Repositioning…

April 17, 2017

aircraft carrier

(April 9, 2017 | The aircraft carrier USS Carl Vinson (CVN 70) transits the South China Sea while conducting flight operations)

While the world’s superpowers reposition their military strength toward the borders of North Korea, the financial markets look to be following closely in their wake and reordering their asset weighting toward one of less risk. North Korea, Syria and Russia remain major diplomatic question marks for the U.S. State Department right now. We will see if the recent show of force of a MOAB dropped in Afghanistan and three Navy Carriers on their way to Korea will calm the situations or make them more tense. Back in Washington D.C., the political agenda remained blurry as the White House came out in strong favor of a weak U.S. Dollar and lower interest rates. They are also fine with China manipulating their currency if they will help fix North Korea. Also, major tax reform will be difficult in 2017 because Healthcare must be fixed first. Throw in the upcoming French election uncertainty, customer dissatisfaction with United Airlines, and an ugly start to the quarterly earnings period (with negative earnings reactions to Fastenal, MSC Industrial, Wells Fargo, JP Morgan and Citigroup) and the market seems to have its work cut out for it. It will be a busy return to the work week as earnings go full swing and the market looks for reasons to buy and not sell.

For the week, safety outperformed…

Bonds and Gold won the return race while international stocks kept your returns flat. U.S. stocks were the worst choice and the market did little to differentiate across market cap as big and small fell 1%+.

bonds and gold

Across the sectors, Gold miners were the risk off place to hide while Biotech was the risk on place to find gains…

Worst performing were Banks/Financials, Semis, Energy and Materials as the market pulled in its horns.

sectors

A big slate of big names reporting this week. Here is a good visual list…

earnings release

(@eWhispers)

Adding to market volatility last week were some strong statements from the POTUS on the U.S. Dollar and interest rates…

As for the dollar overall, Trump reiterated that it is “getting too strong,” which, with characteristic modesty, he partially attributed to a surge of confidence that he had inspired. But, the president quickly added, the greenback’s strength is hurting the U.S. “Look, there’s some very good things about a strong dollar, but usually speaking, the best thing about it is that it sounds good,” he told the Journal.

That has been Trump’s tune consistently. In contrast, he has changed his public position on Yellen and her prospects of being reappointed as Fed chair when her term ends next year. “I like her, I respect her,” Trump said last week, adding, “it’s very early” to consider a change in the central bank’s leadership. There are three vacancies on the Fed’s seven-member board of governors, and Stanley Fischer’s term as vice chair is also up in 2018, so there’s quite a to-do list with regard to the central bank.

During the election campaign, however, Trump told CNBC that Yellen should be “ashamed” of holding down interest rates to boost the economy under former President Barack Obama. Those low rates, he charged, created a “false stock market,” which would be vulnerable when rates finally rose.

Of course, the Fed subsequently raised its federal-funds rate twice in quarter-point increments, in December and again in March, with the central bank’s key rate target up to a still-modest 0.75%-1%. Last week, Trump said, “I do like a low interest-rate policy, I must be honest with you.”

(Barron’s)

 

The POTUS wanted lower interest rates last week, and it got it…

interest rates

The housing market just clicked in a new cycle high in purchase applications…

But if the White House wants lower interest rates, then this trend break could have further strength.

home purchase applications

Speaking of housing, Apartments.com expects to have a good 2017 as apartment vacancy rates continue to climb and owners need more help finding tenants…

Not something that you want to hear if you are long apartments or rental homes. But good news for all those kids out there looking at $2,000/month rents.

rent analysis

(@JakeCahan)

One asset class shooting back into favor quickly is Municipal bonds…

Munis were a quick source of funds after the election but with no legislation on deck in Washington, the asset has only seen buyers recently.

Investors have ploughed back into municipal bond funds, with the most money flowing into the asset class in a single week since 2013, as concerns abate over reforms that would impinge on the tax-exempt status of the investment class.

The shift back into funds that invest in the $3.7tn market — used by US cities and states to fund public works — underlines the view that the Trump administration will not soon take the axe to the country’s tax code, preserving a key benefit to holding municipal debt.

Municipal bond funds recorded $1.6bn of inflows in the week to April 12, the third largest weekly level on record, according to flows tracked by EPFR. Between the election and end of 2016, investors drained more than $14bn from the portfolios — or roughly 4 per cent of the value of municipal bond funds, the EPFR data show.

