Month: July 2017

After peaking in February, Dallas Fed's Manufacturing Outlook has slid almost constantly until July which just saw it bounce modestly from 15.0 to 16.8 (stil below May's levels)

 

Reading The Dallas Fed's breakdown reports,  one wuld think everything is awesome!.

The production index, a key measure of state manufacturing conditions, rose 11 points to 22.8, indicating output grew at a faster pace than in June.

 

 

Other measures of current manufacturing activity also indicated a pickup in growth. The new orders and the growth rate of orders indexes rose several points each, coming in at 16.1 and 12.2, respectively. The capacity utilization index moved up to 18.1 and the shipments index increased three points to 11.6.

 

Perceptions of broader business conditions improved again in July, with a sharp pickup in outlooks. The general business activity index edged up to 16.8, marking a 10th consecutive positive reading. The company outlook index jumped 15 points to 25.9, reaching its highest level since 2010.

 

Labor market measures indicated slightly stronger employment gains and longer workweeks this month. The employment index has been positive all year and edged up to 11.2, its highest reading since the end of 2015. Twenty-one percent of firms noted net hiring, compared with 9 percent noting net layoffs. The hours worked index ticked up to 9.8.

 

Prices and wages continued to rise in July. The raw materials prices index held steady at 15.5, while the finished goods prices index moved up slightly to 5.6. The wages and benefits index remained somewhat elevated at 20.6.

 

Expectations regarding future business conditions continued to reflect optimism. The indexes of future general business activity and future company outlook held steady at 31.6 and 34.8, respectively. Other indexes of future manufacturing activity showed mixed movements but remained solidly in positive territory.

But, respondents did not seem to be so exuberant…

• The foreign competition for new equipment is extremely competitive and our company is not able to match their selling prices.
• Things are going poorly in the economy. We have no projects, and business is slow.
• We are experiencing the summertime blues. Business is very dull July to date.
• We are feeling more confident about the economy improving. More buyers seem to be more confident and placing orders with increased volumes and deliveries further into the future.
• One huge order has spurred our manufacturing. However, nothing similar is expected in the near future.
• There has been a notable decline in orders from energy industry customers over the past 30 days given the drop in oil prices. There is very little visibility on customer demand in the second half of the year.
• The drop in oil prices in 2015 forced us out of our comfort zone and into new industries and locations. We have found that manufacturing technology from the oil industry applies equally well to defense, aerospace, heavy vehicle manufacturing and power generation. As oil recovers, we will also benefit from working in these new markets.
• The increases in business are small but measurable. We have been trying to add employees over the last six months, with no qualified candidates available.
• Grocery store deli and fast-food chain activity remains fairly slow. We are seeing increased activity, with convenience store remodels driven by increased food offerings.

And what about this!!

• I cannot explain it, but we are slower than we have ever been at this time and it seems like we are not the only ones. This is crazy how summer-vacation mindset seems to have set in and companies are just not committing to projects. Most everyone I have spoken to in the graphic arts community is complaining of the same thing. If this doesn’t turn around quickly, there will be some significant cutbacks around here—something that will be very painful, as we are down to only talented workers with no fat to trim.

And finally there's this…

• Washington, D.C., is still a significant contingent factor for a better or worse outlook. Prospects for better are dimming.

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In April, the Fed’s otherwise boring Beige Book revealed a striking anecdote about the current state of the US labor market: as the Boston Fed commented at the time, the qualified labor shortage had gotten so bad, that the hit rate on hiring after a simple math and drug test, has collapsed below 50%. To wit:

Labor markets in the First District continued to tighten somewhat. Many employers sought to add modestly to head counts (although one manufacturer laid off about 4 percent of staff over the last year), while wage increases were modest. Some smaller retailers noted increasing labor costs, in part driven by increases in state minimum wages being implemented over a multi-year period. Restaurant contacts, particularly in heavy tourism regions, expressed concern about possible labor shortages this summer, exacerbated by an expected slowdown in granting H-2B visas. Half of contacted manufacturers were hiring, though none in large numbers; several firms said it was hard to find workers.

