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 (29 March 2018)

PERSONAL INCOME AND OUTLAYS, FEBRUARY 2018

Personal income increased $67.3 billion (0.4 percent) in February according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $53.9 billion (0.4 percent) and personal consumption expenditures (PCE) increased $27.7 billion (0.2 percent).

Real DPI increased 0.2 percent in February and Real PCE increased less than 0.1 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.2 percent.image

The core PCE deflator is +1.6% YoY but last 3 months: +2.8% a.r., same as total CPI.

U.S. Pending Home Sales Improve

The National Association of Realtors (NAR) reported that pending home sales increased 3.1% (-4.1% y/y) in February to an index level of 107.5 (2001=100). The gain followed a downwardly revised 5.0% January decline. Winter storms and a low supply of homes on the market were indicated by the NAR as holding down recent sales.

Pending sales improved in each region of the country, led by a 10.3% rise (-5.1% y/y) in the Northeast following a 9.0% fall. Sales in the South increased 3.0% (-1.5% y/y) after a 3.8% decline. Sales in the Midwest improved 0.7% (-9.5% y/y) after a 6.6% shortfall, while sales in the West rose 0.4% (-2.2% y/y) after a 2.6% decline.

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  • Growth in the number of households that rent is expected to remain above that of homeowners. (The Daily Shot)

Source: John Burns Real Estate Consulting

Reis: Apartment Vacancy Rate increased in Q1 to 4.7%

Reis reported that the apartment vacancy rate was at 4.7% in Q1 2018, up from 4.6% in Q4, and up from 4.3% in Q1 2017.  This is the highest vacancy rate since Q3 2012. The vacancy rate peaked at 8.0% at the end of 2009, and bottomed at 4.1% in 2016. (…) With more supply coming on line – and less favorable demographics – the vacancy rate will probably continue to increase in 2018.

Truck Driver Salaries Rising on Surging Freight Demand

The American Trucking Associations, a trade group that represents fleet owners, said annual truck-driver salaries rose between 15% and 18% from 2013 to 2017, with growth varying based on the type of fleet and the nature of the routes.

Some private-fleet drivers earned as much as $86,000 annually in 2017, up from $73,000 in the group’s 2013 survey, on top of benefits packages that included new paid leave offers and more-generous retirement plans. The survey showed the median salary for a truckload driver working a national, irregular route—essentially an entry-level driving position—was $53,000, up $7,000 or 15% from 2013. (…)

Trucking companies (…) have added anywhere from one to several cents per mile to their driver compensation this year. Chattanooga, Tenn.-based U.S. Xpress Enterprises Inc. last month said it would offer bonuses that could bring drivers an extra $50,000, based on incentives.

The pay increases and tight capacity are hitting retailers and distributors with higher shipping costs. (…)

Fed’s Harker, Seeing Stronger Inflation, Lifts His Outlook for Interest Rates Philadelphia Fed chief expects three rate increases this year, up from his previous view of two

(…) The pace of any movement in price pressures requires as much attention as the level of annual price rises, Mr. Harker said. Inflation that rises rapidly past 1.9% annually would be more troubling than 2.1% inflation that is creeping slowly higher, he said.

Mr. Harker said the risk of increased trade tariffs and other barriers presented one source of uncertainty about current projections of the interest-rate policy path. “Trade tariffs increase costs,” he said. (…)

U.S. Fiscal Future Won’t Be Like Its Carefree Past The country is shrinking its tax base just as interest expenses surge and social programs get harder to cut

(…) In the U.S., interest swallowed 8% of federal revenue last year, the highest of all AAA-rated countries. As interest rates return to normal and debt keeps rising, Moody’s thinks it will hit 21.4% in 2027. (…)

Republicans adamantly oppose tax increases, and indeed just passed a tax cut on party lines that is projected to slash revenue to just 16% of GDP, a level normally only seen when the economy is weak, not at full strength as it is now. (…)

Moody’s says in a crisis wealthy countries in theory can tolerate lower social benefits because that doesn’t impoverish people. But it goes on to note that income inequality and poverty are both higher in the U.S. than among its wealthy peers, and thus “it may have less flexibility” to cut entitlements. (…)

Why Are States So Strapped for Cash? There Are Two Big Reasons

(…) Medicaid, the state-federal health insurance program for the poor and disabled, and public-employee health and retirement costs.

