DAILY DIARY
My Takeaway of the Day
Though the Indices eeked out some gains, I would observe the strength of consumer staples ( (PG) , (KHC) , (PEP) , (UN) ) and lower bond yields (by one to two basis points) today.
This strength might be construed as risk off and indicative of slowing domestic economic growth.
I added further to my net short exposure. Though not as high as when I had a large Nasdaq short (now medium sized) I am getting back to a sizeable net short exposure which is beginning to rival my previous two year (or so ) high of last week/early this week.
Thanks for reading and enjoy the evening.
Plausible TWTR Takeover Bet
I feel that the Twitter (TWTR) takeover bet is quite plausible and I am backing my view with a number of way out of the money lottery bets.
In all likelihood I will tear up these tickets, but if a takeover does occur it would virtually result in a game changing impact on my portfolios.
And the Beige Book Says...
"Businesses generally remained optimistic about the near-term outlook, though most Districts noted concern and uncertainty about trade tensions--particularly though not only among manufacturers. A number of Districts noted that such concerns had prompted some businesses to scale back or postpone capital investment."
- Fed Beige Book
The two year yield is back to the high of the morning at 2.75% noting these growing price pressures along with wages. The ten year yield is back at 2.96% after trading below after the good auction.
Here are some key snippets from the Fed's just released Beige Book for economic activity through August:
"The economy expanded at a moderate pace."
"Dallas reported relatively brisk growth, while Philadelphia, St. Louis, and Kansas City indicated somewhat below average growth."
"Consumer spending continued to grow at a modest pace since the last report."
"Manufacturing activity grew at a moderate rate in most Districts, though St. Louis described business as little changed and Richmond reported a decline in activity."
"Transportation activity expanded, with a few Districts characterizing growth as robust."
"Home construction activity was mixed but up modestly, on balance. However, home sales were somewhat softer, on balance--in some cases due to reduced demand, in others due more to low inventories."
"Commercial real estate construction was also mixed, while both sales and leasing activity expanded modestly."
"Lending activity grew throughout the nation."
Here are some comments on the broad labor shortages and that wage situation:
"Labor markets continued to be characterized as tight throughout the country, with most Districts reporting widespread shortages. While construction workers, truck drivers, engineers, and other high-skill workers remained in short supply, a number of Districts also noted shortages of lower-skill workers at restaurants, retailers, and other types of firms."
"Employment grew modestly or moderately across most of the nation."
"Wage growth was mostly characterized as modest or moderate, though a number of Districts cited steep wage hikes for construction workers. Some Districts indicated that businesses were increasingly using benefits--such as vacation time, flexible schedules, and bonuses--to attract and retain workers, as well as putting more resources into training."
Boston: "Some staffing firms noted increases in bill and pay rates, ranging from low single digits to 10 percent."
New York: "Businesses in most service industries indicated that wage pressures remain fairly widespread, though they have not intensified... Looking ahead, fewer businesses indicated planned wage increases than had been the case in recent months."
Philadelphia: "Once again, over half of the non-manufacturing contacts reported increases in wage and benefit costs. Staffing firms reported no dramatic changes in wage trends; even in labor markets with the District's lowest unemployment rates, wages were said to "continue to inch up."
Cleveland: "Overall wage pressures were in line with the moderate trends seen so far in 2018. A few transportation and manufacturing contacts reported that they were having to give off-cycle wage increases to retain workers. One auto dealer increased incentives and starting pay for mid-level technicians, while a retailer noted the contact's firm's new bonus program had helped keep turnover in check. One banker noted raising wages for more experienced professionals because these professionals were more mobile."
Richmond: "Wage increases remained modest, overall" but "employers continued to report tight labor markets and difficulties finding qualified workers."
Atlanta: "Contacts continued to report that wage pressure was growing; however, increases greater than 2 to 3 percent remained targeted, rather than broad-based. In response, firms continued to approach compensation creatively (e.g., offer enhanced flexibility, use bonuses and other incentive pay, and offer profit sharing or other forms of temporary compensation that can be discontinued if necessary). Reports from some firms indicated that they were unable to pay the higher wages demanded by experienced job seekers. Instead, they shifted their focus on higher margin business lines or planned to "wait it out" and not to fill the positions."
