are not deep in “buy low” territory.

The same can be said of valuations. “Normalizing” trailing EPS for a full year of lower tax rates (about $145), the Rule of 20 P/E has dropped back to its long term “fair” or median value.

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Picking up where DoubleLine CEO Jeff Gundlach left off yesterday with his Ira Sohn recommendation, which as a reminder was to short Facebook on concerns of regulatory crackdown and go long commodities ahead of a late-cycle inflationary boom, on Tuesday Gundlach spoke at an event for DoubleLine clients and reiterated his late-cycle skepticism, warning that treasuries are still “not attractive” even though the benchmark 10Y yield briefly crossed the key 3% threshold earlier in the day.

The bond king said he is in no rush to buy, well, bonds, because he expects that, based on recent Core CPI prints and the NY Fed underlying inflation gauge, that US inflation will go even higher, sending Treasury prices lower. The fund manager said some indicators are suggesting 3% inflation, and noted that while it might not get there, “something higher than the current rate is sensible.” (…)

Gundlach said that he does not think the yield curve will invert before the next recession. This likely goes to Gundlach’s thesis, which he proposed in January, that in the next recession we won’t see a bid for safety out of stocks and into bonds. In other words “we won’t see a bond market rally.” (…)

First, Gundlach said he thinks that Fed chair Jerome Powell is “not going to bail out the market.” (…)

Second, Gundlach said that the next big move will likely be in gold prices which have broken their downtrend line, and are on the verge of breaking out to the upside. “It’s getting almost exciting…  something big is happening,” he said cryptically.

He then revealed his target, saying that based on classic chart reading, an “explosive, potential energy” of a huge “head-and-shoulders bottom” base was signaling a move of $1,000 in gold prices, and added that “Gold is maintaining an upward pattern above its rising 200-day moving average, which is extremely good.”

But so is the S&P 500 Index:

Lowry’s Research yesterday said that “while NY Comp. Volume jumped to about 3.8 billion shares, Down Volume was a subdued 60% of total Up/Down Volume, suggesting much of [yesterday’s] weakness was due to a lack of buying interest, not to widespread intense selling. Thus, [yesterday’s] decline appears to be part of the truncated rallies and reactions that have characterized market activity over the past two months.”

THE DAILY EDGE (24 April 2018): MARGINS SQUEEZE?

U.S. Existing-Home Sales Rose in March

Existing-home sales increased 1.1% in March from February to a seasonally annual rate of 5.6 million, the National Association of Realtors said Monday. Compared with a year earlier, sales declined 1.2%. (…)

The median sale price for an existing home in March was $250,400, up 5.8% from a year earlier.

Inventory is especially tight at the lower end of the market. Deals for homes priced below $250,000 declined in March on an annual basis, while transactions for homes priced above $250,000 grew robustly from the previous year. (…)

The average interest rate on a 30-year fixed-rate mortgage for the week ending April 19 was 4.47%, according to Freddie Mac, up from 3.95% at the beginning of the year.

The housing market is going nowhere but South as Haver Analytics illustrates:

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Nerd smile And now, one must consider one’s after tax cost…

Meet the new mortgage-interest deduction. It’s smaller and much more concentrated among high-income households.

In 2018, the deduction will save taxpayers $25 billion, down from $60 billion in 2017, according to estimates released on Monday by the Joint Committee on Taxation, the official analysts of tax policy for Congress.

That’s largely because of the way last year’s tax law change altered the standard deduction. The much higher standard deduction means that far fewer taxpayers will itemize their deductions. In most cases, only taxpayers with total deductions exceeding $12,000 for individuals and $24,000 for married couples will itemize. And those deductions can now include only $10,000 in state and local taxes, which means the most likely itemizers are Americans with sizable mortgages or charitable contributions.

The result is that just 18 million households are expected to itemize deductions for 2018, down from 46.5 million in 2017, according to JCT.

The resulting home mortgage-interest deduction — once considered a tax break too sacred to touch — will be used by just 13.8 million taxpayers, down 57%. In 2017, about 12.4% of the tax break went to households with incomes exceeding $500,000, and 36.5% of the benefit went to people earning between $100,000 and $200,000.

Now, 23.9% of the shrunken mortgage-interest deduction is projected to go to households making more than $500,000 with 28.9% of the benefit going to households between $100,000 and $200,000. (…)

Just kidding In early 2019, many Americans will get a surprise when filing their 2018 tax returns: their mortgage has gotten a lot more costly.

Bank of Canada sees economy improving, plays down inflation risk

Poloz, in testimony to the House of Commons’ Finance Committee, reiterated that while higher interest rates would likely be warranted over time, some policy accommodation is still required to keep inflation on track.

Pointing to the bank’s outlook for inflation of 2 per cent two years from now, Poloz said policymakers are confident they have the right modelling and framework to guide interest rate decisions.

