EDGE AND ODDS’ Almost DaiLY CHAT (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 4, 2024
Awful Jobs Report Aside, the Economy Is Still Strong Despite a jobs report scare, the overall picture is of steady growth
(…) There were multiple distortions bringing it down, including a strike at Boeing and two major hurricanes. These affected not only the number of people working but also the survey collection methods of the Bureau of Labor Statistics. Attempting to divine from this figure how the economy is performing at a macro level would be foolhardy.
Perhaps more worrying would be the downward revisions in estimates for job growth in August and September, by a combined 112,000. (…)
Doubts about the reliability of the October jobs report should lead interested observers to look at other indications of the economy’s health. An obvious one is gross domestic product. Data released on Wednesday showed that it grew at a respectable 2.8% annual rate in the third quarter, adjusted for seasonality and inflation, down only slightly from 3% the prior quarter. (…)
During JPMorgan Chase’s quarterly earnings conference call, Chief Financial Officer Jeremy Barnum said the bank’s analysis of its own clients’ spending patterns suggest consumers have cut back some of the splurging they did on vacations and cruises after the pandemic ended. But he added that other discretionary categories like retail spending haven’t slowed. This is partly why the bank’s “central case” expectation for the economy isn’t so much a soft landing but a “no landing scenario” whereby strong growth continues, he said. (…)
The most likely scenario, according to Fed funds futures markets, is now that the Fed’s target rate will be a full percentage point lower by its meeting in June 2025 compared with now, according to the CME FedWatch tool. One month ago, bets centered around 1.5 to 1.75 percentage points of cuts by then. If the economy keeps its recent performance, there may be no need for any rate cuts at all next year. (…)
There is not much sense analyzing October’s job numbers other than the unemployment rate based on the household survey which was steady at 4.1% from 4.3% in July.
The unemployment rate is based on a separate survey of households. Respondents who say they had jobs but weren’t at work because of bad weather are still counted as employed. The same goes for workers with jobs who are on strike.
Based on the household survey, the Labor Department estimated there were 512,000 people with jobs who didn’t work as a result of bad weather, though many of those, such as salaried workers, would still be paid and therefore still be included in the jobs tally. Over the previous 20 years, the number of people out of work because of bad weather during October averaged 69,000.
Weekly unemployment claims were 222k for the week ended October 30, down from 242k at the August 7 pre-hurricanes peak. WARN notices point to lower claims ahead.
(Apollo)
USA: Manufacturing production continues to fall, but at slowest pace in three months
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) posted 48.5 in October, up from 47.3 in September but below the 50.0 no-change mark for a fourth consecutive month. The latest reading indicated that business conditions deteriorated modestly, albeit to the least extent since July.
New orders decreased for the fourth month running in October, and at a solid pace. Respondents indicated that uncertainty around the Presidential Election had been a common cause of a drop in new orders as customers hesitated before committing to new projects.
New export orders were also down, albeit only slightly and to a much lesser degree than total new business. Demand weakness was especially evident in Europe.
Falling sales led manufacturers to reduce output for the third consecutive month, but the rate of contraction was the weakest in this sequence and only slight.
There was increasing confidence that output will expand over the coming year, with sentiment rising for the second month running to the highest since May. In a number of cases, optimism reflected expectations that business would revive following the Presidential Election. Higher sales and falling interest rates also supported confidence.
While business sentiment strengthened, current muted demand conditions meant that firms continued to lower their staffing levels and purchasing activity at the start of the final quarter of the year.
Employment was down for the third month in a row, albeit only modestly. Meanwhile, the rate of contraction in purchasing activity accelerated to a marked pace that was the steepest since June 2023. The latest fall in purchasing was linked to lower new orders and efforts to cut inventories accordingly. Indeed, stocks of inputs were reduced to the largest extent in 14 months.
Firms purchasing inputs during the month were faced with lengthening supplier lead times for the first time in three months. Delivery delays in part reflected the impact of recent hurricanes, but also capacity issues at suppliers and issues with freight.
Some firms also reported delays in shipping finished products to clients, contributing to a further build-up in post-production inventories. Manufacturers continued to deplete outstanding business, however, given ongoing reductions in new orders.
The rate of input cost inflation slowed for the second month running and was the weakest since last November. Where input prices increased, panellists reported higher costs for raw materials such as cardboard, metals and packaging. Rising prices for freight were also mentioned.
