Subscribe FREE to the Moneyball
Economics Newsletter

China’s Lehman Moment Is Coming

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

Before I dig in to the coming Lehman moment out of China, you should understand how China has impacted the world.

First, let’s start with debt. Debt sits at the heart of China’s miracle growth.

China has more than quadrupled its debt load since 2007.

Just between 2007-2014, its debt exploded from $7 trillion to $28 trillion (simply incomprehensible numbers).

China’s addiction for growth (in building mega-cities, bridges, roads, etc…) helped push demand for commodities higher (like iron ore, steel, and oil).

But the initial day of reckoning came late 2014. The world was unable to absorb the unrelenting Chinese production.

In the face of massive excess supply, prices collapsed. The ripple effect hit the energy sector first. Then the materials space… then worked it’s way through the economy from there.

China’s rulers got scared of it death-spiraling.

They know that their economy is more sizzle than steak. They know that the books are cooked and the actual economic production is a lot smaller than is reported. They also know that a huge portion of the economy is in debt up to their eyeballs and any drop in prices (iron, copper, real estate, whatever) will lead to pain.

So they began lending like crazy.  The money supply (M1) raced from a mild 10% annual growth rate to 25% year-over-year.
The results were very mixed.

In the past, printing cash pushed up the GDP.  But it had no effect.

Industrial Production barely budged.


But they cared more about one thing: Housing Prices.
Housing is the source of most debt exposure and also consumer spending.
A collapse in housing would lead to riots. Literally. (China has a history of riots by the masses.)
That implies an economic slowdown will follow in a few months.

Indeed, speculators are reacting to the tightening of easy money.  Iron ore prices have collapsed.
In fact, the chart below is already obsolete: prices fell a further 5% today.

The key point is that demand never really grew.
Chinese hot money and gambling bid up prices.  Now that the hot money is being curtailed, prices are dropping again.

Worse, now the Chinese factories have to dump all of their excess production.
Deflation will be coming shortly.
It is impossible to see the Fed raise rates 4 times this year.  There simply won’t be inflation.

Plus, I believe that the Fed was counting on Trump delivering fiscal stimulus.  Unfortunately, the window for Trump is closing.  It’s already towards the end of May and there’s been no tax plan.  Worse, any plan will be set to face a lot of pushback.

The ACA move has failed (seriously – after 7 years of complaining and saying that they had a better plan, the Republicans had nothing) and that means sharks smell blood iin the water and will push back on every Trump proposal.

By June/July, companies are no longer thinking about investment plans.  Instead, they are on vacation and, when they return, their minds will turn to winding down the year.

KEY TAKEAWAY: China’s economy has exploded thanks to trillions of debt and other means of fiscal stimulus. They’re doing their best to keep the trillions in bad loans from spiraling out of control. Yet, as you see, the more stimulus isn’t helping increase industrial production. Now, China has to dump all that excess capacity. This will lead to a serious deflationary spiral. Be wary.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

Earnings Season Underway… Here’s How To Profit

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

Earnings season is underway… and I still see earnings surprises coming.

I scope out a company’s hiring and operational spending to get a read on these companies.

Having worked in the corporate world, I can tell you for a fact that today’s hiring is tomorrow’s revenue and earnings. That is, companies hire today based on their expectations of future business activity. And I have good line-of-sight to their hiring and operating expenses (OPEX).

Moneyball models are able to forecast major inflection points where companies cut back their hiring/OPEX in advance of slowing sales. I was able to see the inflection point down (My readers had plenty of opportunities to profit. If you’re interested in getting a beat into earnings season before it happens, check out my Moneyball Trader).

In essence, companies have held spending lower for longer. Not because revenues were falling. But because it led to margin expansion.

This makes our strategy simple.

A lot of companies are ramping up their spending . There is exactly one reason why companies hit the spending gas pedal: business is picking up.

When I see this, I will jump up and shout: go LONG.  And with the market gung-ho, anyone flashing upside will get amply rewarded.

