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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.
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.
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,
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.
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.
Is the Snap Back in Rates Really that Surprising?
by Bryce Coward of GaveKal Capital,
The post-Fed action in the bond market yesterday was impressive, yet left some begging for answers. If the Fed raised short rates yesterday and reiterated its plans for the subsequent five rate increases through 2018, shouldn’t the long-end be selling off? If it were only that easy.
Putting the Post Brexit Rally into Perspective
by Bryce Coward of GaveKal Capital,
The post Brexit change in sentiment has been swift and considerable. More specifically, the change in sentiment over the last two days has been swift and considerable. Indeed, prior to Monday the S&P 500 had rallied 6.4%, but 10-year Treasury Bond yields had declined about 8bps, crude oil was down 2%, copper was flat, gold was up 3% and counter cycle stocks had outperformed cyclicals by 44bps. Not exactly a risk-on type of setup, especially when keeping in mind that the major European stock indexes remain down nearly 20% in USD terms from their 2014 highs and banks everywhere look downright terrible.
Smart Money Positioning is Supportive of Bonds
by Bryce Coward of GaveKal Capital,
This may come as a shock with 10-year rates near multi-year lows this morning , but the “smart money” commercial traders are positioned for a further decline in rates. In the chart below we show the net number of options and futures contracts held by commercial traders (blue line, right axis) – who are termed the “smart money” because they happen to be right more often than not especially at important turning points – overlaid on the 10-year treasury bond yield.
China is Doubling Down on State Directed Growth
by Bryce Coward of GaveKal Capital,
Over the weekend we got the monthly slue of Chinese data around fixed asset investment, credit creation, retail sales, and industrial production. Generally speaking, the data was soft, with misses in all categories. But one data point continues to stand out to us as evidence of the not-so-subtle involvement of government sponsored entities in the Chinese economy.
Valuations are a Reason to Favor Active Management at this Stage
by Bryce Coward of GaveKal Capital,
It would be tough to make the case that aggregate valuations are low at this stage in the bull market, and that valuation expansion is a likely tailwind to further equity gains. Alas, aggregate valuations are only one measure, and while aggregate measures do indeed point to heightened “valuation risk”, individual company valuations remain highly disparate.
State of Affairs of the Chinese Corporate Sector – Part 1
by Bryce Coward of GaveKal Capital,
The Chinese economic situation has been firmly out of the limelight for the better part of three months now as the country’s fiscal kitchen sinking has shown obvious signs of ramping into gear. If the world’s investors and economy watchers have breathed a collective sigh of relief, the Chinese corporate sector must be partying like it’s 1999 because Chinese businesses were headed strait off a cliff.
On The Statistical Significance of the Knowledge Factor
by Bryce Coward of GaveKal Capital,
Over the last week or so we’ve been highlighting how factor investing is not as cut and dry as advertised. The traditional simple factors (value, size, momentum, quality, low volatility) sometimes work and sometimes don’t so investors are left to make educated guesses about which factors will work in any given year.
Is Factor Investing Really a Reliable Strategy? For the Knowledge Factor it is!
by Bryce Coward of GaveKal Capital,
It’s become common knowledge now that factor investing “works”, but are the most widely used factors really that reliable on a year to year basis? As it turns out, no, they are not reliable on a year to year basis…that is for every common simple factor like value, size, minimum volatility, quality, or momentum. But the Super Factor – the Knowledge Factor – bucks the trend.
Markets Are Short-term Overbought, Especially Cyclicals, Yet Breadth is Tepid
by Bryce Coward of GaveKal Capital,
It’s become common knowledge now that factor investing “works”, but are the most widely used factors really that reliable on a year to year basis? As it turns out, no, they are not reliable on a year to year basis…that is for every common simple factor like value, size, minimum volatility, quality, or momentum.But the Super Factor – the Knowledge Factor – bucks the trend.
Is a Bright Spot Emerging in the Global Equity Markets?
by Bryce Coward of GaveKal Capital,
The question on everyone’s mind is how deep is this going to go? The honest truth is that no one knows, but we are starting to spot a glimmer of hope among an unlikely group that suggests that the world is in fact NOT going to hell in a hand basket. That group is the probably the most hated group of stocks in the world: emerging markets.
The Narrowness of this Market in Two Charts (reprise)
by Bryce Coward, of GaveKal Capital,
Back on January 25th we highlighted just how narrow this market has become, with fully 83% of stocks in our global index having posted negative returns since the May 21st, 2015 high in the global equity market.
What Investing Factors Have Worked the Best for Equities Over the Last Year?
by Bryce Coward of GaveKal Capital,
Factor investing is a well known and utilized means that investors use to allocate capital in hopes of outperforming the market over long stretches. It’s also known that no factor works all the time, and factors go into and out of favor with what can be a menacing frequency. With that said, what factors have worked the best for equity investors over the last year as the market has meandered around all-time highs and settled to multi-years all in twelve short months?
