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 (16 February 2018): The Big Dipper (2)

U.S. Factory Output Flat Again in January

Industrial production—a measure of everything made by factories, mines and utilities—fell 0.1% from a month earlier, the Federal Reserve said Thursday. Economists surveyed by The Wall Street Journal expected a 0.3% rise. An initially reported 0.9% gain in December was revised down to 0.4%.

Utility production picked up last month, largely reflecting cold weather that caused homes and business to turn up the heat. But that gain was offset by flat manufacturing output and a drop in mining production. (…)

Capacity use, a measure of slack, dropped two-tenths of a percentage point from a month earlier to 77.5% in January. That’s 2.3% below the economy’s average since the early 1970s. (…)

Economists said the decline in output is almost surely temporary. Other reports, include surveys of manufacturers, suggest factories are seeing higher demand boosting production. (…)

True. Markit’s January Manufacturing PMI survey revealed that

The latest index reading indicated a strong improvement in business conditions across the manufacturing sector. Moreover, the index signalled the strongest upturn in the health of the sector for over two-and-a-half years. Extending the trend seen since June 2016, manufacturers indicated a further rise in production in January. The rate of growth accelerated to the sharpest in twelve months.

Then, how come manufacturing output has been essentially flat since October?

And real retail sales declined 0.2% in December and 0.8% in January.

And vehicle sales have declined 7.6% from their September 2017 peak to stand below their 2016 and 2017 average.

Trucking Rates Come Down a Bit but Problems Persist for Shippers

Rates on the spot market, where companies book last-minute transportation, have come down from record highs hit last month amid a nationwide shortage of available trucks. Shippers have postponed deliveries that aren’t urgent or are moving more cargo by rail, reducing pressure on trucking fleets struggling to hire drivers.

But many shippers and trucking companies warn that the lull may not last, for a number of reasons. The strong economy is boosting freight demand. Produce distributors typically hire more trucks starting this month to move crops from Mexico and Southern states to grocery stores around the country. Full enforcement begins in April for a new federal safety rule that requires truckers to electronically log hours behind the wheel, potentially removing some big rigs from the road.

Last week, the average spot rate for the most common type of big rig was $2.17 per mile, down from $2.26 in January, though still up a third from a year ago, according to online freight marketplace DAT Solutions LLC. Capacity remains tight, with demand measuring at about seven loads per available truck for the week ending Feb. 10, compared with 2.4 loads per truck during the same period in 2017, according to DAT. (…)

Higher freight costs are weighing on corporate profits and raising prices for consumers. On Thursday, wholesaler US Foods Holding Corp. USFD 9.60% said the shortage of available trucks hurt its fourth-quarter profits, and it will attempt to pass along those costs to its restaurant and food-service customers in the coming months. Last week, Tyson Foods Inc.TSN 0.05% said rising freight costs will help push meat prices higher at the supermarket.

Cereal-maker Kellogg K 3.07% Co.’s logistics costs rose at a double-digit rate in the fourth quarter, with percentage increases in the high single digits expected in 2018.

Tight capacity is giving trucking companies the upper hand in negotiations over long-term freight contracts. Contract rates are expected to rise as much as 10% in 2018. This week,Werner Enterprises Inc., WERN -0.39% a large Omaha-based trucking company, reset its guidance on rate increases at between 6% and 10%, up from 4% to 8%. (…)

But no worry, the Trump administration is on top of the situation:

White House Adviser Cohn Downplays Concerns Over Rising Inflation, Bond Yields

(…) Mr. Cohn downplayed any concerns reflected by markets on Thursday. “We know how to deal with inflation. We don’t know how to deal with deflation in this country,” he said. (…)

The budget deficit fell to 2.4% of gross domestic product in 2015 before rising to 3.4% last year. Economists at J.P. Morgan expect the tax cuts and spending deal will boost the deficit to 5.4% of GDP next year, or $1.2 trillion.

Mr. Cohn said the White House pays close attention to deficits but said higher spending was necessary to secure new defense investments. The administration had to agree to non-defense spending increases to secure votes for the extra Pentagon funding, he said.

“Ultimately deficits do matter,” he said. “We don’t really have a choice here. We need to make a large investment in modernizing our military.”

He’s right. There are not so many ways to deal with inflation: lift interest rates enough to stop demand.

One sure way to raise inflation, however, is to boost demand when it is already strong, stretch resources when they are already stretched and borrow tons of money to do so.

Then you raise interest rates…

THE BIG DIPPER (2)

Since the correction low last Friday, the S&P 500 jumped 200 points (7.9%).

If that was it, we once again re-wrote history with a historically short 13-day correction.

