Unclear Risk…

April 25, 2016

Unclear Risk…

For the past three months the market has shifted into a ‘Risk On’ position, and last week showed no abatement of the trend, even with the wrench of earnings thrown in. If anything, earnings of more predictable earners led to selling, while ugly earnings led to buying. It was a very bizarre week especially with the ‘no agreement’ in Doha leading to a surge in energy prices; few saw that one coming. Weak economic data kept thoughts of immediate Fed action on hold while the bulk of us spent our time nose down in earnings releases. There were some significant earnings movers as a result of their releases and comments last week…

In the winning camp, look at:

SWN +15% Energy
NSC +11% Railroads
DFS +8% Credit Cards
URI +8% Industrial
UA +7% Cons Discretionary
STI +5% Banking

For the losing camp:

NFLX -13% Cons Discretionary
UAL -10% Airlines
MSFT -7% Technology
IBM -6% Technology
GOOGL -5% Technology

But at the end of the week, the ‘Risk On’ trend persisted as you can see in the numbers below…

Energy, materials, commodities and the more leveraged and lower quality names and countries outperformed, while high quality, safety and what has worked were sold once again. Take note of the brutal rotation in consumer staples and utility stocks which were caught in significant portfolio rotations last week.

Team Leuthold noted a significant change in a key component of their Equity model. I highlight it because the global credit markets are big and indicative…

When Corporate bond prices are rising on a smoothed 26-week basis, the DJIA has generated an annualized price gain of 11.5%, compared with a small annualized loss (-0.3%) when Corporate bond prices are falling. Decade-by-decade results show remarkable stability in this relationship over time, and the indicator’s performance this decade is close to its long-term results.

(The Leuthold Group)

@LeutholdGroup: #CorporateBond action sparked $DJIA BUY signal. Signal record not perfect but solid; long-term +11.5% annlz’d return

Another chart on the dramatic appetite shift for risky corporate credit…

@jsblokland: High Yield Chart! The global #highyield #spread has tightened by a staggering 220 basis points since mid February.

If some are wondering where the fuel for the next round of risk buying might come from…

@Vconomics: BofA: There are $6 trillion of negative yielding government bonds and $17 trillion of bonds yielding less than 1%.

No doubt some no/low yielding cash found its way into Argentina last week…

Investors who bought bonds in Argentina’s record-breaking sale have made $597 million in profit in just two days.

The bonds that were sold for $16.4 billion now have a market value of about $17 billion as of 12:11 p.m. in New York, according to prices compiled by Bloomberg. The notes, the first overseas debt sold by the country in 15 years, got bids from potential buyers for more than four times the amount offered, according to the government.



And the appetite for junk credit even includes those bonds traded with clothespins for your nose…


The largest component of the worst credit risks are those exposed to commodities. Energy prices have bounced. And now here comes the bounce in basic metals…

“Our view is that China is destocked and restocking should support the steel rally at least for the rest of the second quarter,” he said.

“And if real demand for infrastructure follows through to absorb rising steel output, prices may be supported all year, as our global steel team believes.”

Credit Suisse’s most recent Global Steel Update said that the world was “at the start, for the first time since 2009 … of a major restocking event which could last over four quarters, delivering a very strong 2017.”

“We think Chinese demand could surprise at 5 to 10 per cent growth in 2016, versus house forecasts of minus 2 per cent.”

Global steel recovery outside of China “is likely to be more robust than most investors fear, given the extent of destocking in the past 19 months and protectionism in place limiting export flows.”

(Sydney Morning Herald)

The weak U.S. Dollar has helped commodity prices. Combine the weak Dollar with tightening credit spreads and rising equity prices and you have just laid out a perfect environment for financial conditions…

@LizAnnSonders: Financial conditions looser now than when #Fed raised rates in December h/t The Daily Shot newsletter

Speaking of financial conditions, last week’s Markit Mfg PMI should help to keep the Fed in check for the time being…

At 50.8 in April, down from 51.5 in March, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index signaled the weakest upturn in overall business conditions since September 2009. The flash PMI index, which is based on approximately 85% of usual monthly survey replies, was only marginally above the crucial 50.0 no-change threshold. As a result, the headline figure was slightly weaker than the previous post-crisis low recorded in October 2012 (51.0).