Chicago: "Manufacturers continued to report that they had delayed or turned down projects because of difficulties in finding workers. There were also reports of firms forgoing layoffs to avoid the challenge of finding workers when demand picked up... Wage growth remained modest overall, with wage increases most likely to be reported for managerial, professional and technical, and production workers. Most firms reported rising benefits costs."
St. Louis: "Wages have increased modestly since the previous report. On net, 40 percent of survey respondents indicated that wages were higher or slightly higher than a year ago, and 39 percent reported increases in labor costs. Contacts in construction and transportation reported that labor shortages have led to wage increases in those industries. Small business wages in St. Louis grew moderately."
Minneapolis: "Wage growth was moderate to strong since the last report. An ad hoc survey of Minnesota staffing firms found average wage growth of 3 percent to 5 percent, with similar expectations for the coming year. A western Wisconsin contact said lower-paying positions were seeing catch-up wage increases, "while the top (wage) stays in place." Increasing entry-level wages from $11 to $13 "hasn't had much of an impact in recruiting, but moving to over $15 has." A North Dakota contact said wages for entry-level office jobs have risen from $12 to $14 over the past year, while those for entry-level forklift operators have gone from $14 to $16 or more. Due to high vacancies, salaries for high-tech positions in Minneapolis-St. Paul were seeing strong increases."
Kansas City: "A majority of respondents reported labor shortages for low- and medium-skill workers, due primarily to a lack of qualified applicants. Contacts specifically noted difficulties filling commercial driving positions and most positions within the retail and food-services sectors. Wages rose modestly in most sectors, and moderate wage growth was expected in the coming months."
Dallas: "Wage pressures remained elevated, with more than 60 percent of firms saying they were increasing wages and/or benefits to recruit and retain employees. Upstream energy firms reported significant pressure to raise wages in the Permian Basin despite flattening of the rig count... A transportation services firm was offering up to $15,000 in multi-year sign-on bonuses in some areas. Retailers noted difficulty filling lower-level positions, with several contacts reporting starting wages of $15-$16 per hour to remain competitive. Nearly 60 percent of firms said they were unable to pass higher labor costs to customers through price increases."
San Francisco: "Wage growth ticked up broadly, and some businesses increased benefits in response to more labor retention challenges. Contacts across the District noted upward compensation pressures for accountants, software engineers, and information technology professionals. In the Mountain West, small businesses moderately raised starting wages and benefit compensation to better compete with larger national employers. In order to retain employees and attract new hires, a few businesses increasingly offered flexible work arrangements."
On prices: "All Districts noted fairly widespread input price pressures, particularly for construction materials and freight transportation. Tariffs were reported to be contributing to rising input costs, mainly for manufacturers. Businesses' input costs have generally been rising more rapidly than selling prices, though there have been increased efforts to pass along cost hikes to customers. A few Districts noted some increase in inflation expectations."
Recommended Reading
On knowledge@Wharton:
"A Decade After the Great Recession, Is the Global Financial System Safer?"
My Thought of the Day
I am old enough to remember when "unusual option activity" would raise a red flag at the Securities and Exchange Commission.
Adding to TWTR
Disruption in NASDAQ and FANG is hurting Twitter (TWTR) today.
I am very large in the name and just added at $29.62.
Gold Is Rallying
I'ts interesting that the weak inflation data (PPI today but CPI tomorrow, so we'll see) might actually help gold here as the Fed can lean a little dovish post the Sept 26th hike...
Auction Action
I haven't talked about auctions recently.
After a mediocre three year note auction yesterday, today's ten year was better. The yield of 2.957% was slightly below the when issued price just prior. The bid to cover of 2.58% was better than the 12 month average of 2.49%. Also, direct and indirect bidders took about 77.5% of the auction, above the one year average of 71% and thus leaving dealers with the least since January.
So, finally we have a good auction where maybe the near 3% yield attracted interest. This comes ahead of the CPI tomorrow. The other three key influences for Treasuries in coming months will be firstly, will there or won't there be a trade deal with China. Secondly, we are two and a half weeks away from another ramp up in Fed QT and a 50% cut in ECB QE with the net liquidity injection from the Fed, ECB and the BoJ falling to zero in Q4. It was $100 billion per month in Q4 2017. Lastly, the September 15th deadline is upon us for pension funds to saddle up their pensions at the 35% corporate rate tax deduction benefit rather than just a 21% deduction after September 15th. Pensions have been big buyers of longer term Treasuries this year in anticipation of this change.
