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 (18 April 2018)

Travelling week.

U.S. Housing Starts and Building Permits Recover

Total housing starts in March increased 1.9% to 1.319 million units (SAAR) following February’s 3.3% decline to 1.295 million, revised from 1.236 million.

An increased number of multi-family starts accounted for last month’s overall gain. They jumped 14.4% (23.8% y/y) to 452,000, the highest level since October 2016. Starts of single-family homes declined 3.7% last month (+5.2% y/y) to 867,000 from February’s 900,000. It was the lowest level in three months.

Movement in starts last month varied around the country. Housing starts in the Midwest strengthened 22.4% last month (29.5% y/y) to 180,000 after a 1.4% February rise. In the Northeast,s starts notched 0.8% higher (13.8% y/y) to 132,000 after two months of strong increase. Starts in the West declined 1.5% (28.2% y/y) to 386,000 and reversed February’s 1.8% gain. Starts in the South slipped 0.6% to 621,000 after a 9.9% decline.

Building permits increased 2.5% (7.5% y/y) to 1.395 million following a 4.1% February decline. Single-family permits declined 5.5% (+1.7% y/y) to 840,000 after a 1.4% increase in February. Permits to build multi-family homes jumped 19.0% (18.4% y/y) to 514,000, after falling 13.6%. (…)

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U.S. Industrial Production Strengthens; Factory Output Ticks Higher

The Federal Reserve reported that industrial production increased 0.5% (4.3% y/y) during March following a 1.0% February rise, revised from 1.1%. A 0.4% rise had been expected in the Action Economics Forecast Survey. Factory sector production improved 0.1% (3.0% y/y) after a 1.5% jump. Utility output surged 3.0% (5.4% y/y) and contrasted with February’s 5.0% decline. Mining production strengthened 1.0% (10.8% y/y) following a 2.9% increase. (…)

Capacity utilization increased to 78.0%, the highest level since March 2015. Factory sector capacity utilization slipped to 75.9%. (…)

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Punch How the Tax Cut Trump Loves Will Deepen Trade Deficits He Hates Major tax cut, higher federal spending will push up imports, widening gap

(…) The U.S. runs a trade deficit because it consumes more than it produces while its trading partners, collectively, do the opposite. (Another way of saying this is that the U.S. invests more than it saves, while other countries save more than they invest.)

(…) in a recent report economists at Goldman Sachs studied the historical record and found that all else equal, every $100 boost to the budget deficit because of policy decisions (as opposed to economic developments such as a recession) raises the trade deficit by $35. (…)

Correcting the deficit with one country or in one product is often pointless because the shortfall may simply reappear elsewhere. Indeed, the shale revolution has helped slash the single biggest contributor to the deficit by boosting exports of oil and slashing imports. Yet the gap in all other commodities has grown by more than enough to offset that benefit. (…)

Surprised smile ZEW Expectations Take a Dive: From Fear to Eternity

This follows the sharp degradation in the Empire Manufacturing Survey’s outlook (see yesterday’s Daily Edge). Obviously, trade issues are causing great anxiety among biz people…

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…while non-biz people don’t care much:

China’s move to ease trade tensions with the U.S. by scrapping joint-venture rules for auto makers could open a path to higher profits for American car companies, but some said untangling a web of partnerships forged with Chinese companies over decades may prove too difficult.

Beijing responded to U.S. calls for a level playing field in the world’s biggest auto market with a plan to phase out rules requiring foreign auto makers to share factory ownership and profits with Chinese companies by 2022. Regulations concerning electric-vehicle joint ventures will end this year, potentially aiding niche companies or market newcomers like Tesla Inc. (…)

Last week, Chinese President Xi Jinping, in an apparent attempt to defuse trade tensions, said tariffs on imported vehicles would be significantly reduced from the current 25%, another important concession to foreign vehicle makers looking to further tap China’s growth. (…)

Although overseas car companies entered the joint ventures reluctantly, some say they have come to accept them as a fact of life in a country where foreign businesses can struggle without local allies. (…)

A person familiar with GM’s strategy said the prospect of reaping 100% of the profits may be enticing, “but you’d also get 100% of the cost and complexity.” This person said partnerships help when working with regulators, developing a manufacturing footprint and managing supply chains and retail networks. (…)

Pointing up Lifting limits on electric-car makers by the end of this year would encourage foreign investments from Tesla and others, helping China become the world’s factory for electric vehicles, he said. (…)

Looks like the Chinese are presenting the U.S. Administration good PR material but with large potential “unintended” consequences…Confused smile

Meanwhile, biz people may be more concerned by such trends in the real world:

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  • Elsewhere in Europe, the Swiss franc is nearing 1.2 per euro. This was the currency cap before the 2015 blowout. (The Daily Shot)

THE DAILY EDGE (17 April 2018)

Travelling week.

We got the U.S. retail sales stats for March yesterday. Pick your analysis:

From Haver Analytics:

Total retail sales increased 0.6% (4.5% y/y) during March following an unrevised 0.1% slip in February. The gain was the first in four months. A 0.4% increase had been expected in the Action Economics Forecast Survey. Excluding motor vehicles and parts, retail sales improved an expected 0.2% (4.5% y/y) following an unrevised 0.2% rise.

From the WSJ:

(…) Overall retail sales edged up 0.2% in the first quarter from the fourth quarter. In the fourth quarter, a holiday-sales period, they rose a more robust 2.5% from the prior quarter.