These days, they consume about one out of every five tax dollars collected by state and local governments. That is the highest share since Medicaid was created in 1965. Postretirement health benefits, which are harder to quantify, add to that burden and have cumulatively cost states more than $100 billion since 2008, according to government financial disclosures compiled by Merritt Research Services.

Those costs are outpacing growth in tax revenue year after year. In 2016, state and local governments collected about $136 billion more in taxes than they did in 2008, adjusting for inflation. Two-thirds of those additional dollars went to fund pensions and Medicaid, according to a Wall Street Journal analysis of Commerce Department spending data. (…)

Twenty-two states faced budget shortfalls in 2017. Ten couldn’t agree on a new budget before the start of their next fiscal year. Illinois’s credit rating was downgraded nearly to junk status.

To save money, states are sending less aid to cities. Many cities, in turn, are increasing fees and fines on everything from garbage collection to parking tickets. Others, such as Hartford, Conn., have teetered on the brink of bankruptcy.

The cash crunch is likely to get worse. Federal actuaries predict that Medicaid’s annual cost, which was $595 billion in 2017, will exceed $1 trillion in 2026. States and many localities pay about 38% of that tab. The remainder is covered by the federal government. (…)

Source: The Daily Shot

THE SITTING BULL
spy
NATO Moves Toward Readying More Troops to Confront Russian Threat Europe has more than a million troops in its armies, but military planners fear those ready for rapid deployment in a conflict with Russia would only be counted in the thousands. NATO, at U.S. urging, is working to change that.

Red rose Barrick Gold founder and philanthropist Peter Munk dies at 90

Great person, great businessman.

THE DAILY EDGE (28 March 2018): Can you bear the correction?

Is the Bear Market Here Yet? Market indicators suggest that the nine-year bull cycle has more room to run

(…) Late last year, analysts at Bank of America Merrill Lynch compiled a set of 19 indicators that have preceded past bear markets, which are unofficially defined as a 20% retreat from the most recent peak. Right now, those signposts suggest that the risk of a downturn is rising but that a reversal isn’t imminent.

In the past, bear markets were on the horizon when 80% of those signals—which include rising interest rates, growing consumer confidence, tightening credit conditions and surging market volatility—have been triggered. Right now, 13 of the 19 indicators have been tripped. Several others, such as a narrowing gap between short-term and long-term bond yields, a condition known as a flattening of the yield curve, are inching closer.

While a 68% hit rate might seem high, this threshold was typically reached an average of two years before stocks peaked in the past seven bear markets, according to a Bank of America report dated March 13. (…)

The Lesson From Stock Corrections Past? 200 Days of Pain

(…) In this bull market alone there’s been five other corrections like this one, and it’s taken around seven months on average for equities to climb out of their hole. Based on that path, the current jitters won’t be fully eradicated until August. (…)

Since 2009, the average correction in U.S. stocks has lasted 200 days and lopped 14 percent from the S&P 500. (…)

Valuation is not a timing tool but it helps measure valuation risk vs reward. This is the first correction this cycle when valuation was near extreme levels. It really is the first “greed correction” this cycle.

It is important to watch the yellow line, the Rule of 20 Fair Value, which is [(20 – inflation) * EPS]. It was steadily rising during the first two corrections as profits rose strongly; it declined in the next two as profits either stalled or declined while inflation rose slightly.

This time, profits are surging much faster than inflation which, with the market correction, is bringing a quick and steep drop in valuation back to “Fair Value” range after “normalizing” 2017 EPS with the 7% expected tax reform boost.

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The chart uses trailing data. If analysts prove right on their 2018 earnings estimates of $158, the S&P Index “fair value” per the Rule of 20 will be 2875 next February, assuming 1.8% inflation. As I wrote in Monday’s THE SITTING BULL

As 2018 progresses, the race will be between growth in profits and growth in consumer prices. If profits meet the current full year bottom-up forecasts of $158.00, the S&P 500 index sells at 16.3x forward EPS. For the Rule of 20 P/E to be at the 20.0 fair value, inflation could rise to 3.7%, double its current reading! If inflation is 2.5% by year-end, fair P/E would be 17.5 which would mean 2765 on the S&P 500 Index assuming $158 in EPS.

