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 April 2018): Inflation threatens

Many face-offs underway: U.S. vs China on trade, U.S. vs Syria and Russia, Trump vs Mueller, FB (and tech) vs EU and Congress. But a key one is inflation vs bonds vs equities.

CONSUMER PRICE INDEX – MARCH 2018

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in March on a seasonally adjusted basis after rising 0.2 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.4 percent before seasonal adjustment.

A decline in the gasoline index more than outweighed increases in the indexes for shelter, medical care, and food to result in the slight seasonally adjusted decline in the all items index. The energy index fell sharply due mainly to the 4.9-percent decrease in the gasoline index. The index for food rose 0.1 percent over the month, with the indexes for food at home and food away from home both increasing.

The index for all items less food and energy increased 0.2 percent in March, the same increase as in February. Along with shelter and medical care, the indexes for personal care, motor vehicle insurance, and airline fares all rose. The indexes for apparel, for communication, and for used cars and trucks all declined over the month.
The index for all items less food and energy rose 2.1 percent, its largest 12-month increase since the period ending February 2017.

Core CPI:

  • last 6 months annualized: +2.4%
  • last 4 months annualized: +2.7%
  • last 3 months annualized: +2.8%
U.S. Producer Price Gains Accelerate

The headline Final Demand Producer Price Index using new methodology increased 0.3% in March following a 0.2% rise in February. Twelve-month growth rose to 3.0%. A 0.2% March rise had been expected in the Action Economics Forecast Survey. The PPI excluding food & energy increased 0.3% versus an expected 0.2% rise. Year-on-year growth accelerated to 2.7%, the fastest pace since late-2011. An updated measure of core producer price inflation (the overall index excluding food, energy and trade services) strengthened 0.4% for the third consecutive month. Prices for this index rose 2.9% y/y, the strongest reading since the series began in August 2013.

Using the old methodology for the Producer Price Index, prices rose 0.2% (2.9% y/y). Excluding food & energy, the index increased 0.2% (1.9% y/y) following no change.

Final demand goods prices rose 0.3% (3.2% y/y) after a 0.1% dip. The goods price index excluding food & energy gained 0.3% (2.2% y/y) after three consecutive 0.2% increases. (…)

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Core PPI is up 2.9% YoY In March but has been rising at a 4.9% annualized rate in Q1. Core goods: +2.8%; Services: +3.6%.

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The huge acceleration in health care prices has to squeeze consumers in 2018.

Source: @jbjakobsen

  • The PPI report suggests that the services component of the PCE inflation measure could suddenly spike. (The Daily Shot)

Source: Capital Economics

  • David Rosenberg says that 25% of firms reported to the NFIB that they plan to raise prices, a ten-year high. Look what they have already done:

  • And here is that breakout in crude oil. (The Daily Shot)

What’s bizarre on this next chart?

Global economy suffers loss of momentum in March

Global economic growth slowed sharply to the weakest for over a year in March. The JPMorgan Global PMIâ„¢, compiled by IHS Markit, fell for the first time in six months, down sharply from 54.8 in February to a 16-month low of 53.3. The 1.5 index point drop was the steepest seen for two years. To put the decline in context, while the February PMI reading was consistent with global GDP rising at an annual rate of 3.0% (at market exchange rates), the March reading is indicative of 2.5% growth.

Inflows of new business and backlogs of work also rose to weaker extents than seen in the previous month. Employment growth remained more resilient, easing only marginally from the decade-high rates seen in prior months to suggest that firms continued to focus on expanding capacity to meet rising demand. Future expectations also remained elevated, suggesting that at least some of the slowdown may prove temporary. Bad weather was cited in many countries as curbing business activity in March.

Surprised smile From the WSJ:

New technology may start creating different patterns for inventories in apparel supply chains. Some factories in southern China are working with software that’s aimed at making the very fastest of fast fashion, offering custom-made clothing and shoes. The WSJ’s Natasha Khan reports the business model is being called “click, buy and make,” and aims to sharply curtail the time from purchase to shipping in a field that’s both notoriously inefficient and extremely sensitive to rapidly-changing tastes. Spencer Fung, who runs Hong Kong’s Li & Fung Ltd. , one of the largest supply-chain managers in the global garment industry, said new technologies could ultimately mean that more companies would be able to place small orders and avoid being stuck with extra inventory. Production costs remain a concern, but companies say advancements in automation will help them stitch together the leanest of lean supply chains.

‘Just look at the average size of orders—it’s been going down for years. It went from hundreds of thousands to tens of thousands. And it will keep going down until it approaches a unit of one.’

—Spencer Fung of supplier Li & Fung Ltd., on the impact of technology on apparel orders.

