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Bumpy End To The Year
Europe would like to have America's problems. Here we have declining public spending, increasing receipts, falling debt to GDP ratios and unemployment 3% below the European average. This puts the Fiscal Cliff (and I was so hoping to avoid that clich) debate somewhat in context. It's serious enough to draw the attention of corporate CEOs, put a heavy dampener on business confidence, which we saw in the recent NFIB report, and postpone hiring plans and capital investment, which showed up in last week's Empire and Philly Fed surveys.
Overcoming the Brake Light Shockwave
Big democratic breakthroughs, say Egypt, Tunisia are halting and fall far short of the hopes they embodied. Technology is a race over mobility and brevity but hardly elicits the same wonder from years past. Governments are polarized. The US had almost no voting overlap in recent years so big ideas are on the wane. In Europe, the supra-national organizations like the EU are swift to talk and slow to act. No we're not reactionaries. We think all this is explained by the deepest drop in output in the post-war period and the slowest recovery.
Favorable Reports Post Sandy
The devastation of Sandy blighted the week. We were lucky in that most of our employees escaped the worst effects. We had some evacuations and plenty of lost power. But the images of devastation were overwhelming and we hope our clients and friends of the firm are safe. Perhaps, as a non-native, my perspective is warped but in the US we have an uncanny ability for industry, problem-solving, drive, inventiveness and optimism. Sometimes the very best of us comes out in these times.
More traction...Just Look Through the Earnings
Last week saw an important debate on how the US has fared in the post recession recovery. The short answer is, "not well" if measured by a return to GDP growth trends or per capita income. But the counter, as explained by Reinhart and Rogoff, is "faster than you would expect." We're in the second camp.
Strong Employment But Still Lots of Slack
The ECB's dearth of tools came through loud and clear last week. Rates remained unchanged not because the economies have a ghost of a chance of recovery but because inflation, at 2.7%, scored well above the 2% target. There's a certain amount of in-built inflation in European economies not present in the US, for example, indexing across many industries and pensions, VAT and euro denominated commodity costs. The combination of higher oil costs and a weaker euro put some of the YOY increases in energy costs as high as 40%.
Typical Post-QE
We have typical post-QE market behavior. GTs sold off, then rallied. Equities rose, then flattened. The dollar sold off then strengthened. Gold crept up. Other commodities rose, yawned and gave up most of their gains. Earlier QEs took several months for this to play out. It now all happens in quick time.
Clear Progress
Two weeks into a new era of ECB and Fed policy and it is a tie between the gains in equities, with the US and European broad indexes up around 2.2%. But it's the lack of follow-through and opacity of the ECB moves which are perhaps the most disconcerting and so, probably, the more short-lived. While both central banks reported easing in the form of securities purchases they had very different origins and aims.
Curious Repetition
Greece had a bond payment in the middle of the week that was paid with no drama and then announced that it had enough cash to finance its needs through October. However, it is using cash set aside to recapitalize banks in order to meet general obligations. The bond buying proposals are still priced into the market.
Careful With That Beehive, Eugene
When you move a beehive, you must move it more than three miles or not less than three feet. Anything else confuses the bees. Markets can be the same. And that's why President Draghi's comments reverberate still after two weeks. No one seems to understand what he meant.
How Hoover Caused the Euro Crisis
There is a Burkean principle that many sorts of change must be regarded with skepticism. In the last few months in Europe we have seen new maxims, new ideas, new commitments, new resolves, lots of new acronyms, yet very little has changed from two years ago when Greece surfaced as the first casualty of the banking/sovereign crisis.
An ECB Rally
We remain dependent on European statements but what a difference a year makes. This time last year we saw softening economic data and increasingly poor news coming out of Europe. But then we had a diffident ECB president who had just finished a round of rate increases as Europe slumped. This time we have combative words from Mario Draghi to support the euro, apparently at all costs.
Weaker Headlines
Well, the whole Spanish banking solution from a few weeks ago was not destined to last. Back in late June, the EU welcomed, along with the ECB, EBA and IMF that the EFSF /ESM would provide around 50bn of capital, provided the financial sector gave certain conditions and horizontal restructuring plans. And, even better, the FROB would receive the funds and ensure at the time of the capital infusion, Spain would honor its Excessive Deficits Procedures. Got that?
Still Drifting
We are in earnings season. This is a welcome relief from the macro and political world that has dominated markets and sentiment for several weeks. Earnings allow us to look at what companies are seeing and how they're reacting. We know they're operating in world of miserable nominal GDP growth so we will look at margins, sales, pricing power, management and cash positions. But first, why so listless and skittish?
