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)

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THE DAILY EDGE (24 January 2018): Keep on Trucking!

U.S. Regional Banks Say Tax Overhaul Jump-Started Loan Demand

(…) After struggling with slowing loan growth throughout much of 2017, U.S. regional bank executives said the promise of lower taxes spurred a pick-up in commercial loan demand in the fourth quarter, as well as a rise in consumer spending on credit and debit cards. That, along with increased interest rates, prompted many of the lenders to raise their loan growth and profit outlooks for the coming year.

“It was almost like a dam broke when the tax legislation got enacted,” said Steve Steinour, chief executive officer of Huntington Bancshares Inc. in Ohio. “We had a massive amount of activity in those final three weeks of the year.” (…)

The chart is as of Jan. 10. The biz end has yet to really bounce.

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A Shortage of Trucks Is Forcing Firms to Cut Shipments or Pay Up A nationwide truck shortage is forcing thousands of shippers into a tough choice: postpone all but the most important deliveries, or pay dearly to jump to the front of the line.

(…) Freight volumes in December hit near-record levels for that time of year, on the back of a strengthening economy. Retailers are replenishing stocks after one of the strongest holiday sales seasons in recent years. Manufacturers are also shipping more cargo; in December, industrial production had the largest year-over-year gain since 2010, according to the Federal Reserve.

What’s more, bad weather and a new federal safety rule that took effect in December have crimped the supply of available trucks. Diesel prices are near a three-year high, adding to transportation costs. (…)

Spot-market prices for dry vans, the most commonly used big rig, are up more than 20% year-over-year. Analysts expect long-term contract rates that shippers negotiate with carriers to rise by between 5% and 8% this year. (…)

January is typically a quiet month for freight. But in the first three weeks of January, national average spot truckload rates were higher than during the peak season in 2017, according to DAT. (…)

Analysts expect capacity to become scarcer in April, when produce shipments pick up and full enforcement of the ELD rule kicks in. Vehicles without the devices may be removed from the road.

The normal seasonal decline in shipments has not happened:

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Expenditures are up more than twice the rate of shipments growth:

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Because costs have exploded:

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Consumer goods manufacturers use a lot of trucking, yet their operating margins are already under pressure:

Price War Pressures Consumer-Goods Giants Household goods from diapers to toilet paper to razors are getting cheaper, but what is a boon for shoppers is squeezing profits at the world’s biggest consumer-goods companies.

(…) The dynamics are setting up a tug of war this year between consumer-products companies that are pouring money into new products and marketing in hopes of commanding higher prices, and retailers and shoppers increasingly accustomed to discounts.

Kimberly-Clark Chief Executive Tom Falk said in an interview that P&G ’s discounting, along with pressure from retailers and a decline in the U.S. birthrate, have reduced demand for the company’s baby-related products and other items. That is driving the industrywide push to cut prices, he said. (…)

Trump Team at Davos Backs Weaker Dollar, Sharpens Trade War Talk

South Korea has responded quickly and forcefully to a US decision to slap tariffs on imported washing machines and solar panels, with officials in the east Asian nation seeking to reinstate levies on imported American products. (…)

(…) Stephen Schwarzman, the CEO of Blackstone who led the president’s Strategic and Policy Council before it was dismantled last summer, said there would be “a lot” of financial inflows into the U.S. “There are companies from all around the world who are looking at the U.S. and saying this is the place to be,” he added. (…)

New Rules Could Make U.S. a Tax-Friendly Regime A provision in the newly revised tax code slashes the income tax that companies pay on royalties from the overseas use of intellectual property, making it more attractive to house these rights on American soil.

The new tax break, for what is dubbed foreign-derived intangible income, effectively reduces tax on foreign income from goods and services produced in the U.S. using patents and other intellectual property to 13.125% until the end of 2025, after which the rate rises to 16.4%. Previously, royalties paid to a unit in the U.S. would have been taxed similarly to other U.S. income, for which the top corporate tax rate was 35%. The new headline corporate rate is 21%. (…)

The new U.S. deduction comes as Ireland is set to phase out, by the end of 2020, the most storied version of this maneuver, the Double Irish—which has been used by large firms, including Facebook Inc., Google parent Alphabet Inc. and drugmaker Allergan PLC. (…)

“Now the U.S. has to enter your consideration, absolutely,” said Anna Scally, head of the tech and media practice in Ireland for accounting firm KPMG. She added that firms are currently crunching numbers to find the best alternative locales that comply with tax rules. “It’s not a slam dunk,” Ms. Scally said of the U.S. “But it is an option.” (…)

The U.S.’s elevation as a tax-efficient locale may face challenges from other countries that claim the new foreign-derived tax deduction is an unfair trade subsidy, tax advisers say. Also, the effective FDII rate is set to rise to 16.4% in 2025—without taking into account additional U.S. state taxes—and could make the break less attractive.

The possibility of a political reversal has also made businesses more cautious, experts say.