(Financial Times)

rent analysis

Many know that I fall back to looking at credit during times of uncertainty. This chart of High Grade vs. Low Grade is showing some concern…

The green bars in the chart below show the iBoxx Investment Grade Corporate Bond iShares (LQD) trading at a new five-month high after clearing its 200-day average. The red bars, however, show the iBoxx High Yield Corporate Bond iShares (HYG) backing off from its early March high. The fact that investment grade bonds are rising, while junk bonds are weakening, carries a potentially negative message for stocks. That’s because junk bonds are more closely correlated with stocks than bonds.

(Stock Charts)

junk bonds chart

Financials have also been an important part of the markets move higher. Now it looks like all of the buyers have become sellers…

financial sector chart

Also worrisome is the slowdown in new highs in the market…

@ArthurHill: New highs are dwindling, but we have yet to see an expansion of new lows. April new lows still less than March.

S&P 500 index chart

On the flip-side of the market risk equation, Gold looks like it wants to breakout…

gold shares chart

(@JLyonsFundMgmt)

Looking abroad, China had some good economic data this weekend…

china economic data

Take notice, there is a change in trend in China…

China’s economy accelerated for a second-straight quarter as investment picked up, retail sales rebounded and factory output strengthened amid robust credit growth and further strength in property markets.

Gross domestic product increased 6.9 percent in the first quarter from a year earlier, compared with a 6.8 percent median estimate in a Bloomberg survey. It was the first back-to-back acceleration in seven years.

(Bloomberg)

China economic growth chart

Given this China data, another reason to look at the relative valuations of U.S. versus the rest of the world…

We showed an equivalent chart like this of U.S. vs. Japan. It is even more extreme when comparing to the BRICs. (Brazil, Russia, India, China)

China vs. U.S. economic growth chart

Another asset finding gains is lumber prices…

Flip back to strong housing demand and falling interest rates.

lumber prices chart kicking sand cartoon

Someone kicking beach sand in the FT this weekend…

Hanging over Pimco is the question of how it will perform if interest rates rise. After a 35-year bull market for bonds, a sharp reversal is the one thing that Mr. Roman says he worries about.

“It is in the middle of the night when we think about this. A really drastic and rapid rise in rates is bad for all financial assets. But medium-term it should be incredibly good for Pimco because I’m convinced we do better than most.”

It is at this point that DoubleLine comes up in conversation, albeit obliquely. The upstart bond manager founded in 2009 was one of several beneficiaries of Pimco’s recent outflows; it has grown to $100bn in assets and founder Jeffrey Gundlach has often been called the heir to Mr. Gross’s “bond king” title.

“We’ll do better than most,” Mr. Roman continues, imagining a bond bear market. “We’ll kill all the $100bn shops down the road in LA. If you have a long-term view, that’s actually a way to cleanse a lot of the weaker guys.”

(Financial Times)

 

We will get plenty of travel data points with earnings this week. Here are some more slowing industry data points from last week…

Demand for flights to the United States has fallen in nearly every country since January, ¬according to Hopper, a travel-booking app that analyzes more than 10 billion daily airfare price quotes to derive its data. Searches for U.S. flights from China and Iraq have dropped 40 percent since Trump’s inauguration, while demand in Ireland and New Zealand is down about 35 percent. (One exception: Russia, where searches for flights to the United States have surged 60 percent since January).

The result could be an estimated 4.3 million fewer people coming to the United States this year, resulting in $7.4 billion in lost revenue, according to Tourism Economics, a Philadelphia-based analytics firm. Next year, the fallout is expected to be even larger, with 6.3 million fewer tourists and $10.8 billion in losses. Miami is expected to be hit hardest, followed by San Francisco and New York, the firm said.

(Washington Post)

 

Speaking of travel, the United Airlines Board of Directors needs to just start dialing every number at Amazon looking for any nominee…

True Customer Obsession

There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.

Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.

Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.

(Amazon CEO, 2016 Shareholder Letter)

 

Cutting back work to 40 hours a week is the new “Winning the Lottery”…

“I’ve been a nurse for 28 years and I’ve always worked a lot of overtime at more than one job,” said the player. “We’ve been really short staffed lately, so when I told my boss she was afraid that I was going to retire. I told her that I am not planning to retire, but I am cutting my hours back. I’m not sure I’ve ever worked just a 40-hour week, so working just 40 hours at one job will feel like retirement to me!”

On Monday, the woman claimed her prize at Lottery headquarters and will receive a one-time lump payment of $2.5 million.

(Fox 11)

 

Finally, the best front page of the weekend…

 

kicking sand cartoon

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