One of the more bullish "fundamental" theses discussed in recent weeks, perhaps as an offset to the documented record collapse in mortgage origination - because without debt creation by commercial banks one can kiss this, or any recovery, goodbye - has been the so-called surge in loans and leases as reported weekly by the Fed in its H.8 statement. Some, such as the chief strategist of retail brokerage Charles Schwab, Liz Ann Sonders, went so far as to note that this is, to her, the "most important chart in the world."
This is indeed notable because as we have shown in the past, for nearly five years, total loans and leases within the US commercial system remained virtually unchanged from a level of about $7.3 trillion, first attained when Lehman filed for bankruptcy. And it doesn't take a PhD in monetary theory to figure out that this lack of credit revival (alongside the historic collapse in shadow bank liabilities) is precisely what the Fed's endless QE programs had been, at least on paper, trying to avert.
Of course, if the data represented by the Fed which supposedly is a sample of call reports distributed to commercial banks, is accurate, then it would be a welcome development to the economy as it would indicate that finally lending conditions are easing, and demand for money is rising at the retail level as opposed to just the institutional (where it is merely used to buy risk assets). In other words, it would slowly allow the elimination of the Fed's artificial conditions and removal of the central-planning umbrella.It would also indicate inflation may finally be returning to the economy (as opposed to just food and energy prices).
And logically, since the Fed's data is sourced by the banks themselves, what the Fed is representing and what the banks report quarterly should be in rough alignment.
Unfortunately it isn't.
Now that the Big 4 commercial banks - JPM, Wells, Bank of America and Citi - have reported their March 31 numbers, we can compile not only what the total amount of outstanding loans was as of the end of Q1, but more importantly, what the change in the quarter was. After all, for Liz Ann Sonders it is this change that is "the most important" data in the world.
What we learn is that the Top 4 banks held some $3.14 trillion in loans and leases at March 31.
So far so good. But what is not so good is that the change of this number in the first quarter is not an increase even remotely comparable to what the Fed makes those who read its H.8 statement believe it is. Quite the opposite.
As the chart below shows, in the first quarter, of the Big 4 banks, only Wells Fargo reported an increase - a tiny $4 billion to be exact - in its loans and leases portfolio. All the other banks... saw a decline in their loans and leases holdings.
We show this on the chart below.
We admit that we have taken a sampling of banks, even if it is the four biggest banks in the US, those which account for 42% of all loans outstanding, and a complete analysis would require complete data from not only regional banks, but also foreign banks operating in the US. However, if the four best capitalized banks, flush with trillions in Fed excess reserves, are indicating on their own that they are nowhere near lending at the level the Fed is telegraphing, and are in fact reducing their loans outstanding, why should the others be more generous in their lending activities?
Which brings us to the question: is the Fed fabricating loan level data?
Or, less dramatically, is the Fed merely once again goalseeking its weekly "data" to account for a world in which deposit expansion is no longer running at the pace seen in pre-taper days. It would be logical that the one "plug" the Fed would adjust to balance off its model is to boost lending activity, which would explain why the Fed is suggesting lending is surging.
Unfortunately, lending is not only not surging, it is contracting, if only among the Big 4 banks in the first quarter.
So whether the Fed has an ulterior motive, or is simply fudging for a lowered Fed reserve creation growth trendline, we believe the people deserve an answer: just what is really going on here?
"While the music is playing, you keep dancing," seems the only possible explanation for the fanatical demand for peripheral European bonds as everyone and their pet rabbit front-runs the ECB (or merely rushes to the 'yieldiest' thing given Draghi's implicit guarantee). At 3.1%, it beggars belief how 'risk' is mispriced in these sovereigns should any capital regulations ever mark sovereign debt as anything but riskless.
Remember what happened the last time Draghi did any bond-buying (the SMP) - we saw bonds sell off into the actual actions of the central bank... so it seems the market continues to trade on the promise (and yet hope it never comes true)...
Well that plan didn't work so well eh? It would appear that during the 2010 period spreads doubled from 100bps to 200bps and once again during the 2011 period, spreads almost doubled from 260bps to over 500bps in Spain.
In one of his more vitriolic speeches, UKIP MEP Nigel Farage lashes out at the terrible deja vu being 'imposed' on supposedly democratic nations across Europe. "The whole European project is based on a falsehood... and it's a dangerous one.. because if you try to impose a new flag, a new anthem, a new president, a new army, a new police force; without first seeking the consent of the people you are creating the very nationalisms and resentment that the project was supposed to snuff out." Farage concludes, he is not against Europe but is "against this Europe," and this year's European elections will mark the turning point.
Many commentators consider what the Fed has done to be akin to providing stimulus, morphine, juice to an ailing economy.
We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.
Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).
In the case of the Fed’s actions we will see a similar “death” of Democratic Capitalism and the subsequent death of the capital markets.
We are, of course, talking in metaphors here: the world will not end, and commerce and business will continue, but the form of capital markets and Capitalism we are experiencing today will cease to exist as the Fed’s policies result in the market and economy eventually collapsing in such a fashion that what follows will bear little resemblance to that which we are experiencing now.
The focus of this “death” will not be stocks, but bonds, particularly sovereign bonds: the asset class against which all monetary policy and investment theory has been based for the last 80+ years.
Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years.
