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Is The Fed Now looking At A December Lift Off?
by Eric Bush of GaveKal Capital,
One of the data releases that has gained more attention recently than what it has historically received is the quarterly Employment Cost Index (ECI). With focus moving to not just job growth, but wage growth as well, the ECI index is a data point that Fed watchers are watching to guess what the Fed’s next move is going to be. Unfortunately for those that were wanting a September lift-off, the ECI thoroughly underwhelmed during the second quarter.
Is The Biotech Bull Market Still Intact?
by Eric Bush of GaveKal Capital,
Biogen’s $85 (or 22%) drop on Friday has put a spotlight on the biotechnology sub-industry as a whole. And rightfully so, as biotech has been the best performing sub-industry in the United States over the past four years (as always, this data is on an equal-weighted basis). Biogen, which was the third largest biotech stock by market cap before the drop and is now the fifth largest, has generally been a stock market leader. Whenever leadership begins to turnover that is usually an important signal for the market. So has biotech run its course?
Let’s Put Some Context To This Stock Buyback Craze
by Eric Bush of GaveKal Capital,
According to this CNBC article, “twenty percent of the S&P 500 have reduced their share count by 4% year-over-year in each of the last five five quarters” with the trend continuing in the second quarter. There are plenty of large buyback programs being undertaken by large-cap companies such as Intel and McDonalds and in that CNBC article they also mention Apple as a company joining the “buy back monsters” such as IBM and Exxon Mobile. However, for the market as a whole, is this time really all that different?
Can We All Stop Being Surprised By Company Earnings “Surprises”
by Eric Bush of GaveKal Capital,
According to the FT, S&P 500 earnings are on track to decline by about 2.6% year-over-year which is actually about 2% better than what analysts were expecting at the end of June. So this is turning out to be a better earnings season than must expected? Not really. This is just a continuation of the game where consensus expectations are moved lower and lower until companies can, you guessed it, “surprise” to the upside.
Bottom Pick These Commodity ETFs At Your Own Risk
by Eric Bush of GaveKal Capital,
Last week Bryce highlighted that commodities continue to get decimated and this post prompted a question: should the contrarian investors out there start taking a closer look at commodities? The short answer is investors are much better off keeping their capital in the equity market rather than trying to scoop up a few commodity ETFs.
Very Weak Strong Closes
by Jennifer Thomson of GaveKal Capital,
Earlier this year, we took an in depth look at our Strong Close and Weak Close Indicators (details here). An updated look at those charts reveals the number of strong closes for the S&P 500 has continued to decline since the beginning of the year and is currently at levels not seen since 2012.
How US Equity Valuations Have Changed Since 2008
by Eric Bush of GaveKal Capital,
The average price to cash flow multiple for a US equity is currently 16.9x. However, as is always the case in a diversified market, the range of valuation multiples varies quite a bit if we break out companies by industry group. The cheapest industry group is utilities currently trading at 7x cash flow. Only two other industries, energy and telecom, are trading below 10x cash flow. On the other end of the spectrum, four companies are trading above 20x cash flow and one, pharma, biotech and life sciences, are trading above 30x.
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.
Correlation Among Stocks, Especially In Europe, Have Shot Higher
by Eric Bush of GaveKal Capital,
Over the past several weeks, correlations among stocks have been increasing which makes it increasingly difficult for stock pickers to outperform. The most dramatic example of this is happening in Europe.
54% of All EM Stocks Are In A Bear Market Even As The MSCI EM Index Is Off Only 7%
by Eric Bush of GaveKal Capital,
Two weeks ago we noted how more stocks than you might think are in a correction. At that time, 42% of the constituents in MSCI World Index were at least 10% off its 200-day high. As of yesterday, that number has increased to 57%.
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.
While Attention Has Been On China, EM Latin America Keeps Taking It On The Chin
by Eric Bush of GaveKal Capital,
EM Latin America stocks are by far the worst performing stocks in the world this year. So even though all eyes are on China at the moment, as Bryce recently pointed out, the Chinese stock market doesn’t matter much for non-Chinese investors.
