Why Has the Chinese Yuan Been So Strong, Will it Last, and What Does it Mean for the US?
Since May 2020, the Chinese Yuan has defied the path of other emerging market currencies, strengthening by almost 12%.
Spotlight Sysmex: On the Bleeding Edge of Health Care Diagnostics
Headquartered in Japan, Sysmex is the No. 1 provider of blood diagnostics equipment in the world.
Spotlight Kurita: Water as Breakthrough Technology
Based in Tokyo, Japan, Kurita Water is a global leader in water management and water treatment chemicals.
Powell Successfully Walks the Tightrope
We highlight a few takeaways from Fed Chair Jerome Powell’s confirmation hearing today before the Senate Banking Committee, broken down by topic.
Forward Thinking: 2022
This quarter’s strategy report, Forward Thinking 2022.
Is the Market Looking Through the Current Inflation?
This Friday we’ll see where the US CPI comes out. We recently got the November print for the Eurozone CPI, and it came in hot, hitting 4.9% year over year.
Spotlight Tokyo Electron: Shifting Left
Since its founding in 1963, Tokyo Electron has been accumulating the technological expertise it builds on to deliver industry-leading production equipment in two product categories: semiconductors and flat panel displays.
Spotlight Tokyo Electron: Shifting Left
Since its founding in 1963, Tokyo Electron has been accumulating the technological expertise it builds on to deliver industry-leading production equipment in two product categories: semiconductors and flat panel displays.
Have Option Players Taken the Week Off?
For years preceding the COVID-19 pandemic, call option volume averaged about 15% of daily NYSE volume. This was a normal level of speculation that investors were used to.
International Stocks Could be Ripe for a Catch-Up Trade
A definite feature of the last decade has been the persistent underperformance of European and Asian stocks vs US stocks. Foreign stocks have underperformed with such consistency that it’s almost expected at this point.
Does the Fed Having a Brewing Velocity Problem?
A prominent feature of the post-Great Financial Crisis period has been the persistent decline in velocity, which is why the Fed has had to pump so much money into the system for so long. Absent an increase in the money supply, the drop in the velocity, all else equal, would have likely been the backdrop for a long recession.
Here’s One (More) Reason Inflation Could Accelerate Through Mid-2022
It’s no secret that pandemic-related government policy is driving at least some of the inflation currently being experienced in the United States. Indeed, real disposable income per capita has deviated from a linear trend in a meaningful way since 2020.
Here’s Why the Fed Could Stay Easy for a LOOONG Time
This week Jerome Powell tossed the market a bone by hinting that the Fed would be patient in raising short-term interest rates due to the continued slack in the US labor market and inflation that would likely be “transitory”.
We find compelling evidence that seasonal factors exist, historically leading November and December to be the highest 2-month combined returns all year. In our allocation portfolios, we have increased our equity exposure significantly in an effort to capitalize on these year-end trends.
The Epitome of Financial Repression in 2 Charts
By now investors are quite aware of the consequences of financial repression via negative real interest rate policies. Since interest rates on “risk free” government debt are too low to even compensate for inflation, it pushes investors out the risk spectrum in an effort to achieve a positive rate of return after inflation.
For The First Time Since the 70s, Demographics Support Higher Rates
New projections of the labor force growth rate by the US Bureau of Labor Statistics show the US labor force growth accelerating in the 2020s for the first time since the 1970s.
Is Inflation Starting to Impact Equity Returns?
Fed funds futures for 2022 and 2023 have broken out to new highs, likely on the back of rising inflation expectations. As things stand now, the market is looking for three hikes by the end of 2023, with the effective fed funds moving from 8bps today to 85bps.
Spotlight GEA Group: Processing Half of All Beer on Earth
GEA is one of the largest global suppliers of food processing technology, building the machinery, plants, processes and systems that help producers deliver food to people.
5 Divergences in the Stock Market to Keep an Eye on this Fall
With the S&P 500 up nearly 20% and international developed stocks up 13% year-to-date, the markets are having a banner year so far.
Spotlight Straumann: Dental Dominance and Digitization
Today Straumann leads the market with a full portfolio of prosthetics and products for restoring and regenerating teeth and dental tissue. Over the last 30 years, it has enabled millions of people to regain tooth function and improve the appearance of their teeth.
Mid-Quarter Update: What Does Transitory Mean?
Mid-Quarter Update: what does transitory mean?
Spotlight Sofina: Pioneers in Family-Led Corporate Innovation
Based in Brussels, Belgium, with offices in Luxembourg and Singapore, Sofina is a family-run investment company with equity holdings in Europe, the U.S. and Asia.
Spotlight Carl Zeiss Meditec: A Vision in Innovation
Carl Zeiss Meditec was formed in 2002 when the medical device business was spun off from the larger Zeiss Group, a leader in optical, semiconductor and electronics manufacturing equipment founded in 1846 in Germany.
What is the Culprit(s) for Recent Equity Weakness?
Just when everyone thought we had COVID-19 whipped, the delta variant came along and US cases inflected higher.
Here’s Why the US May Have a Housing Boom for the Next 5 Years
The United States is just at the beginning of a housing boom that could last for the next five years.
Inflation Is Starting to Weigh on Consumer Confidence and Spending
This week US CPI inflation for June rose at a stunning 0.9% MoM, or 11% annualized, placing it among the highest sequential inflation readings in the past 40 years.
Spotlight Pandora: Charming the World with Jewelry Innovations
Known globally for its charm bracelets, Pandora is the world’s largest jewelry brand.
Payroll Report Gives Little Ammo to Fed Hawks
The ever-important payroll report came in ahead of expectations for June, but will ultimately do little to sway policy in toward the hawkish faction of the Federal Reserve Board.
Spotlight Associated British Foods: Organizational Capital at Work Feeding Britons
Headquartered in London, UK, Associated British Foods is a diversified food ingredients and retail group and owner of the global brands Twinings, Ovaltine and Mazola.
Employment Miss Likely to Keep Fed Patient, And Support the Cyclical Trade
For the second month in a row, the US payroll employment report has come in below expectations.
Spotlight Solvay: Chemical Progress Through Science and Humanity
During the pandemic, Brussels, Belgium-based materials manufacturer Solvay provided hydrogen peroxide, hand sanitizer, face shields and financial assistance to families in distress.
Spotlight Dometic: Cooling, Heating, Eating & Drinking On the Go Since 1922
Based in Stockholm, Sweden, Dometic makes accessories for mobile living, including in RVs, boats, campers and outdoor life.
Breaking Down the Employment Report and the Market’s Reaction
Today the US employment report for April was released and it took the markets by surprise. Estimates were for net job gains of 1 million. Instead, the US economy added 218K private sector jobs. This compares to 708K private sector jobs in March.
Why Rates Could Still Drift Lower, But Will Ultimately Go Higher
10 year Treasury rates peaked at the end of March at 1.74% after having risen from low of just 0.56% back in the summer of 2020. Now, the rate stands at 1.57% even as economic data continues to come in smoking hot and policy remains incredibly accommodative.
Reflation and Rotation
This is our Q1 2021 slide presentation of our quarterly strategy report.
Spotlight LVMH: Bernard Arnault’s Luxury Empire
LVMH Moët Hennessy Louis Vuitton is a leading global luxury brands group.
Spotlight DeNA: Embracing the User’s Point of View
Pronounced “D-N-A,” this Knowledge Leader was founded in 1999 by three Tokyo entrepreneurs seeking to establish an online auction site.
Spotlight BHP: Embracing Technology to Clean Up Mining
Headquartered in Melbourne, Australia, BHP is the world’s No. 1 mining company.
Spotlight Groupe Bruxelles Lambert: Champion of Digital Transformation
Belgian holding company Groupe Bruxelles Lambert invests in European industry leaders with two key strategies in place.
Spotlight South32: A Bias Toward Base Metals
Australian metals miner South32 is a 2015 BHP Billiton spinoff named to reflect the southern latitude where most of its assets are located.
Spotlight Investor AB: Best-in-Class Begins with R&D and Sustainability
Sweden’s Investor AB was founded in 1916 by the Wallenberg family with the aim of making long-term investments in high-quality global companies, a business philosophy it has maintained through booms, depressions, recessions, and global trends.
Spotlight AngloAmerican: Sustainable Innovation Via Safer, Smarter Mines
AngloAmerican was founded in 1917 by Ernest Oppenheimer, who moved from Germany to Johannesburg, South Africa, and secured financial backing from J.P. Morgan to start a gold mining business.
Inflation Here, There and Everywhere
What a week for price data! We have been writing about the possibility of higher inflation for months now, most recently here. We have also highlighted the most likely assets to benefit from higher inflation like copper, oil and energy stocks.
There is An Alternative to Crazy Expensive Tech Stocks, We Just Need to Remove the Kaleidoscope Glasses
To say the market is bubblelicious is a bit of an understatement given that retail “investment” in call options and penny stocks is quite literally off the charts, dwarfing numbers we saw in 1998-2000.