The reason for this is that the Treasury (US sovereign bond) market is the basis of the entire monetary system in the US and the Global financial system in general. Indeed, US Treasuries are the senior most assets on the Primary Dealers’ (world’s largest banks) balance sheets. To understand why this is as well as why the Fed’s policies will ultimately destroy this system, you first need to understand the Primary Dealer system that is the basis for the US banking system at large.
If you’re unfamiliar with the Primary Dealers, these are the 18 banks at the top of the US private banking system. They’re in charge of handling US Treasury Debt auctions and as such they have unprecedented access to US debt both in terms of pricing and monetary control.
The Primary Dealers are:
- Bank of America
- Barclays Capital Inc.
- BNP Paribas Securities Corp.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Goldman, Sachs & Co.
- HSBC Securities (USA) Inc.
- J. P. Morgan Securities Inc.
- Jefferies & Company Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- Nomura Securities International Inc.
- RBC Capital Markets
- RBS Securities Inc.
- UBS Securities LLC.
You’re bound to recognize these names by the mere fact that they are the exact banks that the Fed focused on “saving” thereby removing their “risk of failure” during the Financial Crisis.
These banks are also the largest beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact was meant to benefit those Primary Dealers in Europe, not the US housing market. The same goes for QE 3 and QE 4.
The Primary Dealers are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.
Put another way, Treasuries are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system, thereby controlling the amount of money in circulation in the economy.
When the Financial Crisis hit in 2007-2008, the Fed responded in several ways, but the most important for the point of today’s discussion is the Fed removing the “risk of failure” for the Primary Dealers by spreading these firms’ toxic debts onto the public’s balance sheet and funneling trillions of dollars into them via various lending windows.
In simple terms, the Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels). This again ties in with my “cancer” metaphor, much as cancer spreads by infecting healthy cells.
When the Fed did this it did not save capitalism or the Capital Markets. What it did was allow the “cancer” of excessive leverage, toxic debts, and moral hazard to spread to the very basis of the US, indeed the entire world’s, financial system: the US balance sheet/ Sovereign Bond market.
These actions have already resulted in the US losing its AAA credit rating. But that is just the beginning. Indeed, few if any understand the real risk of what the Fed has done.
The reality is that the Fed has done the following:
1) Set itself up for a collapse: at $4 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $54 billion, the Fed is leveraged at over 50 to 1 (Lehman was at 30 to 1 when it failed).
2) Called the risk profile of US sovereign debt into question: foreign investors, now fully aware that the US’s balance sheet is suspect (the US has lost its AAA credit rating), are dumping Treasuries (see China and Russia). This has resulted in the Fed now being responsible for the purchase of up to 91% of all new long-term (20+ years) US debt issuance.
3) Put the entire Financial System (not just the private banks) at risk.
The Financial System requires trust to operate. Having changed the risk profile of US sovereign debt, the Fed has undermined the very basis of the US banking system (remember Treasuries are the senior most asset against which all banks lend).
Moreover, the Fed has undermined investor confidence in the capital markets as most now perceive the markets to be a “rigged game” in which certain participants, namely the large banks, are favored, while the rest of us (including even smaller banks) are still subject to the basic tenants of Democratic Capitalism: risk of failure.
This has resulted in retail investors fleeing the markets while institutional investors and those forced to participate in the markets for professional reasons now invest based on either the hope of more intervention from the Fed or simply front-running those Fed policies that have already been announced.
Put another way, the financial system and capital markets are no longer a healthy, thriving system of Democratic Capitalism in which a multitude of participants pursue different strategies. Instead they are an environment fraught with risk in which there is essentially “one trade,” and that trade is based on cancerous policies and beliefs that undermine the very basis of Democratic Capitalism, which in the end, is the foundation of the capital markets.
In simple terms, by damaging trust and permitting Wall Street to dump its toxic debts on the public’s balance sheet, the Fed has taken the Financial System from a status of extremely unhealthy to terminal.
The end result will be a Crisis that makes 2008 look like a joke. It will be a Crisis in which the US Treasury market and sovereign bonds in general implode, taking down much of the US banking system with it (remember, Treasuries are the senior most assets on US bank balance sheets).
We cannot say when this will happen. But it will happen. It might be next week, next month, or several years from now. But we’ve crossed the point of no return. The Treasury market is almost entirely dependent on the Fed to continue to function. That alone should make it clear that we are heading for a period of systemic risk that is far greater than anything we’ve seen in 80+ years (including 2008).
The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine.
That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.
This concludes this article. For a FREE investment report outlining how to protect your portfolio from a market collapse, swing by www.gainspainscapital.com.
Phoenix Capital Research
One glance at the 'ticks' surrounding this morning's so-called "fat finger" in EURCHF and it is clear that this was anything but a human trader falling asleep on his keyboard or accidently selling 100 yards and not 100 million CHF... Welcome to the 'unrigged' markets... (in FX also)... where stop-hunting algos rip to a 50-day moving-average in milliseconds to remove all stops before fading back ingloriously to unchanged. As Nanex suggests, this started in the CHF futures market...
The ramp took EURCHF up to its 50DMA before fading back...
And appears from the adjusting bids and offers to be anything but a fat finger error...
and here is Nanex with the close up in the CHF futures market...
On April 16, 2014 at 10:35:24, about 1800 Swiss Franc Futures contract suddenly dropped prices in 1 second. Prices mostly recovered over the following 12 seconds.
1. June 2014 Swiss Franc (6S) Futures on April 16, 2014
2. Zooming in
Fat finger - or algos gone wild?