Historical Stock Market Analysis
by Eric Bush of GaveKal Capital,
According to our work, the US stock market is currently in the longest running cyclical bull market that has ever taken place in a structural bear market. We are currently in the 6th year of the cyclical bull market. No other cyclical bull in a structural bear has ever made it past five years (the prior longest was from October 2002 – October 2007).
S&P 500 Suffers First 2% Down Day Since End of 2014
by Bryce Coward of GaveKal Capital,
Today was no doubt a risk off day for the markets. There was persistent selling pressure in stocks worldwide with the S&P 500 down 2.09%, but international indexes down quite a bit more. Given that today was the first 2% down day since December 18th, 2014 and October 10th, 2014 before that, we thought we’d highlight the utter lack of volatility in these markets since the end of 2011.
Is The Decline in the Euro Over?
by Jennifer Thomson of GaveKal Capital,
Though downward pressure on the EUR/USD exchange rate has eased a bit since April, we can’t yet say for certain that the trend has reversed. We will be watching these charts, in particular, for any clues as conditions in the Eurozone evolve over the coming weeks.
US GDP Growth Over Time
by Eric Bush of GaveKal Capital,
When the first estimate for US GDP was release, we showed how the long-term growth rate of the US economy has been steadily falling for decades. We highlighted this by looking at the 10-year annualized percentage change in nominal and real GDP.
The Market Continues to Vote for Japan Over Europe
by Bryce Coward of GaveKal Capital,
Despite Japanese stocks outperforming European stocks by 7% YTD and 14% over the last year, the investment community has continued to basically ignore Japan in the commentary we read. But, for those who have been overweight Japan it has been a good ride.
Are Staples and Health Care Poised for More Outperformance?
by Bryce Coward of GaveKal Capital,
Today’s cyclical jolt aside, it appears from glancing at relative performance charts of growth counter-cyclicals (our code wording for the Consumer Staples and Health Care Sectors) that they could be poised for a relative performance breakout.
Who Would Have Guessed? Russia is the Best Performing, and Cheapest, Country Index YTD
by Eric Bush of GaveKal Capital,
Raise your hand if you thought Russia would be the best performing country index through roughly the first half of 2015? I imagine there aren’t too many digital hands up right now…
Mortgage Rates At 35-Week High But Purchase Applications Picking Up
by Eric Bush of GaveKal Capital,
According to the Mortgage Bankers Association, for the week ending June 5th, 30-year fixed rate mortgages are the priciest they have been since October 3rd. Granted, at just 4.28%, 30-year fixed rates are historically very low but are 41 basis points higher than the low for the year.
Sales Estimates Still Falling
by Eric Bush of GaveKal Capital,
Over the past six months, only one out 24 global industries has experienced a positive tailwind to its FY1 sales estimate. That lone industry: diversified financials. Diversified financials FY1 sales estimate has increased by 3.5%, on an equal-weighted, USD basis, over the past six months. The other 23 industries have all seen its FY1 sales estimate fall over the past six months with energy taking the biggest beating (-21%). Over the past month, zero industry have experienced increasing FY1 sales revisions and FY1 sales estimates have fallen on average by 0.8%.
Competitive Dynamics in the US Fund Management Industry
by Steven Vannelli of GaveKal Capital,
ETF Trends reported the other day that total ETF assets under management are expected to double by 2020, translating into roughly $740 billion per year of flows into ETFs (link to story here). If we look at just equity related ETFs, the growth dynamic is easy to see.
The Knowledge Effect: Excess Returns of Highly Innovative Companies
What drives stock returns? Answering this question has been a goal of investors ever since Harry Markowitz introduced his Modern Portfolio Theory in the 1950s. Later, William Sharpe’s Capital Asset Pricing Model illustrated that the market itself is the first and foremost element in explaining a stock’s performance. However, empirical research over the past several decades has identified many other effects beyond simply the market that exhibit a strong explanatory power of stock returns.
Stock Picks in the European Technology Sector
by Steven Vannelli of GaveKal Capital,
For the last five years the European technology sector has been locked in a trading range relative to the MSCI All Country World Index (USD). Recently, however, European technology stocks have been performing quite well. On an equal weighted basis, they have been the second best performing group in Europe year-to-date.