 

One respondent said that during a recent six-month attempt to add to staff for a new product, two-thirds of applicants for assembly line jobs were screened out before hiring via math tests and drug tests; of 400 workers hired, only 180 worked out.

Fast forward to today when we have a practical example of how severe this quandary has become for employers. 

According to WTVR, an Ohio factory owner said on Saturday that although she has numerous blue-collar jobs available at her company, she struggles to fill positions because so many candidates fail drug tests. Regina Mitchell, co-owner of Warren Fabricating & Machining in Hubbard, Ohio, told The New York Times this week that four out of 10 applicants otherwise qualified to be welders, machinists and crane operators will fail a routine drug test. While not quite as bad as the adverse hit rate hinted at by the Beige Book, this is a stunning number, and one which indicates of major structural changes to the US labor force where addiction and drugs are keeping millions out of gainful (or any, for that matter) employment.

Speaking to CNN’s Michael Smerconish, Mitchell said that her requirements for prospective workers were simple: “I need employees who are engaged in their work while here, of sound mind and doing the best possible job that they can, keeping their fellow co-workers safe at all times,” she said.

This has proven to be a problem.

“We have a 150-ton crane in our machine shop. And we’re moving 300,000 pounds of steel around in that building on a regular basis. So I cannot take the chance to have anyone impaired running that crane, or working 40 feet in the air.”

While President Trump addressed his blue-collar base in Ohio this week, returning to his campaign theme of getting local communities back to work and returning jobs to America from overseas, the problem may not be a scarcity of jobs: it is workers who are not under the influence. As Mitchell said she has jobs… she just doesn’t have sober applicants. For 48 of the 50 years her company has been around, drug abuse had never been an issue, she told Smerconish.

“It hasn’t been until the last two years that we needed to have a policy, a corporate policy in place, that protects us from employees coming into work impaired,” she said.

As discussed here repeatedly in recent months, opioid use is on the rise across the country, but especially in Ohio. In 2014, the state had the second-largest number of opioid-related deaths in the United States and the fifth-highest rate of overdose.

“This opioid epidemic that we’re experiencing … it seems like it’s worse than in other places all over the country,” Mitchell said.

Ohio’s new law on medical marijuana, which went into effect in 2016 and allows those with a qualifying condition and a recommendation from a physician to buy the drug legally, was another hurdle for employers to overcome, she said.

“The difficult part about marijuana is, we don’t have an affordable test that tells me if they smoked it over the weekend or smoked it in the morning before they came to work. And I just can’t take the chance of having an impaired worker running a crane carrying a 300,000-pound steel encasement,” she said.

 

For now, she said, there are almost 12,000 open skilled labor jobs in Mahoning County. “There are good-paying jobs and the opportunity for people in our area. We just can’t find people to show up who can pass a drug test,” she said.

Maybe instead of focusing how to perpetuate the US waiter and bartender job recovery, the BLS – and the administration – should contemplate how to eliminate the pervasive addiction problem which is rapidly becoming a structural hurdle for America’s millions of unemployed.

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For the first time since February, poending home sales rose month-over-month.

However, for context, the pace of home sales is now unchanged since May 2015…

Pending home sales managed to hold its head above water Year-over-Year – up just 0.7%.

“Market conditions in many areas continue to be fast paced, with few properties to choose from, which is forcing buyers to act almost immediately on an available home that fits their criteria,” Lawrence Yun, NAR’s chief economist, said in a statement.

 

“Low supply is an ongoing issue holding back activity. Housing inventory declined last month and is a staggering 7.1 percent lower than a year ago.”

Two things do stand out though:

• 13 percent of sales went to investors, smallest share this year
• All-cash transactions accounted for 18 percent of signings, the smallest share since June 2009

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After exploding to its highest since May 2014 in June, Chicago Purchasing Managers gave up hope in July.

PMI plunged most since Feb 2015 to 58.9 – erasing all of July’s “surprise” gains as new order growth slowed and prices paid accelerated.

Only 2 components were rising:

• Prices paid rose at a faster pace
• New orders rose at a slower pace
• Employment rose at a slower pace
• Inventories rose at a faster pace
• Supplier deliveries rose at a slower pace
• Production rose at a slower pace
• Order backlogs rose at a slower pace

Are ‘soft’ surveys about to start waking up to reality?

