Calm beach. Inclement markets.

July 10, 2017

Calm Beach

It never fails that when you decide to slip out of the office for a break, the markets will act up. Last week was not an exception to the rule as investor anxiousness continued to cause activity on trading desks. Rising global yields continued to stress risk parity funds and leveraged hedge funds who were positioned for lower interest rates. Ripples in fixed income floated into currencies, equities and even commodities. If you had your nose buried in a book then you may have not noticed much in the weekly changes. But if you were active on a day-to-day basis, there was plenty to take advantage of and trade.

Finally some market moves for the traders…

I count seven 50 basis point moves in the last three weeks with four of those moves to the downside. That downside cluster is a first for 2017.

SPX Chart

The Nasdaq has been a source of concern in the recent month…

But breadth as defined by the Adv/Decl Volumes suggest that the market is healthier than the index suggests.

NDX 100 Index

(@HumbleStudent)

Watch the two-year Treasury Yield…

It is a good flight to safety, as well as general economic/inflation measure. When it rises, it often provides a good environment for equities. Right now the positive backdrop is in place.

U.S. Treasury Yield 2-Year

Will the rising two-year Yield bench press the 10- and 30-Year Yields higher?

United States Interest Rates

(@TihoBrkan)

Another major thermometer for the equity market is the health of the credit market…

And right now Junk bond spreads remain near cycle lows even with the problems in Energy and Retail.

High Yield Spread

(JP Morgan)

Transportation stocks also broke out to all-time highs last week…

Not a sign of an equity market top.

Transportation Average ETF Chart

(@beckyhiu)

Also, if the market were really positioning for a breakdown, wouldn’t Utilities, Staples and REITs be performing better?

XLU, XLP, XLRE Chart

Citibank updated its “Bear Market Checklist” and doesn’t see a reason to run…

“Right now, only two of 18 factors are flashing sell compared to 17.5 in 2000 and 13 in 2007,” analyst at the bank wrote. “Global trailing and 12-month forward PEs are starting to look frothy, but the dividend yield and CAPE still look reasonable.”

Citi says that the checklist is not designed to be a market timing indicator for a short-term corrections, but rather larger moves.

And, unless the warning signs start to flash again, the bank says any small pullback in the near-term should be bought.

(Business Insider)

Global Bear Market Checklist

The good news for those of us who are active stock pickers, is that there are plenty of names to buy and to avoid (or short)…

Look at these giant market caps pushing 52-week lows on Friday…

Active Stock Pickers Chart Lows

And here are a few giant market caps that were moving through 52-week highs on Friday…

Active Stock Pickers Chart Highs

Of course the quarterly earnings period draws near…

Quarterly Earnings Report

(@bespokeinvest)

Friday will be the big day this week with several Bank earnings hitting the tape…

Most Anticipated Earnings Releases

(@eWhispers)

Good news for the Global Bulls, earnings are rising and revisions are positive…

A very good backdrop for global stock prices according to Ned Davis Research.

MSCI ACWI Trailing Earnings

(@NDR_Research)

The Fed is going to start shrinking its balance sheet…

At the June meeting, we started to receive details. Here is how it might look. It will be interesting to see how the market deals with $2 trillion in paper leaving the system. This is one reason why Ray Dalio at Bridgewater wants you to start dancing near the exit door.

The Federal Reserve balance sheet

(JP Morgan)

And as the Fed begins to liquidate, here is how the Barclays U.S. Agg Index is positioned for duration…

Duration of Barclays U.S. Aggregate Chart

While rising rates will be a negative to Bonds, they should help Financial stocks…

Given the upward move in interest rates has been more extreme in Europe, it should be little surprise that Euro Financials have outperformed U.S. Financials (even with the currency impact).

Euro Financials vs. U.S. Financials Chart

Howard Marks had some important comments last week in this interview…

In an interview with the Financial Times, Mr Marks said: “Most investors have given up on high-grade bonds and mainstream stocks as a way to get a good return in a low-return world. Instead they go up the risk curve to try to get the return they used to get more safely.”

His assessment comes as private equity groups raise their largest funds ever — including CVC in Europe raising €16bn and Apollo also attracting more than $23bn from investors.

“Private equity has been knighted as an area where investors can get high returns in a low-return world,” Mr Marks said. “The inflow of money to any area makes that a challenge and it will take a considerable skill and discipline to wrest good returns safely in a low return world. There is no magic.”

(Financial Times)

 

And as we all weigh the stock vs. bond allocation debate, just a quick long-term refresher of drawdown risks between the two asset classes…

Stocks vs. Bonds Chart

How do I say ‘Wow’ in Chinese?

Yum China, with exclusive rights in mainland China to KFC, Pizza Hut, and Taco Bell, reports its loyalty program has set a milestone, mobile payments are sizzling, and delivery service is red hot.