Burberry continues to receive the benefit of a growing luxury class in the emerging markets.
Their second half 2013 earnings announcement today shows that fears related to a China (FXI, quote) slowdown are missed placed.
Burberry today announced sales growth of +19% with Asian sales also a +19% as and China band Korea were better than expected.
Burberry opened a flagship location in Shanghai earlier this month with a commitment that they have also exhibited in other major developing cities.
Despite the perception of a slower Chinese consumer has China macro slows the results from major multinational luxury brands are mostly very strong.
Burberry and Tiffany have been in a 12% trading range over previous three months while waiting for signals on their global growth both shares are bouncing today and should trade to February highs with March lows as your stop
by Craig McFadzean and Christopher Crowe, Turn8 Partners
The last couple of weeks have been disconcerting as the rally of the last six months seems to have hit a wall. The market sold off two weekends ago, had a reprieve for a day last week, then finished off with a nasty slide that continued into this week with huge intraday swings. We believe there are two primary reasons for the selloff: Market fatigue & Style Rotation. As a result, on Monday, the 7th, we started to raise cash, rotating away from some of our momentum holdings and placing Stop Loss orders as a precautionary measure should the correction get ugly.
Market Fatigue – “how much higher can this market go?”
We’ve been in this situation a couple of times over the last year, but the market has been resilient and shrugged it off. It may not be as easy this time due to several headwinds.
First headwind – The current bull market reached the five year mark on March 9th. This is meaningful because the average bull cycle since the Great Depression has been 3.8 years with only a handful lasting more than five years. More interestingly, those that lasted longer than five years typically saw only a few mini corrections of 5% plus over the first five years followed by frequent 5% pullbacks as the cycle approached the market peak. Sound Familiar? This seems to be the pattern so far in 2014.
Second headwind – The Federal Reserve began reducing their Quantitative Easing programs last Fall and have continued reducing their liquidity program this Spring. The question many investors wonder is how much the stimulus drove the market the last five years versus economic recovery?
Third headwind – Price. Looking at common ratios such as price-to-earnings (P/E) shows the market at a price level that no longer makes it as cheap as it was last year and many measures actually show the market as overvalued (see Chart 1 below).
Chart 1 = Shiller P/E is considerably above the mean
Fourth headwind – The verdict is still out because we are in the middle of first quarter earnings season, but we have seen a greater number of companies miss on their numbers (see Chart 2 below).
Chart 2 = The nuber of companies beating estimates is decreasing
Fifth headwind – We are approaching the “sell in May and go away” time of year, which statistically contains the worst performing months on average over history particulary in mid term election years (see Chart 3 below).
Chart 3 = Average monthly S&P performance shows tough summers
Style Rotation – Momentum versus Value
We have seen a violent shift in the market from pricey, momentum, growth stocks to value stocks. We’ve seen this within sectors, within markets, and across geographies. Examples of the shift from momentum are moving from the high flying internet stocks like Amazon and Netflix to large cap tech such as IBM and Microsoft, or from biotech to utility and REITs, and from the US to Emerging Markets.
Chart 4 = Risk appetite rolling over as bearishness increases
Tackling this market – Turn8′s Approach
We believe market risk is elevated right now. There is an increased potential of a prolonged pullback and limited upside potential for the next month or two. We do still believe the second half of the year will be ok and the broad recovery will continue, however patience is required right now and we look to take advantage of the pullbacks to rotate into holdings we have had our eye on.
Swing Model (short term model)
What we’ve done?
The Swing Model makes up 10% to 15% of everyone’s account and is our first line of defense. We had this model at 100% “Risk On” until end of January using the S&P500 ETF and then split the exposure in the model to include 50% short-term government bonds. Last Monday, April 7th, we took all risk off the table for the time being.
What we are monitoring?
We are watching the earnings releases and other fundamental developments, but more importantly, the technical signals such as MACD, Relative Strength Indicators, Buying Volume, Option Trading as well as others. It’s the technical signals that will be key to determining when risk calms down and we can shift back to more Risk On.
Core Equity Model (medium term model)
What we’ve done?
This is a medium term model and therefore we are less concerned with the fits and starts of the market that the nimbleness of our Swing Model is designed for. The key over the medium term is the overall macro sentiment, but the Core Equity does also act as the second line of defense.
- This key shift we made at the start of last week was switching our largest position, the broad S&P500 iShare (ticker = IVV), into a pure value ETF covering the S&P500 called Rydex Guggenheim Pure Value (ticker = RPV). With the challenges facing growth and momentum stocks we wanted to reduce exposure to these types of holdings by focusing on value stocks that currently offer less downside and likely more upside because of a more realistic price per share.
- We also sold our small cap position which presents more volatility. The proceeds have been kept in cash for the time being.
- Lastly, for now, we placed stop loss orders on all the sector specific exposures to minimize losses, but also hedge our bets and stay invested should the market bounce and the correction ends up being a mini correction and not a full blown slide. We have the stop loss orders placed at key support prices.
What we are monitoring?
If we see earnings deteriorate, more dangerous geopolitical flare up, or simply key support levels of the market break, then we will move a little more into cash. If support holds then we look to continue to further rotate into investments representing better value and away from momentum. A prime example of this would be further expansion of our Emerging Market exposure, which traditionally are considered riskier, but not right now. Emerging markets trade at much lower price-to-earnings (P/E) than Western markets because they have been rather flat the last couple of years, which means they may have less downside and more upside. We have also started to see the money flow this way as the month of March saw $7.9 billion net outflow of US ETFs while the emerging market iShare (EEM) had net inflows of $1.4 billion. The international markets we are closely monitoring are Sweden, Indonesia, Vietnam and India.
