I like my tea and my markets much stronger…

February 22, 2016

I like my tea and my markets much stronger…

Although last week was a shortened week due to the holiday, its strength left many of us scratching our heads wondering where was the big buying? Clearly the short covering of the most volatile names that have underperformed in the past year (energy, materials, and low quality) was noticeable, but where were the new buyers with high conviction? This should show up in elevated volume across names and sectors, but I only found small examples of it.

Energy continued to dominate the headlines and mark every move in Equities. While the Saudis and Russians agreed to fix production at January levels if other OPEC nations join in, will this be enough to solve the current overproduction problem? If the fix was in, we didn’t see it in the credit markets as Energy, High Yield and High Grade spreads remained elevated.

So let’s watch the markets bounce and challenge overhead resistance levels at the prior peaks and falling moving averages. Meanwhile we will look for signs of new sector leadership, buying volumes and falling volatility as this pot of tea strengthens.

Plenty of Volume in the market pullback for the last two months, but where were last week’s BUY tickets?

Why the Oil analyst is currently the highest paid person on the trading desk. Another week of Oil leading stocks…

Speaking of volatility, two-thirds of days are now 1% moves…


(@jsblokland)

Rising volatility and declining prices are not helping Mutual Fund flows…

Bought High, Selling Low?

Sovereign wealth funds may withdraw $404.3 billion from global stock markets this year if oil prices remain in the $30 to $40 per barrel range, according to the Sovereign Wealth Fund Institute.

Wealth funds, which have amassed about $7 trillion in assets, exited about $213.4 billion of listed equities last year as the slump in crude oil put pressure on domestic finances, the Las Vegas-based SWFI said in an e-mailed report sent Monday…

Sovereign funds from Qatar to the United Arab Emirates and Russia, which amassed about $7 trillion of assets as oil soared higher than $100 a barrel, are now liquidating investments after a more than 70 percent slump in crude since 2014. During the boom, oil countries led a surge in investments in the U.S. and Europe, buying stakes in iconic companies such as Barclays Plc as well as trophy assets including Manhattan hotels, European soccer clubs and London luxury homes.

(Bloomberg)

 

As oil prices jumped higher on the Saudi/Russia talks, several Oil companies grabbed the lifeline…

U.S. oil producers reeling from an 18-month price rout have cautiously begun hedging future production this week, fearing this may be their best chance yet to lock in a $45 a barrel lifeline for 2017 and beyond…

The re-emergence of hedging interest, which traders said was still limited in scope for now and mainly in the form of inquiries rather than execution, came as a surprise to some, surfacing below the $50 psychological threshold that some traders had thought would be needed to coax back producers.

The activity likely reflects both the growing investor and lender pressure to safeguard heavy debt requirements down the road, as well as the fact that drilling costs continue to decline, allowing companies to break even at lower prices.

“The $45 is break-even for a lot of producers. It’s not just about making a profit, it’s about staying alive,” one trader said.

(Rueters)

 

Other companies hit the market with large secondary offerings…

Oil prices remain at depressed levels, but investors in new shares issued by energy companies are acting like they have detected a bottom.

North American oil-and-gas producers have sold more than $5 billion of new shares so far this year, including three deals on Wednesday. They have found a receptive market despite last year’s poor stock performance for energy company stock offerings.

Demand for these follow-on offerings, in which already-listed companies sell new shares, has been strong. Devon Energy Corp., one of the largest U.S. energy producers, boosted the size of its Wednesday evening offering by 25%, to more than $1.2 billion, to meet investor interest.

Investors have been lining up to grab shares of beaten-down exploration-and-production companies, betting that oil prices won’t go much lower and that these shares are coming cheap.

(WSJ)

 

Devon Energy told the market on their earnings call that they were fine with their capital. Did they have a nightmare in their sleep?

“The decision to issue equity was taken very seriously and with much thought and discussion among the management team and Devon board,” the company said in a statement to Reuters. “Devon believes this is a prudent additional measure to protect against the possibility of lower commodity prices for a prolonged period.”

(Reuters)

 

Hopefully the Energy secondaries will work out better than the long list of last year’s IPOs…

Of the almost 175 companies that made their U.S. stock-market debuts in 2015, more than 70% are now trading below their IPO prices. On average their stocks are down about 20%.

Nine of last year’s 10 largest U.S.-listed IPOs are now trading below their initial sale price. On average, those 10 stocks are down about 25%…

With the IPO window basically closed for now, late-stage private companies that raised money last year are being asked to “revisit their spending plans for 2016” to make sure they can get to profitability on the cash they have so they don’t have to count on raising more money, said Byron Deeter, a partner in the Silicon Valley office of Bessemer Venture Partners.

(WSJ)

The fine art market is starting to follow the price action of last year’s IPO market…

Last week, sales totals at Christie’s and Sotheby’s evening auctions of contemporary art were, respectively, 50 percent and 44 percent less than last year’s. This month, the take from the auction houses’ evening sales of Impressionist and modern art fell 35 percent at Christie’s and 50 percent at Sotheby’s.