By the end of the second quarter, total members in our loyalty programs surpassed 100 million, including 83 million members for KFC and 26 million for Pizza Hut.

Mobile payments exceeded 40% of company sales in the second quarter of 2017. Over $900 million in company sales were settled by cashless payment methods during the quarter.

(Card Flash)

 

It was a big week for electric cars. Wonder what would Ove say?

For Volvo the internal combustion engine has run its course.

In the face of competition from upstarts like Tesla Inc., which begins production this week of its new mass-market Model 3 electric battery-powered family car, the Chinese-owned automotive group on Wednesday said all new Volvo models from 2019 would be either fully electric or a hybrid.

Volvo is the first major auto maker to abandon the technology that has powered the industry for more than a century. Hakan Samuelsson, president and chief executive of Volvo Cars, said in a statement that the move “marks the end of the solely combustion engine-powered car,” reiterating his target of selling one million electric cars and hybrids by 2025. “When we said it, we meant it. This is how we are going to do it.”

(WSJ)

 

Expect to start hearing more about Ag stocks…

Drought in the Great Plains is decimating an important portion of the U.S. wheat crop, pushing prices to multiyear highs and drawing hedge funds and other speculative investors to a typically lonely corner of financial markets.

Spring wheat futures at the Minneapolis Grain Exchange have leapt 40% in a little over a month, far outpacing more widely traded corn and soybean contracts. The exchange said total volume and participation in June and July has broken a series of record highs…

The share of spring wheat in good or excellent condition fell to 37% earlier this month, the U.S. Department of Agriculture said, compared with 72% the same time last year. That is the lowest good-or-excellent rating in almost 30 years.

(WSJ)

Grains Sunbindex Total Returns Chart

(@TihoBrkan)

Not just a great list for investing…

But also a good list for developing relationships, becoming a customer or supplier of, hunting for a new job, etc. Definitely worth spending time on the 50 names that MIT came up with.

50 Smartest Companies 2017

(MIT Tech Review)

A great read… The music industry according to super-producer Jimmy lovine

Iovine remains concerned that there is too much free music available — and YouTube, he says, is the biggest challenge. The site is “a massive problem for the record industry . . . it represents something like 50 per cent of all music consumption but only four or five per cent of the revenue. How does that work?”

He is concerned too about changes to the industry’s business model — the fact that big acts can now make much more from international touring than from recorded music sales. “There are so many places to play now. Play Dubai and you might make half a million dollars — ‘Oh, that’s more money than I’m going to make on my entire f***ing album.’” If acts are touring all the time and playing their hits, the quality of new music will inevitably suffer. “Not everybody does that. Kendrick Lamar, Ed Sheeran, Adele . . . they stopped touring and made their record.”

(Financial Times)

 

Well said Justice Roberts…

Supreme Court Chief Justice John Roberts delivered the commencement address at his son’s ninth-grade graduation last month, bestowing advice that ran counter to many typical commencement speeches.

Now the commencement speakers will typically also wish you good luck and extend good wishes to you. I will not do that, and I’ll tell you why. From time to time in the years to come, I hope you will be treated unfairly, so that you will come to know the value of justice. I hope that you will suffer betrayal because that will teach you the importance of loyalty. Sorry to say, but I hope you will be lonely from time to time so that you don’t take friends for granted. I wish you bad luck, again, from time to time so that you will be conscious of the role of chance in life and understand that your success is not completely deserved and that the failure of others is not completely deserved either. And when you lose, as you will from time to time, I hope every now and then, your opponent will gloat over your failure. It is a way for you to understand the importance of sportsmanship. I hope you’ll be ignored so you know the importance of listening to others, and I hope you will have just enough pain to learn compassion. Whether I wish these things or not, they’re going to happen. And whether you benefit from them or not will depend upon your ability to see the message in your misfortunes.

(TIME)

 

Get Howard Roark Architects on the phone ASAP…

ThyssenKrupp’s Multi allows for multiple cabins to move up the same shaft, travel horizontally, and then come down another shaft in a continuous loop. The group says the Multi will revolutionise the way skyscrapers are designed and create more opportunities for city planners, as it allows for taller buildings by dispensing with cables, which take up a large amount of space. By using magnets and motors instead, the area that would have been needed for cables is reduced by up to 50 per cent. “There is no limit in height,” says Andreas Schierenbeck, chief executive of ThyssenKrupp’s elevator unit. “You can build as high as you want. If you’re an architect and you want to build 600m, 1,000m, 2,500m, you’re welcome. No problem. “We are running out of space in our cities. We are wasting so much space on elevator shafts.”

(Financial Times)

 

If you are a fan of Shoe Dog or Nike, this interview is a must watch…

Phil Knight Bloomberg Interview

(Bloomberg)

Finally, the funniest Tweet that I saw this week…

IHop Funny Tweet

And Lastly…
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