Treasuries are at the high of the day with the 10 yr yield just below 2.96%:
Source: Peter Boockvar
As I mentioned yesterday my largest individual investment is in two year U.S. Treasury notes.
Midday Musings From Sir Arthur Cashin
Once again trade rumors move stocks. Rumor on Canada talks put a mild bid under stocks around the opening. Then rumors of a possible restart of China talks at the Mnuchin level sparked what looked like a short squeeze and vaulted stocks up through resistance.
Drop in crude inventories was reconfirmed at 10:30 and that helped crude and energy stocks.
- Arthur
Shorting
Shorting more aggressively now.
At the Top
My guess is that we have seen a top for both the S&P and Nasdaq for the year.
SPY Update
Pressing short (SPY) on a scale higher.
The Book of Boockvar
Peter Boockvar thinks "something has to give" (and I agree):
The bleed in Asian stock markets continued overnight and here is a great visual of what has taken place since June. The SPX is in white and the MSCI Asia Pacific stock index is in orange (Japan 38%, China 18%, Australia 11%, South Korea 8%, Taiwan 7% and then other). This is not a sustainable trend and something has to give one direction or another as the Asian region is 1/3 of global GDP, greater than North America and Europe.
China announced that aggregate loan financing in August totaled 1.52 Trillion, about 200b yuan more than expected. It's up from July but down from August 2017. The main reason for the upside was a further pick up in corporate bond issuance. The shadow finance side saw a continued decline in loans and bank loans were below what was forecasted. Either way, the Chinese government has encouraged an increase in lending to cushion the slowdown going on and it wasn't much reflected on the bank side, only via corporate bonds. This was also reflected in the slowdown in money supply growth (M2) that moderated to 8.2% y/o/y growth, 4 tenths less than expected. This data was reported after Chinese markets closed but the yuan is basically unchanged. The anticipation of whether we'll see another round of tariffs is a real wet blanket on not just the Chinese economy but everyone that depends on it. Also, China is struggling with the desire to slow excessive credit growth and delever on the one hand and the want to offset the current economic pressures on the other.
BN is reporting the heightened intensity on the part of US business to end these tariffs and the threat of more. "Trade associations representing farmers, retailers and manufacturers are joining forces in a new multi million dollar campaign to oppose President Trump's tariffs, in the latest attempt by US business to stop an escalating trade war...a new coalition called Americans for Free Trade is joining Farmers for Free Trade to change the direction in Washington...The groups are launching a campaign of more than $3mm, involving town hall style events in key congressional districts ahead of the midterm elections, digital advertising and other grassroots outreach to Congress and the administration."
We are seeing a bounce today in some of the beaten down EM currencies such as the Turkish Lira, Indian Rupee and Indonesian Rupiah. The Turkish central bank will hike rates tomorrow with the amount the only question. The current consensus is a 325 bps hike to 21%. Indonesia intervened in the market and the Indian government is telling the RBI to stem the decline. Some serious value is being created in EM for anyone with a time horizon more than a year.
Ahead of PPI at 8:30am we have the 2 yr yield at 2.74% and a one month T-bill that is approaching 2% at 1.97%. The 10 yr is a stone's throw from knocking on the 3% door again. Inflation breakevens two years out is at 2 month highs after Friday's wage data. The 10 yr breakeven at 2.12% is just 8 bps from the May multi year high notwithstanding the decline in many commodity prices. CPI comes tomorrow.
After touching 60 last week, Investors Intelligence said Bulls fell back to a still very elevated 57.7 while Bears rose a touch to 18.3 from 18.1. The bull/bear spread of near 40 is not far from the wide this year of 53.4 in late January. As said before, this year when Bulls have gotten north of 55 and certainly 60+, the market has tended to consolidate and correct. When it's fallen back below 50 that was a contrarian set up for a bounce. The same seems to be happening again as it was two weeks ago when SPX had its record close. Keep in mind that these sentiment indicators are only short term tools.
