Just Enjoy It…

July 11, 2016

Just Enjoy It…

Everything is higher: Bonds, Stocks, REITs, Gold. It might soon become easier to construct a list of names that aren’t making new highs than those that are. While Brexit and Italian Banks’ issues still worry the markets, they are also providing the opportunity for global yields to slide lower. And while a strong rebound in Friday’s Non-Farm Payrolls should have worried investors for a potential future interest rate hike, it didn’t because few think they will pull that pin this year or next. So growth with low inflation. Call it Goldilocks. Grab two handfuls of sand and throw it into the air. As Friday’s VERY broad reaction shows, the market wants to make new highs so cover your summer shorts and get the heck out of the way of it. I saw that a bull beat a bullfighter over the weekend in Spain. It looks like both the U.S. Stock and Bond bulls want a copy of that Spanish headline.

Non-Farm Payrolls data on Friday shows why it is so important to look at the averages and not just one isolated datapoint…

@SoberLook: Chart: While US June payrolls report was much stronger than the 175k expected, the revised May was a disaster –

After the data hit, the market’s thoughts of a rate cut disappeared, while the thoughts of a rate hike went nowhere…

@jsblokland: Strong #payroll number for June (even worse number for May), #Fed rate hike still unlikely until at least 2018.

If you are wondering why stocks are following bonds higher, J.P. Morgan thinks the market is more comfortable with the DCF value of Equities at lower interest rates…

“However, investors appear to be making a very simple conclusion when considering US equities: the present PE, while perhaps mildly stretched on an absolute basis (a bit north of 16x assuming the SPX can earn ~$130 in ’17), is increasingly “cheap” in light of the price action in bonds. This debate (whether to look at valuations absolutely or relative to bonds) isn’t new (it has been raging ever since central banks deployed unconventional strategies in the wake of the crisis) but appears to have been decided (for the time being) on Fri after the US jobs data. The inability of 10 year TSY borrowing costs to rise Friday despite a blow-out 287K figure sent a strong signal that yields prob. won’t be a headwind for some time to come. While Fed assumptions shifted mildly after the NFP figures (and the Fed-sensitive 2 year yields inched up as a result), the long-end of the TSY curve (10 and 30yr yields) is beholden to int’l bond trends and thus yields will have a very difficult time rising meaningfully given the price action in Europe and Japan (where yields are sinking across curves, regardless of the credit risk associated w/individual countries). This dynamic was the big conclusion from Friday – stocks weren’t responding to materially improved economic trends but instead the rally was a function of “good enough” growth coupled w/rates that don’t seem at risk of shooting higher (if two great ISMs and a blow-out jobs number couldn’t get 10yr yields higher, then nothing will and thus Bunds/JGBs will set the pace for US borrowing costs). With the risk of higher rates ostensibly off the table, investors were more comfortable considering equity valuations through the lens of Treasury yields.”

(JPMorgan)

 

I love lopsided, big volume days in the market…

Friday was a big one. Shorts were being covered and cash was being put to work in every asset class. So tough to fight the tape from here.

(RenMac)

Shorting U.S. Bonds has become the next widow-maker trade…

@TihoBrkan: Treasury Long Bond #TLT is trading more than 2 standard deviations above the 200 day MA

Equity and Risk buyers have taken note of the significant move in Junk Bonds. Watch equities follow High Yield higher…

(Daily Shot)

Great list of the all-time highs in the major ETFs being set last week…

(@MktOutperform)

Since the previous all-time high set last summer, it has been the defensive categories which have led the market…

For the market to continue to higher levels, it will need participation from the bottom performing sectors. Stock watchers did notice the outperformance of Biotech and Semis last week.

(@bespokeinvest)

Yes, I can play the acronym game also: BURTS > S&P 500…

The week’s returns were mostly positive domestically with only Energy faltering. Continued gains out of Metals/Mining. Again important to note that Tech, Biotech and Cons Cyclicals outperformed while most risk assets outperformed their less risky counterparts…


Summer break ends Wednesday afternoon with YUM and CSX hitting the tape…

@zozotrader: Earnings for the week of 7/11 to 7/15

Much disagreement on how stocks will act during earnings. Tom Lee is in the positive camp given the rise of net positive preannouncements…

@fundstrat: Tactical argument to be long into 2Q16 earnings. Pos. pre-announcements best ratio since 2011…



The REIT spin-out question is increasingly being asked. Josh Brown had a good piece on it…

You very rarely hear people discuss the role of publicly traded real estate in their portfolio mix. Usually, this piece gets lumped into the equity side or neglected outright. Standard & Poor’s has historically included REITs in the Financial sector, alongside banks, insurers and brokerages. Investors take their exposure to the group for granted.