Thumbs down White House Says Trump Has Power to Dismiss Mueller The White House said President Trump believes he has the authority to fire special counsel Robert Mueller, as lawmakers from both parties warned against doing so one day after an FBI raid on his lawyer.
Left hug Right hug Facebook’s Zuckerberg and Senators Face Off Lawmakers grilled Facebook Chief Executive Mark Zuckerberg over the company’s handling of user privacy while also signaling they were prepared to embark on a new era of regulation for big tech companies.

(…) During several hours of questioning, Mr. Zuckerberg sought to manage the discontent through a combination of contrition for missteps and calm explanations to complicated questions. And yet throughout, the 33-year-old billionaire was careful not to commit to any major changes in how the platform functions or how it sells advertising.

Mr. Zuckerberg acknowledged that Facebook feels responsibility for what is posted on its service.

“It’s clear now that we didn’t do enough to prevent these tools from being used for harm as well,” Zuckerberg said. “And that goes for fake news, foreign interference in elections and hate speech, as well as developers and data privacy.”

“It’s not enough to just build tools. We need to make sure that they’re used for good,” he said. “And that means that we need to now take a more active view in policing the ecosystem.” (…)

“We didn’t take a broad enough view of our responsibility, and that was a big mistake. And it was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here.” (…)

“The status quo no longer works,” said Sen. Chuck Grassley (R., Iowa), the Judiciary Committee chairman. “Congress must determine if and how we need to strengthen privacy standards to ensure transparency and understanding for the billions of consumers who utilize these products.” (…)

Ultimately, Mr. Zuckerberg didn’t promise basic changes to the design of its platform and advertising business, including Facebook’s reliance on users’ personal information to show relevant ads in their news feeds. Facebook instead is promising to enforce its policies more stringently. (…)

“We’ve seen these apology tours before,” Sen. Richard Blumenthal (D-Conn.) said. “You have refused to acknowledge even an ethical obligation to have reported this violation of the FTC consent decree.”

The senator said he has letters from Facebook employees that indicated not only a lack of resources but also a “lack of attention to privacy, and so my reservation about your testimony today is that I don’t see how you can change your business model unless there are special rules of the road.” (…)

From the WaPo:

14 years of Mark Zuckerberg saying sorry, not sorry

Zuck’s longtime motto “move fast and break things” should now be “move fast and fix things”. Can’t claim a lack of resources. FB earned nearly $40B in the last 3 years!

IT MUST BE PRETTY LATE IN THE CYCLE

Yesterday I received an unrequested email from “Value Investor” which, presumably, offers investment advice to value investors. The web site claims to provide “free undervalued penny stock picks” with particular expertise in

  • Biotech
  • Cannabis
  • Crypto
  • Mining

Our subscribers have been able to see mining companies grow from concept to full production, emerging biotech companies go from pre-Phase 1 all the way to FDA approval, tech companies from blue print phases all the way to commercially retailing their products, and of course our subscribers have seen the budding businesses in cannabis literally grow from seed to sale, now with the addition of the crypto / blockchain sector there has NEVER been a better time to create your own market success story.

The value & price model is our mantra because the markets are all about making money. By handpicking featured companies, our members are allowed access to in-depth research and detailed reporting on some of the market’s most valuable, hidden prospects. We show you these early opportunities before the Wall Street elite have a chance to catch on. With a keen sense of trend spotting, ValueInvestor.com is becoming the premiere destination for real, actionable ideas offering short, mid, and long-term potential for our members.

Devil

Given the worldwide water crisis, I’m wondering if they would see value in this product?

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THE DAILY EDGE (10 April 2018): Trade, Credit Matters

Xi Vows Greater Access to China, Warns Against ‘Cold War Mentality’ In a 40-minute address, Xi Jinping promised foreign companies greater access to China’s financial and manufacturing sectors, pledging Beijing’s commitment to further economic liberalization amid rising trade tensions with the U.S.

In a speech that officials had billed as a major address, Mr. Xi said Tuesday that plans are under way to accelerate access to the insurance sector, expand the permitted business scope for foreign financial institutions and reduce tariffs on imported automobiles and ownership limits for foreign car companies.

Throughout his 40-minute address, Mr. Xi never mentioned the trade friction with the U.S. or President Donald Trump. His remarks seemed designed to offer some policy initiatives, if not concessions, while drawing a contrast with President Trump’s “America First” agenda and portraying China as a steady global partner committed to the international trade order. (…)

“We have every intention to translate the measures into reality sooner rather than later,” Mr. Xi said, though he didn’t provide a clearer timetable for those or the other measures announced. (…)

How about these guys?

(…) The official confirmed that negotiators are discussing a proposal from the U.S. that calls for certain vehicle parts to be made in zones where wages average at least $15 an hour Confused smile, which excludes Mexico, as part of the content calculation.