Similarly, output prices increased at a slower pace in October, after inflation had hit a five-month high in the previous month.
The “solid” decline in new orders is said to stem from the uncertainty on the U.S. elections. We shall see if they rebound next month.
Regarding the high “confidence that output will expand over the coming year”, why lower staffing levels and cut purchases and inventories at the steepest pace since mid-2023.
The ISM manufacturing index pulled back to 46.5 in October, the lowest reading in over a year. A decline in current production and inventories triggered the drop, but it wasn’t all bad as there was a slight gain in new orders. (…)
Source: Institute for Supply Management and Wells Fargo Economics
Canada: Stronger growth of manufacturing sector signalled in October
The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI®) signalled a second successive monthly improvement in operating conditions during October. Moreover, growth was firmer, as signalled by the headline PMI improving to 51.1. That was up from 50.4 in September and a 20-month high.
Underpinning growth in October was a solid rise in manufacturing production. It was the first time since July 2023 that output has increased, and the uplift was the best registered by the survey in over a year-and-a-half. Some panellists reported that market demand had improved, leading to a net increase in total new orders. Growth was however marginal and centred on the domestic market: new export business continued to fall during October, extending the current downturn to 14 months.
With output rising at a noticeably faster pace than new work manufacturers added to their stocks of finished goods. Growth reflected a mixture of positive expectations for orders, but also some delays in shipping from warehouses. It was the fifth time in the past six months that a rise in inventories has been recorded. (…)
Workforce numbers rose in October for the second month in a row, with growth the best since April 2023. Extra workers were also hired in anticipation of increased production in the coming months. Although confidence was a little down since September it remained comfortably above trend. An improvement in sales and market demand, supported by the release of new products, should underpin growth in the year ahead.
On the price front, input cost inflation softened during October, though was still marked amid reports of higher prices for metals and related products. Vendor performance also deteriorated again marginally. Ocean freight delays were commonly reported, linked to a mixture of poor weather and disruption in the Panama and Suez canals.
Finally, output charges were raised in October, but only marginally and to the slowest extent for five months. Whilst firms sought to pass on higher input costs to clients, competitive market pressures tended to limit pricing power.
Eurozone manufacturing slump eases slightly in October
The HCOB Eurozone Manufacturing PMI increased to 46.0 in October, from 45.0 in September. Albeit still below the 50.0 threshold which separates growth from contraction, the uptick in the headline index indicated an easing of the deterioration in the euro area’s manufacturing industry. The overall pace of decline was also the slowest since May.
The eurozone manufacturing sector continued to be weighed down heavily by its two largest economies – Germany and France – where contractions remained sharp. (…) Moderate deteriorations were seen in Italy and the Netherlands, although a renewed improvement at Irish factories was recorded. (…) The top performer was once again Spain, which posted its fastest improvement in industrial conditions since February 2022.
Factory output levels continued to decrease across the euro area in October. Although the rate of contraction cooled since September, it was solid and broadly in line with the average seen over the current 19-month sequence of decline. Production lines were once again squeezed by a lack of incoming new work, including from abroad. Total new order inflows shrank at the start of the fourth quarter, although the extent of the fall was the softest since June. (…)
Employment was cut further at the start of the fourth quarter. Despite easing, the rate of job shedding held close to September’s 49-month record. (…) eurozone manufacturers’ growth expectations were at their weakest in a year.
Meanwhile, as was also the case in the previous survey period, costs faced by eurozone manufacturing companies decreased in October. The reduction was modest, but the fastest since March. Survey respondents opted to share lower input prices with their clients as charges for goods leaving the factory gate were discounted to the greatest extent in six months.
Big Oil Dials Up Output Growth Just as OPEC Mulls Supply Boost
Exxon Mobil Corp. and Chevron Corp. capped Big Oil earnings season by revealing blockbuster increases in fossil fuel production — just as OPEC and its allies are preparing to increase the supply of crude into the global market.
The US oil majors’ increases were fueled by pumping record amounts of crude from the Permian Basin, which continues to surprise analysts with year-over-year growth and efficiency gains. (…)
The US companies weren’t alone. Shell Plc and BP Plc hiked production 4% and 2% respectively, even despite net zero targets that are more aggressive than their American rivals. (…)
Chevron is pumping 27% more oil and gas than a decade ago despite cutting capital expenditure in half. Much of that is because the company was spending heavily on Australian gas projects that are now operational, but it’s also down to efficiency gains and a pivot toward the Permian. Chevron has doubled its production in the basin in the last five years and is now returning records amounts of cash to shareholders.
