That was a highly significant week…

June 20, 2016

That was a highly significant week…

First, Microsoft showed us all what they think of negative/zero global interest rates by borrowing to buy LinkedIn for a 50% premium. With the cost of money free, why not take a chance to make that strategic investment that your team thinks will fit perfectly and generate a positive return. Once the current Brexit worry passes, I’d expect those companies that are feeling good about their base business to unlock the calls from the M&A bankers and start looking at more transactions.

Second, the FOMC didn’t touch interest rates as expected, but their dot plots and comments did say much about their future direction. A weaker jobs picture, lack of core inflation and ongoing fireworks overseas released much of the helium in the future Fed interest rate expectations. One former hawkish voting member went so far to even ground his dots for the next two years on the belief that low growth and low inflation are here to stay. Bonds, equity income proxies, gold and foreign currencies loved the news.

Lastly and sadly, two children lost their Mom in the United Kingdom throwing the recent hopes of a Brexit into the Thames. Anger in politics has gone too far and I think we will see visible proof of that in this week’s vote—just as we have also witnessed in the bounce of the British Pound since last Thursday. With a Remain vote in sight, both the Pound and Euro should continue their bounce while also assisting U.K. and Europe Continent equities and credits. Relief should also be seen in broader global equities which have had their fate intertwined with the upcoming Brexit vote as noted by the recent 50% spike in the VIX.

Looking at the calendar, we have only two weeks left in the second quarter. So companies will be winding down their books and looking into Q3. The difficult year-over-year comparisons for anyone touching the energy space will end with this Q2, which will imply an acceleration in earnings gains for the indexes for the next four quarters. Maybe this will mean little to some asset allocators, but it will mean the world to those analysts and sector investors who have had to watch incredible double-digit revenue declines and vaporized earnings and cash flow for their energy-related businesses. The credits and stocks in these spaces have already bottomed thus telling you that there is light at the end of the tunnel. Will investors continue to add to their energy, materials and industrial positions as earnings recover? Sure they will. With so many stocks, ETFs and commodity-influenced geographies down 50-99% from their highs, they will likely continue to find incremental dollars from other areas of the market. The big bottoming patterns in these prices will not be ignored.

Nearly every global asset was influenced by the move in the British Pound last week…

While Brexit polls have continued to take down the Pound for the last two weeks, everything changed on Thursday.

Earlier in the week, Alan Murray noted how a potential Brexit was having a significant influence on global investment planning…

Yesterday, Brexit was the top topic at a discussion I moderated among 35 women who sit on the boards of major global corporations. The session was off the record, so I can’t report specific comments. But the group was broadly representative of global business, and the general view was that uncertainty over Brexit has already led many companies to cut back global investment plans. The uncertainty is not confined to the U.K. and Europe. And it is unlikely to end June 23, regardless of the vote’s outcome. A number of the women expressed broader concern about rising nationalism across the globe, and several referenced the graduation speech given last month by GE’s Jeff Immelt, signaling an end to seventy years of globalization.

(Alan Murray, Fortune)

 

Portfolio Managers remain less worried of a Brexit vote this week…

Forex markets however are much more concerned given this chart of the British Pound VIX…

Plenty of insurance on the Pound is being bought and sold to get through this month’s vote.

(@DriehausCapital)

Back to the Federal Reserve, last week’s inaction and comments killed any likelihood of an interest rate hike out into 2017…

(Bloomberg/WIRP)

When it was first released, I thought that the chartist must have made a mistake in their Excel data series. But no, that was just Bullard dropping the mic and grabbing his fishing pole…

Federal Reserve Bank of St. Louis President James Bullard said Friday he now favors just one interest-rate increase through 2018 after changing his view of where the economy is headed, putting him at odds with other policy makers.

The change in view makes Mr. Bullard the most “dovish,” or reluctant to continue raising rates, of the 17 officials in Fed leadership roles, as the rest of his colleagues still see gradual rate increases over the next few years. Mr. Bullard tied his change in outlook to a belief that the economy’s current path of modest growth is likely to continue. That means the Fed is likely to only need one more quarter-percentage-point rate rise this year before holding steady…

Mr. Bullard said he sees the Fed’s benchmark federal-funds rate at 0.63% over the next two and half years, an “essentially flat” path, which indicates he was the sole official who argued in the official central bank forecasts released Wednesday that the Fed has but a single rate rise ahead of it. The Fed’s current fed-funds target range is 0.25% to 0.50%.

(WSJ)

 

(Business Insider)

This line chart was taken when James Bullard was still a red meat eater…

With interest rates stuck in reverse for the time being, guess who is seeing an uptick in business? Hint: The 30-year mortgage rate just fell below 3.6%…

Wells Fargo & Co., the nation’s largest mortgage lender by origination volume, said Thursday that it expects mortgage volume industrywide to be 20% to 25% higher for the year than the roughly $1.5 trillion it initially anticipated. J.P. Morgan Chase & Co., the second-largest mortgage lender, also said Thursday that industry volume could be up by 50% this year from initial forecasts.

“There is much more demand than we expected,” said Steve Hemperly, head of mortgage originations for J.P. Morgan. “We’re not acting like this is a window that’s closing quickly.”

