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 (17 January 2018)

Companies Tout Tax Benefits as Earnings Season Begins Some of the biggest U.S. companies are promising significant annual savings, bigger pension contributions, higher dividend payments and more extensive stock buybacks as executives start to discuss the impact of the federal tax overhaul.

(…) “The macro environment is as positive as we’ve seen in many years,” Citigroup Inc. Chief Executive Michael Corbat told investors Tuesday morning. “Tax reform could change the sentiment among those making investment decisions from optimism to confidence and become the boost the U.S. economy needs to drive growth higher.” (…)

Executives at bank holding company Comerica Inc. said Tuesday that lending could slow for a time as the tax overhaul leaves customers with more cash. (…)

“I can’t say for sure that the fact that companies are going to have more cash, they’re going to spend more on marketing dollars,” CEO Michael Roth of advertising giant Interpublic Group of Co s. Inc. said in a conference presentation last week.

“A lot of these companies were not capital-constrained nor were they cash-constrained, right?” Mr. Roth said. “It’s not clear that all of it is going to end up to increase employment and investment in assets or increased marketing dollars—I think we have to wait and see.” (…)

Last week AbbVie executives said they plan to improve employee benefits, contribute more to the company’s pension plans and make bigger charitable contributions. (…) Still, the company expects to generate far more cash than it can use productively in the business, he added, calling it fair for investors to expect AbbVie will increase the pace at which it pays dividends and buys back shares.

Capacity utilisation remains very low. We’ll have to wait and see. Meanwhile, surplus cash will reduce borrowings, increase employee comps and pension plans,dividends and buybacks.

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This is the hope although my red line suggests this is as good as it gets (chart from RBC):

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The above chart is for S&P 500 companies. Small cap companies are also not prone to capex spending…

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…partly because their finances are stretched out:

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That’s also the problem for most large caps other than a few heavy weights with large cash holdings:

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January’s US SMI survey is mixed. Prices charged are charging up.

Source: World Economics (via The Daily Shot)

Fed’s Kaplan Sees 3 Rate Rises This Year, but Says More May Be Needed Dallas Fed President Robert Kaplan said he expects the U.S. central bank will need to raise interest rates three times this year and perhaps even more to prevent a robust economy from overheating.
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How about long-term rates, given the coming supply?

Source: Deutsche Bank, @fxmacro (via The Daily Shot)

Let’s hope the Fed does not start shedding assets.

And foreigners!

And U.S. corps:

(…) The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends. (…)

OUPS!

  

EARNINGS WATCH

We now have 30 S&P 500 company reports for Q4. Per Thomson Reuters/IBES, the beat rate is 77% and the surprise factor is +3.1%. Trailing EPS are now $131.76.

Analysts are gradually updating their 2018 estimates taking into account company guidance on tax reform. Q1’18 EPS are now seen up !5.3% from +12.2% on Jan. 1. Full year EPS: +14.9% to $150.37 from +12.0%.

Markets are already discounting a lot of growth (RBC):

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Angel How Michael Wolff Got Into the White House for His Tell-All Book Devil

THE DAILY EDGE (16 January 2018)

Did you miss?

Breaking out of low-growth ‘new normal’ is on horizon (Mohamed El-Erian) Both backward-reading and forward-looking indicators confirm that the global economy is experiencing a pick-up in growth that is synchronised, real and multi-dimensional.
  • This synchronized growth “is being increasingly underpinned by fundamental economic forces” (pro-growth policies, ample liquidity “and, in Europe, an endogenous economic healing process have been the main contributors to the world’s improved economic prospects.
  • Either we get “higher and more genuine growth that would validate elevated asset prices, facilitate the “beautiful normalisation” of monetary policies and reduce political tensions” or “recessions that would lead to financial instability, a higher risk of policy mistakes and greater political polarisation.”
  • The better scenario “would also call for commodities to outperform” and higher bond yields.
  • “As 2018 evolves, we should expect higher multi-year growth to increasingly become part of the baseline for many projections.” 

Right on cue:

  • Bull market to run at least three more years, Goldman Sachs says

One-third of Canadians can’t pay monthly bills as interest rates set to rise, survey suggests

The quarterly MNP consumer debt index survey finds the number of Canadians who can’t cover their fixed monthly expenses is up eight points since September.

It also finds Canadians who are making ends meet have less disposable income, with an average $631 left after paying bills and contributing to debt repayment. That’s 15 per cent less money left over than in the previous quarter.

The survey says Canadians worried more about their debt as the Bank of Canada raised its benchmark interest rate twice last year and is expected to continue the momentum in 2018.

Four-in-10 respondents say they fear financial trouble if interest rates rise much further and one-in-three agree they’re concerned rising rates could move them toward bankruptcy.

More than 70 per cent of respondents say they’ll be more careful with how they spend money as rates move up, and nearly half say they believe they’ll have to take on more debt over the next year to cover expenses. (…)

This one-third group of Americans are likely facing the same outlook:

Battle Stations: U.S. and China Prepare for Trade Clash of the Titans A trade war between the U.S. and China would be more bruising and protracted than the battles that raged in the 1980s over Japanese exports, and would risk taking down the entire global trading architecture.

(…) In this brewing battle fueled by protectionists in both camps (Mr. Trump’s “America First“ finds its nationalist counterpoint in President Xi Jinping’s “China Dream”), each side has an exaggerated sense of its own advantages. (…)

Confused smile Hot market greets ‘super PIK’ bonds sold by Irish billionaire Success of new deal from Ardagh Group highlights tolerance of risk

(…) The $350m “super PIK,” or payment-in-kind bond, raised at the end of last week will pay a dividend to a group of shareholders in Ardagh Group, a one-time small Irish glass bottle maker that has grown in the past two decades into one of the world’s largest metal and glass packaging companies.

PIK refers to bonds or loans that can pay their interest with further debt rather than cash. This means the size of the debt can balloon quickly and leave lenders with steep losses if the underlying company is not able to handle the growing burden.

While Ardagh listed on the New York Stock Exchange last year, 92 per cent of its shares are held privately, with its billionaire founder and chairman Paul Coulson the largest shareholder. It is these private shareholders that are receiving the dividend.

“In plain terms, the use of proceeds is essentially providing a ‘margin loan’ to legacy shareholders,” noted analysts at credit research firm CreditSights. (…)

This is as bas as it gets. Ardagh borrows $350M and gives it to its shareholders. It will pay interest by issuing more debt. This super PIK was 7 times oversubscribed!

FYI, 81% of loans in Europe have been “cov-lite” in 2017 vs 21% in 2013 (WSJ Dec. 28, 2017). Anything to do with the ECB buying just about anything thrown at it?