“The market peaked in the first half of 2015 and the second half saw a softening,” said Todd Levin, an art adviser in New York. “I expect that to continue in 2016.”

The main reason for the slump, experts said, is that buyers have been unnerved by financial turbulence in the wake of slowing growth in China.

(NYTimes)

 

As hedge fund investors know, there are some dramatic losers and winners as the market has shifted in the last two months. The trend following CTAs have done well as they are mostly short equities. Others have been too long to fight the negative returns of Equities…

YTD performance of CTAs has been strong on account of their short S&P 500 equity exposure (see Figure 3). Over the last two days, short term (1-month) equity momentum turned positive, and limited CTA short covering likely contributed to the market rally. Overall, medium and long term equity momentum remain negative and are more likely to stay so. To turn momentum significantly positive, the S&P 500 would need to go significantly higher, which is hard given current EPS and multiple forecasts. With every additional week, short Oil and long USD momentum signals are becoming more vulnerable.

YTD performance of equity long-short Hedge Funds was likely dragged down by their net long equity exposure and heavy exposure to popular growth and momentum stocks. As a result, the HFRXEH index performed in line with passive investors (S&P 500). The momentum selloff in the first week of February negatively impacted equity quants who are on average overweight momentum/low volatility factors. This has erased the positive performance of HFRXEMN index accumulated since August (Figure 3). (JPMorgan)

Hedge Funds also fill the bottom YTD risk-adjusted return slots of Goldman’s weekly market performance chart…

So why are stocks volatile? Rising economic uncertainty…

@NickTimiraos: JP Morgan says odds of a recession in the next year now at 32%, up from 22% two weeks earlier

Even market participants are quickly changing their tune…

@NickatFP: Starting to sink-in that economy may be late cycle now

The Economist wonders if Central Banks can save us this time…


(Economist)

At least Jobless Claims stopped their upward rise…

Although I never, ever want to hear about rising consumer delinquencies if I am long anything but Treasuries…

“During the quarter, we saw a shift in the trends in delinquencies. Greater than 30-day delinquencies were 0.82% as compared to 0.68% a year ago, greater than 60-day delinquencies were 0.51% as compared to 0.41% a year ago…we’re certainly not alarmed by it, but we think we’ve reached the trough of charge-offs and we expect them to go up.” —Cabela’s CFO Ralph Castner (Sporting Goods)

(@Skrisiloff)

 

As we noted last week, U.S. farmer economics are in for a tough year. On Friday, John Deere showed us how difficult it will be as they lowered their Farm Cash Receipts outlook for 2016. The stock responded with a 4% decline…

“John Deere’s first-quarter results reflected the continuing impact of the downturn in the global farm economy as well as weakness in construction equipment market. At the same time, all of Deere’s businesses remained solidly profitable, benefiting from the sound execution of our business plans and the success of actions to develop a more responsive cost structure.” (John Deere CEO, Samuel Allen)

(BusinessInsider)

And why the pause in housing?

Not just residential, but commercial starts also looking to slow…

The ABI Index declined in January to 49.6 vs. 51.3 in December and 50.2 in November. The ABI is a leading indicator of construction activity, and our analysis shows that there is a nine- to twelve-month lag between architecture billings and construction spending. (JPMorgan)

One of the more interesting data points last week was the pick-up in CPI & PPI…

Some food for thought from Eric Peters regarding the much lower return outlook…

“One of my guiding lights is the notion that macro is aggregated micro,” said the CIO. A collage of micro images yields a macro picture. “It’s not a philosophy, it’s the truth.” US consumers hold $100trln of assets, $69trln of which are financial assets, much of which now yield nothing or negative. The rest yield little and GDP growth is slow, even after six years of unprecedented stimulus that pulled future demand (and investment returns) forward. From 1927-1984 an equity portfolio yielded 4% annualized. But from 1984-2015 that number was over 8%. “Investors can always pretend something is true, but when you add it all up, you see that it’s not.” Eyeing recent experience, we’ve built society to require 8% returns on our $69trln of financial assets, but if we revert to 4% returns, we’ll suffer a $2.76trln shortfall every year. Compare that to America’s $17.5trln annual GDP to grasp the impact on pensions, entitlements, Baby Boomers. Gone is the age of investment abundance. “You could argue there will be a washout, the market will get healthy, then people can make money on the bounce – and yes, that’s true.” But the guys with a lot of assets now will never crush it on the decline; they never do. The guys who make money in bear markets are small, fringe. “Hedge funds believe they need to promise double digit returns to justify high fees, and yet if you add up the micro you’ll discover that over the next decade median hedge fund returns will be 1-2%. The top quartile will be 4%, the top percentile perhaps 7.5%.” The best performers will be gifted market timers. “The entire industry mindset is wrong here. And it’s a trap. When you promise something you can’t deliver, you structure your portfolio in ways that will kill you.” (EricPeters/WkndNotes)

And finally, lots of thoughts running around about Apple & FBI conversations. Here is a cartoon that sums it up quickly…

VIEW PAST BRIEFINGS >

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, 361 Capital is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of 361 Capital.