A Crisis Is Not An Emergency
Some crises linger for years. The sterling crisis began in 1964 and, despite periodic respites, was not solved until the early 1990s. The oil crisis burned for over ten years until the political and economic stars realigned and restored order. Latin America lingered for over ten years before a breakthrough of sorts...not for everyone though, as Argentina's GDP per capita is the same as it was in 1960. A crisis is not the same as an emergency.
Timid Actions, Fearful Times
Since 2010, investors have traveled between optimism and pessimism every three months. It's negative right now. Here's why: A very timid move by the Fed. What was glaring was the entire board revised down their expectations on the economy: i) GDP down by $500bn ii) unemployment up 500,000 and iii) lower core and PCE inflation. Not just for 2012 but next year as well. That takes complacency to a new level.
I Like These Calm Little Moments Before the Storm
It is the job of investment managers to look beyond the gloom. There's plenty of it. The big list last week was the slow hand clap the market gave to the Spanish bank rescue, the probable downgrade of India, one of the dead cert BRICs we all read about, and queasy economic data from the US. Now we don't just jump in and buy on all the bad news. We're not likely to retain clients that way.
Bertha and Casey
Markets braced last week for a bailout on Spain which came this weekend. Its banking sector is in wretched condition and joins other European banks at 25 year lows in share price. The official downgrades came long after the stock market had voted with its feet. European leaders had little to add to the debate. There's some talk of a twin track: some European countries pressing on to further integration, some coping with contraction and austerity on their own.
Are my methods unsound?...I don't see any method at all, sir.
This week we can add the lowest ever level of GT10, which touched 1.44%, and the 7-year note firmly below 1%. German 10-Year Bunds fell to 1.12%, brining the total return close to 20% over the last year. Over in Switzerland, it will cost you nearly 0.5% for the privilege of holding a two year bond. If negative rates are on offer, distress and fear are not far behind.
New Lows and a Dud IPO
We're testing all sorts of lows: 1) record low for GT10 auction last week 2) GT30 yield, same level as Dec 2008 3) European banks are at same price level as 1987...so 25 years of gains wiped out 4) euro stocks same level as March 2009, so all the gains gone 5) US safest and best place to be 6) China stocks at same level as 2006, since then the Chinese economy has doubled and 7) to cap it all we had an IPO that should never have happened. We're back in risk territory and markets don't want to extend or commit.
The world is not ending. Nor is it
Last week saw more dire talk on the end of the euro, the lowest ever GT10 auction, a 2.2% swing in SPX[1] and an overly dramatic reaction to hedging losses at JPM[2]. But these are not big enough to push aside the broad positives: i) Europe will cobble together some compromise...there's already broad agreement that pure austerity needs dilution and the Bundesbank even made soothing noises on inflation ii) US economic data was broadly helpful iii) market metrics remain solid and iv) the federal government is in budget surplus. Yes, no lies. Read on.
Why Be Scared Of A Hat
Markets tend to overreact and the last few weeks in France were no exception. Equities fell around 9% on the expectation of a change in government. On close look, the Hollande manifesto is modest...a change in retirement age here, a year difference to a balanced budget, a non-descript growth pledge, tax banks more, reduce immigration. Markets also have notoriously short memories: socialist (i.e. left of center) governments are good for markets. Stocks rose vigorously in the years after leftist governments took control of France in 1981, Sweden in 1998, the UK in 1997, the US in 1992.
Digbys Umbrella and a Dinner to Remember
The US economy is on a painfully slow road. It is recovering. Jobs numbers are better, even though some hiring in the first quarter may have been brought forward by mild weather. Production, manufacturing and exports, all signs of regained competitiveness in the US, are showing steady improvements. And the government sector is contracting. Not on purpose mind you, but jumping off a cliff and letting inertia do the work result in the same end. Above all of this, we have a Fed using every monetary policy at their disposal to try and promote growth and employment.
Trading For Now, No Breakout Yet
Markets seem to be taking the broader economic news in their stride. The FOMC confirmed its policy, so no new buying but also no unwind on the balance sheet. The demand for safe assets remains very high and that leads us straight to MBS where we maintain a very over-weight position. Equities are drifting higher, which we like as we increased the position some weeks ago. It helps that positive surprises outnumber negative surprises by 3:1 so far this earnings season. The market tends to overreact to news which suggests there's lack of conviction. But at least there's no over-valuation.
Hold In There...Still Good News
First quarter markets flirted with euphoria. Jobs numbers were good, the Fed kept its head and confirmed a stable policy, Europe was quieted through the LTRO feedstock and corporate earnings looked good with the bank stress tests and a California fruit company powering ahead. But, understandably, and as with any attention disorder patient, markets need caring support. The catalyst for the recent drops was surprisingly benign: Spain and Italy are finding it tough to implement austerity, the Fed is not promising QE and earnings are going to be spotty. Still we haven't changed our outlook.