Global Alpha Model (long term model)
What we’ve done?
This is our 20 to 25 stock model where we try and own a good group of companies given the market trends and theses. We are generally comfortable being fully invested in this model, but have started the process of tweaking exposures for the value shift we’re starting to see. We sold 7 of our 25 stock positions last week. These were either higher momentum holdings like Gilead, or holdings we currently have less conviction in like Costco, or holdings that recently ran up substantially like Caterpillar. We are keeping the proceeds in cash for the time being.
What we are monitoring?
This is our long term model and therefore we don’t want to be out of the market too long although we have little problem being patient. We have our eyes on several holdings within our hot watch list and look to invest in a few holdings over the coming weeks.
Please don’t hesitate to reach out should you have any questions or concerns.
ABOUT TURN8 PARTNERS
Turn8 Partners is a discretionary investment management firm providing comprehensive Wealth Management Advice and Investment Services to exclusive clientele in Canada and the United States. Combining forward-thinking solutions, based on a professional foundation, we implement and manage customized wealth management strategies to ensure the realization of our client’s goals.
The information above is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the information is prohibited. The contents have been prepared to provide you with general information only and do not constitute any investment recommendation. In preparing the information, we have not taken into account your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed. Any examples shown are purely hypothetical and have been included for demonstrational purposes only. Past investment performance is not indicative of future investment performance and the value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. Any reference to returns linked to currencies may increase or decrease as a result of currency fluctuations. Any references to tax treatments depend on the circumstances of the individual client and may be subject to change in the future. Nothing provided should be constituted as an offer or invitation to anyone in any jurisdiction where such offer or invitation is not lawful, or in which the person making such offer or invitation is not qualified to do so, nor has it been prepared in connection with any such offer or invitation. We reserve the right at any time and without notice to change, amend, or cease publication of the information. For further information please contact us.
Copyright © Turn8 Partners
(888) 203-1112, Code: 7683601
(Replay available through April 2014)
During the week of March 24, 2014, there were 23 Capital Group investment professionals in Toronto doing research. This investment cluster is affectionately called the “Yield DOGS” (Dividends Oughta Grow).
Capital International – U.S. Equity portfolio managers Chris Buchbinder and Barry Crosthwaite were part of that group of investment professionals focused on finding growing dividends. Chris and Barry joined advisors on a conference call to share their views about the U.S. market. Highlights from the call are below.Conference Call Highlights The run-up in U.S. stocks
“U.S. stocks have had an amazing 40% run over the last two years. It wouldn’t surprise me to see a correction of 10% or more. I carry a little more cash than I normally would, but I still feel good about the market over the medium term. That’s based on valuations, which are not extreme given the slow economic cycle and the fact that funds are flowing back into equities.
“As the U.S. economy starts to normalize, we’re getting away from this environment where macro is so important to driving results. Stock picking is becoming more important.”
A framework for evaluating the health of equity markets
“When I look at any market around the world, I focus on fundamentals, valuations and flows. All three look reasonable for the U.S. market:
“U.S. economic growth has been very slow since 2008, which is unusual after an economic recession. Typically, since World War II, you’d see post-recession growth in the 4-8% range. The reason for this slow growth has been the amount of leverage that was built up in the U.S. economy between 1980 and 2007. Now, the big deleveraging headwind has stopped, and banks are willing to loan. Consumers are starting to take on more debt; businesses are starting to borrow. There are no excesses built up in the U.S. economy, and there’s no reason for the Fed to start raising rates and halt a recovery.”2. Valuations are not extreme
“The U.S. equity market is at about 16 times earnings, not far from average. The sweet spot for P/E ratios is when the long bond is between 3.5% and 5.5%. You go above or below that, and P/Es start to compress. You usually get a P/E in that period at about 15 to 20 times, or call it 17Vz times. So if we have a gradual economic expansion and a gradual increase in rates, it would not surprise me to see P/Es actually go up modestly.
“Small cap stock P/Es are over 20, which is high relative to history, and mid cap stocks as well. But large cap U.S. stocks – which is primarily what the U.S. Equity Fund is looking at — have pretty reasonable valuations, so I think there’s value there.”]
“Flows into U.S. equities between 1995 and 2000 were $1.25 trillion. Fast forward to 2007 to 2012, and $1.25 trillion flowed into fixed income, while almost $500 billion flowed out of equities. 2013 was the first year we had positive flows into equities in a number of years, and it’s continuing this year.”The U.S. Gulf Coast
“The U.S. is going from being an importer of refined products – gasoline, diesel, natural gas, fertilizers, some chemicals – to an exporter of those products over the next decade. In the next five years or so, the U.S. will spend $100 to $150 billion building chemical plants on the U.S. Gulf Coast I’m investing in engineering construction companies, in regional banks that are going to benefit from real estate values, the job market and the income that’s going to be created in that region.”The transportation fuel chain
“The five-fold increase in oil prices has really shocked the global transportation chain. It takes a long time to move to substitute fuels or to higher efficiency vehicles. In autos, the internal combustion engine is being redesigned to increase mileage. I’m investing in companies that supply high-tech components for those engines. Trucks, trains, marine transport engines that run on diesel fuel today will likely convert to natural gas. Right here in the Great Lakes, Shell Oil is signing contracts to turn ships into LNG vessels.
