Fear of Heights?

September 18, 2017


It was all-time equity highs across the board last week, as the global markets disregarded the North Korean fireworks in favor of buying 100-year Austrian bonds at a 2% yield. U.S. economic data began to feel the effects of the recent hurricanes (a pop in jobless claims to 284k) while U.S. consumer prices jumped to a surprising +0.4% (outlier or new trend?). As we wait for more bumps in the data and keep an eye on Washington D.C., there can be no denying that the stock markets feel good. Interest rates are low and credit quality remains well above average. And while the indexes are at highs, there are many experts on the sidelines who remain cautious on risk. Very important to highlight the big upward move in low quality names the last two weeks (pointing fingers at Energy and Retail). It is difficult to be short and negative when bottom of the barrel stocks make double digit percentage weekly moves. Likely some of these recent sprints in some sectors are overdone and in need of a rest. But if you are a long-time bear expecting a sharp correction, I would suggest turning off the screens and hibernating off the grid for the next several months.

Succinctly said by the Urban Camel…

The major US indices all recorded new all-time highs (ATH) this week. The very broad NYSE, covering 2800 stocks, also made a new ATH, suggesting the rally is supported by adequate breadth. Longer-term studies and the fundamental macro data continue to indicate that further upside into year-end is odds-on. Remarkably, a new survey shows that fund managers are the most underweight US equities in 10 years, despite the SPX rising 9 of the last 10 months by an impressive 17%.

(The Fat Pitch)

Perfectly put by Ben Carlson…

Ben Carlson Tweet

Notice the recent surge…

…in new highs and equally important plunge in new lows…

SPY Chart

(Stock Charts)

Another good indicator of market strength: the most shorted stocks are ripping higher…

Bespoke Market Strength Chart

For the week, it was the weakest performing assets that performed the best…

So, Small Cap stocks in equities, and Junk in bonds.

iShares Chart


Ditto for the sector performance on the week…

SPDR Chart


Several pointed the pop in consumer inflation last week…

This might continue to surprise as the Hurricane price disruptions ripple through the markets.

Inflation may be creeping higher. Inflation has been virtually nonexistent for months, but that may be starting to change. The Consumer Price Index rose a more-than-expected 0.4% in August, the strongest gain in five years. Price advances were due to a number of factors, including higher lodging costs and surging automobile prices.

(Bob Doll/Nuveen)

Europe has been having its share of inflation surprises. Maybe our turn next?

Inflation Gap Chart

As long as growth remains robust and unemployment continues falling, it will be hard for central bankers to relinquish the idea that shortfalls in inflation are temporary. Moreover, concerns about the consequences of keeping monetary policy so accommodative—in particular, dangerously overheated markets—will persist.


While the BofA/Merrill Lynch monthly portfolio manager survey shows that investors are still not thinking about inflation yet…

BoA Inflation Survey

Credit quality remains stellar and the demand for yield is ravenous…

“You know if you look at credit, it’s almost the best it’s ever been ever.”

—JP Morgan CEO Jamie Dimon (Bank)

“We’re seeing maintained high level of competition for the trophy assets, Class A properties like we own. San Francisco 222 Second traded at around the 4% cap. That’s $1,200 – low $1,200 a foot…San Diego Diamond View Tower, which is in downtown San Diego, near the ballpark traded about a week ago, going in high 4s, like 4.7%, $675 a foot. And there’s a building in Del Mar, which is our largest submarket. It’s in Ashgrove 4.5% going in yield. So prices are strong. In San Diego, we’re seeing 50 to 100 basis points over San Francisco spreads.”

—Kilroy CFO Tyler Rose (REIT)


You have now entered a default-free zone…

But I will add that Toys R Us might happen this week so September will not be a zero.

Tracy Alloway Tweet

And Hugh Hendry’s final market thoughts as he closed up his hedge fund last week…

His Eclectica hedge fund had bet large on a difficult environment for the last few years and it was very defensively positioned. Interesting comments from him as he closes the door:

Hugh Henry Quote

The iPhone disrupted the cellphone industry. Will the electric motor disrupt the German auto industry?

The former CEO fears that the auto industry – especially BMW, Daimler and Volkswagen – has underestimated the momentum of the transformation, and that it is resting on its laurels instead of developing new concepts.

The German auto industry needs “a clean break,” says Neumann. It has to “accept that diesel is gradually going extinct.” Of course, he adds, the auto industry can still make money with internal combustion engines for a number of years. “But it’s time to reduce complexity, that is, develop a much smaller number of different engines,” says Neumann. He recommends car companies use the money they save to invest heavily in electromobility.

He has a warning for the entire sector: Unless the auto industry consistently reforms itself, it “runs the risk of being outpaced by new competitors from China and the United States.”


The new hot seat in Corporate America…

There is no Board of Director’s fee large enough to compensate for what this group of 11 is about to go through.

