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

Month: December 2019

THE DAILY EDGE: 19 DECEMBER 2019

Cass Transportation Index Report November 2019

(…) Shipment volumes, which have been negative y/y all year, fell 3.3% y/y in November. We’ve been talking for several quarters now about how we’re in another freight recession (the other being 2015-2016) during this long-tenured economic expansion in the U.S., which shows most clearly in the rail carload, LTL tonnage, and Cass shipment data. Some of this is due to an inventory destock (primarily at the retail level), while much is due to the softening industrial economy (where we believe inventories are still elevated). Moving into 2020, we expect volumes to flatten out but not surge much, and a turn to positive y/y comps in the shipments index could be seen as soon as January 2020.

Cass Shipments Index November 2019

(…) we show in the graph below that the Cass TL Linehaul Index has a strong correlation to the quarterly yield metrics reported by the publicly traded TL carriers. This index should be watched intra-quarter to see any changes to trends that may impact the stocks. Presently, going off this data and from conversations we’ve had with several carriers this past week, we see 4Q19 as a soft quarter for both pricing and volumes among trucking companies.

Cass Truckload Index w Carrier Data November 2019
Trump Administration Weighs Plans to Reduce Student Debt President Trump has asked advisers for a plan to help Americans with their student-loan debt, according to senior administration officials. Proposals being discussed would aim to counter Democrats’ debt-forgiveness plans.
Chinese State Investors Extend Help to Troubled Lender China’s sovereign-wealth fund is bailing out troubled lender Hengfeng Bank, the latest show of government support for the banking sector, which has come under intensifying financial stress as the economy slows.
Negative-Rates Pioneer Goes to Zero Sweden’s central bank, one of the pioneers in wielding negative interest rates, became the first to end that policy, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure.

(…) On Thursday, the Riksbank raised the key rate to zero from minus 0.25%. The bank moved because a majority of its policy makers expect inflation to be close to its 2% target over the coming years. Some policy makers have also become more concerned that a longer period of negative interest rates could lead businesses and households to take on too much debt, or force banks to charge to accept deposits, which could lead to a rush into cash.

But it signaled caution, indicating it has no plans to raise its key rate further in the coming year. Underlining that caution, two of the six members of the executive board— Anna Breman and Per Jansson —opposed the move, preferring to wait until it’s clear that inflation will remain around target. (…)

In the eurozone, negative rates are exceedingly controversial in countries like Germany, where many fear they keep unproductive companies alive, hurt bank profits and subsidize profligate governments by making debt extremely cheap. (…)

By discouraging commercial banks from parking their money at central banks, negative rates prod financial institutions to lend at low cost to other banks, businesses and consumers, in turn pushing people to borrow more, spend more and save less. Negative rates can also weaken the national currency, delivering a boost to exports and increasing prices of imported goods to fuel inflation.

That dynamic has partly worked in Sweden, helping to boost growth and employment. Swedish economic growth surged in 2015, and remained above that of the neighboring eurozone in most subsequent years, while its jobless rate has edged lower. (…)

Subzero rates have also pushed more money into equities and bonds, with holdings in mutual fund reaching all-time highs since rates went negative, said Gustav Sjöholm, savings economist at the Swedish Investment Fund Association. (…)

(…) “If the ECB would also make this move, Denmark would move automatically as it’s pegged, the Swiss would also be likely to follow through and we would see a move away from negative rates in the Eurozone. This is basically our bet.’’ (…)

Might also push U.S. yields higher and the USD lower…

Sanctions-hit Huawei plans components plant in Europe

(…) The chairman added: “In the area of 5G technology, we are already no longer dependent on the supply of chips and other components from American companies.” (…)

THE “TRADE DEAL”

Mike Pillsbury, Hudson Institute, interviewed by Lou Dobbs (via China Debate):

DOBBS: ‘I want to establish first whether there is text to all of it.’

PILLSBURY: ‘There are some limited texts. Whether the President wants to announce the whole thing with the long, written agreement, I’m not sure.’

  • ‘There’s a matter here that the Chinese may have given him so much that he doesn’t really want to embarrass them by making it all public.’

Gao Feng, a spokesman at the Chinese commerce ministry (Reuters):

“After the official signing of the deal, the content of the agreement will be made public,” Gao said.