“This change even impacts airplanes. For example, the Boeing 787 Dreamliner is 25% more fuel efficient than existing fleet and airlines are buying them for their fuel efficiency. I’m investing in the supply chain of component companies that may benefit from changes like these.”
How rising rates might affect dividend stocks
“Companies with growing dividends- not just high yields that do not grow– can actually do well or better than the market, even in periods where rates are rising. If you were contemplating a period of rising rates and inflation, you’d want to focus on those companies that have substantial pricing power, such as consumer staples companies that can pass inflation through to their consumers. That plays into my investment framework right now.”
Copyright © Capital Group
Having been stopped out of his "long punt" in copper futures (which are, we remind readers, levered via margin and not a simple cash percentage loss of capital), world-renowned (for something) Dennis Gartman has issued his latest missive - ultimate contrarian call - advice... "we are sellers this morning of copper and buyers of crude oil, one relative to the other, with the problems in China weighing upon the former while crude has held impressively as other commodity prices have fallen." Crude oil longs beware... prepare to be Gartman'd.
Via Dennis Gartman,
We were stopped out of our copper position yesterday, losing 1.2% on the position, which when compared to the 10-15% movements we’ve seen recently in NFLX or TSLA or others such as that seems rather inconsequential but is important nonetheless. Those not out should be out... now.
[deflecting the futures-contract - and thus 10-20x levered via margin - 1.2% loss in copper with a 10-15% gain in unlevered risk positions in NFLX and TSLA (a magical catch we suppose) seems a little disingenous to us - but we digress]
NEW RECOMMENDATION: Indeed, we are sellers this morning of copper and buyers of crude oil, one relative to the other, with the problems in China weighing upon the former while crude has held impressively as other commodity prices have fallen. As we write, June WTI crude is trading 103.79 and July copper is trading $3.0010. We’ll have stops in tomorrow’s TGL, but we’d not wish to risk more than 2% on this rather unusual spread position.
Of course, there is no discussion of beta differentials... relative tick sizes, or capital allocations to this 2-legged strategy that a real-world trader would have to undertake - but then at $29.99 you get what you pay for...
Oil spec longs at record highs...
by James Picerno, The Capital Spectator
The US stock market is nothing if not resilient. There’s no shortage of risks lurking around the world, but the American equity market shows minimal signs of relinquishing its role as the leading performer among the major asset classes. Sure, the bears mount a challenge every so often (including last week’s selloff), but any setbacks have been temporary affairs… so far. Indeed, the bulls took control again yesterday and stocks mounted a modest recovery.
The numbers, as usual, tell the story. Using our standard list of ETF proxies, via a 250-trading-day window (the rough equivalent of 1-year returns), a broad measure of US stocks (VTI) is higher by more than 21%. Meanwhile, government bonds in emerging markets (EMLC) continue to sit at the bottom of the performance ledger for the trailing 250-day period.
For another view, here’s how the numbers stack up with a graphical summary of the relative performance histories for each of the major asset classes for the past 250 trading days by way of the ETF proxies. The chart below shows the performance records through April 14, 2014, with all the ETFs rebased to 100 based on a start date of April 17, 2013:
Now let’s consider an ETF-based version of a passive, market-value-weighted mix of all the major asset classes–the Global Market Index Fund, or GMI.F, which is comprised of all the ETFs in the table above. Here’s how GMI.F stacks up for the past 250 trading days through April 14, 2014. This investable strategy is higher by 11.2% across that span of time, or roughly midway between the returns for US stocks (VTI) and US bonds (BND) over the same period.
Comparing the overall dispersion of returns for the major asset classes via ETFs suggests that the rebalancing opportunity is relatively low for GMI.F overall vs. recent history. Analyzing the components of GMI.F with a rolling median absolute deviation of one-year returns for all the funds–the GMI.F Rebalancing Opportunity Index, as it’s labeled on these pages–suggests that there’s minimal potential generally for adding value by reweighting this portfolio in comparison with the past 12 months. Keep in mind that the opportunity for productive rebalancing will vary depending on the choice of holdings and historical time window. Meantime, don’t overlook the possibility that any given pair of ETFs may present a substantially greater or lesser degree of rebalancing opportunity vs. analyzing GMI.F’s components collectively.
Finally, let’s compare the rolling 1-year returns (250-trading-day performance) for the ETFs in GMI.F via boxplots for a revealing comparison of price momentum across the board. The gray boxes in the chart below reflect the middle range of historical 250-day returns for each ETF—the 25th to 75th return percentiles. The red dots show the current return (as of April 14) vs. the 250-day return from 30 trading days earlier (blue dots, which may be hiding behind the red dots in some cases). Note that most of the asset classes are posting relatively high or comparable 250-day trailing returns vs. the numbers from 30 days earlier.
Regular readers will recall that I began my Wall Street career on the ginormous fixed income trading floor of what was then Merrill Lynch in downtown Manhattan. Of the hundreds of people who called the seventh floor of the World Financial Center home during the workday then, astonishingly few were women and even fewer were traders – those who committed hundreds of millions of dollars of Merrill’s capital every single day. Even so, and despite rampant and often aggressive sexism, the women were always amongst the very best of the breed – smart, shrewd, savvy and discerning.
