THE DAILY EDGE: 28 AUGUST 2019

The CAB is a leading economic indicator derived from a composite index of chemical industry activity. The chemical industry has been found to consistently lead the U.S. economy’s business cycle, given its early position in the supply chain, and this barometer can be used to determine turning points and likely trends in the wider economy.

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), fell 0.1 percent in August on a three-month moving average (3MMA) basis following a similar drop in July and four months of gains. On a year-over-year (Y/Y) basis, the barometer was flat at 0.0 percent (3MMA).

The unadjusted measure of the CAB fell 0.5 percent in August after a 0.1 percent gain in July. The diffusion index was 59 percent in August. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for July was revised upward by 0.58 points and that for June by 0.62 points.

“A pattern of fluctuating CAB readings – months up followed by months down – indicates late-cycle activity,” said Kevin Swift, chief economist at ACC. “The barometer signals gains in U.S. commerce into early 2020, but at a slow pace, while rising volatility suggests change may be coming.”

The zero line has been an important level. It has held so far in 2019…

China Prepares for the Worst on Trade War After Trump’s Flip-Flops

Perhaps nobody was more surprised to hear that China had called President Donald Trump’s administration to restart trade talks than the government in Beijing itself.

After a weekend of confusing signals, Trump’s credibility has become a key obstacle for China to reach a lasting deal with the U.S., according to Chinese officials familiar with the talks who asked not to be identified. Only a few negotiators in Beijing see a deal as actually possible ahead of the 2020 U.S. election, they said, in part because it’s dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break. (…)

It all made for splashy headlines and momentarily boosted stocks, but nobody in Beijing officialdom appeared to know what he was talking about. Even worse, his efforts to depict China as caving in negotiations actually confirmed some of their worst fears about Trump: that he can’t be trusted to cut a deal. (…)

China has prepared contingency plans in case of a no-deal scenario, three officials said, including putting U.S. companies on its unreliable entity list and stimulating the economy. (…)

“A gradual decoupling is happening de facto because companies have to make alternative plans when there’s so much uncertainty,“ said Tim Stratford, chairman of the American Chamber of Commerce in China and a former assistant U.S. trade representative. (…)

China’s Potential New Trade Weapon: Corporate Social Credits Foreigners worry that Beijing will use its corporate “social credit” system as a weapon against international companies amid the U.S.-China trade war.

(…) While Beijing’s better-known plans for a social-credit system for individuals have stirred privacy concerns, a parallel effort to monitor corporate behavior would similarly consolidate data on credit ratings and other characteristics, collected by various central and local government agencies, into one central database, according to China’s State Council. The system is set to fully start next year.

An algorithm would then determine to what degree companies are complying with the country’s various laws and regulations. In some cases, companies could be punished by losing access to preferential policies or facing stricter levels of administrative punishment, a document from the State Administration for Market Regulation showed. Analysts said that other punishments could include denial of access to land purchases, certain loans and procurement bidding. (…)

Mr. Conrad said some of the language used in recently released draft rules for a blacklist of heavily distrusted entities—which is a part of the corporate social-credit system—echoed the Beijing authorities’ warnings about their planned unreliable foreign-entities blacklist, suggesting that the two efforts are intertwined. (…)

While some analysts are hopeful that the system could also allow for more objective standards to be applied to foreign and domestic companies, the new regulations will likely mean higher compliance costs and more uncertainty for foreign businesses. (…)

Alphabet Inc’s Google is shifting its Pixel smartphone production to Vietnam from China starting this year as it builds a cheap supply chain in Southeast Asia, the Nikkei business daily reported on Wednesday.

(…) The U.S. internet giant plans to move most of its American-bound hardware out of China, including the Pixel phones and its smart speaker Google Home, Nikkei said. (…)

(Tks Fred)

(…) Last year, the national debt increased by over 6 percent of GDP. And nominal GDP growth was 5 or 5.1 percent. So all of the growth of the economy basically can be ascribed to debt. Another way to put it is if we hadn’t increased the national debt at all and just kept it the same, there would’ve been no economic growth. There would’ve been a negative sign. Which means there’s no organic growth in the economy. (…) Corporate debt is triple the size it was in 2006 before the great recession. I mean it’s just massive.