The Mortgage Bankers Association in May increased its expectations for new mortgages for 2016 to $1.608 trillion, its fourth increase from $1.380 trillion at the year’s start. It said it expects a slight increase in its June update. In 2015, mortgages, which include refinancings, totaled $1.63 trillion.

The group also boosted the share of refinancing activity. It now expects that to be nearly 40% of total activity. While that is nowhere near the peak of 71% in 2012, it is up from 33% in the group’s January forecast.

(WSJ)

 

Although the mortgage biz is accelerating, bank and lending stocks were taken down last week by an uptick in Citigroup’s May credit card write offs and by the news of Synchrony Financial seeing worsening trends in their credit card portfolios…

Lenders and credit-ratings firms are warning that credit cards, auto loans and student loans are weakening, suggesting that a new round of borrower delinquencies and losses for financial institutions could be on the way.

Synchrony Financial, the largest U.S. issuer of retail-store credit cards, increased its forecast for credit losses over the next year, saying some customers were failing to catch up on overdue payments. The increase in expected losses wasn’t huge—0.2 to 0.3 percentage point—but it rattled investors who are nervously watching for a peak in the credit cycle.

(WSJ)

 

The week’s returns were mostly about the losing returns than the winning. If you avoided Financials, Tech, Healthcare and the Nasdaq then you did better than most…

@bespokeinvest: Equities red, treasuries green. This week’s asset class performance matrix. Start a trial: https://t.co/JQndP1FQwk

If Brexit doesn’t happen this week, the S&P 500 could have a sizable bounce in it ready to be released…

Great chart from Ari Wald of Oppenheimer which Josh Brown highlighted over the weekend. 50% moves in the VIX typically highlight areas of opportunity in the market. The current set up is even better given the markets lack of a defined downtrend.

(TheReformedBroker)

This is the low in S&P 500 quarterly EPS. Year-over-year comps get better from here as the S&P 500 digests its Energy-related earnings declines…

Uruguay has been helped by low energy prices. It fears higher prices so is locking in 40% of its future imports…

The Uruguayan government signed an agreement with the World Bank (WB) to protect its economy to the volatility of oil prices, officials said.

The agreement, signed on June 7, involves buying insurance worth $15.7 million that the Ministry of Economy will pay in two installments to the World Bank to ensure compensation if the oil price exceeds the barrier of $55 a barrel, on average over a period of 12 months.

Should oil prices exceeded, on average, $55 per barrel between June 7, 2016 and the day of the 2017 Uruguay will receive compensation.

(El Diario)

 

A very large buyer of Natural Gas is also positioning for higher prices…

@pradeeepk: Public Service CEO Says U.S. Natural Gas Prices Have Bottomed. $UNG

Sure looks like the long-term momentum money in Natural Gas has shifted from short to long…

@LMTentarelli: Very Deep Bullish Monthly MACD cross $FCG – long term momentum change

As banks cutoff lending to Energy companies, any ramp in production will be starved of capital thus possibly adding to commodity price gains…

Burned by the market crash and pressed by regulators, lenders from multinational financial firms to small local banks are steering clear of oil and gas, dumping problem loans for less than half their value, tightening lending requirements, and exiting the business all together. In Houston, Geoff Greenwade, chief executive of Green Bank, a small lender with $3.8 billion in assets, said he’s done with energy for good after his bank had to write off nearly $10 million in bad loans earlier this year, up from about $180,000 in 2015.

“This will leave a bad taste in our mouth for years,” Greenwade said. “We don’t get paid enough on these loans to take on all of that commodity risk.”

A pullback in lending means many of the small, independent drillers that drove the last boom here and across the country won’t have the money to quickly ramp up production and resume hiring. Cash is the lifeblood of an industry that must spend billions up front on the hope of a future payoff, and cash reserves among publicly held U.S. producers have plunged by more than $15 billion, or nearly 40 percent, over the past year.

(Houston Chronicle)

 

Lack of capital to expand the energy industry will not be good news to Texas who just barely scraped a positive number in May’s employment with only 200 jobs added…

(Texas Workforce Commission)

Generic truck driving jobs days are limited…

Okay, this is extremely cool science. Time to get long Iceland or Hawaii real estate?

But scientists at Lamont-Doherty Earth Observatory at Columbia University and other institutions have come up with a different way to store CO2 that might eliminate that problem. Their approach involves dissolving the gas with water and pumping the resulting mixture — soda water, essentially — down into certain kinds of rocks, where the CO2 reacts with the rock to form a mineral called calcite. By turning the gas into stone, scientists can lock it away permanently.

One key to the approach is to find the right kind of rocks. Volcanic rocks called basalts are excellent for this process, because they are rich in calcium, magnesium and iron, which react with CO2.

(New York Times)

 

Finally, Disneyland opened last week in Shanghai. Notice the other major global brand in this picture from their opening week?

(New York Times)

And Lastly…

The next Weekly Research Briefing will be Tuesday, July 5 featuring a review of the first half of 2016.

To stay up-to-date in the meantime, 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 >

We are Growing!

361 Capital has several career opportunities available, so please spread the word or apply on our careers page. Opportunities include: Internal Sales Consultant and Director, Digital & Demand Generation.

 

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.