Part of that was to be expected. In such a male dominated, testosterone fueled world, only the very best women would be allowed access to that boy’s club in the first place. And only the very best of them would be allowed to stay. Still, the women traders I knew seemed more calculating and less prone to foolish errors than many of their male counterparts. They were also quicker to recognize and fix the errors they did make. And the research data backs up my anecdotal experience.
Which, in a roundabout way, brings me to my point. Last week I participated in an excellent conference entitled Diversifying Income and Innovations in Asset Allocation put on by S&P Dow Jones Indices in Beverly Hills. I spoke about retirement income strategies. Among the other presenters was Deborah Frame of Cougar Global Investments in Toronto. Her presentation focused on asset allocation and it was very enlightening.
During the cocktail hour, she and I were discussing the research literature that looks at the differences in men and women when it comes to investing. She took exception to my having characterized one of those differences, consistent with the literature, as women being more “risk averse” than men. She made the point that women are more “risk aware” – more cognizant of the risks they face and smarter about dealing with them (in general, of course). In her view, that’s why, for example, women so routinely asked for directions (in the days when phones didn’t come with GPS) when they weren’t sure where they were, and men so routinely refused to do so.
And, by golly, she was right. Since women generally are better investors, they should be portrayed positively (more “risk aware”) rather than negatively (more “risk averse”). Moreover, since men (again, in general) are more risk seeking and more likely to make foolish investment decisions, they should not be the standard to which women are compared. It should be the other way around. It was sexist of me to look at things otherwise.
Thanks, Deborah. Lesson learned (I hope).
Not much to add here that we haven't already said before about the state of demand for housing by the ordinary American.
First it was Wells Fargo:
Then it was Citigroup:
And now, it is Bank of America.
Remember when bank success (and profitability) depended on them lending such trivial things as mortgages so they could arb the Net Interest Margin (which incidentally also tumbled to a record low for Bank of America)? Good times...
In other news, the "housing recovery" is now complete.
by Mark Perry, American Enterprise Institute
The Paris-based World Federation of Exchanges (WFE), an association of 60 publicly regulated stock market exchanges around the world, recently released updated data on its monthly measure of the total market capitalization of the world’s major equity markets through the end of March. Here are some highlights:
1. As of the end of March, the total value of equities in those 60 major stock markets reached $62.4 trillion and set several milestones. First, global equity values exceeded $62 trillion for the first time and established a new all-time monthly record in March (see chart above). Second, in each of the last five months except January, the global stock market capitalization has exceeded the previous cyclical record monthly high of $60.2 trillion set in October 2007 (see chart above). That was several months before the global economic slowdown and financial crisis started, and caused global equity values to plummet by more than 54% (and by almost $33 trillion), from $60.2 trillion at the end of 2007 to only $27.7 trillion by early 2009 (see chart). The record high $62.4 trillion world stock value in March was $2.2 trillion (and 3.7%) above the previous pre-recession peak.
2. Over the last year, world stock markets gained $7.3 trillion in value, rising from $55.15 trillion in March 2013 to $62.43 trillion last month. The 13% annual increase in world equity value over the last year was led by a strong 21% gain in the Europe-Africa-Middle East region, followed by a strong increase of 17.2% in the Americas, and a weak gain of only 1.4% in the Asia-Pacific region.
3. By individual country, the largest year-over-year increases in stock market values in March were recorded in Greece (117%), UAE (58%) Ireland (58%) and Oman (36.4%). In the US, the NASDAQ capitalization increased by 31.1% and the NYSE by 20.3%. The biggest losses in equity value over the last year (measured in US dollars) were posted in Turkey (-30.6%), Peru (-26.7%) and Chile (-23.3%). The number of countries with positive increases in equity valuation over the last year (40) outnumbered countries with declines in stock market value (20) by two-to-one.
MP: Compared to the recessionary low of $27.7 trillion in February 2009, the total world stock market capitalization has more than doubled (a 125% increase) in five years to the current record level of $62.4 trillion in March, more than recapturing all of the global equity value that was lost due to the severe global recession and the various financial, mortgage and housing crises in 2008 and 2009. The global stock market rally over the last five years to a fresh record high in March has added back almost $35 trillion to world equity values since 2009, and demonstrates the incredible resiliency of economies and financial markets to recover and prosper, even following the worst financial crisis and global economic slowdown in at least a generation.
Copyright © American Enterprise Institute
The stretch for yield looks set to continue now that fears over an imminent Federal Reserve (Fed) rate hike have diminished, though investors may want to think twice before overreaching for yield.
Last week, minutes from the Federal Reserve’s Open Market Committee’s (FOMC) March meeting confirmed that the FOMC did not intend to convey a more hawkish posture following its March meeting and the U.S. central bank is in no rush to raise interest rates. Instead, concerns about persistently low inflation suggest that the Fed intends to keep rates “low for long.”
Stubbornly low yields have made income tough to come by in recent years, and they have sent investors searching for yield and income wherever they can find it.
As I write in my new weekly commentary, the prospect of a prolonged period of low rates is encouraging investors to continue to stretch for yield by entering ever more speculative fixed income asset classes in which the risks may not be worth the higher yields, such as Greek bonds.
Greece’s recent bond sale, for instance, was 8x oversubscribed, meaning the amount of purchase requests exceeded the amount of bonds available. Foreign investors bought more than 90% of the issue, which yielded less than 5%, the lowest yield since before the advent of the European crisis.
