The hawks are leaning in…

May 23, 2016

The hawks are leaning in…

Keeping the financial markets on their toes as investors head into summer, the Fed’s most recent speakers have elected to take on a more hawkish tone. Was this coordinated? Or, did they just get lazy and borrow each other’s notes? If the Fed was looking to wake up the markets, they have succeeded. In two weeks, the two-year treasury yield has jumped from 0.71% to 0.90%, and the U.S. Dollar has jumped 1.5%. The pop in rates has brought pain to yield-sensitive equities like REITs, Utilities and Consumer Staples. Meanwhile, the strong U.S. Dollar has hurt Commodities and Emerging Market assets. While the tone of recent speakers was direct regarding the Fed’s ability to hike rates again, do they believe that they will have the data in front of them during the summer months to justify it? Someone should create a book with May earnings releases from the top 25 retailers for the next Fed meeting. That will keep their hands off the rate hike button.

The Fed’s Rosengren was one of the many speakers sent last week to shift the markets expectations…

Until last week markets were putting extremely low odds on a summer rate increase, in part because of the dovish tone of Fed chair Janet Yellen’s last speech two months ago. That picture was transformed on Wednesday, as the Fed minutes from its April rate-setting meeting suggested it was preparing the ground for a second interest rate increase following the quarter point rise in December.

“I want to be sensitive to how the data comes in, but I would say that most of the conditions that were laid out in the minutes, as of right now, seem to be … on the verge of broadly being met,” said Mr. Rosengren, who has a vote on rates this year as part of the regular rotation of regional Fed presidents on the FOMC.

To justify a move at its next policy meeting in June, the Fed set itself three tests: to see additional signs of a rebound in the economy in the second quarter, further strengthening in the jobs market and for inflation to carry on towards the Fed’s 2 per cent goal.

(Financial Times)

 

As the Fed talk increased, the market’s bet on a summer rate increase soared faster than a Leicester City title win bet…

(@biancoresearch)

Does anyone else have a feeling of Deja Vu?

Within the Fed’s data packet would be a chart of agricultural commodity prices which have stopped going down…

(@hedgefundclone)

If agriculture, metal and energy commodity prices begin to turn higher, expect portfolio managers to be moving from their significant under-weight positioning…

(Fat Pitch Blog)

Speaking of agriculture, the top two M&A events of the year now touch the ag space. Throw in Dow and Dupont from last year, and you now have M&A in five of the top six players in the world…

(@Dealogic)

M&A is being made possible by investors returning to the debt markets to help finance big deals. Note the 4X demand for the Dell M&A paper last week…

Yield-starved investors piled into a bond sale from Dell on Tuesday as the US computer group raced to complete the fourth-largest bond sale on record.

The sale, which has been closely watched since Dell announced its $63bn takeover of EMC last year, drew sizeable investor demand as order books closed, allowing bankers leading the transaction to increase the size of the deal by $4bn to $20bn, two people familiar with the matter said.

Underwriters counted roughly $85bn of investor orders for the transaction, rivalling the $110bn stumped up for the Anheuser-Busch InBev mega sale earlier this year.

The strong demand, which included at least $20bn of orders from investors in Asia and Europe, underscored the enthusiasm with which fund managers are willing to bid on corporate bonds as yields on other asset classes tumble.

(Financial Times)

 

As mentioned previously, weekly sector performance was dominated by the under-performance in high dividend, yield sensitive Utilities and Staples. Financials found interest from the jump in short-term interest rates…


As one would expect, high-dividend paying stocks track closely with interest rates. So their under-performance last week as yields jumped should not be a surprise. If you think rates will continue to move higher and you are overextended dividend payers, then you might want to revisit your current equity holdings.

Although energy company defaults continue in 2016, there remain some profitable areas to make money for smart bond investors…

So far in 2016, US high yield energy groups have defaulted on debt of $26bn, already smashing the $17.5bn total seen during the whole of 2015.

“With the latest round of energy defaults completed, the big question is how many more bankruptcies will occur this year. The answer is probably quite a few,” said Eric Rosenthal, director of leveraged finance at Fitch.

But the surge in defaults has coincided with stellar returns- the highest seen since 2009. US energy junk bonds have returned 15.9 per cent so far this year, a seven-year high, and the third best year-to-date returns in the last two decades, according to Bank of America Merrill Lynch indices.

(Financial Times)

 

This chart shows the plunge in yields and rebound in prices which have occurred among the most worried credits. Reminds you of a Portuguese or Greek debt yield chart. Some investors will have made some very attractive purchases in the last six months that will pay big returns for years…

(@swaptions)

If you are looking for yield in the current high-risk duration environment, Barron’s offers you a look into the portfolio of a top decile income-seeking manager…

(Barron’s)

Non-taxable retirement accounts now own over one-third of U.S. Stocks. Taxable households and foreign owners each own about 25% of U.S. equities…

(Tax Policy Center)

There are almost 2,000 exchange traded products now in the US. So, according to the data, almost 25% of them have no assets or do not trade…

The quantity of exchange-traded funds (“ETFs”) and exchange-traded noted (“ETNs”) continues to zoom higher. There are now 450 products on the list, and the growth trajectory is on a path to surpass 500 by the end of the year. For May, there are 26 new names joining the list and 11 coming off. Only seven of the removals were the result of improved health—the other four died and lost their listings. The current membership consists of 342 ETFs and 108 ETNs. Further segmentation of the ETF population reveals that 41 are actively managed funds, 151 have smart-beta labels, and the remaining 150 are traditional capitalization-weighted ETFs.

(Invest With An Edge)

 

Sean Parker’s The Screening Room is looking to change the movie viewing model. The number of screens will continue to rapidly shrink just as Lucas and Katzenberg predicted…

“What you’re going to end up with is fewer theatres,” George Lucas said during a panel at the University of Southern California in 2013. “Bigger theatres, with a lot of nice things. Going to the movies is going to cost you 50 bucks, maybe 100.” In 2014, Jeffrey Katzenberg, the co-founder of DreamWorks, suggested that we are close to an era when films will only last in cinemas for three weeks. He argued that a film will come out in cinemas for 17 days — three weekends — which is where 98 per cent of films make 95 per cent of their revenues anyway. On the 18th day, the film will be available everywhere and you will pay for the size: a movie screen will be $15, a 75-inch TV will be $4, a smartphone will be $1.99. “When that happens — and it will happen,” said Katzenberg, “it will reinvent the enterprise of movies.”

(Financial Times)

Summer starts in a week and I know that many will be contacting me for requests on how to get their kids and grandkids fired up about coding. If you want to give them a break from the screen and want to put a good book in front of them, pick up “Secret Coders”…

Last year, the graphic novel Secret Coders launched with a premise that was a novelty in the world of YA fiction: Three students who set out to solve the mystery at the heart of their school—through coding…

The critically acclaimed series is, in theory, meant to teach kids about the importance of computer programming using comics—but it turned out to be a good read for anyone trying to understand more about how the world works. Here are a few reasons you should be reading Secret Coders…

(Wired)

Finally, I have always been a fan of Byron Wien, both in market strategy thoughts and in life lessons. Here is your cheat sheet on the latter…

(Barron’s)

And Lastly…

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