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Authored by Satyajit Das via The Independent,

Current growth, short-term profits and higher living standards for some are pursued at the expense of costs which are not evident immediately but will emerge later. Society has borrowed from and pushes problems into the future…

The world cannot countenance the idea that human progress might be at an end or even have stalled. 

The belief that advances in science, technology as well as social and political systems can provide continuous improvement in human life is perhaps the most important idea in Western civilisation. Yet attempts to measure actual progress are curiously vague. In January 2016, Italian Prime Minister Matteo Renzi dispensed with practicalities arguing that “Europe cannot just be a grey technical debate about constraints, but must again be a great dream”.

Thomas Carlyle’s 19th-century analysis of England provides a useful benchmark for assessing human achievements.

Carlyle was critical of a world "submerged in mamonism". The undeniable improvement in living standards over the last 150 years is seen as evidence of progress. Improvements in diet, health, safe water, hygiene and education have been central to increased life spans and incomes.

The lifting of billions of people globally out of poverty is a considerable achievement. But many of these individuals earn between $2 (£1.50) and $10 dollars a day. Their position is fragile, exposed to the vicissitudes of health, employment, economic conditions and political and societal stability. As William Gibson observed:

“The future is already here — it’s just not very evenly distributed”.

Economic progress also has come at a cost. Growth and wealth is increasingly based on borrowed money, used to purchase something today against the uncertain promise of paying it back in the future. Debt levels are now unsustainable. Growth has been at the expense of existentially threatening environmental changes which are difficult to reverse. Higher living standards rely on the profligate use of under-priced, finite resources, especially water and energy, which have been utilised without concern about conservation for future use.

Current growth, short-term profits and higher living standards for some are pursued at the expense of costs which are not evident immediately but will emerge later. Society has borrowed from and pushes problems into the future.

The acquisition of material goods defines progress. The concept of leisure as shopping and consumption as the primary economic engine now dominate. Altering Bob Dylan’s lyrics, the Angry Brigade, an English anarchist group, described it as: “If you are not being born, you are busy buying”.

Carlyle, who distrusted the “mechanical age”, would have been puzzled at the unalloyed modern worship of technology. Much of our current problems, environmental damage and pollution, are the unintended consequences of technology, especially the internal combustion engine and exploitation of fossil fuels. The invention of the motor vehicle was also the invention of the car crash. Technology applied to war continues to create human suffering. Mankind’s romance with technology increasingly is born of a desperate need for economic growth and a painless, cheap fix to problems such as reducing in greenhouse gas without decreasing living standards.

Carlyle’s hope for an “aristocracy of talent” has not been fulfilled. After a brief period of decline in the years after the Second World War, inequality measured as concentration of wealth and income is rising. Less than 100 billionaires now own as much as 50 per cent of world’s population, down from around 400 billionaires a little more than five years ago. Hereditary monarchies and “an idle landowning aristocracy” are less prevalent than in Carlyle’s time, although the current US administration and many emerging nations still emphasise filial ties. Instead, a gang of industrial buccaneers and pirates and a powerful working aristocracy of politicians, business leaders, professional and bureaucrats dominate public affairs. These include graduates of elite educational establishments such as America’s ivy league school, Britain’s Oxbridge complex or French ‘enarques’, America’s technology entrepreneurs or alumni of prestigious institutions and think tanks, which function as shadow governments. The new feudalism is like the older model, with class, privilege and wealth still highly influential.

Pre-occupation with narcissistic self-fulfilment and escapist entertainment is consistent with Carlyle’s concern about the loss of social cohesiveness, spirituality and community. His fear of a pervasive “philosophy of simply looking on, of doing nothing, of laissez-faire … a total disappearance of all general interest, a universal despair of truth and humanity, and in consequence a universal isolation of men in their own ‘brute individuality” … a war of all against all … intolerable oppression and wretchedness” seems modern.

Carlyle’s fear of the loss of individual freedom has proved well founded. The Black Lives Matter movement, the treatment of women and minorities and growing racial and religious intolerance highlight the disappointing limits of social progress. Following the 9/11 attacks, a fearful population has acquiesced in an unprecedented loss of privacy and civil liberties. Technology and social media permit an extraordinary level of monitoring of private lives. The state and powerful interests have emerged as Stalin’s engineers of human souls.