Well, the history books I believe will say the peak of the super cycle in global stock markets was January 26th 2018 — so, that’s 18 months ago. The world index is substantially lower than it was at its peak on that day. The broader U.S. stock market is also lower than it was January 26, 2018. The falsest narrative out there currently is how the U.S. is in a raging bull market for stocks — it’s completely untrue. Plus, if a recession comes, it’s completely nonsensical to think that you are going to see positive gains in earnings. So you should expect to continue to tread water at best in the U.S. equity market.

I think the bond market right now in the United States is very hard to predict, because given natural forces of free markets yields would be rising between now and the 2020 election. However, the Fed could very easily manipulate the yields, as has been seen in Japan and Europe, and they’ve made comments that they’re open to that idea. So, will bonds yield go to 5 or 6 percent? Or will they go to zero? It’s up to the Fed. And, based on what they’re saying, I would give the natural market being left to its own devices less than a 50 percent probability. (…)

The federal deficit typically increases to about 4 percent of GDP in postwar recessions. Look at the past two: The deficit went up to 6 percent of GDP in the ’02 recession and it went up to 8 percent of GDP in the ’08 recession. So, amazingly in the next recession, you can be talking about a deficit of $3 trillion.

Three trillion dollars! And you know, certainly foreigners aren’t buying our debt anymore. China isn’t buying our debt anymore, so who’s buying the debt? It’s the public. So in a recession, how’s the public going to come up with $3 trillion to buy these bonds? (…)

Analysts pare back US corporate profit estimates Expectations for earnings at S&P 500 companies fall by most in three years

The FT uses Factset data to report that

the S&P 500 index will increase profits 2.4 per cent on a per-share basis this year, down from the 7.7 per cent growth expected at the start of the year. The 5.3 percentage-point drop in full-year earnings expectations marks the largest decline on a year-to-date basis since 2016. Second-quarter profits for companies in the S&P 500 are down 0.4 per cent on a per-share basis with 96 per cent of companies having reported.

Tough year to keep track of earnings as each aggregator has its own approach to “unusual items”, including large fines incurred by some tech cos. Factset has Q2 “operating” earnings down 0.4% but Refinitiv/IBES has them up 3.2% while Capital IQ has them up 4.7%. Interestingly, “as reported EPS” are up 3.9% in Q2 per Capital IQ.

Per Refinitiv, full year EPS are expected to increase 2.0%, down from +7.3% expected on January 1. Capital IQ sees them up 7.0%.

I continue using Refinitiv/IBES for continuity.

YIELD INVERSION

Bespoke charts the other important yield inversion:

S&P 500 Yield Tops the Thirty Year

The yield on the 10-year US Treasury dropping below the dividend yield on the S&P 500?  That’s so last month.  Today, it’s the 30-year yield that’s falling below the S&P 500’s dividend yield.  At 1.966%, the 30-year Treasury yield just dropped below the dividend yield of the S&P 500 for the first time since March 2009.  Who knows if we’ll finish the day with a 30-year/S&P 500 inversion, but the way things have been moving, it’s probably just a matter of time if it doesn’t happen today. (…)

Looking at individual stocks, it’s pretty amazing how many stocks now yield more than the 5,10, and 30 year US treasuries. As of this morning, two-thirds of the stocks in the S&P 500 yield more than the 5-year, more than 62% yield more than the 10-year, and slightly more than half yield more than the 30-year.

The S&P 500 dividend payout ratio is currently 34.7%, down from 40% in 2016 but up from 27% in 2012 and 28% near the peaks in equity markets in 2001 and 2007. Ed Yardeni provides the economy-wide payout ratio, currently at 40.7%.

Union Approval Near 50-Year High

Sixty-four percent of Americans approve of labor unions, surpassing 60% for the third consecutive year and up 16 percentage points from its 2009 low point. (…) The current 64% reading is one of the highest union approval ratings Gallup has recorded over the past 50 years, topped only in March 1999 (66%), August 1999 (65%) and August 2003 (65%) surveys.

I find particularly interesting the jump in union approval since the Great Financial Crisis. A 16 point jump (+33%)!

There is a 55% jump among Republicans!

In addition to partisanship, union affiliation is a significant driver of union approval. Specifically, 86% of U.S. adults living in a household with a union member approve of unions, compared with 60% of those in nonunion households.

Gallup says that only 14% of Americans reside in a union household. So 60% of the 86% of non-unionized households approve unions. That’s 52% of non-unionized households approve (wish?) unions.