Given recent corporate guidance, Q1’18 earnings seem likely to meet or exceed forecasts. If inflation remains stable, only sharply deteriorating sentiment would drive equities much lower. In the middle of the last correction, valuation dropped to 18.3 on the Rule of 20. That would bring the S&P 500 Index down to 2440, 6.7% lower than now. This next chart uses EPS of $158 and 1.8% inflation at the current 2610 level:

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This chart from Ed Yardeni shows previous corrections against the 200d m.a.. I find important to watch the slope of the 200d m.a. and whether it gets crossed over or not.

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The FANG+ Index is currently sitting on its 100d m.a. following its 12.5% setback. There is another 9.4% step before its 200d m.a..

Lowry’s Research says that last week’s sell-off clearly failed to exhaust Supply and that its indicators “suggests the risk of further near-term losses remains elevated.” Risk-parity trades need to be undone…

The main economic risks lie with the U.S. consumer as interest rates and inflation rise in tandem:

(…) Unlike Detroit auto makers that have either eliminated entire sedan lines or slowed down sedan production over the past year, Japanese, German and Korean auto makers haven’t taken their foot off the pedal.

Just this year through February, Honda, Toyota Motor Corp. and Nissan Motor Corp. have collectively sold about double the amount of sedans in the U.S. compared with the Big 3 Detroit auto makers, according to Autodata Corp. (…)

Honda’s dealer inventory of the Accord was over 100 days’ supply in February, much higher than what’s considered healthy for the industry, according to data from WardsAuto.com. (…)

Year to date through February, sales of the Accord are down 12.9% to 37,430 units sold. Toyota, meanwhile, has seen a 2.3% increase in Camry sales through February to 48,929 vehicles.

Nissan will also slow production at its plant in Tennessee, which produces a number of vehicles including the Altima and Maxima sedans, along with the Rogue crossover, among others. Dan Mohnke, Nissan’s head of sales in North America, said in an interview last week that the auto maker will slow the speed of its lines to reduce inventories by about 15% through June. (…)

  • Rise in Key Rate Pinches Borrowers Companies are paying the most in nearly a decade for some types of short-term borrowing, the latest threat to a long-running U.S. economic expansion.

(…) The three-month London interbank offered rate climbed to 2.29% in the U.S. on Monday, its highest since November 2008. Libor measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, from corporate loans to home mortgages. (…)

Some real-estate investment trusts, which hold property such as offices and other commercial buildings that generate income, are starting to feel the impact. They tend to borrow more, and about 15% of their borrowing is floating-rate debt typically tied to Libor, according to Deutsche Bank estimates. (…)

The average cost for nonfinancial corporations to borrow in the commercial paper market for 90 days has more than doubled over the last year. (…)

Holders of roughly $1.2 trillion in consumer mortgages that are pegged to a form of Libor stand to pay more, too, while rates on some other types of consumer debt, such as private student loans, are also likely to move higher. (…)

Beware companies financing long-term assets with short-term loans…There will be blood, often times in surprising places.

2020!
Waymo Orders Up to 20,000 Jaguar SUVs for Driverless Fleet 

The deal, announced Tuesday, is potentially worth more than $1 billion, and escalates Waymo’s effort to put vehicles on public roads without human drivers behind the wheel. The vote of confidence comes a day after Arizona’s governor suspended Uber from testing in the state following the first pedestrian death involving a self-driving vehicle. (…)

Waymo will add its driverless technology to the new Jaguar I-Pace all-electric sport-utility vehicle and it said it would begin testing this year before deploying the SUVs in 2020. The companies said as many as 20,000 of the SUVs will be built in the first two years, and more vehicles could be purchased after that. (…)

Waymo says a fleet of 20,000 Jaguars could serve a million trips a day. A fleet about that size has the potential to service a small to midsize community, according to research conducted by Larry Burns, who has consulted for Waymo and worked at General Motors as head of research and development. (…)

Ryder to Launch Commercial Vehicle-Sharing Platform

Ryder System Inc. R -1.94% is developing an Airbnb-like marketplace for transportation assets that puts idle commercial vehicles in the hands of users looking to affordably expand capacity.

Ryder, which provides short-term truck rentals and fleet-management services for companies, said Tuesday that during the work week about 25% of U.S. commercial vehicles sit unused for more than a day.

The company’s new service, dubbed COOP, was launched in January in the Atlanta metro area. Ryder said it plans to fully expand the service in the Atlanta area next month and into several other major markets next year. (…)

Ryder will have to figure out how to serve customers of its new rental marketplace without driving down prices in its actively managed fleet business.