THE DAILY EDGE: 18 DECEMBER 2019

U.S. JOLTS: Job Openings Edge Higher; Hiring Weakens

The Bureau of Labor Statistics reported that the total job openings rate rose to 4.6% during October from an unrevised 4.4% in September. It remained, nevertheless, below the 4.8% record in January. The job openings rate is the job openings level as a percent of total employment plus the job openings level. The ability to find workers to fill openings weakened as the hiring rate fell to 3.8% from 3.9%. It has been moving sideways since early last year. Employers became less inclined to let workers go. The layoff & discharge rate fell m/m to 1.2% and reversed the prior month’s increase. Individuals were ready to seek new positions as the quits rate held m/m at 2.3% and has been trending higher for ten years. (…)

The level of job openings rebounded m/m by 3.3% (-4.3% y/y) but has been declining since January’s high. It remained near the lowest level since March of last year. Private-sector openings fell 6.2% y/y, but government sector job openings increased 16.8% y/y.

Hiring activity weakened in October. The private-sector hiring rate slipped to 4.2% and remained below July’s expansion high of 4.4%. (…)

Total hiring declined 3.1% (-1.9% y/y) after a 1.1% September rise. Hiring in the private sector fell 3.5% (-2.0% y/y). Government sector hiring rose 2.0%, but was unchanged y/y.

fredgraph (23)

U.S. Factory Production Rebounds in November After GM strike resolved, industrial production posts biggest month-over-month increase since October 2017

Industrial production, a broader measure of factory, mining and utility output, increased a seasonally adjusted 1.1% in November from the prior month.

Excluding motor vehicles and parts, industrial production increased 0.5% last month and the manufacturing index rose 0.3%. (…)

Manufacturing output, which accounts for about 75% of the nation’s total industrial output, also increased 1.1% in November, the most since February 2018. That followed a 0.7% drop in both September and October.

Mining production fell 0.2% last month, while utilities output increased 2.9%. The mining index, which includes oil-and-natural-gas extraction, was up 2% from a year earlier.

Capacity utilization, which reflects how much industries are producing compared with what they could potentially produce, increased by 0.7 percentage point to 77.3% in November.

No clear turn yet even though manufacturing output excluding motor vehicles rose 0.3% MoM after having declined 0.3% MoM in both October and September. But November was a better month, after several bad ones, as this Haver Analytics table shows:

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An Additional Drag from Commercial Aircraft (Goldman Sachs)

  • We estimate the grounding of the 737 MAX lowered GDP growth by around 0.3pp in both Q2 and Q3 (qoq ar), as the collapse in shipments was only partially offset by a pickup in the difficult-to-measure inventory component. Last night’s announcement that production of the plane will also be halted argues for an additional hit to GDP.

  • GDP source data available for October and November indicate that the elevated pace of aerospace inventory accumulation in Q3 ($18bn SAAR) has continued into Q4. The January production stoppage suggests that this pace should approach zero in 2020Q1, lowering growth in that quarter by around 0.4pp (qoq ar). We are therefore lowering our 2020Q1 GDP estimate to 2.0%.

U.S. Housing Starts Increase as Building Permits Strengthen

New home building remained strong during November. Housing starts increased 3.2% (13.6% y/y) to 1.365 million (SAAR) from 1.323 million in October, revised from 1.314 million. The Action Economics Forecast Survey had expected 1.346 million starts for last month.

Multi-family starts increased 4.9% last month (7.3% y/y) to 427,000 following an 11.8% improvement during October. Single-family starts increased 2.4% in November (16.7% y/y) to 938,000 after October’s rise of 1.6%.

Starts in the South rose 10.3% (13.4% y/y) to 752,000, the highest level since March 2007. In the West, starts improved 1.4% (22.7% y/y) to 351,000, the highest level since September of last year. Moving lower last month were starts in the Midwest where they fell 15.5% (+9.7% y/y) to 158,000. They’ve been trending sideways since 2016. Starts in the Northeast declined 3.7% (-4.6% y/y) to 104,000, the lowest level since July.

A 1.4% increase (11.1% y/y) in building permits to 1.482 million brought them to the highest level since May 2007. Permits to build multi-family homes increased 2.5% to 564,000 (14.9% y/y) while single-family permits rose 0.8% to 918,000 (8.9% y/y).

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Business Roundtable CEO Economic Outlook Dips for Seventh Straight Quarter

The survey was made prior to the “trade deal”.

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For an economy clearly in need of consumer spending…

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With sales expectations so low, cost controls need to be triggered:

Since 2003, CEOs have been asked every fourth quarter to identify the greatest cost pressure facing his or her company. In Q4 2019, 48 percent of Business Roundtable CEOs identified labor as the top cost pressure, reflecting strong real wage growth for U.S. workers and a healthy U.S. job market due in part to a competitive business environment created by the 2017 tax law.