Carlyle bemoaned “a parliament elected by bribery”. Two centuries later, the need for vast sums to finance political campaigns and hold onto political office has made elected officials captive to donors. Carlyle would have recognised the lack of political leadership, simplistic ideas that are selected to maximise popularity and the use of propaganda to polarise opinion along racial, regional or other demographic lines for electoral advantage.

Other than in some material elements the future is likely to be much like the past with the tragic or farcical repetition of the same things. Human achievements, even when they are considerable, rarely change things more than marginally. The power of individuals and society is overstated. Each epoch only creates transient winners and losers.

Progress is ultimately based on the idea of perfectibility, that education and ideas can improve human nature or behaviour. But man may not be perfectible. Human irrationality, destructiveness and selfishness may not be able to be overcome.

The idea of progress is an ‘innocent fraud’, a term coined by economist John Kenneth Galbraith to describe a lie or a half-truth that with repetition becomes common wisdom.

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A truly massive scandal is brewing in Big Tech.

This scandal concerns the fact that 60% of advertising “clicks” are in fact NOT coming from humans; they are generated bots or automated algorithms that don’t buy anything. EVER.

If you don’t believe me, and think I’m just making this up, consider what Keith Weed had to say last month.

Weed is head of Marketing for the consumer goods giant Unilever. In this role, he oversees a marketing budget of $8+ BILLION per year. And here are his statements on the impact of bots in digital advertising.

With $8.4 billion in annual ad spend, the advertising industry pays attention when Unilever is unhappy. During the Cannes Lions Festival of Creativity, Unilever's chief marketing and communications officer Keith Weed outlined the three concerns that "keep him up at night."

"If you don't have your ad viewed, you are dead,” Weed told a Cannes audience on Wednesday.

He wants advertisers to "join up the dots in the digital industry." As Weed sees it, this ecosystem is corrupted. Some 60% of traffic online is bots. "We want to buy eyeballs of viewers not bots," says Weed. "If it is too good to be true, it probably is."

Source: Mediapost.

What does this mean?

The Tech Giants, Facebook and Alphabet (formerly Google), make the bulk of their money by charging advertisers a certain amount for every click the advertisers’ ads receive online.

The price that Facebook and Alphabet can charge for advertising space is based on the amount of web traffic that ads receive. The more traffic these ads receive, the HIGHER the prices Facebook and Alphabet can charge advertisers for ad space.

So if 60% of ALL AD CLICKS are in fact BOTS, not HUMANS, the reality is that these ad prices are in fact MASSIVELY overstated.

Again, if you think I’m making this up, consider that another consumer goods giant, Proctor and Gamble cut its online marketing budget by $100 million and found… ZERO IMPACT ON GROWTH.

Procter & Gamble Co. said that its move to cut more than $100 million in digital marketing spend in the June quarter had little impact on its business, proving that those digital ads were largely ineffective.

Almost all of the consumer product giant’s advertising cuts in the period came from digital, finance chief Jon Moeller said on its earnings call Thursday. The company targeted ads that could wind up on sites with fake traffic from software known as “bots,” or those with objectionable content.

Source: WSJ.

Again, Proctor and Gamble cut online advertising by $100 million and had ZERO impact on its results.

These are two massive companies both of which spent BILLIONS in advertising. And both of them are stating point blank that the value of digital advertising via companies like Facebook and Alphabet is MASSIVELY overstated.

What happens if these companies have to begin accurately pricing their ads? What happens if more advertising giants start pulling funding?

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In a move that is certain to prompt more allegations that Wikileaks is part of a counter-establishment push, one ostensibly supported by Russia, on Monday morning Wikileaks dumped more than 21,000 “verified” emails associated with the French presidential campaign of Emmanuel Macron. Julian Assange’s organisation claims the batch of  21,075 emails, dating from March 2009 to April 2017, have been uniquely verified through its DKIM system.

As a reminder, in the days before the May 7 French presidential election, Macron’s campaign confirmed it was hit with a “massive, coordinated” hack which released 9 gigabytes of personal documents.