Productivity, an Additional Case for Homebuilders
There are a few ways to measure productivity. One simple way to measure productivity at the company level is to calculate sales per employee. Higher sales for the same number of employees obviously means each employee is pulling more weight. Profits are a byproduct.
Party Like Its 1999
In this Q4 2020 slide presentation of our quarterly strategy report, we discuss: Bob Farrell’s Rules for Trading (#5 and #7 especially resonate with us right now). What the retail trading frenzy, recent IPOs and speculation can tell us...
Get Ready for Services Prices to Accelerate Higher
We’re going to keep this post short and sweet because the charts speak for themselves. Today, preliminary Markit PMIs were released for January. Headline numbers ticked up, which is great and shows a continued expansion into the new year.
What is the Best Hedge to Hot Inflation?
This week investors learned of president-elect Joe Biden’s initial bid for the next round of covid-19 relief. The number came in at $1.9tn. Importantly, included in this figure is mainly covid relief as opposed to a longer-term fiscal package that will be heavily weighted to infrastructure.
The Probability of Stagflation is Rising
This week we were privy to both new inflation and initial unemployment claims data. The CPI data revealed a rather mundane inflation scenario. Meanwhile, the weekly initial claims number came in at a whopping 853K and missed estimates by the largest amount since June.
Breakeven Inflation is Breaking Out
Inflation expectations as priced by the Treasury market are hitting 18 month highs just now. As the reader can see, inflation expectations across all treasury maturities are at cycle highs.
Gold: Testing Patience But Toeing the Line (For Now)
Since early August the “barbarous relic” has corrected some 9% while many other assets have ascended to all-time highs. This has no doubt caused a bit of consternation for holders of gold who have been using the metal not as a hedge, but as a capital appreciation vehicle unto itself.
The Election has Crushed Volatility
As election results continue to trickle in suggesting Joe Biden will be the next president, there still remains a bit of uncertainty with respect the final electoral vote tally as well as any legal challenges that will emerge in the coming days.
Foundations for a New Structural Gold Bull Market
In this presentation, we outline our argument for gold entering a new structural bull market.
Stock Options Traders are Back at the Speculation
In the last few weeks stock market sentiment as expressed in options has come full circle. Back in August we were noting a rather amazing level of outright speculation in stock options, mostly by small traders that were buying short-dated out of the money calls on the FAAMGs.
A Broader Market, but Not a “Value” Rotation
In recent weeks the market has been notably broader in terms of the upside participation from stocks other than FAANMGs. Typically, this type of action in the early stages of a business cycle would be strongly associated with the “value” style working, since “value” companies skew considerably smaller than “growth” companies in aggregate.
Correction Update: Correction Continues
We’ve been writing for the last month about the risks, and then the corrective activity in the stock market. Even as the market didn’t peak until the first few days of September, it “feels” like this pause has lasted longer than that.
Innovating Gold Production
Franco-Nevada is the world’s largest gold royalty and streaming company. This means the firm invests in gold and mines, but indirectly, the idea being to provide investors with exposure to gold prices and gold exploration while limiting the risks of investing directly in mining companies.
Correction Watch: Divergences are Developing Between Large US Stocks and Everything Else
Last week we put out a succinct mid-quarter update in which we highlighted 9 negative inputs into a tactical equity framework. This post builds upon that by calling out 7 rather conspicuous divergences that are developing in the financial markets.
Financials Can’t Catch a Break, and What it Means for the Market
The bank stocks are at it again as they make another new 52-week relative performance low compared to the broad market. It’s a perennial issue. Over the last year the KBW Bank Index, an index of 24 of the largest US banks, has underperformed the S&P 500 by 30%.
Mid-Quarter Update: Nine+ Negative Inputs for the Equity Market
We believe the risks of an intermediate decline are higher than average and would advocate a more cautious stance toward equities right now.
Value over Growth or More of the Same?
When it comes down to it, there are a few key macro variables that are highly correlated with the relative performance of value vs growth – most of them measuring the reflationary impulse in the system in different ways.
A Trillion Here, a Trillion There…and What it Means for Stock Market Leadership
Over the weekend the world learned of the Senate Republican’s “opening bid” for the next round of fiscal stimulus in the United States. That number came in at a nice, round $1tn. Now, as large as that number is, it still pales in comparison to the $3.5tn House bill that already passed.
When the QQQs Make You Queasy
Here we are in the dog days of summer, and the hot weather is not the only thing making us a little queasy. The darling stock market group since 2011, the Nasdaq 100 stock index, has soared a cool 20% this year and well into all-time high territory. Indeed, the height is making us queasy from vertigo.
10 Major Investment Implications (and 32 charts!) of a Weak US Dollar
With the US dollar index recently having completed a so called “death cross”, we thought it would be a good opportunity to review the investment implications of a potential trend change in the USD.
Fisher & Paykel Healthcare: A Pandemic Study in Embracing Change
How does a Knowledge Leader handle a global pandemic? By adapting.
Owning Gold is as Much about Diversification as it is about Capital Appreciation
Regular readers of our content know that we have been building the case for several years now on why gold deserves a place in diversified portfolios.
Ready for Another USD Rally?
As funding strains appeared in March, the USD surged. Then the Fed stepped in with massive foreign exchange swaps as a way to lend USD to foreign central banks, intended to ultimately be lent to borrowers in need of USD.
The Path to Average Equity Returns in the 2020s is Challenged
The returns of the 2009-2020 bull market were nothing short of extraordinary. From the 2009 low in the S&P 500 to the 2020 high, stocks gained a massive 488%, or nearly 18% on an annualized basis.
There is Nothing Normal About the US Savings Rate
Even as the stock market chugs up the wall of worry, we were reminded today that the economic fundamentals remain mired in simply unprecedented territory.
Keep an Eye on the Yuan & Corporate Spreads
Since the March 23, 2020 low, when the Federal Reserve announced basically unlimited liquidity via a variety of programs, corporate spreads have narrowed, and the stock market has risen substantially. In the chart below, I overlay US investment grade spreads over the S&P 500 Index.
Here’s 5 Reasons Why Gold Miners Have Massive Outperformance in the Tank
As I write this note on a dreary Friday afternoon from Boulder, CO I am reminded of my town’s origin. Its first non-native settlers established the town 1858 as a base camp for gold and silver miners.
Here’s Where Friday’s Employment Report Could Really Disappoint
Given the surge in unemployment claims over the last month the US unemployment rate is expected to rise to 16% in April from just 4.4% in March. Shocking as that number is, we have no problem with that forecast.
If the Bear Market is Over, Why Are Commodities and Transports Underperforming?
We are beginning to see some important divergences develop between the stock market and other data that suggest we are not out of the woods yet.
Here’s Why 2/3rds of US Oil & Gas Companies May not Exist a Year from Now
Energy companies are facing a life or death moment in 2020 with the price of WTI crude oil falling to $13.64/barrel as of this writing. Indeed the collapse in energy prices combined with poor fundamentals leading into the COVID crisis make most of the oil…
Welcome to the Death Throes of 60:40 Diversification
Back in the good ole’ days of mid-January, asset allocators could look to long-duration US government bonds as a refuge for stormy weather. Those days are no longer.
Why the Fed Cut Rates by 50bps: Will it Help?
Despite the relief rally yesterday, financial conditions have tightened significantly in the last couple of weeks. This likely explains why the Fed just made an emergency 50bps cut to the fed funds rate.
Anatomy of a Panic Selloff
Anyone reading this post already knows that palpable panic has set into equity markets over recent days. We present these charts to highlight the extreme nature of the selloff so far, and as a reminder of the rarity of these events. In times like this, it’s important to remind oneself that these kind of extremes are transient and often present, at the very least, unique tactical opportunities.
A Selloff, But Not An Actionable Low…Yet
Watching while the largest equity market in the world falls by a whopping 8% in four trading days brings us back to the 2008-2009 meltdown period of the financial crisis. Normally an 8% drop in such a short time frame would present an interesting intermediate-term buying or rebalancing opportunity outside of a recessionary environment.
Ready for Action?
Fed funds futures are on the move today, with longer dated futures now pricing in now two 25bps rate cuts by the end of the year. However, the market does not seem to be pricing in, yet, any material chance that the Fed cuts at its March meeting.
What’s Behind the Breakout in Gold?
This week’s breakout in gold is an epic expression of our times in which potential economic problems are quickly followed by massive actual and expected responses by central banks and governments. The problem de jour (for both markets and the public) is of course the real and scary health and economic consequences of a further spread COVID-19.
A JOLT to Job Openings & Asset Expectations
This morning the monthly job openings and labor turnover (JOLTS) report was released, and it came in significantly shy of expectations. While Bloomberg’s consensus estimate was for 6.925 million job openings, the actual number came in at 6.423. It is important to keep in mind that this is December data, so it doesn’t yet reflect the impact of the coronavirus on business operations.
A Recovery, But of the Square Root Variety
Regular readers of this blog and of our other commentary know that we have been looking for some kind of cyclical rebound in economic activity starting in the first quarter of 2020.
Why Coronavirus is Scary for Financial Markets
As dangerous as the virus is, we believe financial markets face a larger risk from the impending economic slowdown the virus will create due to the massive quarantine effort of China underway.
Short Anatomy of a Sell-Off
Sell-offs can start for any number of endogenous or exogenous events. A mentor used to tell me, “There are a million reasons to sell a stock, but one reason to buy.” What he meant was that there are always personal reasons to sell...
What is Driving US Treasury Rates Lower in 2020?
10-Year US Treasury yields are down about 30bps so far this year, continuing the trend of lower rates that began in the fall of 2018 and confounding investor expectations for rising rates which would validate a turn up in economic activity.
New All-time Highs on Declining Breadth is Reason for Caution
There are a number of factors that have us tactically concerned about a period of over-exuberance among equity investors. Those include record low put/call ratios and extreme inflows into equity ETFs. But among the more troubling facts of late is the breakdown in breadth we are witnessing even as the equity markets rally to new cycle or all-time highs.
Strong 4th Quarter, Election Year Supports the Case for a Strong Q1
Unless something dramatically changes in the final few days of 2019, the 4th quarter for equity market performance will be one to write home about. The S&P 500 is currently on track to deliver about a 9% price return, which would be the second best quarterly performance in the last five and a half years.
Mid-Quarter Update: Spotlight on US Corporate Profits
US corporate profits are down from the 2014 peak. In this mid-quarter special report, we dive deep into corporate profits, taxes, profit margins and the increasing government debt levels that have propelled stock and bond prices higher, in our view, leading to rising equity and government bond valuations.
Consequences of an Inflection in the Chinese Yuan
As hopes for a trade deal fade, similar to May and August, the CNY is devaluating against the USD again. In our work there are a handful of fairly mechanical relationships that should follow if the CNY continues to devalue.
Economic Growth Has Not Hit Bottom Yet
Even as left tail risks to US and global economic growth seem to have been mitigated over recent weeks (more accommodate financial conditions, rising of some PMI data, worst case trade outcome seemingly a lower probability now), incoming data continue to suggest the nadir of this slowdown cycle has not yet been reached.
Not So Fast on the Cyclical Chinese Recovery
Investors were unfortunately treated to a rather disappointing package of October Chinese economic data. Three of the most important hard data series were reported: fixed asset investment, industrial production and retail sales.
Technology & Materials: Do You Take the Over or the Under?
As each day passes and more evidence of some sort of bottom in economic activity emerges, the chances of market rotation into the more beaten down areas of the global equity market would seem to be rising.
If International Equities Outperform, Will You?
I wrote a week ago about how international equities may be finally getting the help they need to break the back of a long-term underperformance trend. It’s a trend that has caused international stocks to underperform US stocks in eight of the last eleven years.
EAFE Equities: Can they Ever Work Again?
EAFE stocks, those in the developed Europe and Asia regions, have underperformed US stocks in eight of the last eleven years. That batting average might be decent if you are a professional baseball player, but not so much if you are a professional investor.
Last week the Federal Reserve announced the re-commencement of large scale asset purchases in order to alleviate funding pressures that had been bubbling for several months.
Hard Data Gets Put to the Test
United States and indeed global economic data have been weak – at least that is the unabated message from the PMI data that were released this week on both manufacturing and services. At this stage everyone knows the survey data, or “soft” data, are weak.
International Value: Optionality on Reflation
At some point the global economy will get a dose of reflation. Whether that comes from the current central bank easing cycle, fiscal policy response, coordinated fiscal-monetary action, or a détente in the US-Sino trade dispute is not yet known.
Confirmation of the Deterioration in Consumer Confidence
In our mid-quarter update, we highlighted the plunge in the University of Michigan’s consumer confidence indicator, suggesting that “good feelings” among consumers were starting to fade. Often surveys offer a leading glimpse into economic activity. A more confident consumer is more likely to make those big-ticket purchases, like homes and cars, as well as consuming more services.
Is the Bond Rally Over or is This a Correction in a Downtrend in Treasury Yields?
With interest rates on the 10-year US treasury bond having moved nearly 50bps higher over the last 10 days it is certainly worth asking the question if we’ve seen the low in interest rates or whether this is more of a correction in an ongoing downtrend in rates.
A Deep Dive into Consumer Confidence
In this mid-quarter special report, we do a deep dive into the University of Michigan survey and discern what it may mean for the vigor of the consumer moving forward, prospects for a recession and consequences for asset allocation.
The Calculus for Fed Inaction is Getting Tougher by the Day
Over the last few days investors have been given a good amount of information to digest from incoming economic data, Federal Reserve meting minutes, and Fed speakers opining about monetary policy at the annual Jackson Hole conference. Even still, everyone is waiting on THE speech from Fed Chairman Powell tomorrow to set to the expectations for the Fed’s upcoming meeting in mid-September.
German Banks: Cutting Off Nose to Spite Face
Germany’s second largest bank, Commerzbank, reported a fourth straight quarter of falling revenue and projected lower profit for the year, suggesting clients have been impacted by trade tensions.
3 Reasons Why More Tariffs are Bullish for Government Bonds
Today’s news of 10% tariffs on the remaining $300bn of imports from China took markets by storm today with US stocks moving from a 1% gain to almost a 1% loss on the day. Meanwhile, gold closed at a 6-year high of $1445.
The Debt Ceiling Impasse Has Meant Mini QE Since May – Will Mean QT When Resolved
When the US government gets near its statutory debt limit, congress must lift the debt limit in order for the Treasury to continue to issue debt to pay for government expenses. Simple enough.
It’s Not Just Powell Pandering to Markets – Rate Cuts Are Necessary
We have been surprised over recent weeks to read a slue of commentary proclaiming that the economy is in great shape and Fed Chairman Powell is just pandering to markets by signaling rate cut(s) in July and beyond.
Beneath the Surface of China’s CSI 300 Index is Kind of Boozy
On January 3, 2019, Chinese stocks made a v-shaped bottom and surged into a peak on April 19, 2019. Since then, stocks have corrected by about 7%, dropping, recouping about 6% of the peak to trough decline that ended on June 6, 2019.
Could This Be a Brutal Earnings Season? If So, How Should One Be Positioned?
Yesterday BASF, the largest chemical company in the world, announced its earnings would fall well short of analyst estimates in the second quarter. Earnings season in the US begins in a few weeks. So, we ran through our charts to harvest any insights about how corporate earnings may play out.
Bad News is Good News on Payroll Friday
In this post we’ll highlight how this payroll report could either beat or miss expectations and what each case could mean for bonds, stocks, the USD and gold.
Is the Fed Already Behind the Curve?
To cut or not to cut is no longer the question. Now the question is the quantity, magnitude and timing of rate cuts for the rest of the year.
The Bond Market is Not Impressed with the Fed
A few days of trading certainly does not make a trend, but we have our eyes on the nuanced message coming from the market – a message that has yet to give us an all clear signal.
The Fed’s Many Options for Tomorrow
Tomorrow will obviously be one of the most important news days of the year for financial markets with the Fed expected at the very least to signal that a rate cutting cycle is in the offing.
Here’s Why the 1998-99 Melt Up in Stocks is Not an Appropriate Analog
As expectations for a Fed easing cycle have gained momentum, we’ve seen an abundance of comparisons between the current period and the late 1990s.
Mid-Quarter Update & Slides: Escalation
In this mid-quarter update, entitled “Escalation,” we discuss the backdrop of escalating trade wars and our belief that the environment is more favorable for US Treasury bonds relative to stocks.
Risks For the Second Half of 2019 Are Mounting by the Day: Part 2
In today’s report, we will address one of the asset allocation implications of those factors, namely that long-term US Treasury bonds could have a substantial downside in yield even from these levels.
Risks For the Second Half of 2019 Are Mounting by the Day: Part 1
As we look into the second half of the year and into 2020, we are left with a fleeting feeling about the prospects for a cyclical uptick in growth and therefore earnings. The problem is not so much with the current pace of growth or incoming data (which by the way hasn’t been very good).
The Latest Tariffs Come at a Time of Weakening Economic Growth
The announced tariffs have come at a rather inopportune time, economically speaking.
Emerging Market Stocks Underperform When the US Dollar Strengthens…Here’s Why
The relationship between the performance of emerging market stocks and the US dollar is one of the tightest macro relationships that exists in investing.
Surprise Surprise, Dollar Breaks Out, Small Caps Outperform, EM Underperforms
Last week we wrote how the US dollar could be in for a major move when it breaks up or down out of the major consolidation it has been in for the better part of six months.
Which Way the US Dollar Breaks Will Have Major Asset Allocation Implications in Second Half of 2019
The US dollar is on the cusp of making a major move. The question is which way will it go, higher or lower? The directional movement of the US dollar will have significant asset performance implications once the tug of war between dollar bears and bulls is resolved.
Manufacturing Weakness Continues: A Review of US Economic Data
So far this week, we’ve received a few data points that reinforce the manufacturing slowdown taking place in the US. Below is a calendar of events for the last couple days.
Lumber and Copper Prices are Diverging – Which is Signal and Which is Noise?
