A Bit Cloudy…

August 28, 2017

Jackson Hole Wyoming

The doves joined the fishermen in enjoying the clouds that rippled through Jackson, Wyoming last week. While Draghi talked up the European and global outlook, Yellen went the other direction and avoided talking about monetary policy. This would imply that there is little to worry or talk about. As a result, the market doves took control by buying bonds, selling the U.S. dollar, and continuing to shift their risk assets overseas. By day end Friday, the markets were betting on a 34% chance of a Fed Funds rate hike in December—down from 57% a month ago.

The elephant in the lodge was the debt ceiling hike. I still can’t believe anyone could think that Congress would not hike the limits. But, of course, after a few minutes reading the Washington D.C. twitter stream, and I can believe that almost anything is possible. While the Treasury Bill curve is getting kinked on the debt ceiling showdown, the global credit markets remain solid with the exception of some potholes in the U.S. energy and retail sectors. Right now, it is all about politics. The POTUS is threatening a shutdown to try and get his agenda some attention, while at the same time attacking Ryan, McConnell and Corker. I must have forgotten this chapter in “The Art of the Deal”. Meanwhile, the market was right to be very concerned about Gary Cohn resigning a week ago. If there is one White House resignation that the markets DO NOT want to see, it is Gary Cohn leaving. While his decision to speak up has likely cost him the top Fed job, his decision to stay has kept the U.S. markets from being thrown into disarray.

It will be a busy week of data and a quiet week of markets, so expect some volatility. The continued U.S. dollar weakness will benefit overseas stocks, bonds and commodities. Look at gold and the miners poking their heads up and out of the dirt. The lack of monetary talk by Yellen should further discourage investors from owning bank and financial stocks. Enjoy your last week of summer for those that have it. And when you get back home to fill that fridge, stop by a Whole Foods to check out Amazon’s new lower prices.

What a great top story in the WSJ last week: Synchronized Global Growth…

For the first time in a decade, the world’s major economies are growing in sync, a result of lingering low-interest-rate stimulus from central banks and the gradual fading of crises that over years ricocheted from the U.S. to Greece, Brazil and beyond.

All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis.

The International Monetary Fund in July projected global economic output would grow 3.5% this year and 3.6% in 2018, up from 3.2% growth in 2016.

(WSJ)

Growing in Sync

International stocks have been set up perfectly this year:

1) Accelerating growth versus the United States

2) Lower valuations than the United States

3) And a collapsing U.S. Dollar

VEU Chart

As Bespoke shows, you could have just invested in U.S. companies with significant foreign revenues and done equally well…

S&P 500 Yield

(@bespoke)

For the week, emerging market equities led the returns…

International bonds (developed and emerging) also did well as the U.S. Dollar moved sharply lower.

iShares Chart

(8/25/17)

EM equities getting a big assist from EM currencies which have now moved well beyond U.S. election levels…

EM stock and bond investors want stability and this chart shows that they are getting it.

JP EM Currency Index Chart

(WSJ/Daily Shot)

If you need further proof that the world is comfortable with risky EM, look at these yields of Ukraine, Mongolia and Belarus…

New World Yields

(Decision Economics)

As global growth, currency stability and debt risk declines, the Chinese equity market is beginning to break out…

FXI Chart

(@edwardrooster)

As is Brazil’s…

EWZ Chart

Some additional items to consider if you are investing in emerging markets…

Emerging-market economies have become stronger structurally over the past several years. Their exchange rates have become more flexible, thereby making the economies more resilient to external shocks. Levels of foreign exchange debt and current account deficits are lower, while foreign exchange reserves are higher. Reforms in India, China, and Indonesia have moved in the direction of better balancing those economies, while Brazil’s reforms are still very much a work in progress. Conditions for commodity exporters are gradually improving. The main risks to this positive outlook are adverse geopolitical developments, extended policy uncertainty in the US, Brexit-related developments in Europe, increased protectionism that impacts trade and global supply chains, and a more rapid than expected moderation of central bank stimulus.

(Cumberland)

Now, if you really want to invest in the fastest growing countries in the world, here is your hunting list…

@TihoBrkan: Emerging Asia & Frontier Africa is where majority of strong growth is happening. It is also where majority of stock markets are depressed.