“We’re getting more efficient in everything we’re doing,” Chevron CEO Mike Wirth said in an interview. “We’re getting more for every dollar we spend.”
The growth in US production — currently about 50% higher than Saudi Arabia — is helping to keep millions of OPEC barrels off the market. These barrels, combined with fresh supply from Guyana, Brazil and elsewhere, could mean that 5 million barrels a day of productive capacity “will be available in 2025 that is not currently producing today,” Macquarie analysts said in a report. That’s agains the backdrop of “relatively weak” demand growth, they said. (…)
Exxon projects in Guyana and the Permian, which now make up about a quarter of overall production, can pump crude for less than $35 a barrel, meaning they should remain profitable during a potential downturn.
- Oil Was Written Off. Now It’s the Most Productive US Industry Oil and gas extraction has seen the fastest labor productivity gains of any sector in the past decade.
(…) “It’s astounding, really,” says Matador Chief Executive Officer Joseph Foran. “You give people a target, and they’ll find out better ways, better equipment, better techniques.” The U-turn, or horseshoe well, is an example of the small improvements that together have pushed oil and gas producers to the biggest labor productivity gains of any US sector over the past decade—including even tech-related industries, which have historically ranked first. The nation’s crude output has risen to a record 13.3 million barrels a day, 48% more than Saudi Arabia. All with less than a third of the rigs and far fewer workers than were needed 10 years ago. (…)
US oil production will grow by 600,000 barrels a day in 2025, about 50% more than this year’s growth, due to higher well productivity, according to BloombergNEF. (…)
Over the past decade, however, the oil boom has helped the American economy grow at a faster pace than those of other rich nations and kept demand for workers high. Even though the shale revolution is now 15 years old, its success has yet to be replicated outside the US, where geology, property rights and available capital combine to make it possible. Higher levels of productivity across all sectors could add $10 trillion to US gross domestic product from 2023 to 2030, according to a McKinsey Global Institute analysis.
Productivity in the oil and gas extraction sector almost tripled in the 10 years ending in 2022, compared with a near-doubling in some tech-driven industries. (…)
Operators continue to improve the fracking process. That includes drilling longer wells and releasing the water at half the rate, reducing friction that can slow the process and waste horsepower. Explorers are now drilling 4-mile (6.4-kilometer) wells horizontally through layers of shale, up from 3 miles only a year or two ago. Industry consolidation is aiding the trend. Producers, by buying companies with neighboring acreage, are gaining access to larger swaths of land into which they can drill lengthier wells. (…)
Back in 2014, Permian operators needed crude prices above $70 a barrel to make a profit. But about a decade later, they can make money in the $40-a-barrel range, even as they expand to less favorable geologic formations, according to S&P Global Commodity Insights. (…)
“If you go back to 2012, there were books written about how shale is going to be a flash in the pan, it’s going to go away, and here we are 11 to 12 years later, and it hasn’t gone away—it still keeps growing.” (…)
Meanwhile, Saudi Arabia reportedly needs $80/bbl to balance its budget.
In September, OPEC+ said it would extend voluntary production cuts of 2.2 million barrels per day to the end of November, and would gradually phase out these cuts on a monthly basis starting Dec. 1. The group’s next committee meeting and full ministerial gathering are also scheduled for Dec. 1.
If OPEC+ phases in the amount it currently plans, oil prices are likely to drop well below the base-case forecast from S&P Global Commodity Insights, to as low as some $40 a barrel in March, said Wu. (MarketWatch)
BTW:
Canadian oil production and exports continue to boom. Canadian crude oil production hit an all-time record in 2023, at 5.1 million b/d, as companies ramped up in anticipation of the Trans Mountain expansion’s startup. Analysts have suggested that total could increase by as much as 500,000 b/d on average this year.
Crude exports from Canada reached a record high of four million b/d in 2023, according to Statistics Canada, and continue to climb. According to figures from the U.S. Energy Information Administration released this week, Canadian crude exports to the United States hit a record 4.3 million b/d in July, 2024, following the startup of the Trans Mountain project. (Globe & Mail)
So the U.S. and Canada combined are producing more than 19M b/d, about 55% more than OPEC+ current production.