Equifax Directors


If you need to get up to speed on what went wrong at Equifax, Wired Magazine had the details out quickly last week…

CAPPING A WEEK of incompetence, failures, and general shady behavior in responding to its massive data breach, Equifax has confirmed that attackers entered its system in mid-May through a web-application vulnerability that had a patch available in March. In other words, the credit-reporting giant had more than two months to take precautions that would have defended the personal data of 143 million people from being exposed. It didn’t.

As the security community processes the news and scrutinizes Equifax’s cybersecurity posture, numerous doubts have surfaced about the organization’s competence as a data steward. The company took six weeks to notify the public after finding out about the breach. Even then, the site that Equifax set up in response to address questions and offer free credit monitoring was itself riddled with vulnerabilities. And as security journalist Brian Krebs first reported, a web portal for handling credit-report disputes from customers in Argentina used the embarrassingly inadequate credentials of “admin/admin.” Equifax took the platform down on Tuesday. But observers say the ongoing discoveries increasingly paint a picture of negligence—especially in Equifax’s failure to protect itself against a known flaw with a ready fix.


As fans of HBO’s Silicon Valley will know, you can fit at least eight coding programmers into this house…

A house in Sunnyvale just sold for close to $800,000 over its listing price.

Your eyes do not deceive you: The four-bed, two-bath house — less than 2,000 square feet — listed for $1,688,000 and sold for $2,470,000.

“I think it’s the most anything has ever gone for over asking in Sunnyvale — a record for Sunnyvale,” said Dave Clark, the Keller Williams agent who represented the sellers in the deal. “We anticipated it would go for $2 million, or over $2 million. But we had no idea it would ever go for what it went for.”

(Mercury News)

Sunnyvale House

Geek parent cartoon of the week…

Cloud Image

There is a new entry on the most crowded trade board…

Most Crowded Trade Chart


Plenty of discussion about Bitcoin and Cryptocurrencies last week. J.P. Morgan’s top quant, Marko Kolanovic, wrote…

“Cryptocurrencies cannot be reliably valued and they have significant ‘tail risk’ that could come in the form of a regulatory ban,” writes Kolanovic. “Moreover, the whole cryptocurrency market exhibits some parallels to fraudulent pyramid schemes.”

It’s likely that other governments will follow in China’s footsteps and crack down on digital currencies, he added.

“While we don’t know whether the price of cryptocurrencies will go up or down in the near-term, the history of currencies, governments and financial fraud tells us that the future for cryptocurrencies will likely not be bright,” according to the strategist.


And the New York Times had a great article which included this description of an Initial Coin Offering…

If you’re having trouble picturing it: Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an I.C.O.


And the CEO of J.P. Morgan had his comments summed up by this Wall Street Journal reporter…

Aaron Back Tweet

If you are still confused about which cryptocurrencies are in your electric wallet, CLSA made this quick reference chart for you…

CLSA Chart


But forget about mining cryptocurrencies right now. Grab your mud boots and waterproof calculators and get to Houston or Florida ASAP…

After Hurricane Irma, Florida residents are lacking in many necessities. One of the more frustrating is a scarcity of insurance adjusters, which is threatening to anger policyholders and potentially delay the state’s rebuilding efforts.

Many of the state’s adjusters—responsible for inspecting property damage and estimating the value of the loss—are 1,000 miles away, working on claims made after Hurricane Harvey hit Texas.

Insurers are scrambling to get more of the nation’s 57,000 independent adjusters to Florida, creating a bidding war and the promise of a record payday for those who are available. Some Florida home insurers have increased fees paid to adjusters by about 30%, insurers and adjusters say. In some cases adjusters can earn $30,000 for evaluating a single complex property claim.


Moving people from 100-year flood plains will not be a cheap endeavor…

One of the toughest questions, according to Bill Read, a former director of the National Hurricane Center, is what to do about the tens of thousands of homes already in the 100-year flood plain. Houston’s median home price last year was $230,000; buying out a hypothetical 50,000 homes would cost $11.5 billion. Acquiring and demolishing every damaged structure would cost more than $31 billion.

Buyouts on that scale are “just unthinkable,” Read said.

But Emmett, the Harris County judge, is thinking about it. He said the government should move “as soon as possible,” and said it would cost “billions and billions of dollars.”

“There’s no question we’re going to have a large-scale buyout of houses in Harris County and in this entire region,” he added.


Flood Image

Recollection of the week…

The week of April Fools’ Day of 1981 began badly. That Sunday night my husband told me he was leaving me. He had fallen in love with one of his graduate students, and they were headed back to the tropics the next day.

I was completely devastated. It was totally unexpected. 33 years later, I still don’t know what to say about it. I was just beside myself.

He gave me a new vacuum cleaner to soften the blow.

(Huffington Post)

Finally, Pink Floyd is looking for a title for their new album cover…

Pink Floyd Album Cover


And Lastly…
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