China’s Farm-Purchase Targets Under Trade Deal Face Skeptics The partial trade pact reached by the U.S. and China last week could be a boon to American farmers hard hit by the trade war, but the agricultural sector’s relief over a deal is being tempered by skepticism over the ambitious targets set by U.S. negotiators

(…) “They need U.S. pork, they need U.S. soybeans. Do they need $50 billion of agricultural goods? Absolutely not,” said Dave Marshall, a farm-marketing adviser with First Choice Commodities Inc. (…)

At their highest, the value of agricultural exports to China reached nearly $25 billion in 2013 and 2014, according to the Commerce Department.

However, analysts say that a major reason exports were able to hit such high levels was the higher price of commodities. In 2013, soybean futures traded at a high of roughly $13.50 a bushel—over 30% higher than they closed on Tuesday. Corn and wheat futures were roughly 100% higher in 2013 than now.

One way the U.S. could achieve its target would be by expanding sales of other agricultural products. The deal will also lift barriers on animal-feed additives and agriculture biotechnology that have prevented U.S. farmers from fully exploiting the Chinese market, according to the USTR. (…)

In November, China allowed U.S. poultry into the country for the first time in four years, a move which the industry estimated could lead to over $2 billion in additional sales. The U.S. has said other meats, seafood, rice, dairy, infant formula and even pet food would receive new access to the Chinese market.

But it isn’t clear how this could quickly scale up to $40 billion or $50 billion a year of purchases. (…)

“You’re getting to the point where you’re talking about more [volume] than the U.S. exports in a year,” said Ryland Maltsbarger, associate director of agriculture pricing and purchasing at IHS Markit Ltd. “Getting to $40 billion seems to be a stretch.” (…)

As part of the trade deal, the U.S. said, China has agreed to increase exports overall to China by $200 billion, split over the next two years, with targeted amounts specified for each year. (…)

Including services, China imported around $186 billion a year from the U.S. in 2017, the year before the trade war began.

Mr. Scissors calculated that instead of adding $100 billion to that $186 billion total for each of the two years, exports of goods and services could be ramped up gradually, to $246 billion next year and $326 billion in 2021—an annual growth rate of more than 30% for two consecutive years, far beyond anything ever achieved by American exporters.

After agriculture, the largest U.S. export to China has been civilian aircraft, a category that will be dented at least for a time by the production suspension of Boeing Co. ’s 737 MAX jets.

“But even if ag gets to those targets, which is a stretch in itself, and even if you get an enormous sale of aircrafts, you’re still $130 or $140 billion short,” said Mr. Scissors. “Everything else [that the U.S. exports to China] is small export volume.” (…)

The only way to reach such goals would be to divert large amounts of U.S. exports and Chinese imports away from other countries, which could set off complaints from other countries.

Because the goals are specified over a two-year window, it wouldn’t be apparent until well after next year’s presidential election if China fails to live up to the deal. Nerd smile (…)

  • this chart shows the effective tariff rate on US imports from China based on the August projections vs. the post-“interim deal” agreement. (The Daily Shot)

That makes me wonder whether China did in fact agree to what the U.S. side says they have.

(…) “We will see,” said Kudlow in response to Maria Bartiromo on “Sunday Morning Futures,” her Fox News Channel show, as she asked him about Beijing’s new “cybersecurity” rules. “There’s a large IP chapter in this deal and there’s also a large forced technology transfer chapter in this deal. I don’t think we know enough about these new Chinese rules and we’ll have to look at that and by the way if they do violate them of course we will take action.”

Bartiromo was referring to two sets of Chinese rules. On December 1, Beijing implemented the Multi-Level Protection Scheme 2.0, issued pursuant to the 2016 Cybersecurity Law. On January 1, China’s Cryptography Law becomes effective.

These measures prohibit foreign companies from encrypting data so that it cannot be read by the Chinese central government and the Communist Party of China. Businesses will be required to turn over encryption keys. Companies will not be able to employ virtual private networks to keep data secret, and some believe they will no longer be allowed to use private servers.

Together, these measures allow Beijing to take all the data and communications of foreign companies. (…)

Judging from Kudlow’s nonspecific response to Bartiromo and his admission of not knowing much about “these new Chinese rules,” the administration apparently has not considered the linkages between them and the trade deal. If that is indeed the case, the Phase One deal will be pointless. (…)

FedEx Warns of Another Hit to Profit FedEx posted a 40% drop in quarterly profit and again cut its earnings targets, as the delivery giant records less revenue from its Express business and books higher costs tied to delivering more e-commerce packages to homes.

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