The rising 200-day m.a. once again proved a good stopper, as was the Rule of 20 P/E at “20” (THE BIG DIPPER?).

I suggested to watch coming inflation data as well as the fixed income market, particularly the High Yield market.

Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. (…)

And beneath the surface, pain metrics have been building up of late.

Derivatives tied to corporate bonds moved more than the underlying cash debt last week — another sign that investors sold more liquid holdings during the equity turmoil rather than offload harder-to-sell debt, according to JPMorgan Chase & Co. (…)

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We are now back to a level which is 7% above the 200-d. m.a. and a Rule of 20 P/E of 21.1 (if we pro forma trailing EPS for a 7% average tax effect), a quick return to overvalued territory.

Many are concluding that the correction was just a technical “thing” and that we are back on the jolly ride.

And yet, meanwhile, in just a few days, inflation data got much worse, retail sales data were very bad, manufacturing data has flattened, interest rates rose further, the high yield market is shaking, the USD is weak and gold is rising. Something not quite right.

This via John Mauldin:

The index was developed by New York Federal Reserve President William Dudley in the 1990s. It measures financial conditions in money markets, debt and equity markets, and the traditional and shadow banking systems. While the inverse of the index does not perfectly track the S&P 500, it has historically acted as a coincident indicator with peaks in the US equity markets.

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The Goldman Sachs FCI is a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable.

From David Rosenberg:

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THE DAILY EDGE (15 February 2018): Inflation? Stagflation?

Inflation Starts to Make a Comeback

(…) A monthly measure of what households pay for everything except gasoline and food rose a seasonally adjusted 0.349% in January—the strongest one-month increase since March 2005—driven by broad-based increases in costs like rent, clothing and medical services. (…)

While the consumer-price data suggested that inflation is growing, some analysts said it is doing so at a manageable pace. That is unlikely to cause the Fed to alter radically the pace of interest-rate increases it has signaled, analysts said. (…)

In the 12 months to January, overall prices rose 2.1%, beating economists’ expectations of a 1.9% rise. A jump in gasoline prices in January helped drive the increase. When stripped of volatile energy and food prices, the index was up 1.8% from a year earlier. (…)

Analysts cautioned that a few components of the consumer-price report could prove to be aberrations. Apparel prices reversed three months of declines in January, rising 1.7%, the largest monthly boost since February 1990. That category has experienced deflation for large parts of the last two decades because of a flood of cheap imports, and few analysts see it becoming a new source of inflation now.

In another potential aberration, the cost of vehicle insurance rose 1.3%, its largest monthly increase since November 2001. (…)

More increases in the consumer-price index could be in store. Price drops last spring for a handful of items, such as wireless-phone plans, led to a string of soft inflation readings. Fed officials said they expected this would prove transitory. With last year’s price cuts fading into the past, annual measures of inflation are on track to pick up in the months ahead. (…)

  • NO DENYING

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (4.2% annualized rate) in January. The 16% trimmed-mean Consumer Price Index also rose 0.3% (3.5% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 1.9%, the CPI rose 2.1%, and the CPI less food and energy rose 1.8%.

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Note that the above numbers are rounded to one decimal. January CPI was actually +0.5385% while core CPI was +0.34945%, its highest reading since March 2005. The annualized rates below use the 5 decimal readings on total CPI and core CPI. The Cleveland Fed’s rates use one decimal numbers.

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The Cleveland Fed’s inflation nowcasts are produced with a model that uses a small number of available data series at different frequencies, including daily oil prices, weekly gasoline prices, and monthly CPI and PCE inflation readings. The model generates nowcasts of monthly inflation, and these are combined for nowcasting current-quarter inflation. As with any forecast, there is no guarantee that these inflation nowcasts will be accurate all of the time. But historically, the Cleveland Fed’s model nowcasts have done quite well—in many cases, they have been more accurate than common benchmarks from alternative statistical models and even consensus inflation nowcasts from surveys of professional forecasters.

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The NY Fed’s UIG derived from the “full data set” increased slightly from a currently estimated 2.94% in December to 3.00% in January. The “prices-only” measure decreased slightly from 2.18% in December to 2.17% in January.

And, BTW, the January jump in inflation was not caused by accelerating Services prices (core Services: +0.3%, +2.6% YoY) but by core Goods which spiked 0.4% after a 0.2% gain in December. Weak dollar impacting?

  • PRODUCER PRICE INDEXES – JANUARY 2018

The Producer Price Index for final demand increased 0.4 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in December and moved up 0.4 percent in November. On an unadjusted basis, the final demand index rose 2.7 percent for the 12 months ended in January.