World’s Fastest Growing Economy

For the week, Biotech led the way while the Staples group got Amazon’d…

SPDR Chart

(8/25/17)

The commodity miners and basic material sector is gaining quick ground helped by many charts that look like copper…

It will be interesting to see if there is incremental global demand on base metals prices as Houston moves to fix its infrastructure after Hurricane Harvey.

Comex Copper Chart

(WSJ/Daily Shot)

Another chart breaking out is that of utility stocks…

See the bond chart below it (utes like to follow bonds) and think equity defense without getting Amazon’d. (Although the utes have long-term risk of getting Tesla’d.)

XLU Chart

Speaking of Tesla…

@PlanMaestro: Lithium … the new white gold

Below the Salt

U.S. homebuilders will need to allocate capital to finding the next Barry White if they want to sell more homes…

I was surprised by this chart. I’d like to read up on the reasons to why should anyone sees some good articles or research.

Household Formation

(WSJ/Daily Shot)

SUV profits being removed from the auto industry. Even with very low gasoline prices…

“The industry is wildly overweight on crossovers,” John Murphy, an auto analyst for Bank of America Merrill Lynch, said in a recent presentation. The number of crossover models sold in U.S. dealerships is expected to rise to 110 nameplates by late 2020, up from 78 today, he estimated.

Auto makers like GM—long dominant in the SUV market—have relied on bigger or heavier vehicles with higher price tags to drive profits, and offset the losses that result from sales of family sedans or compact cars. But in the first half of 2017, incentives for SUVs shot up 33%, according to research website Edmunds.com, with the average discount or rebate in the segment reaching $3,200.

SUV Sales

(WSJ)

Speaking of price cuts, Amazon is going to make you go to a Whole Foods this week…

The tech giant’s $13.7 billion purchase of Whole Foods has sent shock waves through the already changing $800 billion supermarket industry. The wedding between Amazon and the upscale grocery promises to upend the way customers shop for groceries. Cutting prices at the chain with such an entrenched reputation for high cost that its nickname is Whole Paycheck is a sign that Amazon is serious about taking on competitors such as Wal-Mart Stores Inc., Kroger Co. and Costco Wholesale Corp.

(Bloomberg)

Whole Foods Price Changes

How the U.S. re-gains its global manufacturing dominance: Robots

When the Chinese clothing manufacturer Tianyuan Garments Company opens its newest factory in 2018, it will be in Arkansas, not China, and instead of workers hunched over sewing machines, the factory will be filled with fully autonomous robots and their human supervisors.

Once the system is fully operational, each of the 21 production lines in the factory will be capable of making 1.2 million T-shirts a year, at a total cost of production that can compete in terms of cost with apparel companies that manufacture and ship clothing from the lowest-wage countries in the world. The factory will be one of the first to use a technology that could herald immense changes in how the apparel industry works.

(Fast Company)

Did you know that Mexico has a lower unemployment rate than the U.S.?

Mexico Unemployment Rate

(WSJ/Daily Shot)

Expect to hear all about tax reform for the next few weeks…

“Starting next week, the president’s agenda and calendar is going to revolve around tax reform,” Mr. Cohn said in an interview. “He will start being on the road making major addresses justifying the reasoning for tax reform and why we need it in the US.”…

Mr. Cohn indicated that the White House does not have a fixed or detailed plan for tax reform; instead it is asking the committees to negotiate the details. He would not say if the White House wanted a corporate tax rate of 15 per cent — which Mr. Trump previously insisted on — simply saying that he wanted the rate “as low as possible so that businesses want to create jobs here”.

He said the plan would preserve three of the biggest deductions for individuals: on charitable donations, mortgage interest payments and retirement savings. It would raise the standard deduction cap that applies to most tax filers, but would eradicate many other personal deductions, he said, adding that the White House also wanted to get rid of “death taxes”, Republican terminology for estate taxes, which will face resistance from Democrats.

(Financial Times)

Top Tweet of the Week from a former Oval Office insider…

Anthony Scaramucci Tweet

Got six straws?

I don’t understand the combination, but the price is incredible.

Mercedes-Benz Stadium Food

And Lastly…
To get your daily dose of Blaine, follow @361Capital on Twitter for aftermarket tweets and more. Also, start following our 361 Capital Blog for timely insights from other members of our Investment team.

VIEW PAST BRIEFINGS >

 

Learn More: