Still afraid to put your boat in the water?

May 31, 2016

Still afraid to put your boat in the water?

Don’t worry, you aren’t the only one. With the Fed getting more anxious to raise interest rates again and a Brexit vote in a few weeks, many investors are staying out of the water and waiting for those final clouds to clear. But while uncertainty remains high and cash levels remain elevated in portfolios, the U.S. indexes just retook their major moving averages while all of the sector ETFs (including Energy) are now trading above their 50 & 200 day moving averages. A very nice improvement from just two weeks ago. While equity valuations remain a concern, would you honestly pick them over the safety of bonds in a rising inflation and interest rate environment? Maybe TIPS and short duration, credit focused paper? But you would have to be willing to put up with substantial volatility to load up on long Government bonds from any investment grade nation right now. Call me risky, but I would much prefer sailing on a sea of stocks than an ocean of Treasuries right now.

Six month charts of the S&P500 and the Sector SPDR ETFs signaling clear skies right now…

@ArthurHill: All 9 sector SPDRs are above their 200 and 50 day SMAs. And..50-day is above the 200-day for all 9.

JPMorgan remains mindful of the market valuation and the big macro items over the next four months…

In the last 48 hours market psychology has evolved and now the consensuses narrative seems to anticipate a further “pain trade” rally. Additional upside is certainly possible but investors need to stay respectful of valuations and multiples get into “stretched” territory anytime the SPX passes above 2075. To justify a sustained move through 2100 one needs confidence in a $130+ EPS number for ’17 and clarity on the big outstanding macro issues (what fiscal and monetary policy levers does Japan pull? Does the Fed hike in the summer? Who wins the US presidency in Nov?) but neither is likely for the time being.

(JPMorgan)

If you want to measure equity concern, note the lack of Bulls…

@LizAnnSonders: Fewest AAII Bulls since 1988 #WallofWorry is intact

Janet Yellen warned beach goers to keep their smartphones tuned to every upcoming set of economic data…

“Productivity is very miserable at the moment and this is the key determinant of living standards. Inflation has been running below the Fed’s 2% target for a number of years although inflation headwinds are stabilizing and my own expectation is that inflation will move back up to 2% over the next couple of years…. Growth looks to be picking up and if that continues and if the labor market continues to improve, which I expect to occur, it would be appropriate for the Fed to gradually and cautiously increase rates over time and probably in the coming months.”

(Janet Yellen, FOMC Chair on Friday)

Speaking of data, the new home sales data last week was very strong…


(NeilDutta/RenMac)

As RenMac mentioned, the higher end housing market is accelerating…

(Daily Shot)

Costco is seeing similar strength from its customer base (which also tends to be a mid- to high-end homeowners) …

“Okay. Well, in terms of the customer, so far so good. We don’t see any dramatic change…Interestingly, when you look at nondiscretionary items…versus discretionary items…including big-ticket items like furniture, electronics and the like, we’ve actually had, relatively speaking, a little more strength in some of those nonfood categories. So that I think allays some of any concerns that some people have had. But generally speaking, I’d have to say our customers are still pretty healthy.”

(Costco CFO, Richard Galanti)

Helped by the strength in housing and durable goods, the economic surprise index last week took a jump higher…

Data this week generally surprised to the upside. The Bloomberg U.S. economic surprise index rose to the highest level since the start of 2015. New home sales popped 16.6 percent in April, while pending home sales jumped 5.1 percent. Durable goods rose 3.4 percent, although most of the gain came from the volatile aircraft and defense components. One exception was the second estimate for Q1 GDP, but the report still showed that activity was stronger than initially reported in the first three months of the year.

(Wells Fargo Securities)

These economic surprises led the NY Fed to raise its Q2 GDP forecast to +2.2% from +1.7% last week…

(NY Fed)

If you feel the economic strength, and expect accompanying inflation will continue, then you might want to review your research into TIPS…

While stocks have done little YTD, equity correlations have fallen to 1-year lows…

(Renaissance Macro)

Unfortunately, Hedge Fund bets were mostly wrong when it came to betting on which equity sectors would outperform…

Hedge Funds bet heavily on Consumer Discretionary and missed. Also of note is the lack of a sector bet by the average core mutual fund. It will be tough to outperform the index if you own the index.