Low Valuations Tough to Come By, Wherever You Look
by Jennifer Thomson of GaveKal Capital,
It is no secret that, whichever way we look at valuations, we think stocks are expensive. One of the more unique methodologies we employ to get a sense of where equity valuations are is to look at them grouped according to ‘buckets’ designated by pertinent levels.
June is Out… But 2015 Lift-off Still On
by Steven Vannelli of GaveKal Capital,
Looking at Fed Funds futures contracts, it would appear that the fixed income market has ruled out a June rate hike but is coming back to the idea of a 2015 lift-off. Currently June fed funds future are spot on the current effective fed funds rate of 13bps. In the chart below, we plot the current effective fed funds rate, the rate implied by the June 2015 fed funds futures contract and the 10 year US Treasury Bond. Since the June contract rate and the current rate are the same, it suggests the markets have completely moved past a June rate increase.
It’s Japan, not Europe, that Continues to Lead in 2015
by Bryce Coward of GaveKal Capital,
Despite the popular news media focusing all their attention on European reflation, Draghi’s QE, Grexit or no Grexit, etc, the real story for investors remains in the seemingly forgotten Japan. Indeed, year to date Japan has outperformed Europe by more than 7% in USD terms and Portugal and Italy are the only two developed market countries to have outperformed Japan. Put another way, the largest stock markets in Europe have all underperformed Japan by a wide margin.
Knowledge Leaders Continued Their Outperformance In May
by Bryce Coward of GaveKal Capital,
Highly innovative companies outperformed again in May, continuing a streak that has been going on for quite awhile now. Whether in the developed markets or emerging markets, Knowledge Leaders have outperformed the broad DM and EM benchmarks over the last month, quarter, YTD, 1-year and since the inception of our Gavekal Knowledge Leaders Indexes.
US Corporate Profit Margins Are Coming Back Down To Earth
by Team of GaveKal Capital,
Today wasn’t the best day for US economic releases. The 2nd revision of 1Q GDP was (unsurprisingly) revised down from 0.2% to -0.7%. The release that caught our eye, however, was the initial release of corporate profits in the US for the first quarter.
Inflation Expectations Are Turning Back Over In The US
by Team of GaveKal Capital,
TIPS derived breakeven inflation expectations have started to fall once again in May. For a little context, starting in last June, breakeven inflation started a steady march lower that lasted until January of this year. Since that time, we have seen a rebound in inflation expectations.
San Francisco Real Estate Is 75% Above Housing Crisis Lows
by Team of GaveKal Capital,
The latest (March) Case-Shiller Home Price Index was released this morning and there were several noteworthy data points in the report. First, our 3-month diffusion index that measures the number of cities where prices are higher now than they were three months ago increased by six cities in March to a six-month high of 18.
European And Asian Stocks Are Approaching Overbought Levels
by Team of GaveKal Capital,
Unlike the majority of this six year old bull market, European and Asian stocks are outperforming North American stocks in 2015 (yes even measured in USD). Asian stocks are nearly 12% higher, European stocks are nearly 10% higher and North America stocks are just about 3%. This surge in Asia and European are starting to hit overbought levels judging by the the % of stocks above its 100-day and 200-day moving average.
Longer Term Trends Have Reasserted Itself In May
by Team of GaveKal Capital,
Remember back in April when we noted how equity trends had completely flip-flopped during the first several weeks of the second quarter and we wondered aloud whether this was a trend change or simply a counter-trend rally? Well, so far in May the market is signalling that equity trends observed in April may have just been oversold (and well overdue) bounce.
Smart Money Most Committed to Falling Rates Since The Last Peak in Long Bond Yields
by Team of GaveKal Capital,
Commercial traders (AKA the smart money) has massively flip flopped their positioning since the end of last year with respect to the long bond. In aggregate, commercial traders have moved from a net short position (benefiting when rates rise) of about 50K derivative contracts to a net long position (benefiting when rates fall) of 22K contracts.
Breakdowns in the Health Care Sector
by Team of GaveKal Capital,
Health care stocks have been the leadership sector in the MSCI World, and many (such as biotech) have reached some pretty elevated valuations. Most stocks in the sector have been in multi-year bull markets trends, outperforming the MSCI All Country World Index significantly.