Softer rates of manufacturing output and new business growth, alongside a weaker rise in staffing numbers, were the main factors weighing on the headline PMI figure during April. The latest upturn in production levels was only fractional and the slowest recorded by the survey since the recovery began in October 2009. Manufacturers cited generally subdued demand conditions, delays to spending decisions among clients and ongoing weakness within the energy sector.

(Markit Economics)


Looking at the updated Barron’s study showed that Portfolio Managers are cautious. It also sheds light on some other consensus opinions, including some stock opinions that look too one sided…

The Dow Jones Industrial Average topped 18,000 last week for the first time since July, cause for celebration on Wall Street and in the press. But the market’s progress from here could be more grudging than the high-fives and cork-popping suggest.

That’s the message of Barron’s latest Big Money poll, which finds only 38% of money managers bullish or very bullish about the prospects for stocks in coming months, down from 55% in last fall’s survey and 45% last spring. The current reading is perhaps one of the least bullish in the poll’s more than 20-year history, a reflection of the market’s lofty valuation.



No comment on this section of the survey…

Ron Baron would like to sing a song to the 81% of the Tesla ‘thumbs down’…

What is your best idea?

Tesla Motors [TSLA]. In five years, they said they’ll do 500,000 cars a year. [Tesla is guiding for sales of 80,000 to 90,000 cars this year.] At 500,000 cars a year, that business should be doing $35 billion to $40 billion of annualized revenues and have an operating profit of $6 billion to $7 billion a year. I think that would be worth 20, 25, 30 times earnings. That makes it a $120 billion to $130 billion business now selling for $30 billion. So that’s a quadruple in five years. This can be the best, largest car company. Toyota does 10 million cars a year; Volkswagen, almost 10 million; General Motors, 9.8 million. Tesla is a better manufacturer. Their new car will cost $35,000 to $50,000 instead of $100,000. In one week, they took 325,000 orders with people putting down more than $1,000 each for a car that won’t even begin delivery until late 2017.



If you want to get bulled up on the most underperforming asset classes then Meb Faber wants to share some reversion-to-the mean work with you…

50% Returns Coming For Commodities And Emerging Markets?

If history is any guide, we’re standing at the edge of 40%–96% returns over the next two years.

This isn’t wishful thinking or wild speculation. I’m not selling anything. Rather, I’m just reporting historical gains from a market set-up that’s repeating itself right now.

So what’s going on?

Well, imagine a rubber band. If you stretch it only slightly then let it go, it’s not going to shoot very far. On the other hand, if you stretch the rubber band to its full elasticity then release it, it’s going to rocket across the room.

History suggests we’re about to see some asset classes rocket across the room.

(Meb Faber)


Another intriguing chart if you are interested in Emerging Market investing…

A ratio that stands out right now is the gold-to-silver ratio, which measures the number of silver ounces needed to buy a single ounce of gold. The spread was above 80 recently, which was the highest since late 2008 and the financial crisis.

Silver is considered to be both a precious metal and an industrial metal. So if industrial metals begin to improve (as they have in the past two months), silver should do well. Here’s where things get interesting. Emerging markets (EM) are correlated with industrial metals, as places like Brazil and Russia are also big commodity exporters.

The chart below shows that the previous two times the gold-to-silver ratio was up near 80, the MSCI Emerging Markets Index was near a low. Time will tell if this plays out again, but it is worth watching for allocating to EM.

(LPL Research)

Uber is now pulling away from car rentals for business travelers…


Most interesting Facebook stat of the week…

The Dodgers have three million Facebook likes. The New York Yankees have 8.5 million. Manchester United has 69 million.



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