The tale from some of the most cyclical and predictive economic indicators are telling investors two very different things at the moment. Copper, the metal with a PhD in economics is giving us the all-clear sign while lumber, which is perhaps only regarded as having a master’s or bachelor’s in economics, is saying, “be careful.”.
Are We on the Same Page Yet? Tailwind for US Treasuries
The IMF made news yesterday by announcing its latest updates to 2019 GDP growth around the world. It guided global growth down and made an especially large cut to Eurozone growth estimates, bringing them down 30bps since January to 1.3%.
Throwing Cold Water on the Excitement Around Foreign Economic Data
Yesterday’s stocks reacted to a raft of overnight foreign economic data that it perceived positively. In this note, I’ll run down the data and my doubts about that reaction. The hits began with China’s Markit manufacturing PMI jumping to 50.5.
Housing Has More Downside, but Homebuilders Have More Upside
Investors have been given another slug of wanting housing data this week. First it was building permits which surprised to the downside and today it was pending home sales, which fell 4.9% YoY vs expectations of a 1.8% drop.
US Yields Could Still Have Quite a Bit More Downside
To the dismay of many observers, US treasury yields have been dead as a doorknob despite the 20% rally in stocks over the last three months. In fact, the US 10-year yield is on the verge of breaking below the 2.56% level it reached on January 4th when recession concerns were flaring.
Small Business Hiring Suggests We May See More Weak Employment Data
Last week we were presented with a fairly cold employment report with the number of job gains being lowest in 18 months and one of the lowest readings in the last decade.
The Trade Deficit Blowout is as Predictable as My Dog Begging for Food at the Dinner Table
The big news of the day relates to the continuation of a trend that has been going on since 2013: the widening of the trade deficit. The trade deficit in dollar terms at $-59.8bn in December and $-622bn for the year broke down to a new 10-year low.
Is the Economic Slowdown Over or Just Getting Started? Part 2
In Part 1 of this series we talked about the lagged effect of interest rates and money growth, AKA “financial conditions” broadly speaking, on economic growth.
Is the Economic Slowdown Over or Just Getting Started?
With US stocks up 11% YTD and nearly 19% since the Christmas Eve low, one could surmise that the economic slowdown that occurred in the back half of 2018 both globally and in the United States was a thing of the past, or at least would be over soon.
The Credit Markets Have Stalled
Credit markets often move before the equity markets, and this can offer helpful information about the near-term path of equity prices. In general, I like to see credit confirming what the equity markets seem to be saying. When credit stalls, like it is now, I take notice.
Putting this Rally Into Historical Context
Several weeks ago we did some research to find out what a typical rally looks like after a big waterfall-like decline takes place.
What Does a Humped Yield Curve Mean for Future Stock Market Returns
As many commentators have pointed out, the yield curve has developed a sort of humped form in recent months. That has led many to speculate about when the yield curve will invert, foreshadowing a recession. If, as the logic goes, the yield curve is about to invert then we all better take cover.
Currency Markets & Knightian Uncertainty
Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit. The concept of a separation between risk and uncertainty is an important one right now given how severely politics are driving markets.
The Employment Report is Not All It’s Cracked up to Be
The “blowout” employment report, while strong in some respects, should be taken with a grain of salt. It’s important to remember that employment is a lagging indicator. Payroll employment often peaks either at the beginning or middle of recessions, so it provides virtually no warning of impending danger.
A New Year, New Expectations in the US Treasury Market
The slide in oil prices in October accounted for most of the move in 10-Year US Treasury bonds via the inflation risk component of the term premium. The two series are always highly correlated and this is a mechanism through which oil price changes are incorporated into US Treasury pricing.
Five Indicators Suggesting 2000 may be a Better Analog than 1998
As a conceptual exercise, it may be useful to frame the current episode of market volatility (both upside and downside volatility) from the perspective of the stock market declines in 1998 and 2000.
What Does a Typical Counter-Trend Rally Look Like After a Big Drop in Stocks?
So here we are, having added 10% to the value of stocks from their Christmas Eve low when we listed a baker’s dozen reasons why stocks could tactically rally from there.
There is Statistical Merit to this Oversold Condition in Stocks as Buying Opportunity
The oversold condition in stocks that has developed over the last several weeks is more than trivial. I highlighted on Christmas Eve the baker’s dozen reasons why equity markets could tactically rally from that point, showing extremes in a variety of indicators.
Santa’s Gift to Investors: Global Oversold Conditions Present Buying Opportunity
The S&P 500 experienced a waterfall decline in December, something rarely seen. Measuring the decline using a 30-day Wilder Relative Strength Index, it is clear the extremes recently experienced.
A Bakers Dozen Reasons Why Stocks Can Tactically Rally From Here
Stocks plunging to new lows on the year and to the lowest level since early 2017 is no way to bring in the holidays. Investors are in panic mode, with precious few precedence of this level of sustained selling outside of the 2008 meltdown.
Is 2019 Going to be the Year of the Profit Margin Problem?
2018 has been kind to corporate profit margins. In fact, the margin expansion we’ve seen so far in 2018 is unprecedented in a late cycle economic environment when wages are rising briskly, at least looking back over the last thirty years.
Prognosis for Fourth Quarter Growth
One of the more well-recognized Now-Casting data series is the GDPNow series produced by the Federal Reserve of Atlanta. Every day they incorporate economic data releases and update their estimate for GDP growth in the current quarter. GDPNow is a great source of information on the real-time performance of the US economy.
Mid-Quarter Update: The Fed is Tightening More than it Realizes
The Federal Reserve is in the midst of an historic tightening cycle, and it has begun to impact the economy.
Was Today’s (11/28/18) Rally the All Clear Signal or More Noise?
The equity markets no doubt experienced a powerful move today on the back of Fed Chair Powell’s dovish remarks mid-day. Specifically, his comments laid the groundwork for a pause in interest rate hikes in the first quarter of 2018.
The Interest Rate Sensitive Sectors of the Economy are Getting Hit by Higher Rates, Which is Next?
It goes without saying that the most rate sensitive areas of the economy should feel the burn from higher rates first. It’s useful, therefore, to look at the performance of those sectors to get a read on the impact that changes in the rate environment are having on the real economy.
Value Investing Isn’t Dead Yet, Just Wounded
Value investing, which is often traced back to Ben Graham in the 1940s, is among the most influential trends in finance in recent decades. Value investing is based on the idea that lots of stocks are out of investors’ favor because of a myriad of reasons, such as recent losses, management upheaval (think GE), product failures, etc.
There is a Huge Disconnect Between Energy Credit and Equity
Oil prices have swung drastically over the last couple months. The market was unprepared for the US to grant waivers amounting to nearly one million barrels/day to fill the void expected to be left by the drop in Iranian exports. Instead of Iranian exports plunging to almost zero by November...
Machine Learning to the Rescue
I am not optimistic about reversing the trend of the ever-rising estimates, but I found a way of substantially improving their accuracy and reliability, thereby enhancing the usefulness of reported earnings and asset values to investors.
Good For a Bounce in Stocks, But How Much More?
The selling over recent weeks has been fast and intense, providing investors almost no relief. This type of short-term selling pressure has reached fever pitch levels that is usually indicative of some sort of relief rally, even if the ultimate lows are still ahead of us.
Energy Sector Performance in Context
Energy is the best performing sector in four of six market-regions. (From two market groups, Developed and Emerging, and three regions, Americas, EMEA, Asia, we get six market-regions.) Among Developed Market sectors, energy is 5th YTD, down about 5% less than the MSCI All Country World Index.
A GDP Report That Screams Trade Wars and Government Spending
Third quarter real GDP came in at a 3.5% QoQ annualized rate for the third quarter, above expectations for a 3.3% growth rate. The growth rate itself wasn’t much of a surprise, and frankly, neither were the drivers of growth.
The Investment Consequences of a Normalization in Long Rates
Steve and Bryce dissected US Treasury bonds, discussing the message of the rates market and how this is directing asset allocation.
More Evidence of a Slowing Housing Market, and its Implications
Today, economy watchers were treated to more of the same from the housing market. That is, more weak numbers suggesting we may have seen the peak in housing activity for the cycle.
Beware! Estimates Dominate Financial Reports
Everyone knows that accounting is boring (not when I teach it, though), but, at least, people think it’s factual. No fake news. After all, accounting comes from counting―counting money, units of inventory, etc. All facts. Nothing further from the truth.
American Evolutions from Sears to Google
Today’s story begins with the once-behemoth that is the American retail firm, Sears. In the last week of September Sears’ stock dipped below $1 a share, reducing the company’s market value below $100 million. Sears may still linger on a bit, but when a big firm falls into penny-stock territory, its outright liquidation is a foregone conclusion.
Trade War is Boosting US Economic Activity … in the Short-Term
Overnight, new data released in China suggests businesses are having a tough time lately. Cheung Kong University produces an alternate PMI Business Conditions Index in association with the China Federation of Logistics and Purchasing. The latest data point plunged more than 10 points from its end of July reading and is currently sitting at 41.88, deep into contraction territory.
Are We in for a Bond-pocalypse or Something Much Milder?
Is last week’s 18 basis point selloff in 10 year government bonds the start of a bond bear market or a market adjusting to the realities of the time, albeit in a somewhat disorderly way? The answer to this question has obvious implications for not just bonds, but all asset classes from equities to commodities to real estate.
Three Hints on the Direction of Chinese Assets
The Chinese stock market is closed this week for the Golden Week holiday. On this side of the Pacific the markets have been busy this week with US Treasury bond yields breaking out and stocks selling off—especially technology—based on the revelation that China implanted devices in technology products shipped to the US.
Higher Mortgage Rates are Starting to Bite the Housing Market
Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing.
Small Caps Fail to Break Out
Among the major groups of stocks around the world that we follow, US small-cap stocks have been the best performer over the last decade as the USD experienced a strong bull market. US small caps have outperformed our mid/large group of developed companies by almost 40% over the last 10 years.
Playing for a Bounce
Over the summer, some groups within the global equity market sold off sharply, leading to the current trends of poor performance and weak breadth. Foreign stocks, cyclicals and value-oriented sectors were the hardest hit.
Wages Are Rising and The Phillips Curve is Not Dead
The Phillips Curve (the relationship between wages and the unemployment rate) finally awoke from its slumber with today’s unemployment report showing private sector wages rising 2.9% year-over-year and non-supervisory wages rising 2.8% year-over-year, the fastest growth rate since 2009.
Thoughts on the Term Premium
As many have documented, the main channel of transmission for the Fed’s quantitative easing policy was via the term premium component of US treasuries. As the Fed’s balance sheet doubled from 2010 to 2015, the term premium embedded in US Treasuries fell from 2.5% to -75bps. The Fed is now shrinking its balance sheet, which on the surface would seem to suggest a rising term premium.
Performance Trends Outside the US are Downright Bad
Chalk it up to strength of the US dollar, trade, policy risk, or whatever, stocks outside of the US are in bad shape. One of the ways we systematically measure the relative attractiveness of a stock in a particular sector, region or country is to calculate the percent of stocks in a group that are currently flashing a red performance alert.
Offsides Positioning in Gold, Bonds and the US Dollar Will Make for an Interesting Fall
We are living through a period of extremely crowded trades at the moment, as Jeff Gundlach notably quipped several days ago. The risk in crowded trades is of course that what would otherwise be relatively minor risk reversals can cause massive covering of positions resulting in large moves in the underlying.
A New Super Factor: the Investment Case for Knowledge
We’re pleased to share a new white paper on the market anomaly that rose above value, size, quality, low volatility and momentum factors. Written by Bryce Coward, CFA, the study details the results of first market test of the Knowledge Effect, the tendency of highly innovative companies to deliver excess returns.
Are Commodities Signaling a Shift Away US Equity Leadership?
Most commodities have suffered lately with the backdrop of tariffs and China’s devaluation. But some have fared worse than others, and there is information content to the relative move in commodities. While copper catches many of the headlines (i.e. Dr. Copper, the metal with a Ph.D in economics) the most significant decline has occurred in lumber.
Who Reads Financial Reports? Nobody!
For several years I have argued, based on comprehensive statistical evidence, that corporate financial reports―quarterly and annual statements―have lost most of their relevance and usefulness to investors.
If This Market is Anything, it’s Narrow
On a day like yesterday when more than half of the US tech sector was down more than 2%, we are reminded of the benefits of diversification. Yet, diversification would not have helped one participate in the market’s rise to the highest level since February.
Quarterly Strategy Update: What We Know, What We Think & What We Are Unsure Of
Recently, fears of a slowdown in global growth brought on by a trade war have led to turbulence in cyclical assets. The US Dollar has risen while commodities and emerging markets have struggled.
Tale of the Tape: Equity Investors More Concerned About Rising Inflation Than Slowing Growth
We calculate statistics for all developed and emerging equity markets around the world. For our mid/large cap indexes, we take the top 85% of all stocks in a given region or country and convert all prices into US Dollars.
Has the Storm Passed in the Emerging Markets?
Stock and currency markets often take their cues from the credit markets, so we find it instructive to keep a close eye on credit spreads and credit default swaps (CDS). Looking at the credit markets in the emerging markets, we think there may be initial signs that the storm that has engulfed emerging market assets may be over.
Yield Curve Inversion: Not What it Appears
There has been considerable discussion lately about the slowly inverting yield curve and what it may signal for growth prospects going forward. Commonly used as a proxy for the yield curve is the spread between 10-Year US Treasury yields and 2-Year US Treasury yields.
The Inflation Story is Alive and Well in Five Charts
In light of Fed Chairman Powell’s congressional testimony, we thought it relevant to revisit the inflation story and provide yet more evidence that the trend in inflation continues to be higher. For now, the Fed has assessed the risks to inflation and growth as balanced in both directions, which is Fed-speak for a policy that is on auto pilot.
Project Independence: Possible this Year if US Petroleum Production Continues to Ramp
The US shale boom has led to a surge in the production of crude oil, and much of this production has been exported in recent years. In the chart below, I plot the gross exports of crude oil from the US. Beginning with almost nothing several years ago (in part because crude exports were banned until December 2015), US daily crude exports have eclipsed two million barrels per day.
5 Indicators That Suggest The Selloff In EMs Has Gone Too Far
Emerging market stocks have taken it on the chin so far in 2018, down 9% and unperperforming the MSCI World Index by about 8%. There are of course plenty of excuses for such bad performance, from trade related issues to the breakdown of the synchronized global growth story.
CNY Devaluation: Is It Different This Time?
The Chinese Yuan has fallen precipitously in the last 10 weeks raising concerns of whether China was using the currency as a weapon to preemptively mitigate looming tariffs.
Yesterday, someone threw in the towel on EM bonds. The Van Eck JP Morgan Emerging Market Local Currency Debt ETF (EMLC) is the largest and most liquid vehicle to invest in emerging market local currency bonds.
Which is More Impactful to the US: Crude Oil or China Trade? Can Someone Tell Currency Traders?
Talk of a trade war with China has recently dominated the discussion in financial markets, overshadowing the other major story playing out in the US economy—normalization of the energy markets. I thought I would answer the question of whether trade with China or oil was a bigger economic issue.
Mid-Quarter Update: The Monetary Policy Pitchfork
The big three central banks (Federal Reserve, European Central Bank and the Bank of Japan) met this week to review their monetary stance. In this mid-quarter update, we share our analysis, The Monetary Policy Pitchfork.
A Reflationary Inflection in Oil Inventories
Venezuela has experienced a collapse in oil production this year as the country sinks into chaos. Daily production is down from 1.7M barrels/day at the end of last year to just 1.44M barrels/day at the end of May. Year-over-year production declines are even larger, down about 500k barrels/day.
Fed Tightening Doesn’t Fully Explain EM Financial Market Weakness
This week financial market participants were delivered a cogent explanation for the weakness in EM stocks, bonds and currencies by India’s central bank governor, Mr. Urjit Patel.
“Bubble-Like Stock Valuations Miss $3.4 Trillion in Hidden Assets” – or Why Intangibles Matter
Last week, in Bubble-Like Stock Valuations Miss $3.4 Trillion in Hidden Assets, Bloomberg detailed how traditional accounting can make a company’s fundamentals “look a lot worse than they are.” In the article, New York University’s Professor Baruch Lev weighs in. “You get numbers which are highly inflated for some companies and are understated for other companies.”
Semiconductor Leadership Highlights the Rotation Into Value Stocks
Semiconductor and semiconductor capital equipment stocks have been stellar performers lately, a trend we have been a bit slow to recognize. So, I decided to do a deep dive on semis and semiconductor capital equipment stocks to see if there is opportunity left to capture.
Divergent Path of US Corporate Profits
Yesterday we got the latest glimpse into US corporate profitability. Depending on the series observed, corporate profits are either flat-lining or rising. Before-tax corporate profits, the blue series in the chart below, are actually net down by $32 billion from the peak in 2014.
Sitting Here in Limbo
As investors, it does feel like we are in limbo, stuck between the push of higher growth and employment and the pull of higher inflation, higher rates, and policy risk. And and the end of the day, despite quite a lot of directional volatility so far this year, the S&P 500 trades at the same level as it did back on January 4th.
The Selloff In Oil/Oil Stocks is Buyable
Energy stock fundamentals remain appealing. Global developed market energy stocks are still trading at recessionary valuation levels with the median dividend yield of 2.5% being near the highest recorded over the last two decades.
Geopolitics Update: Trade War, Tariffs & the Coming Tech Implosion
As the Trump administration’s on-again, off-again trade war with China continues to create uncertainty for investors, we sat down with geopolitical strategist Peter Zeihan to learn more about the tariff program and what it could mean for the US economy.
John Williams Takes the “Under” on Expected Rate Hikes
John Williams, one of the newest members of the Federal Open Market Committee, wrote an article titled “The Future Fortunes of R-star: Are They Really Rising?” where he summarized his views on real neutral interest rates.
Treasuries Signaling Full-On Inflationary Boom in the US
Ten-year US treasury rates broke out this week on the back of news that looks unequivocally like an inflationary boom. Earlier in the week the Atlanta wage tracker ticked back up to 3.3% year over year. Wages moving higher, check. Oil prices broke above $71/barrel. Commodity prices higher, check.