“Given what our outlook is, we’ve got monetary conditions roughly where they should be, and in that context, the fact that inflation is rising above 2 (per cent) for now is due to temporary factors and we can see through them,” he told the committee. (…)

Poloz said policymakers are watching wages, which he said will pick up as job vacancies continue to grow, and will in turn encourage more people to enter the workforce.

“We are just now in the last six months reaching wage movements that are actually positive in real terms, above 2 per cent. And so that’s a really important bridge to cross and when we get up to the 2.5-to-3-per cent zone, then we have got more scope for getting faster reintegration of people back into the workforce,” he said.

Poloz reiterated his expectation that business investment and export growth will soon contribute more to economic growth, which has until now mostly been driven by households and government spending.

“I am hopeful that when we get past the bottlenecks that we saw during in the winter time, that we’ll get some clearing of inventory out and exports will rebound,” he said. (…)

MARGINS SQUEEZE?

(…) Freight volumes are rising on strong economic growth and industrial expansion, and a shortage of available truck capacity is pushing more shipments onto rails. (…)

Union Pacific is offering $10,000 to $20,000 “hiring incentives” to train crews in cities like Denver, Kansas City, Mo., and North Platte, Neb., where its largest rail yard is located. Those jobs average $40,000 in pay over the first year and $60,000 the next, according to job listings.

Electricians to inspect, repair and maintain locomotives are being wooed with $25,000 signing bonuses to Union Pacific locations outside Milwaukee; in Hinkle, Ore., a three-hour drive from Portland; and elsewhere. (…)

BNSF, owned by Berkshire Hathaway Inc., BRK.A -0.44% has hiring incentives starting at $15,000 for some new hires, according to a document reviewed by The Wall Street Journal.

A BNSF spokeswoman said the railroad is facing a talent shortage across its system and is extending the offer to diesel mechanics, electricians and conductor trainees. (…)

The median Union Pacific employee—a locomotive engineer—made nearly $83,000 in total compensation in 2017, according to a company securities filing. Health-care and retirement benefits, including a pension, are also fairly generous. (…)

Trucking companies experiencing strong freight demand are dangling bonuses and other incentives to recruit and retain drivers. Last year, the median salary for long-haul truckload drivers working irregular routes was about $53,000, up 15% compared with 2013, according to the American Trucking Associations, an industry group. (…)

The hiring bonuses aren’t happening on the large freight railroads east of the Mississippi River, where companies say there is slack in the railroad hiring pool. (…)

Maybe that “slack” will take the train to where the bonuses are… Nowadays, moving is winning as The Atlanta Fed shows:

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The median hospital operating cash flow margin—monitored by Moody’s Investors Service as a signal of financial strength—fell to 8.1% last year from 9.5% a year earlier, in a preliminary analysis of 160 nonprofit and public hospitals and hospital systems with credit ratings from the agency, a Moody’s report said.

That is the lowest level in the past decade, Moody’s data show. The prior low point came in 2008, when the median margin reached 9.1%.

(…) a nursing shortage has compounded an uptick in hospital operating expenses, whose growth has outpaced operating revenue for the second straight year in 2017, according to Moody’s.

Hospitals in tight labor markets for nurses are offering bonuses to hire and retain nurses and relying on costly temporary nurse staffing agencies, said Lisa Goldstein, an analyst for Moody’s who also authored the preliminary analysis. (…)

  • Strong ad sales not enough to offset surge in costs at Alphabet

(…) Alphabet’s operating margin of 22 per cent, down from 27 per cent a year ago, missed expectations because of the growth in expenses. (…)

Punch Interesting that one of the fastest growing company, in a virtual monopoly with FB, is experiencing margins problems. Margins also declined in 2017 but many blamed the acquisition of Nest in 2017. Q1’18 vs Q1’17 is clean according to RBC.

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This also won’t help margins:

Oil Breaches $75 on Risk to Iran Deal Brent oil prices hit a more than three-year high amid concerns the U.S. could withdraw from the Iranian nuclear deal, a move that could tighten global supplies.

INFLATION WATCH

From Markit’s U.S. Flash PMI:

  • Services:

Average cost burdens continued to rise in April, with the rate of input price inflation edging up slightly since March. Average prices charged meanwhile increased at a pace broadly in line with that seen in March, albeit one that was weaker than seen for input costs.

  • Manufacturing:

Price pressures within the factory sector intensified, with the rate of input cost inflation picking up to the fastest since June 2011. Cost increases were partly linked by producers to the introduction of tariffs. Moreover, greater client demand and higher raw material prices underpinned the quickest rise in average selling prices for almost seven years.

  • Martini glass World wine output falls to 60-year low Global wine output fell to its lowest level in 60 years in 2017 due to poor weather conditions in the European Union that slashed production in the bloc, international wine organization OIV said.