The S&P 500 Just Erased 24 Months of Gains, but there is a Silver Lining
by Bryce Coward of GaveKal Capital,
With 3 hours of trading left today the S&P 500 finds itself back at the same level it traded at two years ago and down about 15% from the May 2015 high. Scary as this sounds, with today’s action stocks will move further into oversold territory, which will increase the likelihood that this phase of the decline is behind us.
The Average Stock is Just Shy of Being in a Bear Market
by Bryce Coward of GaveKal Capital,
As of today’s closing the S&P 500 index is quite literally in spitting distance of its all-time high as the markets cheered the first rate hike in a decade. Yet, as we noted here and here, most stocks are not quite acting as ebullient as one might expect given former. Here is more evidence of just that.
China Keeping the Dream Alive with Government Spending
by Bryce Coward of GaveKal Capital,
Reported central government spending in China, which is likely only a fraction of the actual level of state directed spending in the economy, has recently shot up to a new all-time high just as the reported economic growth rate has plunged to a low not seen since the late ’90s.
This Chart is Too Ugly for Comfort
by Bryce Coward of GaveKal Capital,
It’s quite easy to get carried away with the drawing of conclusions based on a few technical chart patterns (and we are not doing that here!), but this chart is just too ugly to at least go unmentioned. What we’re looking at is the percent of stocks in our own Gavekal Capital International DM Americas Index that are at least 10% off of their 200-day high.
Is Crude Oil Set to Go the way of Copper, Lumber and Gold on a Breakout of the USD?
by Bryce Coward of GaveKal Capital,
WTI crude oil is at an interesting junction currently. As we write, the USD is on the precipice of a major breakout while WTI crude is just a few percent away from the its late-August lows. Meanwhile, the other most cyclically inclined commodities (copper, lumber) have already breached their earlier lows and the Baltic Dry Index is sitting right at its low.
For Japan, When GDP is so Close to the Zero Line, Inventories are the Dominant Swing Factor
by Bryce Coward of GaveKal Capital,
So Japan’s economy is back in technical recession…for the fourth time in five years (first chart). It’s likely that this unfortunate reality will be met with additional monetary ease, but that is a discussion for another day. Here we’d just like to make a very simple observation: when your GDP growth runs close to the zero bound, as it has in Japan, the inventory factor can be the make or break variable.
How to Invest in a Slowing China World
by Bryce Coward of GaveKal Capital,
The obvious question is then how one positions their portfolio in a world where China is on a structurally slowing growth trajectory. In an effort to not over-complicate things, let’s look at China from the 30,000 foot view. From this perspective we observe two things that will unfold over the next decade.
Do You Believe that China is “Fixed” as Copper Plunges to New Lows?
by Bryce Coward of GaveKal Capital,
The last two days have been met with the usual monthly slue of Chinese economic statistics including retail sales (+10.4% YoY), auto sales (+11.8% YoY), industrial production (+5.6 YoY), fixed asset (infrastructure) investment (+10.1% YoY), and bank loans (+15.6% YoY), among others.
On Why Emerging Market Funds Are Ill Equipped to Capitalize on a Rebalancing China
by Bryce Coward of GaveKal Capital,
We’ve hashed out the arguments for a persistently slowing China in this blog many times, so we won’t go there again today. Instead, we want to focus on a different aspect of the slowing China reality: the fact that most investment products that focus on emerging markets are overweight exactly the wrong economic sectors. In the scenario of a slowing and rebalancing China, the areas of the economy that are likely to benefit the most are different from the areas that gained from the infrastructure build out since 2000.
The Marginal Productivity of Chinese Debt Has Gone From Bad to Much Worse – Not Good for the Rabal
by Bryce Coward of GaveKal Capital,
Taking the Chinese GDP statistics at face value (an increasingly big assumption these days) we point out a rather ominous scenario which seems to be developing in the productivity dynamics of Chinese debt-financed growth. Basically the amount of growth that each new unit of credit produces is plunging to levels not seen since 2009-2010 when the Chinese unleashed the largest GDP adjusted stimulus program in the world.
Q: Is the Chinese Rate Cut a Silver Bullet? A: No!
by Bryce Coward of GaveKal Capital,
Today the Peoples Bank of China cut the benchmark interest rate by .25% and lowered banks’ reserve requirements by .5%. The measure is supposed to spur growth and make life a little easier on debt-ridden Chinese companies. In the immediate term it may give a slight boost to the economy, but there is no chance this measure, or others like it, will keep the Chinese economy from slowing much further in the years ahead. Let us explain.
Small, but Noticeable Divergence Opening Up Between EM and DM
by Bryce Coward of GaveKal Capital,
We certainly haven’t been shy about identifying the rout in EM stocks and the very emotional selloff that took place in August. At the time we showed that the emotion at the August low was commensurate with the 2011 and 2008-2009 panics, both of which happened to be good buy spots for EM stocks.