Digging deeper into where Large Cap Growth and Value Funds have placed their chips…

Apple Inc. most hated by Growth managers. Berkshire and Exxon most disliked by the Value crowd.

(Goldman Sachs)

While most of us fixate so closely on cash equity volumes, look at this chart to show you how big and deep the financial markets are…

Every single day, US Equities trade over $200bn, before we include ETFs. That seems like a lot, but it’s not nearly the half of it – literally. Looking at trading all around the world, we see that global financial markets trade trillions of dollars per day, around $US 16tr reportedly.

(KCG Holdings)

A big piece over the weekend was how fast the low volatility asset class has grown. It will be interesting to see if outflows in the ETFs could actually impact the future volatility of the individual components…

The research group Morningstar classifies 25 ETFs as low volatility funds, with $35bn in assets at the end of April, $9.8bn of which had been invested in the first four months of the year. The pace of inflows picked up sharply in February, after stock markets gyrated with fears of a global recession.

Money has kept being added, even though the Vix index of market volatility has fallen back close to a one-year low. The six largest low vol ETFs alone had further inflows of $1.6bn in May.

The $13.1bn iShares Edge MSCI minimum volatility USA fund from BlackRock, which has doubled in size in the past 12 months, has had inflows on all but three days so far this year. A $7.1bn sister fund that runs a minimum-volatility portfolio of non-US stocks has had inflows on every day but one this year.

(Financial Times)

Barron’s was looking at bubbles over the weekend. Still looks like the average U.S. housing price movement has been under control…

As is well known, the crash in house prices was a prime cause of the 2008-09 recession. While house prices have been rising, they are still well below the peaks of 2007. In April, the most recent month for which data are available, the median price of an existing home was $232,500. In July 2007, the price in today’s dollars came to $263,560.

(Barron’s)

If you want to see housing prices that are a bit more out of control, look north to Canada…

Hedge Funds love Treasuries. Most one way bet in 10 years…

@markets: Hedge funds are the most bullish they’ve been on U.S. Treasury futures in over a decade.

(Bloomberg)

Howard Marks is a great investor and great writer. His recent memo addresses some of the campaign promises that have been made and notes how difficult it is for any single item to have a significant positive impact on the economy…

…most ordinary citizens don’t have what it takes to figure out what is and isn’t economically feasible. Since we’re in the midst of election season, with promises of cures for our economic woes being thrown around, this seems like a particularly appropriate time to explore what can and can’t be achieved within the laws of economics. Those laws might not work 100% of the time the way physical laws do, but they generally tend to define the range of outcomes. It’s my goal here to point out how some of the things that central banks and governments try to do – and election candidates promise to do – fly in the face of those laws.

(Oaktree Capital)

Finally, not wanting to be left out of the self-driving, ride sharing movement, Toyota and Volkswagen place their bets last week…

Just months after GM poured money into Lyft (the one with the pink mustasche), Toyota and Volkswagen both said today they were joining up with other ride-hailing rivals. In VW’s case, it’s investing $300 million in Israeli ride-hail startup Gett. Toyota, meanwhile, is partnering with Uber to, among other things, let people automatically deduct their car payments from the fares they make as Uber drivers.

Clearly automakers have Silicon Valley envy. Startups are transforming the way people move around cities. In order to stay relevant, car companies are trying to show they understand that on-demand services have changed consumer behavior. Driving yourself around in a car you own, it turns out, isn’t the only way to get around anymore—a trend that’s likely to become only more pronounced when the cars start driving themselves.

(Wired)

And Lastly…

To hear more insights, follow @361Capital on Twitter for aftermarket tweets and more. Also, start following our recently launched 361 Capital Blog for timely insights from other members of our Investment team.

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.