Policy, Numbers and Markets. Still good.
Commentary continues to use pre-2008 data as a baseline, whether for economic data, household behavior or corporate prosperity. This is a mistake. We remain in a liquidity trap. This happens 1) when asset prices fall 2) the private sector delevers 3) credit demand becomes inelastic, i.e. immune to price 4) savings increase 5) income balances between the private, corporate, net export and government sectors distort and vi) the reluctant leakages destroy aggregate demand. Throw in higher credit standards and necessary re-regulation and you can see why austerity economics is the final bullet.
Good Quarter. More to Come.
Good week ending an even better quarter. We like this rally because i) large cap stocks were in line with small and mid, that means less speculative juice and more reality investing ii) GTs came unglued fast but iii) Baa spreads came in thanks to low net issuance and high demand, again crushing the crowding out theorists but, no matter, iv) Europe came back from the brink and fewer daily catastrophe headlines and v) the Fed gave plenty of information to not expect a policy reversal. This is solid stuff and markets feel better than this time in 2010 and 2011 when we saw spring sell offs.
A Turning Point
Bottom Line: Bonds are now outside of the recent range, especially in the 30-year. We could see another 10bp retrace to 3.50%. Equities have had a good run but still have reasonable valuations. New money goes to IG bonds. Spreads are approaching their long-term mean but demand from natural buyers is high.
Will he? Won't he?
Will oil prices hurt the economy? No Recent good news on the economy has come with warnings of possible demand destruction from higher oil. First, lets stress that QE does not cause higher oil prices. There are too many iterations between increasing bank reserves and the trading firepower needed to drive spot oil prices sharply higher. And while we have seen an increase since September, we're no higher than a year ago. During that time economic prospects dimmed then brightened MENA troubles flared, receded and then grew, and Asian demand steadily rose. But there are reasons to be sanguine.
Big Headlines...Not Much Action
Bottom Line: Volume: There's still no major conviction in the rally. Too many cautious investors out there keeping a wary eye on their gains. Russell 2000: has broken down recently; the mega caps have overshadowed it. Employment: Still the most sensitive number. Anything above 150,000 is fine but confidence will be shaken if it's much below. AAPL: The most over-owned stock in the market and accounted for about 20% of February gains. The Fed is sticking to its script: and with the growth numbers, this means that GT10s are likely to remain exactly where they are today.
Brute Force and Two Serious Problems
The brute force of liquidity driven markets is waning. Earnings season draws in and there were enough negative surprises, about 30% of reporting companies, to take the edge off the rally. As of writing, we're up over 6% YTD on SPX [1] but with little decisive break out in the last three weeks. Why? Well, the culprits are: Greece: Greece has been punching well above its weight as a pain for some time. China: After a pretty awful 2011, when stocks fell 20% and remain at about half the 2007 peak, inflation, housing and net exports remain a problem.
No Inflation and Plenty of Money
We are still fighting: worldwide fiscal drag (aka the dogma of expansionary austerity) with accommodative money polices. The PBOC joined in with some RRR cuts, although these do not mean much in the Chinese loan-quota system. And the BOJ took steps to weaken the yen. CBs are in control. Government fiscal policies remain ineffectual. Bottom Line: US government bonds remain in a tight band of 190-210. The New Issue Market is strong with low end investment grade names trading at less than 314 over GT10s. We continue to like US equities.
Savers Are Not A Special Class
The self-reinforcing struggles between risk appetite and liquidity continued this week. Since the FOMC meeting, LTRO kicking in, easier policies from the ECB and a run of good economic numbers, we're in rally territory for equities here and abroad. The good news is that this has not come at the expense of other asset classes...so gold, bonds, US$, commodities are all holding up well. The liquidity push cannot have come at a better time. Private sectors are still building precautionary savings and public deficits are closing...
In Praise of Radhanath Sikdar
This week we saw: France and Austria downgraded, Greece take a step closer to default, new bond auctions from Spain and Italy that, while below last month's, had pitifully low bid/cover ratios and Hungary lurch again in its bond prices and currency...down 11% and 22% in last 3 months. On the other side of the trade, Germany auctioned 6-month paper at a negative 0.012%. So this is what happens: fiscal consolidation hits private consumption and investment without (because of a pegged exchange rate system) a rise in net exports or higher lending. Mr. Sikdar would have figured this out long ago.
Bad Medicine, Bad Policies
We can see the results of sensible monetary policy and not so sensible fiscal policy: slow recovery of manufacturing and service jobs, decline in all government jobs and gradually lower participation rates. Expect these trends to continue. We find 30-year bonds with a near 20 duration very tradable. The YTD price swing is already over 4% and with a 3.0% yield; we must be careful that price changes not wipe our coupon returns. Stocks offer attractive entry points but we look at individual companies, balance sheets and management more than the overall asset class.