Is China “Fixed”? Short Answer: Financial Markets Say No
by Bryce Coward of GaveKal Capital,
The rally in stocks off of the August low has in some respects alleviated worst case fears about the fate of the Chinese economy. After all, in hindsight it is pretty clear that the selloff was driven by a simultaneous rerating of Chinese growth expectations by market participants combined with the possibility of higher short rates in the US to boot. These fears resulted in vast under performance of growth sensitive asset prices throughout the correction and then a sharp rally in those assets in the days following its terminus.
Deja Vu All Over Again for the Stock Market Correction?
by Bryce Coward of GaveKal Capital,
In remembering the late, great Yogi Berra, we can’t help but associate one of our all time favorite Berraisms with the current stock market environment as compared with that of late 2011. From our perspective it looks and feels like deja vu all over again. Most of our readers probably vividly remember the panic that ensued over the 2011 government shut down and the then large negative revision to US GDP that sent US stocks down nearly 20% in a waterfall type decline.
Are we About to see a Big Time Rally in the Long Bond?
by Bryce Coward of GaveKal Capital,
During this cycle the positioning of commercial traders (the smart money) has been a crystal ball for players in the treasury market. Every peak in long bond rates since 2010 has been associated with commercial traders net long options and futures contracts on said instrument. At a net long positioning of about 34,000 contracts, the commercials are the most long the long bond since the end of 2013 before the 30-year treasury bond yield fell from 4% to about 2.2% over the course of 13 months.
Analysts Haven’t Been this Negative on Emerging Markets Since...
by Bryce Coward of GaveKal Capital,
In simple terms, everyone has moved to the same side of the boat when it comes to expectations about the prospects of emerging market stocks. Not since the financial crisis nadir in stock prices have analysts of EM stocks been so bearish and quick to rerate expectations. Yet, amid all this negativity, there arises a fantastic opportunity for investors of EM stocks. As the famous Warren Buffet axiom states, “Be fearful when others are greedy and greedy when others are fearful”. To say that analysts are fearful would be an understatement.
Is the Chinese Yuan Undervalued or Overvalued?
by Bryce Coward of GaveKal Capital,
Almost all of the recent analysis surrounding China’s recent currency fluctuation takes for granted that China just joined the global currency war by engaging in competitive devaluation in an effort to spur exports and thus growth. We offer a different take, that the recent move that in effect loosens up control over the peg (slightly) is more a measure of ongoing reform than of competitive devaluation. Indeed, one of the hallmarks of a liberalized financial system is that prices are determined by market forces rather than a central bank or other government entity.
On the Winners and Losers of the Great Chinese Rebalance
by Bryce Coward of GaveKal Capital,
Change can be hard, but change can also be good. At this very moment we are living through one of the largest and potentially destabilizing periods of economic change in the last century. It is the mirror image and reversal of the last great economic paradigm shift. It is China’s shift from an investment driven growth model to a consumption driven growth model. For some it is painful. For others who are correctly positioned it is extremely lucrative. It is affecting all of us whether we know it or not. But most of all, it is inevitable.
Clear Evidence that Demand for ETFs is High and that Appetite is Being Met
by Bryce Coward of GaveKal Capital,
We all read about it in the news, but ETFs really are becoming the preferred investment vehicle for the investing public. The evidence is clear; both in terms of number of funds and net assets ETF growth is outpacing mutual fund growth by a wide margin.
More Evidence of China Slowing Permeating Asia – 7/31/2015
by Bryce Coward of GaveKal Capital,
In today’s edition we highlight just a few data points: the South Korea Business Survey Index making a new low, Japan consumption expenditure having a very weak month, and Japan CPI headed back toward zero. The slowing of the biggest economy in Asia is really having a noticeable impact on the region.
More Evidence of China Slowing Permeating Asia – 7/16/2015
by Bryce Coward of GaveKal Capital,
Yesterday saw a few more weaker data points out of Australia and South Korea that are worthy of mention. Namely, Australian consumer confidence dropped again to around the lowest it’s been since 2009 and South Korea unemployment remained at its cycle highs. No matter what the top line China GDP number was, there is no doubt that China is on a structurally slower growth trajectory and this is most definitely affecting its closest neighbors.
More Evidence of China Slowing Permeating Asia
by Bryce Coward of GaveKal Capital,
Yesterday and today were host to a few more macro data points all signaling basically the same thing – a synchronized slowdown in Asia which appears to be driven by China. In the five charts below we show that Chinese CPI remains anemic while PPI just made a new cycle low, Australian unemployment ticked up, Japanese bank loans appear to be topping/rolling over, the Japanese economy watchers survey is rolling over, and Japanese machinery orders excluding ships keeps weakening.
Results 151–200
of 205 found.