“I don’t think any firm would be well served by betting the ranch on the stability of the new tax law,” said Edward Kleinbard, a former U.S. tax official who is now a tax professor at the University of Southern California law school.

SENTIMENT WATCH

The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. (…)

“While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite,” Goldman said.

  • The S&P 500 Relative Strength Indicator (RSI) (The Daily Shot)

This is not only the highest level for RSI on a “weekly” basis but also one of the highest levels on a “4-year quarterly” basis as well.

Surprised smile Number of stock indices at 3m dwarfs tally of quoted companies Proliferation reflects investor focus on ‘top-down’ analysis of markets

There are now more than 70 times as many stock market indices as there are quoted stocks in the world, according to a groundbreaking survey by the Index Industry Association. A census of its members found that they publish and regularly re-calculate 3.28m indices, of which 3.14m cover stock markets. According to the World Bank, there are only 43,192 public companies in existence. (…)

Party smile How about ETFs and ETNs?

  • Like tech stocks, FANG? How about 3 x FANG? Here is a scary new ETF for you. (The Daily Shot)

For you? Be aware that:

  • The underlying FANG+ Index comprises equal weighted holdings of Facebook, Inc., Apple, Inc., Amazon.com, Inc., Netflix, Inc., and Alphabet, Inc., plus Alibaba Group, Baidu, Inc., Nvidia Corporation, Tesla, Inc., and Twitter, Inc,. I will let you calculate the average P/E of this ETN.
  • ETNs are no ETFs. ETNs don’t own a portfolio of stocks. They are simply debt issued by banks that promise a return to the investor linked to the performance they track. Sounds familiar.
  • A leveraged ETF keeps its leverage constant by boosting its indebtedness – drawing on its swap arrangements – as the value of its assets appreciates.

Maybe we should start buying the VIX!

What Consumers Think About Amazon Go

Infographic: What Consumers Think About Amazon Go | Statista

THE DAILY EDGE (23 January 2018): One Way Sentiment

BOJ’s Kuroda Squashes Speculation on Higher Rates This Year Bank of Japan Gov. Haruhiko Kuroda continued his efforts Tuesday to cool recent speculation that the bank will raise rates this year, indicating that the Japanese central bank wasn’t ready to join a global wave of unwinding led by the Federal Reserve.
Trucking companies are coping with a question they haven’t faced in years:

How much will it cost them to handle all the freight demand coming their way? U.S. truckers are seeing the strongest push for shipping capacity in years and raising rates at a fast pace, but WSJ Logistics Report’s Brian Baskin and Jennifer Smith write that it’s an open question whether the companies or their drivers will reap the windfall. Shippers already are paying premium rates. DAT Solutions say spot-market pricing has been growing at a double-digit pace, and contract prices are on a steep upward curve as customers try to lock in trucks in a strong economy. That should translate into bigger profits as trucking companies report fourth-quarter results over the coming weeks. Trucking company-costs are also surging, however, as companies look to bring in drivers and step up their orders for big rigs to handle the loads. With the U.S. labor market tight, hiring drivers has never been more expensive, but freight volumes show it’s also more urgent than ever. (WSJ)

How JPMorgan Will Spend a Big Chunk of Its Tax Windfall JPMorgan Chase is unrolling a $20 billion, five-year investment across its businesses based on benefits from recent tax-law changes, a softer regulatory environment and its overall growth.

The largest U.S. bank by assets is planning to open up to 400 branches in new markets across the country, grow its home lending to lower-income consumers and boost wages for some retail-banking employees, among other changes, Chief Executive James Dimon said in an interview. (…)

The bank’s effective tax rate will be about 19% this year and 20% over the near term, down from 35% previously, finance chief Marianne Lake said during an earnings call earlier in January.

Mr. Dimon said during the same call that the bank could have roughly $3.6 billion in additional net income in 2018 as a result of the tax overhaul. (…)

JPMorgan said it would boost wages for 22,000 lower-paid, full- and part-time U.S. employees largely in branches and customer service centers. Wages will increase to between $15 to $18 an hour, starting Feb. 25, up from $12 to $16.50 an hour. This is the second time the bank has boosted wages in the past two years; the most recent raise follows a number of large banks’ increases announced in December.

JPMorgan is also giving eligible lower-paid employees an annual award of $750 later in January, which it has done in prior years. Bank of America Corp. and U.S. Bancorp , among other large companies in other sectors, previously announced $1,000 one-time bonuses to many employees.

And for employees making less than $60,000, JPMorgan will reduce medical-plan deductibles by $750 a year.

The bank said it also plans to boost its philanthropic giving by 40% to $1.75 billion over five years, aiming to drive economic growth in local communities.

As U.S. Fires Trade Shot at China, Multinationals Caught in Crossfire

(…) From the vantage point of the Chinese leadership in Beijing, U.S. capitalism and democracy are digging their own graves, while Donald Trump is trashing America’s global reputation. A recent Gallup poll shows U.S. leadership approval ratings around the world plunging to about the same level as China’s.