The index for final demand less foods, energy, and trade services rose 0.4 percent in January, the largest advance since increasing 0.5 percent in April 2017. For the 12 months ended in January, prices for final demand less foods, energy, and trade services moved up 2.5 percent, the largest rise since 12-month percent change data were available in August 2014.

Core PPI is up 3.3% a.r. in the last 3 months, from +2.4% the previous 3 months and +1.6% for the 3 months before. Core goods PPI is up 2.8% a.r. in the last 3 months, the same as in the previous 3 months. Pipeline inflation keeps crawling up: core processed goods prices for intermediate demand are up 4.0% a.r. in the last 3 months after +4.9% in the previous 3 months. They are up 4.6% YoY.

Whichever way I look at the inflation numbers, I get scared:

  1. the Fed could find itself really behind the curve (the yield on 10-year Treasuries climbed to 2.93 percent, the highest in more than four years);
  2. the U.S. consumer could find itself really squeezed (real retail sales declined a huge 0.8% in January after dropping 0.2% in December); another weak month in February and we could get a negative GDP in Q1’18!
  3. The U.S. just cannot afford a recession, however mild it could be, with its current and embedded debt levels.

Jerome Powell on Tuesday:

We are in the process of gradually normalizing both interest rate policy and our balance sheet. (…) The financial system is incomparably stronger and safer, with much higher capital and liquidity, better risk management, and other improvements.

The Cleveland Fed’s Loretta Mester, (considered for the vice chair post):

If economic conditions evolve as expected, we’ll need to make some further increases in interest rates this year and next year, at a pace similar to last year’s.

Which would be 3 hikes.

But what if conditions do not evolve as expected by the Fed, which is the norm?

Saudi Answer to Falling Oil Prices: Production Cuts The kingdom’s energy minister says it is sticking with output cuts, even ‘if we have to overbalance the market a little bit’

(…) “We believe we have to err on the safe side and make sure that the market has balanced,” Mr. Falih said at a news conference. “And if we have to overbalance the market a little bit, then so be it.” (…)

Mr. Falih said he wasn’t concerned about U.S. production. He pointed instead to oil-storage levels going down in the Organization for Economic Cooperation and Development, a sign that the global glut of oil is diminishing.

“You have to look at it from a bigger perspective,” he said,  “What matters to me is inventories are going in the right directions and supplies are in the right direction.”

Mr. Falih and his Russian counterpart, Alexander Novak, both dismissed the idea of unveiling a so-called exit strategy from the OPEC production cuts—an idea advocated by some oil analysts as a way to prepare the market for the end of their agreement.

“We have to think about exit only when the market balance is achieved,” Mr. Novak said. (…)

TECHNICALS WATCH

LR says that yesterday’s “rally produced the second 80% Up Day over the past three days, as NY Up Volume was 83% of total Up/Down Volume.” LR’s indicators registered “a conventional short term buy signal” and “a traders’ buy signal”.

Doesn’t Anyone Care About Deficits Anymore?

(…) In contrast, Mr Trump stands for nothing but red ink. He inherited a US fiscal deficit of $587bn in 2016. By next year it will have doubled to $1.2tn — or more than 5 per cent of gross domestic product. If the tax cuts passed in December are made permanent, which is likely, America’s budget deficit will exceed $2tn in less than a decade. US public debt, meanwhile, will soar to its highest levels since the second world war, at more than 100 per cent of GDP. Normally it would take a deep recession to do this to public finances. But Mr Trump and the ex-Tea Party are pulling it off in the midst of strong growth. (…)

This guy seems to care a little:

Ray Dalio Bets Big Against Europe

Ray Dalio, billionaire philosopher-king of the world’s biggest hedge fund, has a checklist to identify the best time to sell stocks: a strong economy, close to full employment and rising interest rates.

That may explain why the firm he created, Bridgewater Associates, has caused a to-do the past two weeks by quickly amassing an $18 billion bet against Europe’s biggest companies. The firm’s total asset pool is $150 billion, according to its website.

Economic conditions in Europe appear to fit Dalio’s requirements. Last year, the continent’s economy grew at the fastest pace in a decade, and European Central Bank President Mario Draghi has indicated he’s on a slow path toward boosting rates as economic slack narrows. Factories around the world are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices. (…)

Pointing up But Bridgewater’s trades in the U.S. remain a mystery. The Eurozone requires that investors disclose their short bets once they pass a certain size. The U.S. does not.

Warren Buffett’s long-time sidekick speaks on tech, healthcare and his advancing years

as·i·nine, adjective: extremely stupid or foolish.