Financial Conditions are Tightening on the US Consumer
Rising oil prices, food prices and interest rates are likely to soon start taking a toll on the US consumer. Over the last year, gasoline prices are up 28%, the price of cornerstone crops like corn, soy and wheat are up between 5-16%, credit card interest rates have moved to an eight year high of 13.6% and the all important mortgage rate has risen to nearly 5%.
USD Hedging Getting More Expensive: LIBOR-OIS Spread Heading Higher
There are two basic drivers of the London Interback Offered Rate (LIBOR): 1) policy rates and 2) a variable premium. Starting with the policy rates component, in the chart below I compare the interest rate on excess reserves (IOR) and USD LIBOR.
The Unappealing Yield of US Treasuries for Foreign Buyers & US Dollar Strength
With the European Central Bank dragging its feet to begin the monetary tightening cycle, the difference between US and German rates has opened up to record levels. In the chart below, I show the yield on 10 Year US Treasury Bonds and 10 Year German Bunds.
Spotlight: The Secret of Chevron’s Permian Dominance
A recent report by The Wall Street Journal identified a new generation of supercomputers as the fuel behind Big Oil’s “digital arms race to find oil and trim costs.” Indeed, make a quick visit to the websites of most of the Supermajors – that’s BP, Chevron, ExxonMobil, Royal Dutch Shell, Total and Eni in oil speak...
Bitcoin Rebound Suggests US Dollar Bear to Return Soon
Bitcoin made a closing high on December 18, 2017 at $18,764 and then proceeded to fall to the closing low for the year, $6,604.48 on April 6, 2018. Since then, it has rebounded almost 50% to today’s level of $9,670, having broken back through the 50-day moving average.
Quarterly Strategy Update: Volatility Shocks & Dollar Bears
Price excesses have built up over a long bull market. Stocks are expensive, and the volatility shock wave is traveling the globe. This quarter, we discuss the risks correlated with the current volatility, potential new sources of instability, and the sectors that could be the performance beneficiaries of these trends.
The Most Important Detail From the Flash PMI Report is About Inflation
Among yesterday’s data releases was the widely followed ‘flash’ PMI report produced by Markit, which showed that the Manufacturing PMI increased to the highest level since the 4th quarter of 2014. Unlike the final report, which gets published on the first day of the month, the advanced report lacks details on specific components.
Oil Is Breaking Out, So Are Inflation Expectations
After spending the last four months consolidating gains, crude oil is breaking higher again, and it’s taking inflation expectations with it. The break higher in crude isn’t surprising given that oil fundamentals haven’t been this good in years.
Uncharted Territory for Stock Valuations
Another month and another new high in equity valuations, at least relative to sales. Indeed, the median company in our developed world index (which covers the top 85% of companies in each country) just achieved a price to sales ratio that eclipsed the 2000 peak.
New Lows YTD in Chinese Stocks & Highs in Latin America Stocks/Bonds
Last night the China Shanghai CSI 300 index fell a bit more than 1.6%, taking out February lows and setting a new YTD low for the index. This is important since the global equity markets have a very high correlation to Chinese stocks.
US-German Bond Spreads & Equity Leadership
Recent weak data emanating from the Eurozone has been weighing on German Bund yields. The significant drop in the Eurozone Citigroup Economic Surprise Index (CESI) has pressured German Bund yields lower.
Spotlight: Rio Tinto and the World’s First “Intelligent” Mine
Later this year, Rio Tinto will seek board approval to spend $2.2B to build the world’s first “intelligent” mine, a network of robots and autonomous vehicles all working together on the site of the earth’s largest iron ore complex in Western Australia.
Mind The Gap, and Other Non-Confirmations of a Low
As political risk continues to escalate, we are, as always, keenly focused on risk management and the mitigation of potential losses. To those ends, we are monitoring indicators of market breadth for evidence that the worst of the shakeout is behind us.
Energy Stocks Are Starting to Flow
Energy stocks are looking lively today, with energy the best performing sector in the US and second best performing sector in Europe. The likely reason for the buoyant performance is a continued improvement in fundamentals. Inventory data released yesterday showed a steady decline in crude and refined product (ex-SPR) in the United States.
The Good, the Bad, and The Ugly From the Market’s Retest of the February Lowbry
As our readers ponder the implications of trade wars and the possibility for moderately higher inflation – a circular loop if we ever did see one – we thought we’d evaluate the market’s behavior to see what kind of clues it’s giving us about its health.
The Fed Has the Direction of Prices Correct, but Could be Undershooting the Magnitude
Today the Fed hiked the Fed Funds rate by .25% and also updated their policy statement and the so called dot plot, which is a compilation of the FOMC members projections’ for GDP growth, unemployment and prices.
Pairs Trade: Bullish Energy Sector & Bearish Financial Sector
As of this writing, WTI crude oil is back above $65/barrel, closing in on the recent $66.33 high on January 26. While oil and US equities have been in a “wedge” formation where, hemmed in by the January 26 high and the February 90 low, crude oil has broken out from its wedge.
Why Financial Statements Don’t Work for Highly Innovative Companies
Several weeks ago three professors from the Columbia and Dartmouth business schools recapped some of their work on accounting for intangible investment in a Harvard Business Review article. Their key finding, which builds on Professor Baruch Lev’s analysis in The End of Accounting, is that, “accounting earnings are practically irrelevant for digital companies”.
Author Q&A: Daniel Pink on the Science of Timing and How Innovative Firms are Employing His Research
We recently had the opportunity to sit down with author Daniel Pink to discuss his new book, When: The Scientific Secrets of Perfect Timing, now in its 8th week on the New York Times best-seller list.
Time to Be Alert!
This is the time to be alert for any signs of a failure in the S&P 500. Why? There are two really good historical precedents to the current market configuration.
The Employment Report Does Little to Defray the Likelihood of Higher Wage Growth
Today’s unemployment that featured above trend employment growth, a tick up in the participation rate, a flat unemployment rate and a little less wage growth compared to last month is being met with applause from the equity market.
Navigating a USD Bear Market with Equity Factors
The US Dollar appears to have entered a new bear market. In this mid-quarter update, we analyze equity factors and their performance tendencies in recent USD bull and bear markets.
Counter Cyclical Stocks Are Making New Relative Lows, Right on Cue
Counter cyclical stocks, those in the consumer staples, health care, real estate, telecom and utilities sectors, continue to have a tough go at things. In fact, as of two days ago this group of bond proxies made a new low compared to all developed market stocks, thereby continuing and reinforcing a trend that has been in place since the middle of 2016. Why is that?
Corrections Almost Always Test Lows Before They Are Complete
As we navigate a period of market turmoil, its important to remember that non-bear corrective phases typically last six weeks to two months and almost always include several several substantial large rallies followed by selloffs back to the range of the initial low.
Bifurcated Energy Sector Performance Presents Opportunity
Year-to-date the energy sector is the worst performing sector in the developed markets. In the tables below, I highlight statistics from our Knowledge Leaders Selection Universe (KLSU) which captures the top 85% of market cap in the developed and emerging markets.
If This Correction is Over, it Will Be Unique in Leaving Most Individual Stocks Unscathed
There are many different ways in which we can measure the severity of a market correction. The absolute peak-to-trough decline is one way. Duration of the drawdown is another. But we can also measure corrections by taking note of the performance of individual stocks, in what is akin to looking under the hood.
This Selloff Has Yielded Important Information Content
This selloff is demonstrably different than other corrections the market has endured this cycle in one important aspect: it has inflationary rather than deflationary notes to it. This is an extremely important point of context because it tells us something about market participants’ anxieties.
Four Market-Based Indicators That May Help Investors Identify Stock Market Fragility
With a hint of volatility returning to the stock market this week, we though it good timing to review some of the market-based indicators we follow that help us judge the sturdiness of the market. This is by no means an exhaustive list, but rather a few items to consider when evaluating whether pullbacks are for buying or selling.
Quarterly Strategy Update: Breaking Out & Breaking Down
Oil prices have pushed through resistance and are breaking out while the US dollar has pushed through support and is breaking down. All of the major industrial commodity prices are moving in lock step, while the global economy appears to be accelerating led by the United States.
The Stock Market is Extremely Overbought. Is That a Bad Thing or a Good Thing?
By now it’s common knowledge that the stock market is extremely overbought by nearly any measure one chooses to use. This has led many investors to infer a weaker forward return profile than usual on the logic that the normalization in the overboughtness of the market will cause a steep and lasting pullback in stocks.
Bitcoin prices have corrected severely in the last 48 hours. The newsflow suggests investors have concerns about increased regulation in China and South Korea. No doubt these headlines have spooked investors, but I think there is something else at work.
Why Higher Inflation from Oil Prices Won’t Necessarily Result in Higher Long Rates
It’s no secrete that fluctuations in oil prices can lead to dramatic swings in headline price inflation, as chart 1 below shows. After all, not only does oil fuel the vast majority of transportation needs, it’s also a critical raw material used in consumer products far and wide, and much of the price swings in oil are passed on to consumers.