With an uptick in mortgage rates that will likely continue higher next week with this move up in Treasury yields, the MBA said refi applications fell 6% w/o/w and are down 39% y/o/y. The level stands at an 18 year low. Think about that for a second, an 18 year low in refi's with the average 30 yr mortgage rate still below 5%. Back in 2000, the average 30 yr mortgage rate was above 7%. Purchase applications were up a slight .9% and the y/o/y gain was 4.3% which was an improvement from the up 2% seen last week. This all said, with the Labor Day holiday, the timing of activity was likely impacted whether some sped up their process or waited instead.
With the new Italian government in clear focus as we await a new budget and the bond market continues to digest the crash this Spring, the economic data continues to weaken there. Industrial production in July fell 1.8% m/o/m, well worse than the estimate of just a .3% drop. Also, June was revised down. This led to a miss in the overall Eurozone IP figure for July. Seen last week was the Italian manufacturing and services composite index for August which fell to the lowest since October 2016. The ECB meets tomorrow and we will hear again from Mario Draghi. His obsession with achieving 2% inflation has left him totally unprepared for any economic challenges in the coming 12 months before he exits stage left.
Risks Trump Uncertainty in Setting Interest Rate Policy
From my pal Danielle Dimartino Booth:
Important points:
- Central bankers routinely assess quantifiable risks such as wage inflation; determining a value for uncertainties is much more challenging
- Draghi is expected to reiterate what we already know - taper timing and first rate hike a year from now; markets do not anticipate any deviations from expectations
- Critically, wage inflation is running hotter than the ECB's current estimates; the ECB will adjust to maintain its 2% inflation target, which would surprise markets
- Trade war uncertainty and its impact on the real economy adds a new dimension to be addressed by the ECB
- German manufacturing orders' weakness is entrenched as commodity prices slump under the weight of slowing global trade
- Stagflation in the Eurozone may be more pronounced driven by wage inflation that is more intractable due to stricter labor laws; relatively deeper margin compression will follow
Programming Note
I have to travel a bit this morning to conduct some research, so my posts will be less frequent and shorter than usual.
Tales From the Crypt (Issue XXXIV)
From Bloomberg:
The Great Crypto Crash of 2018 looks more and more like one for the record books.
As virtual currencies plumbed new depths on Wednesday, the MVIS CryptoCompare Digital Assets 10 Index extended its collapse from a January high to 80 percent. The tumble has now surpassed the Nasdaq Composite Index's 78 percent peak-to-trough decline after the dot-com bubble burst in 2000.
In Late May, Micron's Share Price Reflected 'Group Stink' and Lemming-Like Complacency
Let's try to connect the dots in the face of what I call "Group Stink."
In Fallen Angels ... And Lessons Learned, I wrote that the rapid decline in Tesla (TSLA) over the last month and the continued fall of two prior darlings, Intel (INTC) and Micron (MU) , should remind us of the poisoned cocktail of "Group Stink." Though the market recovered from a possible breakdown in prices on Tuesday, should the market fall (as I expect over the next six months), there will be many more such "fallen angels."
Micron is trading down another $1.50 this morning at about $42 (it traded at $65 at the end of May) after Goldman Sachs downgrades the shares from buy to neutral (lowering the price target to $50 from $68):
"Delaney, the Goldman Sachs analyst, who is not making a call on the upcoming fiscal Q4 results on September 20, sees weaker fundamentals for DRAM and NAND in calendar Q4 and the first half of 2019. He expects Micron's gross margin to decline sequentially from Q4 of 2018 through mid-2019, and he notes that the stock is historically well correlated with the company's gross margin. His view of margin declines is due to lower memory average selling prices, both from more "challenging" DRAM conditions and also NAND oversupply. Further, Goldman notes that his 2019 earnings per share estimate for Micron is now 31% below consensus expectations. Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices, the analyst tells investors in a research note."
The complacency regarding the S&P 500 (which is within 1.5% of an all-time high) is something to behold in the face of numerous policy, political, economic, geopolitical and other outcomes (many of them adverse).
Maybe, just maybe, the S&P 500 is where the price of Micron's shares were on May 30.