- Next year, global oil production is expected to exceed demand by an average of 1.2 million barrels per day, according to the World Bank’s annual Commodity Markets outlook. That supply-demand mismatch has rarely been exceeded. (Axios)
Data: World Bank. Chart: Thomas Oide/Axios
- The World Bank modeled what might happen if the conflict in the Middle-East escalated and reduced the global oil supply by 2 million barrels per day by the end of 2024 — similar to the disruption seen during the Iraq War in 2003.
In that case, the researchers say oil prices might initially surge, but that spike might be short-lived: Other countries unaffected by the conflict would step in and boost production.
Iran Tells Region ‘Strong and Complex’ Attack Coming on Israel Tehran has warned diplomats that it is planning to use more powerful warheads and other weapons
China Isn’t Planning a ‘Bazooka’ Stimulus—at Least Not This Year Investors’ hopes for bold moves are wishful thinking, no matter who wins U.S. vote
(…) Beijing is discussing how the U.S. election’s potential impact will affect market sentiment in China. They say that authorities are planning on signaling after the legislative session that more steps to support growth are in the pipeline and that a package of incremental measures can be expanded depending on an assessment of risks to the Chinese economy.
For instance, these people say, if Trump wins the election and goes ahead with his promised tariff hikes, China could try to boost what Beijing describes as “effective demand” at home by increasing government spending in high-end manufacturing and other projects seen by the Xi leadership as crucial to the country’s competitiveness. (…)
If Harris is elected and her policies mirror Biden’s tough but more targeted and predictable approach on China, that would likely be the lesser of two evils in Chinese leaders’ views. (…)
Many economists have urged China’s leadership to shift its focus away from factories and toward getting more money into the pockets of Chinese consumers. Such a strategic change in economic policy, the people say, isn’t in the cards, at least for the foreseeable future. (…)
LVMH’s Empty Chinese Megastore Signals Deepening Luxury Crash Upmarket brands are scrambling to adjust strategy after being wrongfooted by the rapid downturn in Chinese spending.
(…) After years of heady growth, China’s luxury market is expected to shrink as much as 15% this year, according to consultancy Digital Luxury Group.
The downturn is partly cyclical, with China’s economy struggling to recover from a nationwide housing crisis. But even more concerning for Europe’s luxury giants are indications of a permanent shift in demand. President Xi Jinping’s campaigns to crack down on corrupt government officials and promote a more equal distribution of income have made displays of wealth not just passe, but potentially dangerous.
“The big watches, the bags, the visible items, put them aside to preserve social unity. And that’s a change in behavior. How long will it last, I don’t know but we have to take this into account.”
Meanwhile, younger Chinese consumers are increasingly spending their money on experiences like travel rather than status symbols. (…)
Kering warned that its annual profit will fall to the lowest level since 2016 after comparable sales at Gucci, the French fashion group’s biggest label, tumbled 25% in the third quarter due to China’s slowdown. LVMH reported a 16% slump in the region that includes China in the same quarter, wider than its 14% drop in the previous three months. (…)
Luxury goods in China are being “deprioritized, especially for middle-income earners,” said Jonathan Siboni, CEO of consultancy Luxurynsight, adding that his company’s data shows a quarter of Chinese consumers find Western brands less appealing than 12 months ago. (…)
Foot traffic at major malls across China during the weeklong holiday at the start of October was 18% lower than a year earlier, according to Baidu Inc. (…)
EARNINGS WATCH
From LSEG IBES:
349 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 77.1% reported earnings above analyst expectations and 17.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 7.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.
Of these companies, 59.1% reported revenue above analyst expectations and 40.9% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.
In aggregate, companies are reporting revenues that are 1.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.
The estimated earnings growth rate for the S&P 500 for 24Q3 is 8.4%. If the energy sector is excluded, the growth rate improves to 11.2%.
The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.8%. If the energy sector is excluded, the growth rate improves to 5.9%.
The estimated earnings growth rate for the S&P 500 for 24Q4 is 10.7%. If the energy sector is excluded, the growth rate improves to 13.2%
Revisions have turned broadly positive:
NOVEMBER! DOES IT MATTER?
The legendary Yale Hirsch, founder of the Stock Traders Almanac, first popularized the “Best Six Months of the Year” phenomenon, which purportedly extends from the close of October 31st each year through the close of April 30th of the following year.