At the same time, I am going to be more cautious about calling for SHORT positions. There’s few reasons companies ramp up spending (and it’s always positive), but there are many reasons why a company restrains spending – not all negative.  For example, a merger or spin-out (AA, ARNC) is frequently accompanied by headcount rationalization and spending cuts.  A false signal, if you will.

In general, I also expect some margin expansion for many industrial companies.

First, because I think costs have been cut and there has been some incremental uptick in demand. Second, because I think suppliers are enjoying some pricing power (they have been raising prices or at least cutting them more slowly).

I’m seeing this in the semiconductor space, for example. Inventories were cut so deep that mild restocking has enabled suppliers to charge better prices. It’s a short-term condition, but it still has positive upside impact.

In other words, it’s easier to find some margin expansion even if companies are only standing still.

KEY TAKEAWAY: My models have now been updated and can more accurately reflect trends and inflection points headed into earnings season. This is providing  Moneyball Trader readers with plenty of opportunities that could reap massive gains. If you’re not a Moneyball Trader reader, I suggest you consider signing up today (check it out here). You’ll have 60 days to take me up on my trades… and if they don’t work out for you, I’ll give you a full refund.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

Newest Macro Data Is W-E-A-K!

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

Last week two of my favorite data points came out: Payrolls & Trade.

Payrolls were a huge miss. Expectations were for 180,000+, but came in almost 50% lower (at 98,000). Automatic Data Processing (ADP) – a global leader in payroll processing – predicted 263,000. 

(This is a huge egg on their face. And it should tell you to be wary of mainstream “experts.”)

Trade data was also bad.  

The background to trade data has been that U.S. fracking reduced oil imports and boosted exports.

That also trickled into oil derivative products like plastics and chemicals. But when oil prices plunged, the value of all these plunged with it. When oil rose back up, so did the value.

To escape the distortion, it’s good to focus on the non-petroleum aspects of trade.

First of all, U.S. exports are dominated by two things: agriculture and autos.  

But autos aren’t really exports: they are auto sub-assemblies that we ship to Mexico and Canada, where they become finished cars and get re-imported.

Drill-down into imports and you’ll see they were flat with two exceptions: a massive (~$2B) drop in smartphone imports and a massive drop in autos.

The smartphone import drop is one I’ve been predicting for a while.  That’s just the tail-end of the wave that follows a new iPhone release.

The auto drop is extremely important though. Autos represent a lot of what’s wrong with the U.S. economy.

  • End of the cycle: we hit peak auto demand last year. In fact, the auto makers over-built and are carrying massive excess inventory. So much that GM and Ford recently shuttered some factories as they bleed down the excess. That’s why auto imports dropped: sub-assembly production dropped.
  • End of student loan turbo-charged debt: student loans have grown $1 trillion since the recession ended, from a base of ~$200 billion. That money had nothing to do with school and was just a way to get credit into the market. Most of that money went to vacations and cars. Only a fraction went to schools. This is why forgiving student debt is B.S. and should not be allowed. But the real point is that the $1 trillion isn’t growing. So the extra fuel for the economy – and particularly car buying – has stopped.
  • “Unnatural acts” have returned (a la 2007): when sales start to flag, salesmen resort to their bag of tricks. One is to extend easy financing. Instead of 4 year loans, almost 50% of new car loans are 6~7 years in duration. (Very easy to do when interest rates were 0%.  Less easy at 1%.)  Another trick of easy financing is to lend to unqualified borrowers. And that’s happening and the payback is obvious: delinquency rates are higher than they were in 2007.

The fact that sales depend on unnatural acts is a clear sign that normal consumer spending has been exhausted. Growth now depends on picking through the bottom of the barrel.

Worse, the entire house of cards depends on massive debt that is set to get more expensive.

But the message from the trade data was that there is no growth going on. Consumers are spending less (autos) and businesses aren’t buying more capital and industrial equipment.