Mr. Xi sees a historic opportunity to ditch the U.S. template and advance the Chinese development model as a credible alternative. His signature Belt and Road initiative to join East Asia and Europe with transport and energy infrastructure is a sign of confidence that China has the ability to reshape the global trade and investment environment.

The capitalist system “is rife with abuse,” a People’s Daily editorial opined. “A new international order is waiting to spring forth.” (…)

The dream of convergence is over; Robert Lighthizer, the hawkish U.S. trade representative, no longer bothers to try to negotiate market opening concessions from China. His report reflects a conviction that the two economies are now fundamentally divergent—essentially playing by a different set of rules, one open the other neo-mercantilist.

This week’s announcement of tariffs and quotas on U.S. imports of solar panels and washing machines marks the start of an effort by Mr. Lighthizer to focus on trade enforcement rather than compromise. This isn’t bluster, as some still think; it represents a profound shift. China and the U.S. are on a collision course. (…)

(…) Solar-industry leaders said tariffs will slow growth in solar-panel installations and the jobs they create, which are more plentiful than in solar-cell manufacturing, a relatively small industry in the U.S.

South Korean and U.S. washing-machine makers meanwhile tussled over whether the trade restrictions will help or hurt domestic jobs, with foreign manufacturers arguing that they will hamstring their efforts to build more appliances at new plants in America. (…)

But the most immediate impact of Mr. Trump opening the door to tariffs may be spurring retaliation by trade partners, as well as inviting more U.S. companies to seek help, said Chad P. Bown, a senior fellow at the Peterson Institute for International Economics in Washington. That, in turn, could trigger additional trade skirmishes and fallout for U.S. workers and consumers. (…)

(…) China is the world’s largest solar-cell producer but already faced steep U.S. tariffs that reduced its share of panel imports to just 11% in the first 11 months of 2017, down from nearly 60% as recently as 2011. Chinese firms producing in places such as Malaysia would get hit under the new tariffs, but Chinese workers wouldn’t feel the pain directly. The washing-machine tariffs, meanwhile, will mostly hit Korean manufacturers such as Samsung and LG Electronics. Monday’s action fits a pattern of focusing on high-visibility sectors that play well with Mr. Trump’s base but won’t hit China where it hurts. (…)

SENTIMENT WATCH
  • More managers think this market rally will last through 2019 and beyond. (The Daily Shot)

Source: BofAML

  • The public is also extremely optimistic. (The Daily Shot)

    Source: @business; Read full article

  • the money is flowing into US equity funds like never before since the dotcom bubble (FT)

(…) From the start of 2000 to the end of last year, holding the latest 10-year Treasury and reinvesting coupons returned 155%, the S&P 500 with dividends 158%, while a 60-40 equity-bond portfolio beat both.

But the magic can’t continue forever. If the link between equity and bond prices were to return to what once counted as normal, the magic disappears—and there are good reasons to fear that could happen soon.

The danger is that bond yields rise without any corresponding strength in the real economy to protect profits and stock prices. The two most obvious causes would be the return of inflation or a shift of stance by the Federal Reserve to stop protecting investors from losses. (…)

it-has-been-a-near-perfect-investing-environment-but-it-may-end-soon-1516642590

It’s too soon to be sure that inflation is awake again after lying dormant for a decade, but there are signs that the tight U.S. jobs market is leading to higher wages. Technological advances such as online shopping still weigh on prices, but with little spare capacity, inflation should pick up. If investors switch focus from the economy to inflation, the nightmare would be higher bond yields and lower share prices.

The final risk is the Fed. (…)

…And the ECB (chart from Jeffrey Gundlach):

ON-CK050_Gund01_NS_20180117181648
  • KKR’s chief investment officer, Henry McVey via the FT’s John Authers:

As we are poised to enter the 104th month of economic expansion amidst the second longest bull market on record in the United States, it is definitely harder to get ‘what you want’ when it comes to uncovering new and compelling investment opportunities. Credit spreads are tight, margins are elevated, volatility is low, and valuations are full in many instances. We are also adding stimulus to the U.S. economy at a time when it probably is not needed. The good news, however, is that our work shows that investors can still ‘get what they need’ in order to generate returns in excess of their liabilities. A major underpinning to our global macro and asset allocation viewpoint in 2018 is that the current investing environment in many ways increasingly feels like the late 1990s. Specifically, across many of the asset classes in which we invest on a global basis, it appears to us that overly optimistic investors are currently overpaying for growth and simplicity in many instances, while at the same time ignoring stories with complexity, uncertainty, and/or cyclicality.

[M]aybe most importantly for long-term investors, were the current inverse relationship between stocks and bonds to break down (i.e., stocks sell off and bond prices decline, not appreciate) amidst stronger growth and less accommodative central bank policy, we believe that this shift in correlations could create a major dislocation that could catch many investors off-guard. This view is not our base case in the first half of 2018, but . . . it is one to which long-term investors should pay attention, particularly if the Fed is forced to accelerate its pace of tightening into a low unemployment, capex-constrained backdrop in the United States in late 2018 and/or early 2019.