In another sign of investor hunger for yield, leveraged loan sales in March hit more than $11 billion. While this isn’t particularly high by the standards of the bond market, it was the strongest showing since May of 2007.
Investors in need of yield should consider the risks, not just the potential return. While there are no absolute bargains in fixed income, there are at least a few segments of the bond market that offer relative value.
I continue to like U.S. high yield and tax-exempt bonds. These two asset classes offer a reasonable yield, without undue volatility. In addition, year-to-date, both have outperformed a broader fixed income benchmark, with municipals being one of the best performers so far in 2014. You can read more about why I like these fixed income sectors in my latest Investment Directions monthly market commentary.
Sources: Bloomberg, BlackRock Research
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.
Copyright © Blackrock Investments
Mayor Bill de Blasio is the first New York City mayor to release his tax returns in 12 years, according to the WSJ. de Blasio earned $165,000 as public advocate last year and brought in an additional $52,000 in rent on a second home he owns in Park Slope, according to his 2013 tax returns. Mr. de Blasio’s effective tax rate was 8.3%.
As WSJ reports, Mr. de Blasio’s predecessor, Michael Bloomberg, a billionaire who served as mayor from 2002 through 2013, released highly redacted copies of his return that gave scant information about his net worth.
In 2001, during Mr. Bloomberg’s first campaign for mayor, he lost his temper on the steps of City Hall when pressed by a reporter about why he was refusing to release his returns when his opponents had released their IRS filings.
“That’s fine,” Mr. Bloomberg snapped. “They don’t make anything.”
Which means, Mr. de Blasio is the first city mayor in 12 years to release a full copy of his tax returns.
New York City Mayor Bill de Blasio and first lady Chirlane McCray reported $165,047 in total income last year, according to a copy of their joint tax return released on Tuesday.
Mr. de Blasio’s effective tax rate was 8.3%.
The federal and state filings, released by his aides on Tuesday afternoon, show de Blasio and his wife, Chirlane McCray, reported receiving $52,000 in rent last year on the property where his mother lived before her death.
Despite their earnings, they reported taking a $6,493 loss on the home, because they paid $28,758 in mortgage and said the home depreciated by $21,547, according to tax code.
According to the return, the city’s first couple reported $5,597 in gifts to charity, roughly 3% of their total income.
We will cover Asian including the Nikkei which were all better in fact Nikkei had the best night in 2014 we are selling strength up to the 15,000 level. In the call we will get into why I think there is good upside, we saw a lot buyers step in at the 200mda on the reversal and emerging markets should just as well.
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Last month's industrial production beat was revised up dramatically to its biggest beat since 1998 - courtesy of the annual revision of the data series as noted below - which left this month showing fading growth. Perhaps more disappointingly was the 4th miss of the last 5 months for manufacturiung production. Capacity Utlization rose to an impressive 79.2% as "slack" in the un-job-producing economy is rapidly disappearing. This was also the highest capicty utilization print (once again courtesy of the annual data revision) since June 2008.
Manufacturing missed 4th of last 5 months... and dropped
From the Fed:
Industrial production increased 0.7 percent in March after having advanced 1.2 percent in February. The rise in February was higher than previously reported primarily because of stronger gains for durable goods manufacturing and for mining. For the first quarter as a whole, industrial production moved up at an annual rate of 4.4 percent, just slightly slower than in the fourth quarter of 2013. In March, the output of manufacturing rose 0.5 percent, the output of utilities increased 1.0 percent, and the output of mines gained 1.5 percent. At 103.2 percent of its 2007 average, total industrial production in March was 3.8 percent above its level of a year earlier. Capacity utilization for total industry increased in March to 79.2 percent, a rate that is 0.9 percentage point below its long-run (1972–2013) average but 1.2 percentage points higher than a year prior
And by group:
In March, manufacturing production recorded an increase of 0.5 percent; factory output rose 1.4 percent in February, 0.5 percentage point faster than previously reported. For the first quarter, the index for manufacturing increased at an annual rate of 1.7 percent, with similarly sized gains for durables and nondurables. The factory operating rate moved up 0.2 percentage point in March to 76.7 percent, a rate 2.0 percentage points below its long-run average.
* * *
In March, mining output climbed 1.5 percent, its fifth consecutive monthly increase; over the past year, the index has risen 7.9 percent. The output of utilities rose 1.0 percent; unseasonably cold temperatures since the start of the year led to a jump in the index of 17.9 percent at an annual rate for the first quarter. The utilization rate for mining, 89.1 percent, was nearly 2 percentage points above its long-run average, while the operating rate for utilities, 85.0 percent, was about 1 percentage point below its long-run average.
Capacity utilization rates in March for industries grouped by stage of process were as follows: At the crude stage, utilization increased 0.6 percentage point to 87.0 percent, a rate 0.7 percentage point above its long-run average; at the primary and semifinished stages, utilization moved up 0.5 percentage point to 78.1 percent, a rate 2.7 percentage points below its long-run average; at the finished stage, utilization rose 0.1 percentage point to 76.7 percent, a rate 0.4 percentage point below its long-run average
Finally, as noted earlier, on March 28 the Fed concluded its annual IP and Cap Utilization data revision, which incidentally led to the surge in the February data (but... but... harsh weather). Those curious can find the full breakdown at this link, but the main visual breakdown of the pre- and post-revision data is below.