Beyond “Payrolls and Trade,” other macroeconomic data have also been weaker than expected.

All in all, the data is supporting my narrative that companies cut costs too much last year and so they replenished supplies at the end of the year. But beyond that replenishment, there hasn’t been much actual growth.

That means there will contradictory signals. On the one hand, earnings reports will likely be positive (my theory of margin expansion thanks to slightly expanding top-lines and flat operational costs). On the other hand, companies are likely to be even more frugal heading into the third quarter.

KEY TAKEAWAY: Major economic data points like payrolls and trade were very weak. Auto debt and student debt are out of control. And my narrative that consumers are almost tapped out is continuing to play out. This will lead to companies becoming more frugal heading into the third quarter.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

The Importance of Revenues and Revenue Growth

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

The Importance of Revenues and Revenue Growth

First quarter earnings are in the book. The second quarter has officially started.

I’m spending the next few weeks doing a deep-dive into what to expect from the economy this quarter. Regular readers know our Vice Index is the true way to gauge the real economy (you’ll receive the most recent Vice Index soon).

I’m also spending hundreds of hours looking into several companies for my Moneyball Trader readers. These readers get my top conviction ideas and have had the chance to make enormous gains (you can learn more here).

So today’s essay is to give you an insight into the true importance of revenues and revenue growth.

For example, here’s a chart of Applied Micro Device’s (AMD) Stock Price.  

I’ve added a few arrows that indicate when earnings were released.

Notice that the stock price moves sharply after earnings releases.

But not just any ordinary earnings release.

AMD’s stock is moving when the revenue growth momentum is shifting.

If you lay the revenue growth over the stock price growth (NOTE: stock price growth, not stock price), they move in step.

Rule #1: The market likes revenue growth. The stock price will move accordingly.

Rule #2: The biggest stock price moves come at the pivot points in revenue momentum

For example, in 2013, AMD’s revenue growth went from -30% to +20%.  A big shift in growth and it was accompanied by a stock price that also surged almost 100%.

The reason is straightforward: investors like winners.

The sign of a winner is expanding business and that is easily measured: growing revenues, expanding margins, growing earnings.

At the pivotal shifts, earnings magnify the effect of revenues.  For example, when a business is shifting into an expansion period, their existing infrastructure cost is growing slower than the revenues.  Simply put, an extra $10M in revenues does not pull along extra support costs.  So the margins and earnings expand faster than revenues.

The opposite is true as well: as business slows, the infrastructure costs drag down earnings faster.

From an investing standpoint, buying and selling the shifts in revenue momentum is the perfect way to maximize yield.

READING THE CHARTS CORRECTLY

Let’s look at that AMD chart again.

Revenue growth accelerates in late 2013 and then moderates into late 2014.  The momentum grows and then slows.

The stock price doesn’t drop as the revenue growth slowed – it simply stopped rising.

However, when revenue growth turned negative, the stock price dropped.

So revenue growth is a pretty safe entry sign and an exit sign.

Here is a chart mapping that revenue growth (both historical and forecast).

I have added the Moneyball Economics forecast which maps my revenue forecast based on operational spending and hiring.

A few things to note:

  • Moneyball Economics signals a lag the turn up.  Beginning 3Q 2016, revenue growth kicks in but the Opex growth accelerates 2 quarters later (in 4Q 2016).  In other words, AMD’s revenues began to grow while their spending stayed flat.  That’s normal: when a company is playing defense, they won’t hire or expand until business activity picks up consistently and in a sustained manner.  The fact that spending has picked up is a powerfully positive sign.  It’s a vote of confidence that AMD sees sustained growth
  • Actual growth is higher than Moneyball’s forecast.  This is more about the AMD business.  Semiconductor designers can ramp production without expanding their infrastructure costs.  In 2H 2016, Microsoft Xbox orders grew 30% or ~6M consoles.  Since AMD makes the processor for the Xbox, the Microsoft order turbo-charged AMD’s sales.  With that done, they are returning to ~8% growth.  