Monetary Movements & Economic Mirage
by Team of GaveKal Capital,
While we entered 2015 with the Federal Reserve talking confidently about lift-off and how many rate increases there would be by the end of the year, the markets didn't seem to buy it. As weak economic data began to surface, the Fed seemed to quietly backtrack first on the date of lift-off and then on the trajectory of the expected hiking cycle.
Can Crude and Copper Keep Rallying with China Slowing?
by Team of GaveKal Capital,
Yesterday saw the monthly slue of Chinese economic stats and the key feature among them was the continued broad-based weakness. The weakness in some of these statistics has been so pronounced (some things like IP and retail sales are at levels near or below those seen at the depths of the financial crisis) that it has us wondering if the price of oil and copper can continue to rally in the face of an increasingly slower China?
US Equity Leadership (Still) Hasn't Changed
by Team of GaveKal Capital,
We mentioned two weeks ago how equity performance has flip-flopped in the second quarter and how asset prices are most likely just in a counter-trend rally. Since then, others have picked up on this theme with a lot of folks calling for higher bond yields in particular (we aren't so sure). If equity markets are in the process of a trend change, one would expect leadership to change as well. As we will show in the charts below, this doesn't look to be happening from a relative performance perspective in the US. All data is in USD, on an equal-weighted basis and as of 5/8/2015 close.
Has Sales Growth Peaked for the Cycle?
by Team of GaveKal Capital,
Sales growth estimates for companies around the world began sliding towards the middle of 2014 as the price of oil began its months-long setback. In the first chart below we show the average and median company's next 12 month sales growth estimate for the MSCI World Index which shows that the level of expected sales growth took a significant step down into the first quarter of 2015.
Amazon and Apple: Two Approaches To Capital Investment
by Team of GaveKal Capital,
With Apple's (ticker: AAPL) announcement that are selling more debt in order to buy back more shares and pay out dividends, a client posed an interesting question to us: Do you think Amazon (ticker: AMZN) will announce something similar soon? Our short answer is most likely no since Amazon tends to reinvest earnings, especially in intangible investments, much more aggressively than Apple does. Let's take a quick look at how Amazon and Apple's investment profiles and payout strategies differ (all data refers to Gavekal's intangible-adjusted financial statements).
An Investigation Into Corporate Investments
by Team of GaveKal Capital,
Profitability and investment are inextricably linked through time. A company's investment decisions today will ultimately drive its profitability level tomorrow. The fruits of a company's investment decisions eventually show up in profitability metrics such as free cash flow margin, operating cash flow margin, and return on equity. Finally. a company's ability to improve these metrics, year-in and year-out, ultimately dictates how a company's stock will perform over the long run.
Dollar Dictated Returns In April - Except This Time The Lowest Correlated Outperformed
by Team of GaveKal Capital,
With April in the rearview mirror, it's a good time to look back on which factors had the strongest relationship to market over the past month. USD correlation had the tightest relationship to the market.
NYSE Margin Debt Charged To New All-Time Highs In March
by Team of GaveKal Capital,
After spending the past year somewhat ranged bound, margin debt increased by just under $11.5 billion in March to a new all-time high of $476 billion, taking out the previous high set in February 2014. The increase in margin debt over the past two months is the largest two-month increase since February 2013.
The Step Down In Long-Term US Growth Rates Breaks Lower
by Team of GaveKal Capital,
From 1974 to 2007, the long-term US growth rate in real GDP generally fell between 3-3.5% on annualized basis (excluding the v-shaped bounce from 1982-1984). We define long-term here by looking at the 10-year annualized percentage change. With the 1Q now in the books, this series just dropped to an all-time low of 1.46%.
The Smart Money Is Getting Long Treasury Bonds Again
by Team of GaveKal Capital,
Long-dated US Treasury bonds have been treading water of late, leaving many rate watchers wondering in what direction the next big move is going to be. One variable in the next move is of course trader positioning. The two charts below show how the "smart money" is betting.
Results 251–300
of 441 found.