This step-child status is about to change. In a long overdue move, MSCI and S&P will begin categorizing REITs as their own sector of the benchmark index on September 16th. REITs now make up 20% of the S&P Financials and are valued at a combined $609 billion as of the end of June.

In our core client portfolios, we allocate to real estate separately from our equity exposure. Many managers aren’t there yet, but I believe this September’s catalyst will change the way REITs are included and thought of.

(TheReformedBroker)

 

Even the Sector SPDR team is now breaking out the REIT performance away from Financials…

(SectorSPDR)

With a stable Fed, it is tough to see how Emerging Markets do not finally get their day in the sun…

“The Fed went from printing $1trln/year to not printing at all,” they said. “Half of that circulated abroad; much of it flowing to emerging markets.” Withdrawal of that liquidity in 2014 manifested itself in a severe 2015 emerging market capital shortage. “There was as much asset liquidation by the emerging world as we had Fed asset-buying in the prior years. This now leaves emerging market exchange rates, yields and equity prices reflecting a liquidity shortage at the same time developed-world asset prices reflect abundant liquidity.”

(Eric Peters, Wknd Notes)

As Pension Plans continue to talk about leaving hedge funds, watch what they do, not what they say…

The analysis finds pension schemes’ total allocation to hedge funds has increased by 4 per cent year on year. This is despite the average hedge fund returning 3.3 per cent in 2014 compared with 5.5 per cent from the MSCI world.

When asked if the findings were a surprise, Damien Loveday, global head of hedge fund research at Towers Watson, the consultancy, says: “No, not really. While some investors, quite rightly for them and their particular circumstances, will decide that their current investments in hedge funds are not fit for purpose, there are many others that recognise the strong diversifying properties that can be found in liquid alternatives when done properly.”

(FinancialTimes)

 

Amazing list of numbers from BofA/Merrill Lynch…

@LadyFOHF: BAML’s ‘portrait of quantitative failure’. Not pretty.

But public pension boards and elected officials don’t find the list amazing in the least bit…

A post-Brexit scramble for safer bonds pulled yields lower and upended global markets just as many public pension funds wrapped up their fiscal year on June 30, eating into any annual gains and widening already-large deficits. Many public pensions that were already having a bad year are expected this month to report their worst annual performances since the last financial crisis in 2008-09…

“Brexit should be a wake-up call for pension plans because it means interest rates are going to stay low or go lower and it makes it even less likely [the plans] are going to achieve the 7.5% rate of return that most of them are assuming,” said former San Jose, Calif., Mayor Chuck Reed.

New York City reduced its return target to 7% in 2013, but that assumption is likely still unrealistic, said Lawrence Golub, a financier and member of the New York State Financial Control Board, which monitors the city’s finances. The assets returned 3.5% in fiscal 2015.

“The 7% is too high for planning purposes,” he said. “It’s not conservative.”

(WSJ)

 

Talk about Swiss efficiency…

Do not be quick to assume that U.K. manufacturers will benefit from a weak Pound…

There are other reasons that the U.K. economy might not enjoy a sales spike to foreign buyers due to the fall in sterling. Modern supply chains are complex and international, meaning companies do not benefit as much from a depreciation. Even a firm that exports, for example, a manufactured final product, may import many of its components.

The final product is cheaper for international buyers at its current sterling price, but if the parts that make it were more expensive to the manufacturer, that competitive advantage is blunted.

(WSJ)

 

Lush buys most of its raw materials from the European continent, so they are less than excited about the blow to the Pound…

(@MayfairCynic)

Still much uncertainty surrounding London’s financial district…

The City of London currently is the dominant financial center for euro-denominated markets. An open question that will hurt the U.K. banking sector for an extended period concerns the uncertain future of London’s “passport” for doing business with the 27 other EU member countries. There is a significant threat that business will move from the City to Frankfurt, Paris, or Dublin.

Particular attention is being given to whether euro clearing can remain centered in London. France’s president, François Hollande, is calling for euro clearing to be conducted outside of London. That would have a serious impact on the City as it could lose an estimated 69% of its interest rate derivatives market. Of course, London continues to have the important advantages of the English language and English law.