Geopolitics Outlook 2018: Three Big Predictions with Extra-Regional Consequences
We recently caught up with Peter Zeihan, author of The Accidental Superpower, to ask his thoughts on the top geopolitical shifts to watch in 2018. He shared his predictions on everything from anti-trust concerns for Silicon Valley and the dire consequences for the United States if we exit NAFTA to why he expects North Korea to back down this year.
Oil Market Fundamentals Haven’t Been This Strong in Years
2018 has so far brought in the highest price of crude oil since late 2014 (chart 1), but we shouldn’t be surprised by the price action. Indeed, ignoring geopolitics for a moment, the fundamental picture for the crude markets haven’t been this favorable in years.
Taxes, Balance of Payments and the USD Paradox
Investors were finally treated yesterday to some of the most important compromise provisions to come out of the House-Senate conference on the Tax Cuts and Jobs Act.
Special Report on the Energy Industry
We expect momentum in the energy sector and resource-related currencies to continue into 2018. In this mid-quarter update to investors, we analyze what this means for the market.
Earnings Don’t Matter!
Our long-time readers are familiar with the work of Professor Baruch Lev of the NYU Stern School of Business, whose research forms the basis for the Knowledge Leaders investment strategy.
The Low Level of the VIX Isn’t a Mystery
The drop in the VIX to ultra-low levels in 2017 has been a point of consternation for market participants and largely misunderstood. Some market participants view the low level of the VIX as an indication of excessively positive sentiment among investors and thus a contrary indicator for the general direction of stock prices.
Cash is an Asset Class Again!
In a US Dollar bull market with interest rates at zero, cash is rightfully dismissed as a non-asset class. But, when the US Dollar is in a bear cycle, things change, irrespective of what US interest rates are.
Bitcoin: What It Is And What It Isn’t
Bitcoin has garnered much mainstream media coverage in recent months which is the natural reaction to its meteoric ten-fold rise this year. The digital currency’s rise to about $11,000 today was met with awe, and then it quickly fell by 20% in a matter of hours, as has been widely reported.
The Fundamental Case for Japanese Stocks
We’ve been arguing for the last year that US-based investors would be well served to overweight foreign versus domestic equities. In this post we’ll dig into that topic a little deeper to try to convey a few of the company specific fundamental drivers of our foreign vs domestic call, especially as they relate to one of our favorite markets: Japan.
Knowledge Leader Spotlight: Microchip Technology Inc., a Fundamental Analysis
From time to time we illustrate our analysis of highly innovative companies in a Knowledge Leader spotlight. Today we look at Microchip Technology Inc. (MCHP), a highly innovative semiconductor manufacturer that produces programmable microcontroller products used in autos, computing and lighting, among many other applications.
International Equities are En Vogue, and Could Stay That Way
Over the last decade US stocks have outperformed the global equity benchmark by about 35% and have outperformed in eight of the last ten years prior to 2017. But that may all be coming to an end.
Oil is Breaking Out and Energy Stocks Have Lots of Upside
As the famous Yogi Berre once said, “You can learn a lot just by watching”. At the moment we are watching the price of oil break out of a trading range to the highest level in about 2.5 years.
The Consumer Staples Sector is No Place Hide
The Consumer Staples sector is often viewed as a safe haven; a sector that, because of its inherent cash flow stability, market participants can turn to as a place of refuge when things get shaky. Yet, persistent fundamental decline among North American Staples companies may well be throwing a wrench in these companies’ abilities to weather a broad market downturn.
Geopolitics Q&A with Peter Zeihan: Mexico’s New Drug War, North Korea, Russian Expansion
We recently met with Geopolitical Strategist Peter Zeihan to discuss three geopolitical shifts for US financial advisors to watch in the coming months.
How Much More Can We Eek Out of the Econ Data?
Several months ago we wrote that looser financial conditions should support economic data and stocks through year end. So far so good. Since then economic indicators such as the Markit manufacturing PMI have continued to chug higher and US stocks are up about 6%.
An Unremarkable GDP Report and Why Trend Growth is Still 2%
Today’s preliminary Q3 GDP number of 3% growth at a QoQ annualized rate has been met with a mix of relief and hope. Relief that one of the most destructive hurricane seasons ever didn’t completely sap growth and hope that two consecutive quarters of 3%+ growth is evidence that trend growth has, finally in the 9th year of this recovery, accelerated above 2%.
Keeping a Close Eye On Momentum in the North American Equity Market
Over the last 20 days, the US equity is showing early signs of exhaustion, and momentum is beginning to weaken. In the following charts, we’ll highlight the various technical measures we calculate each day to illustrate the early turn in momentum. Our KLSU DM Americas Index represents the top 85% market-cap of the US and Canada.
Have We Seen Peak Home Price Growth this Cycle?
The rise in home prices from the trough in 2009 has added $8tn to home values, pushing the value of homes to a level surpassing the 2006 peak.
Quarterly Strategy Update: Dynamic Undercurrents
Since the start of this year, the US Treasury market is signaling a scenario of rising growth expectations and falling inflation expectations, as reflected by the various components that comprise interest rates.
Threats for Small Caps
With some exceptions, smaller-cap stocks in the US tend to pay higher taxes than their larger-cap peers. As such, speculation that corporate tax rates may be cut has stoked the performance of US small caps recently.
Shifting Currents in the US Treasury Market
Employing basic bond math, we can decompose the US Treasury bond into two pieces: real rates and break-even inflation expectations. Because real rates (TIPS) and nominal rates (US Treasuries) are directly observable, break-even inflation is relatively easy to determine.
Chinks in the Armor and Its Implications for Asset Allocation
Indicators of market breadth are often useful in confirming or telegraphing important trend changes in equity markets. In simple terms, indicators of market breadth measure the level of participation of individual stocks in the general trend of the market.
The Rally in Energy Isn’t a Fluke
Since the middle of August the S&P 500 energy sector is up 11.5% compared to just 3% for the index as a whole. Many observers have chalked this outperformance up as a reaction to a deep oversold condition or a short covering bounce, but a growing amount of evidence suggests it may be more than that.
The Impossible Math of the Federal Reserve
The Federal Reserve officially signaled the beginning of its balance sheet run-off. At this point, that’s old news. But, today the Fed released the Z.1 Flow of Funds, which adds to the intrigue of the balance sheet run-off. Why?
What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?
The Federal Reserve is likely to decide next week to begin letting assets roll of its balance sheet as bonds mature, instead of reinvesting the proceeds. This means that the balance sheet will begin to shrink in size and other market participants will be forced to absorb the supply of new issuance of treasury and mortgage backed securities.
Back to the Future: A US Dollar Bear Market?
Knowledge Leaders Strategy mid-quarter update.
Global PMIs Are Very Strong, But Does That Mean Anything For Stocks?
The upturn in global PMIs over the last year has been substantial and for the first time in years the world’s developed economies appear to be expanding in unison. As we can see in the table below, the color of the board has moved from red to green, indicating that nearly every major DM country is seeing improving PMIs.
Investors Should Pay Attention to the Foreign Materials and Energy Sectors
We’ve been talking at length recently about the attractiveness of foreign, cyclical stocks. While foreign developed markets are attractive, emerging markets are especially attractive from a valuation perspective and are also benefiting from what we think is just the beginning of a persistently weak US dollar environment.
Investing in Gold for RICs
For retail investors, there are a few vehicles for exposure to gold. The SPDR Gold ETF (GLD) and the iShares Gold ETF (IAU) are the biggest, lowest cost funds for retail investors. Below are charts of the GLD and the IAU, with price and USD volume overlay to illustrate the liquidity.
How to Play the Gold Break-Out in Fixed Income Markets
Today gold is trading over $1,305, for the first time since November 4, 2016. The breakdown in the USD Index last week was a good signal telegraphing the short-term breakout in gold. Gold is notoriously difficult to value, but we have found one relationship that seems to consistently work.
What Are the Asset Allocation Implications of a Persistently Weak USD?
We’ve been arguing since the end of 2016 that markets could be in for a sustained period of USD weakness and so far in 2017 they delivered just that.
Cyclical Indicators Are Providing a Boost to the Global Materials Sector
It may be an overlooked fact that the global materials sector is the best performing sector over the last three months (up 8.6%), the second best performer over the last month (up 2.7%) and the third best performer over the last week (up 1.3%).
Why Is North America’s Equity Market Underperforming?
On a relative basis, compared to the developed world, North American stocks peaked on November 23, 2016, and have since underperformed by about 4% (in USD).
A Mini-Correction, but No Capitulation (Yet): Three Internal Indicators that Should Point to the Nex
The last week has witnessed the return of multi-directional volatility in the equity markets for the first time since just before the election in the United States last November. At this point we have little reason to suspect the 2% mini correction in the S&P 500 will turn into a major downside swoon.
No Matter How You Slice It, the Crude Oil Market is Coming into Balance
As the title suggests, any way we slice the data, it appears that the crude oil market is coming into balance to a greater extent than is generally recognized. This has broad asset allocation implications.