 

KEY TAKEAWAYS

  • The market loves growth and hates contraction.
  • Playing this momentum is a tried-and-true approach.
  • There is a way to use hiring and opex data to confirm and predict shifts in revenue momentum

For the past year, I have been using the hiring/opex data primarily to catch earnings day surprises – would a company be ahead of or behind expectations.
Going forward, I will also look for situations where revenue momentum looks set to shift, based on my hiring/opex data. This would be for longer term investing (90+ days)

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.

 

What Google Searches Are Telling Us About Consumer Sentiment

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

What Google Searches Are Telling Us About Consumer Sentiment

Sentiment is strong.

Household spending should remain strong through the first half (1H) of 2017, thanks to positive feelings about job security and household finances, based on Google Searches.

But people are still worried about the economy.

The Trump Effect

The University of Michigan’s Consumer Sentiment and the Conference Board’s Consumer Confidence Indices all point to a sharp positive jump following Trump’s election.

But there is no equivalent shift showing up in the Google searches.

Instead, it’s more steady-as-you go.

That’s actually better: if the Indices were correct, then consumer sentiment (and spending) rests on Trump’s ability to deliver.

Instead, if consumers are ignoring the Trump factor, then spending will continue regardless of Trump’s success or failure.

Conversely, if the Consumer Sentiment and Consumer Confidence Indices are correct that Trump has unleashed a burst of consumer spending, then any failure by Trump will lead to a consumer spending pullback.

I believe that the Trump factor is wildly overstated and that consumer spending is more rooted in the basic American consumer habits: spend 100% of what you earn.  And earnings continue to rise, so spending does as well.  

When it comes to positive economic sentiment and Trump’s presidency, it’s easy to mistake coincidence with causation. It’s like a football season that starts with easy games but as the season progresses, we get to see the real performance.  Similarly, Trump is benefitting from events unrelated to him.

That is, the stock market rally was unleashed once interest rates and oil prices moved up.  Business spending was bound to come back once the election was over and companies had to restock.  Third, the minimum wage hike in January boosted incomes and spending.

But as these waves recede (oil rally is done, for example), sentiment could turn down.

JOB SECURITY & PERSONAL FINANCES

Job security is high but it may have peaked..

On the one hand, searches for Salary Raise are at an all-time high.

Unemployment searches are at cyclical lows. On the other hand, both signals have remained flat for almost a year with no signs of improvement.

Meanwhile, the more important signal is the steadily falling interest in Changing Jobs.

For most workers, changing jobs is the most important means of boosting wages. Interest in changing jobs remains high but it’s on a down-slope. That may be pointing to rising concern that jobs aren’t out there.

Consumer spending should remain strong. In addition to the generally strong JobSecurity sentiment, sentiment around household finances looks strong.

HOUSEHOLD WEALTH

All signs point to strong consumer financial sentiment.

Bankruptcy searches are at all-time lows.  And people feel like they have some wealth and assets, based on the interest in investing and in gold.

ECONOMY

What makes this especially encouraging is that people are not blind to underlying shifts in the economic fabric.

Instead, the rising searches for “Interest rates”, “Inflation” and “Recession” serve to indicate that people are fully aware that the economy has headwinds.  Perhaps that will prevent a return to the mad excesses that preceded the previous recession.

KEY TAKEAWAY: So far, the coast looks clear simply according to Google searches. Searches for unemployment are low. Salary raises are high. And changing jobs is trending down.

But that doesn’t mean we’re out of the woods just yet. Google searches show people are worried about the state of the economy – as indicated by the upward trend in searches for “recession”

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

P.S. If you want to make money in 2017, look no further than The Moneyball Trader.

You won’t find it in most mainstream media outlets, but that’s a good thing… it’s why our readers are crushing it so far in 2017.  

Find out how you can get The Moneyball Trader here.