The French electoral commission immediately prohibited the French media from publishing the contents of the leak, and while speculation quickly emerged that Russia was involved in this hacking, France later confirmed there were “no traces of Russian hackers in the Macron cyber attack.”  The head of the French government’s cyber security agency, Guillaume Poupard, told AP  the hack was “so generic and simple that it could have been practically anyone.”

Ironically, less than two months later, with Macron’s approval rating suddenly in freefall, the Russian hacking story re-emrged, when Reuters reported that Russia tried to use an “elaborate Facebook hacking scheme” on the French presidential campaign. It is unclear if the French population will shift their anger away from Macron and to the default scapefoat Russia, helping Macron’s sudden slide in popularity.

To be sure, the Macron hacking story is about to get its second wind when according to Wikileaks statement, there is now a full archive of 71,848 emails with 26,506 attachments from 4,493 unique senders is provided for context. Wikileaks stated that while only the 21,075 emails marked with its green “DKIM verified” banner are certified by WikiLeaks as genuine, it believes “based on statistical sampling” that the “overwhelming majority” of the remainder are also authentic.

RELEASE: 21,075 verified searchable emails from the campaign of President Macron #MacronEmails #MacronLeaks https://t.co/9LlW785eYu http://pic.twitter.com/HIq6nTcdwq

— WikiLeaks (@wikileaks) July 31, 2017

“As the emails are often in chains and include portions of each other, it is usually possible to confirm the integrity [of] other emails in the chain as a result of the DKIM verified emails within it,” the statement reads.

RELEASE: 25,439 email attachments associated with #Macron‘s presidential campaign https://t.co/HRFLKoWft4 http://pic.twitter.com/S56PpeTghg

— WikiLeaks (@wikileaks) July 31, 2017

Curiously, unlike in the US, the initial May hack did not have an adverse impact on Macron’s presidential chances – unlike in the US, where Hillary Clinton has repeatedly blamed “Russian interference” as the main reason for her loss – when the youngest ever French president defeated his opponent Marine Le Pen in a landslide. Should he have lost, the outcome would likely have been different.

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Update: the market has been fixed:

FINRA NYSE TRF: TECHNICAL ISSUE – RESOLVED

 

The previously reported networking issue has been resolved. All systems are functioning normally.

* * *

With another overnight meltup in US equity futures (after disappointing Chinese data), it should be no surprise that the market just broke…

Source: NYSE Arca

 Note that VIX was trading quite chaotically ahead of the ‘break’ and stocks have fallen since it hit…

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Authored by Brean Capital's Peter Tchir via Forbes.com,

You will see a lot of stories about VIX ETFs and ETNs over the coming days.  I have written about the potential for a ETN driven spike in VIX (here).

I have seen a lot of stories about how investors are 'suddenly' nervous about selling volatility and the will typically look at recent fund flow data.

Bloomberg

Bloomberg

The Short Interest – the amount of shares investors have shorted is large on both funds.  In fact, on XIV, the inverse product, more shares are shorted than are outstanding!  This data only goes back to July 14th, so it is possible that something has changed in the past two weeks – but both XIV and VXX are heavily shorted.

When I look at some other ETFs with large short interest relative to shares outstanding XRT (a retail ETF) immediately hits the radar screen.  I can understand why investors want to short retailers (I don't necessarily agree, but I can understand it).

I cannot understand why there is such large short interest in BOTH the long and short VIX products!  Actually, I can.  It is a strategy that tries to capture the re-balancing mechanism between the long and short products on a weekly basis.  This sophisticated strategy has been successful as the underlying funds have been so volatile (I saw a recent reading that showed VXX had a beta of 10 versus the S&P 500 – so it moved 10 times as much on average).

When I look at other long/short "pairs" like TLT vs TBT or DUST vs NUGT I don't see this same pattern of large short interest in both.

In general, investors seem to be happy to 'place their bet' on the appropriate product.

On VIX ETFs and ETNs, there are strategies that involve being short both – that seem to work and may actually dominate the flows.

While I think fund flows are important, it is crucial to watch short interest too or you may be getting the wrong signals.

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