Car sales were up in March but only because the Easter weekend fell in March (with Easter Monday as a bonus) this year. Non-auto ex-gas is +0.3% in Q1, that’s +1.2% annualized, in nominal terms.

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This won’t help going into the summer: from the FT:

US consumer finances hit by higher fuel prices American households expected to spend on average $400 more this year on petrol

(…) By contrast, middle-income US households will on average gain $930 each from the tax cut bill passed at the end of last year, according to the Urban-Brookings Tax Policy Center. Fuel accounted for 4 per cent of total household spending for middle-income Americans, but only 2.6 per cent for the highest earning fifth. (…)

Yesterday I posted this from Randall Forsyth in Barron’s:

BofA ML had anticipated that a third of the respondents to its “Word From Main Street” survey would spend the cash from the tax cuts. Instead, just 16% of respondents said they’d use the money for big-ticket purchases or day-to-day expenses, while 22% said they’d save the tax cuts, and 20% said they’d pay down debt. In other words, close to half of those polled plan to use the tax savings to shore up their personal balance sheets, although the bank suggested that people might be more responsible in surveys than in reality. (Some 20% said they didn’t get a tax cut, although the bank hypothesized that there might have been delays in getting the reductions or that the respondents didn’t notice them.)

Millennials (ages 22 to 37) said they’d be more likely to save the tax-cut money than Gen Xers (ages 38 to 53). Millennials also were less likely to use the windfall for daily spending and more likely to invest or pay down debt, most likely student loans. All of which suggests a “greater sense of responsibility than is often credited to this cohort,” the bank commented.

Really amazing:

Empire State Manufacturing Survey

The index for current  “general business conditions” in April dropped slightly. But the index for future conditions cratered to 40.3%, its lowest level since February 2016. The 25.8-point plunge from March to April was the steepest monthly plunge in the history of the survey. Trade issues?

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China Fends Off Trade Trouble With 6.8% Growth China’s economy expanded at a faster-than-expected 6.8% in the first quarter, though flagging exports and factory output may prove a drag in the coming months.

(…) Retail sales held up particularly well, rising 9.8% in the quarter from the year-earlier period. (…) Meanwhile, industrial production grew just 6% in March, compared with 7.2% in the first two months of the year, and 6.8% overall for the quarter. Investment in buildings, factories and other fixed assets grew 7.5% in the first quarter, below the 7.7% expected by economists polled by The Wall Street Journal. (…)

The Daily Shot has some good charts in China:

  • Quarter to quarter:

  • IP is not strong:

  • And this chart suggests that we will see slower growth going forward due to tighter credit conditions.

Source: IIF

  • Already happening according to this RSM sales index for China:

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The Chinese government is trying to solve its debt problem. The FT writes that “in the first quarter of this year, growth of fixed-asset investment by private companies was the fastest in over two years at 8.9 per cent and outpaced investment by state groups for the first time in almost three years.”

JC Capital argues that reduced availability of capital is hurting GDP growth:

Numbers published Friday showed that financing in March was more restrained than expected, coming in at ¥1.3 trn, with bank loans accounting for ¥1.15 trn of that amount. This data show that nearly all the new financing came fromthe official banks, fitting with the regulators’ (new)view that shadow banks are simply parasites on the body of the state. China’s credit “impulse,” or total bank assets, has fallen as a percentage of GDP every month since February 2017 and is now growing more slowly than nominal GDP for the first time since 2011. The growth of new credit—10.5% YoY—decelerated month on month.

Housing needs to be monitored closely. There is tremendous housing overcapacity in China. If demand wanes, the whole economy will suffer, not best when over-indebted.

Putting aside the indicated appreciation of property values, sales transactions tend to be a good indicator of demand, and transactions are significantly down in March and April. The amount of property sold in the top 10 markets, according to Wind, was down 37% in March and 16% in the first two weeks of April. Prices were uneven, some up and some down, but the reports of publicly listed developers suggested weak pricing. Every major developer except for Poly and Evergrande reported a decline in sales in the first quarter, with the drop in value steeper than the drop in floor space sold. In other words, developers were discounting and still could not sell as much as they did last year.

China Targets American Farmers With Sorghum Surcharges

The ministry said Tuesday that it would require importers to pay deposits worth 178.6% of  the value of U.S. sorghum shipments, following an investigation that initially found the grain was being dumped at prices that hurt domestic producers. (…)

China launched the anti-dumping investigation into U.S. sorghum in February, after Washington placed tariffs on imports of Chinese-made solar panels and washing machines. American sorghum, which is used in animal feed and in China to make liquor, is also on a separate target list of tariffs on goods worth $50 billion.

U.S. sorghum exports to China peaked at $2 billion in 2015 and have averaged nearly a $1 billion a year over the past two years, according to official U.S. data. That makes it a sizeable export—though well below soybeans, more than $12 billion of which were sent to China last year.

China Boosts Its U.S. Treasuries Holdings by Most in Six Months
EARNINGS WATCH

We now have 34 S&P company reports in. The beat rate is 74% and the EPS surprise factor is +4.4% (revenues +1.4%).

Chris Whalen writes what you probably will not ready elsewhere on banks:

U.S. Executives Boost Appetite for Deals Following Tax Reform

(…) 54% of U.S. executives plan to pursue a merger or acquisition transaction within the next 12 months, up from 42% in the prior report six months ago. EY surveyed more than 500 U.S. executives as part of a wider panel of 2,500 respondents from 43 countries interviewed in March and April.