“The proposal would be aspirational, unreachable for Mexico in the short-term,” because the country doesn’t have such wage levels, he said. But the U.S. government first needs to reach an agreement with its own car manufacturers on such a plan.

“The devil is in the details,” Mr. Guajardo added. With U.S. eagerness to reach a deal soon, “when there’s urgency, there must be flexibility,” he said. (…)

And while car sales are plateauing:

DEBT MATTERS
CBO Sees Annual Deficits Exceeding $1 Trillion by 2020 Tax cuts and spending increases enacted over the past four months will lead to wider than previously expected budget deficits and a mostly temporary spurt in economic growth, the Congressional Budget Office predicted.

(…) The Congressional Budget Office said the federal budget deficit would total $804 billion this year, 43% higher than it had projected last summer, and exceed $1 trillion a year starting in 2020. The deficit was $665 billion in the fiscal year ended Sept. 30.

Economic growth will jump above 3% this year thanks to fiscal stimulus, the CBO said, but the agency predicted the acceleration will prove largely fleeting. Larger deficits will add to the national debt: Debt held by the public will hit $28.7 trillion at the end of fiscal 2028, or 96.2% of gross domestic product, up from 78% of GDP in 2018.

Those estimates assume current law will remain in effect, meaning Congress would allow some tax cuts to expire and spending caps to take effect again in the coming years. If Congress extends the tax cuts, as many Republicans want to do, the CBO predicted higher deficits and publicly held debt of about 105% of GDP by the end of 2028—a level exceeded only once in U.S. history, in the immediate aftermath of World War II.

“Such high and rising debt would have serious negative consequences for the budget and the nation; in particular, the likelihood of a fiscal crisis in the United States would increase,” CBO Director Keith Hall told reporters. (…)

The deficit is expected to rise from 4% of GDP in 2018 to 5.4% of GDP in 2022, then ease to 5.1% of GDP in 2028. The debt held by the public will climb from 78% of GDP in 2018 to 94.5% of GDP in 2027, then 96.2% in 2028, the agency said. (…)

It is unusual for the federal budget deficit to significantly expand outside of wars or recessions. (…)

Consumer Credit May Weigh on Economy Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans

(…) First, lenders have grown more cautious over the past year in response to rising delinquencies and defaults on their loans. The Fed’s survey of senior loan officers shows more bankers tightening terms on consumer loans than not in four of the last five quarters. (…)

Second, consumers may now be paying down loans that they accumulated over the past few years of strong credit growth. This effectively means that consumers are saving more. (…)

Ninja Rising Home Prices Push Borrowers Deeper Into Debt More Americans are stretching to buy homes, the latest sign that rising prices are making homeownership more difficult for a broad swath of potential buyers.

Roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc. That was almost triple the proportion of such loans made in 2016 and the first half of 2017, CoreLogic said. (…)

The amount of these loans packaged and sold by Fannie and Freddie increased 73% in the second half of 2017, compared with the first half of the year, according to Inside Mortgage Finance, an industry research group. In that same period, overall new mortgages rose 15%. (…)

Last summer, Fannie Mae moved to back more loans made to borrowers with debt-to-income ratios of up to 50%, up from a typical limit of 45%. Freddie Mac also started backing more of those loans, according to industry researchers.

Fannie’s new policy has resulted in 100,000 new mortgages that otherwise wouldn’t have been made last year and early this year, according to the Urban Institute, a nonpartisan research organization.

Caliber Home Loans, a Texas-based lender, said 25% of its funded loans have debt-to-income ratios of greater than 45%, up from 10% about a year ago. (…)

The Urban Institute found that the share of borrowers with Fannie Mae-backed mortgages who had high debt-to-income ratios and had credit scores below 700 jumped to nearly 25% in the first two months of this year from 19% a year earlier. (…)

Ninja Big Banks Find a Back Door to Finance Subprime Loans Big banks like Wells Fargo and Citigroup are taking a new approach to the subprime market by lending a record amount to nonbank financial firms.

These days, Wells Fargo WFC 0.04% & Co. and Citigroup Inc. C 1.22% are unlikely to make a $14,000 auto loan to a borrower with a subprime credit score. That is now the domain of direct lenders such as Exeter Finance LLC, based in Irving, Texas.

But where does Exeter get the money to make subprime auto loans? From Wells Fargo and Citigroup. They have helped lend Exeter $1.4 billion for that very purpose.

Bank loans to Exeter and other nonbank financial firms have increased sixfold between 2010 and 2017 to a record high of nearly $345 billion, according to a Wall Street Journal analysis of regulatory filings. They are now one of the largest categories of bank loans to companies. (…)

BTW, last March 14:

Last week:

MARCH 2018 REPORT: SMALL BUSINESS OPTIMISM INDEX The Index of Small Business Optimism slipped in March to 104.7, 2.9 points below the February reading of 107.6, the second highest level in its history.

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