Looser Financial Conditions Should Support Economic Growth and Stocks in the Second Half
Proxy metrics for financial conditions from the US dollar, to interest rates to corporate bond spreads have been loosening since June and suggest continued moderate economic growth in the second half of 2017 and a firm equity market.
Performance Trends Highlight Our Optimism on Foreign Stocks
Equity allocators should take note that performance trends in North America are deteriorating while they are picking up outside the US. In the table below, I show the recent performance of the sectors within our KLSU North America index...
Despite Earnings Season Beats, Analyst Expectations Have Barely Budged
By most accounts the Q2 earnings reporting season has been a good one, with most companies surprising to the upside and some offering improved guidance for future numbers. In fact, according to FactSet, more companies have posted a positive sales surprise in Q2 than any quarter going back at least five years.
Coal is Dead and Other Thoughts on Fossil Fuels from Peter Zeihan
With energy setting records as the worst performing sector year-to-date, we were curious about Geopolitical Strategist Peter Zeihan’s thoughts on fossil fuels in the context of the United States’ continued retreat from the global theater.
USD: Worst Start Since 1985 & TIPS How to Navigate
The USD is off to its worst start since 1985, down about 9%. In the chart below (courtesy of Bianco Research), it appears the USD is tracing its performance in 1985 quite closely.
6 Reasons and 21 Charts Arguing for Continued Foreign Stock Outperformance
As our regular readers are aware, we’ve been pounding the table all year arguing that foreign stocks are in a position to structurally outperform domestic stocks. At the risk of sounding like a broken record, we thought we would – in one post – review the setup that makes foreign equities relatively attractive at this juncture.
Calibrating the Energy Sector’s Potential Outperformance
It’s news to no one that energy has been the worst performing sector year to date with plenty of hatred of the sector to go around. Yet, as we write the price of WTI crude oil is up about 2% on news of capex cuts and OPEC’s apparent moves to reign in production and exports.
Can Financials be Leadership with a Flattening Yield Curve?
The financial sector has been getting a lot of attention recently with earnings announcements so we thought we’d weigh in on one aspect of financial stock relative performance that is making it difficult for financials to truly lead this market higher: the flattening yield curve.
Quarterly Strategy Update: Structural Rotation
This quarter, we look at two important structural changes that appear to be underway: a normalization in US and European monetary policy and a normalization in crude oil inventories.
One (more) Reason to Expect the USD to Continue to Fall
The USD is weak again today and plunging lows not seen for 15 months. The “obvious” reasons for the USD weakness include converging foreign economic activity, more hawkish foreign monetary policies, and a general overvaluation of USD.
Are Investors Switching From Active to Passive or From Passive to Cheaper Passive?
It’s been awhile since we’ve weighed in on the active/passive debate so we thought we’d toss our hat in the ring yet again and try to explain the asset migration that is taking the fund management industry by storm.
Chinese Corporate Financials Keep up Disturbing Trend of Deterioration
Highlighting the deteriorating trend in Chinese corporate financials has been an annual feature our of this blog.
Mixed Employment Report Points to More of the Same for Economic Growth
Today’s payroll beat of 222,000 nonfarm jobs being added to the economy in June should be viewed in a larger context of overall slowing employment statistics that all point to the US economy remaining in its relatively weak and slowing trend.
Three Reasons to Expect a Stronger Euro in the Months to Come, and What it Means for Your Portfolio
With the euro up another 50bps today against the USD, we thought it timely to review some fundamental factors that should act to support the longer-term trend higher in the euro.
The USD Selling Off and Econ Surprises at Rock Bottom is a Recipe for Foreign/Cyclical Outperformanc
The US dollar is having another tough go today after it spent the first part of June working off an oversold condition and rallying modestly.
How Much Longer Can Speculators Get of Bonds?
The last six months has seen one of the most incredible changes in investor positioning in 10-year US treasury bonds in recent history. Back in early January, around the time rates peaked, non-commercial traders (AKA speculators) were net short 10-year options and futures contracts by a whopping 17% of open interest.
Where in the World Can Value be Had in the Equity Markets?
To say that value is difficult to find in the global equity markets would be an understatement. In fact, when we look at all 44 of the developed market regions and regoin/sectors, what we find is that in only ten of them is the median company trading at a discount to its own 10-year average multiple.
Our Contrarian Call: A Bullish Thesis on the Energy Sector
Back in December 2016, we discussed our expectation for lower longer-term US interest rates, which we used to justify an aversion to financial stocks. This expectation played out.
Risk Management 101: Diversification (Easier Said Than Done)
The essence of diversification is choosing assets that are not perfectly correlated with each other. The logic is simple enough: when one asset zigs, another zags. Years ago, finance scholars proved that a portfolio of securities is less risky than an individual holding and the idea of diversification as a risk management tool was born.
Three Geopolitical Shifts to Watch this Summer, a Q&A with Peter Zeihan: Part 2
We met with Geopolitical Strategist Peter Zeihan for a quarterly update right before the French presidential elections. In addition to calling Macron’s win, Peter outlined the three most important geopolitical shifts for US financial advisors to watch in the coming months.
Three Geopolitical Shifts to Watch this Summer, a Q&A with Peter Zeihan: Part 1
We met with Geopolitical Strategist Peter Zeihan for a quarterly update right before the French presidential elections. In addition to calling Macron’s win, Peter outlined the three most important geopolitical shifts for US financial advisors to watch in the coming months.
Is the Bond Market Signaling a Change in Course for the Federal Reserve?
A recent run of weaker economic data, highlighted by the Citigroup Economic Surprise Index (CESI) plunging to -32 from 58 in mid-March has caught the attention of the US Treasury bond market.
USD, Valuations, Probability of Rising Budget Deficit all Point to US Equity Underperformance
With the USD now about 5% off its January peak and having made a series of four lower lows and lower highs, it’s fair to say that the period of US dollar strength we witnessed for most of 2016 has come and gone.
As Econ Data Slows, How High Can Rates Rise?
From the middle of April through yesterday 10-year treasury rates rose from 2.17 to 2.40, prompting the obvious question of how high will they rise. The interesting thing about the recent slight backup in rates is that it has occurred within the context of slowing economic data.
Coming Challenges to US Treasury Investing
In the table below we show the aggregate US Treasury maturity schedule. Due to stops and starts of the US Treasury issuing longer dated bonds over the last few decades, there is a huge gap in maturities available for investors.
It’s a Gusher So Far
So far in this earnings season, with over half of companies having reported, the energy sector has experienced the biggest earnings surprise. Earnings have come in almost 23% ahead of analyst estimates, nearly double the surprise of the consumer discretionary sector.
Is the USD Bull Market Over and What That Would Mean for Your Portfolio
Since the beginning of 2017, the US dollar has struggled against nearly every major currency, calling into question the idea that the US dollar is still in a bull market. Indeed, since the dollar made its cyclical high on the first day of 2017 trading,
Quarterly Update: Knowledge Leaders Strategy
In this quarter’s Knowledge Leaders Strategy update, we discuss our work in four areas.
Getting Back to Basics: A No Frills Review of the State of Corporate Innovation
As investors, it’s easy to get caught up in headlines about things like Snap’s $23bn market cap or Tesla overtaking Ford and GM to become the most valuable US auto maker.
Bond Yields Break Below Important Support as Econ Data Notches South
After testing and bouncing off the important 2.32% level four times so far in 2017, the US 10-year bond finally broke below that important threshold. The phenomenon has gone basically unnoticed by the financial commentators, but it occurs just as US economic data begins to wane following the bounce that started in the second half of 2016.
Moore’s Law: Knowledge Economy Firmly on Track
Last week, Intel executives took the stage in San Francisco to report to an audience of analysts, investors and media that Moore’s Law is alive and well. What does this have to do with our investment process and the Knowledge Effect? Everything.
Stocks, Bonds, USD all Reverse Course Following Fed Minutes
It was shaping up to be a pretty good day for stocks until the Fed minutes dropped the balance sheet hammer on the markets this afternoon. In the minutes detailing the discussion at the March meeting, Fed officials suggested they might begin draining the balance sheet later this year.
Stock/Bond Ratio Back at 2007 Peak
As 1Q17 finishes with a gain in the books, the stock to bond performance ratio has also broken to a new cycle high, elevating to levels not seen since mid-2007.
If Trump Gets Taxes and Infrastructure, Who Pays, and What Does it Mean for Stocks?
With the dissolution of health care legislation barely final, murmurers out of Washington seem to suggest tax reform/cuts and infrastructure may be tackled in tandem in a way that attracts bipartisan support.
Characteristics of Capital Preservation: A Look at the US Energy Sector
In a market experiencing the largest pullback since the election, investors are rightly looking for places to hide. At present, according to our work, the US energy sector is the only truly oversold sector.
Which is it: .9% or 2.8%, and Does it Even Matter?
As the first quarter nears its end there is some debate as to where Q1 GDP growth will come in. As recently as yesterday the Atlanta Fed GDPNow estimate had GDP growth of .9% and this morning the NY Fed’s Nowcast is expecting 2.8%.