(Barron’s)

 

The Pew Research Center gave Hillary a Vice Presidential pick cheat sheet…

Looking at the categories that she needs help in, I would bet that she picks an older, white male from a swing state. And so in looking at the betting markets, the candidates that fit her ticket best would be Sherrod Brown (Senator from Ohio) or John Hickenlooper (Governor from Colorado). We should know both VP picks soon enough. Another number that jumps out from the weekend Pew data is that Millennials favor Gary Johnson over Donald Trump in a three horse race. Keep an eye on those young voters to see if they show up in this election cycle.

(Pew Research Center)

(Five Thirty Eight)

Now for a really ‘out there’ idea that came across my desk last week…

We haven’t heard much from John Kasich since he left the race. What if Hillary wanted to pick an old, white guy from a swing state who knew his way around Congress and could possibly heal the great divide in Washington D.C.? If she could convince him, the race would be over tomorrow. Here is a bumper sticker for your car if you feel like running with the idea.

Back to important stuff…

I know what your kids did this weekend…

In terms of Usage Time, Pokémon GO is taking up a ton of its user’s time. As of July 8th, the app was being used for an average of 43 minutes, 23 seconds a day, higher than Whatsapp, Instagram, Snapchat, and Messenger.

(Similar Web)

No, really, I know what they were doing…

As well as any tech centric person under the age of 40 years…

It was a very big sports weekend, but Pokemon Go still took home the trophy for U.S. eyeballs…

The good news is that the kids are now getting outside and exercising…

And Verizon, AT&T, Sprint, Google Droid and Apple iPhone could not be happier.

If you have no idea what Pokemon Go is and your business touches anyone less than 40 years old, grab the next kid that walks by your desk and find out…

For those not yet in the know, Pokémon GO uses your phone’s GPS and camera to turn the real world into a massive hunting ground for the iconic creatures, but it also transforms local landmarks and businesses into Pokémon Gyms (where trainers go to train their Pokémon and battle other teams) and PokéStops, which players can physically visit to stock up on free accessories and items like PokéBalls.

If you’re a local business owner and haven’t yet checked out this game, I’d highly recommend downloading it for free from the Google Play Store (where it is at #1 ahead of Snapchat and Facebook Messenger) or the Apple App Store – there’s a good chance you could be one of these Gyms or PokéStops! If that’s the case, prepare for the influx of foot traffic and potential customers. Entice them, don’t turn them away!…

Fortunately, you can do more than just embrace the game and feature it in your marketing or signage. Pokémon GO has a purchasable in-game item called a “Lure Module” which attracts Pokémon to a particular PokeStop for 30 minutes. Those Pokémon it attracts? They’re visible to and attainable by everyone in the nearby vicinity. Use it during a typically slow period of your day to get more foot traffic, and then use your creativity to turn them into a paying customer.

(Forbes)

 

One of the smartest retailers in Denver was on it immediately to drive traffic to their stores…

And a smart Zoo Director will soon be increasing the foot traffic in the Sloth exhibit by twenty-fold…

It would be great if a viral game could also help mend our current social ills…

At a popular bar in lower Manhattan this weekend…

And in Grand Rapids…

(@firstadopter)

The newly released game did wonders for Nintendo’s stock price on Friday and Sunday night. But don’t buy it blindly because it is currently a very small piece of the Nintendo company…

A two-day rally for Nintendo has lifted the company’s market value by 718 billion yen, or $7.1 billion. The surge began Friday after the debut of a new mobile game app, Pokemon Go, and accelerated Monday with the shares rising by the daily limit of 25 percent in Tokyo.

(Bloomberg)

Let’s just hope those Pokemon’s stay virtual…

(@NickatFP)

Finally, keep encouraging those young GPS monster chasers. Their next hunt might be a bit grander…

“We just did the hardest thing NASA has ever done,” said Scott Bolton, the lead investigator on the Juno mission. After a five-year journey, the spacecraft Juno managed to enter the perfect orbit around Jupiter. Soon, it will start revealing secrets of the solar system’s biggest and most unchanged planet…

The spacecraft would have reached a top speed of 165,000 mph before being slowed down. (For reference, a bullet on Earth can reach a speed of about 1,700 mph.) To achieve the right speed, Juno’s main engine fired for about 35 minutes and slowed it down by only about 1,200 mph. That was just enough to let Jupiter’s enormous gravity capture the probe in an orbit around it.

In effect, NASA achieved to throw a tiny object through 1.7 billion miles of space into an area that is only about tens of kilometers wide. It’s like throwing a basketball from London to New York and managing to hit the backboard perfectly to land the ball in the basket.

(Quartz)

Jovial spacecraft (NASA/JPL-Caltech)

And Lastly…

To get your daily dose of Blaine, 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.