In today’s Emerging Money’s Call Audio – Emerging markets last night rallied in Asia on better than expected GDP print.
We will cover Asian including the Nikkei which were all better in fact Nikkei had the best night in 2014 we are selling strength up to the 15,000 level. In the call we will get into why I think there is good upside, we saw a lot buyers step in at the 200mda on the reversal and emerging markets should just as well.
Cassandras warn that the foreign appetite for US debt is satiated and wonder who is going to buy US Treasuries when the Federal Reserve stops. Not only are US officials not concerned about this, but the Department of Treasury continues its campaign to discourage foreign central banks from buying so many Treasuries.
Foreign official purchases of Treasuries are usually the result of intervention in the foreign exchange market. The rules of engagement as they have evolved from the G7, the G20 and IMF over past decade are to let market forces drive foreign exchange prices. Of course, the orthodoxy prior to this, and the rules under which the high income economies boomed, was the exact opposite.
In any event, the US Congress requires US Treasury Department to make semi-annual reports on the international economic policies and exchange rate practices of the major US trading partners. It did so yesterday, April 15. As part of the report, it must look at whether these trading partners are manipulating their currencies to prevent an adjustment on the balance of payments or to seek an unfair trade advantage. The fact that the US has not cited any country for two decades has, in some sense, makes the threshold more significant.
On the other hand, the currency policy of many countries is more nuanced. It is not just intervention, but a certain purpose of the intervention that is required to conclude manipulation. Let's concede for the sake of the argument that China did not just tolerate, but actually played an active role in the yuan's recent weakness. It may not meet the threshold of manipulation of the law if it did so to wash out what it regarded as speculative positioning.
The Treasury report warns that it would "raise particularly serious concerns" if the recent yuan weakness was an indication that Chinese officials would resist further currency appreciation. However, the report still assumes the if left to market forces, the yuan would strengthen. This assumption is not as obvious as it once was, especially given the sharp decline in its external surplus and the compounded effect of persistent inflation than the US, Europe and Japan.
Though stopping shy of labeling a country a manipulator, which would require bilateral negotiations, the US Treasury still uses the report to express its desires. It calls on China to let markets play a bigger role and take advantage of the opportunity created by widening the band (to 2% from 1% from daily fix). The US does not force China to intervene and buy US Treasuries and it wishes it did not.
The February TIC data show that China's Treasury holdings fell by $2.7 bln, bringing the three month decline to almost $34 bln. Still at $1.27 trillion, China's Treasury holdings remain the largest in the world. Japan comes in a close second with $1.21 trillion. Japan's holdings increased by $9 bln and over the past three months; they have risen by about $25 bln. Japan has not intervened in the foreign exchange market for a few years (2011), but over the past year, its Treasury holdings have risen by about $100 bln. The US Treasury urges Japan to focus on structural reforms that boost the growth potential and not rely on monetary to offset the fiscal adjustment.
Over the past three months, South Korea's Treasury holdings have increased by about $10 bln. The US Treasury report notes that South Korea's current account surplus in 2013 was 6.1% of GDP, the largest in 14 years. It cautions the country that intervention (resulting in US Treasury purchases) should only take place under "exceptional circumstances of disorderly markets" and increase the transparency of the interventions.
Germany did not go unscathed. It says Germany's reluctance to boost domestic demand retards the adjustment process. The US Treasury notes that German domestic demand has only grown faster than GDP in three times in the past ten years. Germany's current account surplus remains well above 7% of GDP. The adjustment that has taken place is largely in the periphery through higher savings, which compresses demand.
The G20 have agreed on working toward readdressing global imbalances. The Treasury's report argues that there are two reasons why a larger adjustment has not taken place. First, surplus countries have not increased domestic demand sufficient. Second, more progress is needed to more fully embrace market-determined exchange rates, refrain from currency intervention and stop excessive reserve accumulation.
Over the course of February, non-residents Treasury holdings rose by about $45 bln. Only about $1 bln was due to central banks. Their note and bond purchases appeared to have been large funded by shifting funds from the bill sector. Of the private sector increase, the lion's share (almost $31 bln) can be accounted for by Belgium. The US Treasury data suggests that Belgium owns Treasuries equivalent to roughly 3/4 of its GDP.
No doubt this overstates the case. Instead, Belgium's holdings, third overall behind China and Japan, are most likely a function of the role of Brussels as a financial center. The bank-owned clearer and custodian, Euroclear has around 22 trillion euro of assets and reports a large increase in Treasury holdings in recent months. Treasuries are ubiquitous collateral.
In January and February, the Federal Reserve reduced the amount of Treasuries it bought by $10 bln (and it reduced its purchases of Agencies by $10 bln as well). Foreign investors more than covered the difference, buying about $92 bln worth over the same period. Of this, foreign central banks accounted for about $15 bln.
US officials have long argued that the self-insurance strategy of building massive reserves is inefficient, expensive, and contributes to financial instability. Remember the Greenspan "conundrum": why US long-term rates were low even though the Fed had been raising short-term interest rates (circa 2004-2005). Bernanke responded by attributing it to Asia, which coming out of the 1997-98 financial crisis, began running significant current account surpluses and building reserve war chests. US officials have been consistent in recent years arguing that the self-insurance strategy is an obstacle to the agreed upon goal of reducing imbalances. They want private investors to buy US assets, including Treasuries, but are not so keen on foreign official purchases.
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