Somali Sense of Humor
The fifth review on the Greek financing package makes grim reading: 1) bank deposit outflows equivalent to 15% of GDP 2) privatization sales proceeds revised down to less than 3% of GDP 3) GDP to fall more in 2011 than estimated and again next year, bringing the cumulative shrinkage to 15% but 4) debt to remain at over 140% for most of the next decade, assuming a 4% paid rate not the 34% market rate and 5) labor productivity deteriorating. In another sign of euro dysfunction, the Bundesbank refused to participate in a general IMF trust for the eurozone.
Teutoburg Forest Remembered
The European Council agreed to some startling actions to stem the crisis: 1) all fiscal deficits not to exceed 0.5% of GDP 2) excessive deficit rules to come into effect when they breach 3% of GDP 3) the Commission to sign off on national budgets and 4) enforce sanctions if debt exceeds 60% of GDP with 5) fiscal integration to follow and 6) EFSF and ESM capital to remain at around 500bn with another 200bn committed to the IMF. The markets' reactions were generally favorable but I doubt any of this will hold.
Engines of Doctrine
European leaders have a tough time stringing together a coherent sentence but the words go roughly like this: 1) drive down deficits 2) pummel inflation 3) encourage companies to invest more and 4) households to spend more and, thus, fingers crossed, 5) create employment. The problem with this is that output gaps drive down aggregate demand and prices. And no business executive will invest while demand is leaking. And so will not increase employment. This standard trap is exacerbated when there is no central bank that can do what central banks do.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
Colditz and the Trevi Fountain
Bottom Line: Keeping volatility down. Raising cash and using the trading opportunities in bonds. Trimming international especially Europe; DAX is 11% off October lows; but sentiment is very negative. This bond rally is all about the need to cover much higher margins on repos for European and Italian bonds but could have more to go.
Troubles Not Shrinking
US employment was unequivocally better in October despite the headline NFP of 80,000. Revisions in recent months mean that since June, the economy created 466,000 new jobs against first estimates of 318,000. Since March in 2010, the private sector created 3.9m new jobs while the government sector lost 1m. The ratio of government to private jobs is back to where it was in 2002. This is not a jobless recovery. It is a slow recovery with the private sector doing well under contorted and aimless fiscal drag. Corporate Profits: Productivity rose again in Q3.
Debarred from Certainty
The innocent pre-2008 are days gone. Expect volatility. Markets distrust most of the news and theres little conviction in any one direction. Vanilla investors are on the sidelines. Day to day trading is mostly position covering and range bound investing. Thats fine with us. The more algos and high frequency trading noise, the easier to spot fundamental anomalies. The challenge is to keep fluid between seemingly different but highly correlated markets.
Separate Tables
About two thirds of companies have beaten expectations and growth is around 16%. If the market holds at 1280 pixel-time level, we will have seen a 17% retracement of the 22% summer correction. Equities look well supported but NFLX, AMZN and GMCR [1] show how fragile is confidence. The ever-reliable Fed surveys from Richmond, Chicago and Kansas all showed improvements with very little sign of price increases. Bottom Line: Some worry that the sell off in bonds may be too rapid but we're comfortable with domestic stocks and, increasingly, international.
A Matter of Sentiment
Greece is no longer the issue. It's a proxy for how to manage the other sovereign debts and recapitalize the banks. In this, all roads lead to Germany. It is the only economy capable of leading or backstopping the various funding institutions. In the last week, bond markets almost gave up on France. Until Germany agrees to some sort of European-wide bond or bank recapitalization, expect more of the same. Meanwhile, banks will reduce their loans to replenish capital and the economy will teeter on recession.
Crossing and Recrossing
Heading into another G20 weekend meeting. There are plenty of ideas around: IMF backing, strategic defaults, broader EFSF guarantees and infusions of bank capital. We would put the probability of any breakthrough at less than 10%, which means more drift. Bond spreads narrowed and the 30-year auction bid-to-cover ratio was significantly better. So much for crowding out. The market rallied but does not feel particularly underpinned.
The Mists Disperse
In both bonds and equities, we're back to mid-August levels. It was not a pleasant ride. The trigger was the debt shenanigans (never good to threaten wage earners) and the European Spartans vs. Sybarites argument. It's quieter now, which gives us thinking time... As Jason wrote here last week, we're not sanguine on rates. Bull market sell-offs are ugly affairs. GT10s could hit 2.25% without touching the sides. With earnings season coming up, we are on the hunt for equity bargains financed with long bonds.
Results 51–100
of 110 found.