Is there really anything to it? And if so, how much does it matter today? Let’s examine the history. We will analyze the performance of the S&P 500 Index during the post-WWII era, i.e., starting in late 1945.
The chart below displays the hypothetical growth of $1 in the S&P 500 only during November through April every year starting in 1945. $1 grew to $125.63.
A “quick-and-dirty” analysis might label this performance as “Very good, but far from perfect.” Key things to note are the 76% Win Rate, the 10.1% Median Return, and the lopsided 16 to 2 skew in periods showing a gain or loss of 15% or more.
However, to fully appreciate the results above, we must compare it to the “other” six months – May through October. The chart below displays the hypothetical growth of $1 in the S&P 500 only from the end of April through the end of October every year starting in 1946.
Whereas $1 invested only in Nov-May grew to more than $125, $1 invested only during the other six months grew to just $2.75. Note the inconsistent nature of returns in the chart below and the fact that May-Oct has shown a gain in ten of the last twelve years.
The table below summarizes S&P 500 performance for all November through April periods versus all May through October periods.
Some key things to note:
- It is incorrect to categorize Nov-April as “bullish” and May-Oct as “bearish”
- It IS more accurate to state that Nov-Apr is much more consistently favorable than May-Oct (Nov-Apr up 76% of the time versus only 66% for May-Oct, Median Gain of +6.6% for Nov-Apr versus +2.9% of May-Oct, and Nov-Apr outperformed May-Oct 71% of the time)
This is playing the odds smartly. Let’s see if we can find a fundamental edge to further improve those odds:
During the November-April periods:
- valuations, inflation and profit trends had no clear impact;
- 8 of 16 declining periods were before or during recessions with fed funds rates peaking or declining;
- in 7 of the 8 non-recessionary declines, fed funds were rising.
During the May-October periods:
- no clearly discernible patterns…
- equities still rise 66% of the time but provide lower returns on average, mainly because of some very bad September-October setbacks.
Stan Druckenmiller says that “it’s liquidity that moves market”. Look how equities typically draw so much more new money between November and April than between May and October. Supply/demand does matter.
My take:
- equity exposure should be on the higher side of one’s long-term range at the end of October…
- …unless recession odds are high or the Fed is openly restrictive.
- May to October: careful with valuations. Some dry powder can prove very profitable.
- Recessions are never good. They are generally Fed-induced to fight inflation.
How these new funds are invested is also relevant.
During the past decade, passive equity mutual funds and ETFs have seen $2.8 trillion of inflows compared with $3.0 trillion of cumulative outflows from actively-managed funds. Alongside passive equity inflows, the share of passive ownership for the typical S&P 500 firm has also increased, rising from 18% two decades ago to 26% today.
This trend appears to be accelerating, as passive funds experienced $1.6 trillion of inflows during the past 5 years vs. $1 trillion over the previous 5-year period. Although actively managed mutual funds have experienced consistent outflows during the past decade, active ETFs have attracted $246 billion of inflows over the past decade. (Goldman Sachs)
But even passive funds need to become more active as Almost Daily Grant’s explains:
Big tech’s bull stampede is spurring high-class headaches for some investors, as the Financial Times reports that funds managed by the likes of Fidelity and T. Rowe price are “are being forced to offload shares” in Silicon Valley mainstays to stay on the right side of the taxman.
Internal Revenue Service rules bar any “regulated investment company” – i.e., most mutual funds and ETFs – from allocating more than 50% of its assets to large companies, defined as positions weighted at more than 5%. (…)
Fidelity’s Blue Chip Growth Fund and BlackRock’s Long-Term U.S. Equity ETF each allocated 52% to such large holdings as of Sept. 30 according to Morningstar, while T. Rowe Price’s Blue Chip Growth Fund has been offsides in six of the past nine months.
Watch end of months/quarters…
Speaking of odds:
Everybody’s got a take on Tuesday (from Bruce Mehlman):
- The Economist’s model says Harris is 52% likely to win.
- Nate Silver’s puts Trump at 51.5% likely.
- The New York Times’ polling average sees Harris +1%.
- Real Clear Politics’ average: Trump +0.3%.
- Voter enthusiasm favors Dems, Right track/Wrong track the GOP.
- Net favorability: advantage Harris;
- more trusted on the #1 issue (economy): advantage Trump.
In reality, nobody knows nothin about nothin.
If history proves anything, it’s that “it’s tough to make predictions, especially about the future.” (Yogi Berra)