Posted in Newsclips, Samples

Discussing The Six Stocks Leading This Rally

 

Net Positions – Why Are Six Stocks Leading This Rally?
In this Net Positions, Jim Bianco takes a look at the six stocks leading the rally.

Comment

There is not a single clean metric to show if the stock market’s returns are concentrated in a few stocks. That is why we use several charts above to show the S&P 500’s gains this year are the most concentrated since the tech bubble of 1995 to 2000.  

To illustrate, a portfolio holding 86% cash and a market weighting of the six FAANMG stocks in the other 14% would be up 2.60% this year. Many fully invested, highly diversified funds have done worse.

2017 investment committee meetings can be condensed into two topics:

  • What to do with FAANMG stocks as a group
  • What to do with the other 494 stocks in the S&P 500 as a group

Simply put, managers will have a very tough time outperforming the market unless they are correctly positioned in the FAANMG stocks. While this simplifies investment meetings, managers are essentially living and dying by these six stocks.

  • Bloomberg View – A Few Big Stocks Don’t Tell the Whole Market Story
    Investor nervousness over concentrated gains in the markets is nothing new. The FANG stocks — Facebook, Amazon, Netflix and Google — accounted for a large part of the S&P 500 gains in 2015, as well. AQR’s Cliff Asness looked at the impact of individual stocks on the S&P 500 from 1994 to 2014 and compared those results to the 2015 FANG-driven market. Asness showed what the impact on overall market performance would have been if you removed the best performing stocks each year
Again, as noted above, there is no single statistic that measures the concentration of returns. This story uses a different set of statistics and comes to a different conclusion.

 

Posted in Newsclips, Samples

OPEC’s Compliance Test

 

  • Bloomberg Graphics – OPEC Reality: Saudis Delivered, Non-OPEC Didn’t.

    Just under a week from now, the Organization of Petroleum Exporting Countries will meet in Vienna to decide whether to extend the first oil production curbs in eight years in order to eliminate a glut. The group will evaluate data, described below, that highlights two key details: First, Saudi Arabia is shouldering much of the burden. Second, non-member producers – who pledged reductions of their own – haven’t delivered in full.

  • Bloomberg – OPEC Wants to Carry on Pumping Less and Earning More
    Production cuts produce higher petrodollar revenues, IEA says

    At first glance, OPEC’s cuts haven’t worked — global oil inventories remain well above normal levels. But the policy’s made a difference where it really counts: juicing the coffers of finance ministries from Baghdad to Caracas. The resurgent flow of petrodollars explains why Saudi Arabia and Russia have largely convinced everyone else in the deal to extend the production cuts another nine months to the end of March 2018.

  • Wall Street Journal – Why OPEC Plans Oil Cuts Into 2018: Aramco’s Coming IPO

    Saudi Arabia is pushing the OPEC oil cartel and other big producers gathered here this week to extend crude production cuts for another nine months. The reason: the timing of the blockbuster IPO of Saudi Arabian Oil Co., people familiar with the matter said. The Saudis want higher oil prices well into 2018 to support the initial public offering of their state-owned oil company, Aramco, people familiar with the matter said. The initial offering of 5% of the company is being timed for some time in 2018 and has been billed as the biggest ever, with valuations reaching over $2 trillion.

  • Bloomberg – OPEC Close to Agreement to Extend Oil-Supply Cuts for 9 Months
    Other proposals will be discussed including even longer curbs

    OPEC and its allies were close to an agreement to extend their oil-production cuts for another nine months as they seek to prop up prices and revive their economies. While ministers gathering in Vienna still planned to discuss other options — a shorter deal for six months or curbs lasting for the whole of next year — consensus was building around an agreement that runs through March 2018.

Comment

We have written quite a bit on the U.S. shale oil production side of the global oil market drama and did a Net Positions (webcast) on this subject last week reviewing our expectations for U.S. production. But with the OPEC meeting finally coming tomorrow, it is time to shift focus to the potential weaknesses in the planned extension. 

Expectations for this meeting have been set quite high as the Saudis and Russians publicly agreed to extend production cuts well in advance of the formal decision. Whispers of deeper cuts in production of a longer extension have been floated as well. As the largest producer and largest exporter of crude oil respectively, Russia and Saudi Arabia have made as much noise as possible in an attempt to regain control of the narrative. But U.S. shale oil producers are not the only risk in their hopes for a drawdown in global oil supplies. 

The Bloomberg Graphics story above includes the visualization below. The squares are sized to production cut targets with shaded squares indicating if they were met (orange) or not (yellow). The top row is OPEC producers led by Saudi Arabia. The bottom row is non-OPEC producers led by Russia. Compliance among non-OPEC producers has faltered. Russia has yet to be in compliance with its agreed cuts and smaller producers have followed suit. Malaysia, Kazakhstan and South Sudan have increased production since the cuts.

The Saudis have earned more excess revenue since the production cuts despite cutting production by more than they agreed. Non-OPEC producers have happily continued pumping oil to sell at higher prices. Despite any public agreements, real declines in global inventories will continue to face headwinds if non-OPEC compliance keeps eroding. 

 

 

The Wall Street Journal story above highlights the Saudis big incentive to keep oil prices high ahead of its planned IPO for Saudi Aramco. It strikes us that this is a major benefit of higher prices that is accruing only to the Saudis. Will they have to give ground to other key producers who sense this imbalance? Iran is another risk factor in achieving a balanced market and may see an opportunity in the vulnerable IPO. 

Conclusion

U.S. tight oil production is not the only threat OPEC faces in its push for meaningful cuts in global oil production. Non-OPEC compliance with production cuts could be a growing problem and the pending IPO will leave the Saudis potentially vulnerable as they try to defend higher oil prices for another nine months. 

Posted in Newsclips, Samples

U.S. Small Cap Outflows

 

  • Bloomberg – Investors Just Pulled the Most Cash From Small Caps in a Decade
    Pain in smaller stocks has some readying for selloff
    Investors pulled $3.5 billion from the biggest exchange-traded fund that tracks the Russell 2000 Index last week, spooked by the steepest selloff in the domestically focused stocks since before Donald Trump’s surprise election win. The biggest outflow in 10 years comes less than a month after small caps roared to an all-time high on speculation Trump administration policies would supercharge growth in the world’s largest economy.

Comment

The last time Bloomberg noted a similar mass exodus by U.S. small cap equity ETF investors was on April 4. Net 5-day flows bottomed on April 7 at -$3.18 billion. We published an update on small caps and the reflation trade on April 12 when it seemed the tide had turned. The Russell 2000 dipped by another 1% before rallying 5.5% through April 26. 

This time it appears as if net flows may have already bottomed. The top panel of the chart below shows total assets in U.S. small cap equity ETFs have fallen 2.5% since May 15 and 5% since the April 26 peak. The bottom panel shows 5-day net flows for small cap ETFs. 5-day net flows bottomed on Friday (May 19) with $3.46 billion leaving small cap ETFs in the prior week. Total net flows for the past 5 days were -$1.92 billion. 

Though slightly larger in magnitude than recent outflows, we think the Bloomberg story overstates the severity of the outflows. 

 

 

Performance for U.S. small cap ETFs has been strong. On average, small cap ETFs are +4.7%. They are up 6.6% since Trump’s election. Small cap ETF investors are likely to continue the dip buying behavior as long as the post-election investments are profitable. 

 

Posted in Newsclips, Samples

What To Look For In The FOMC Minutes

 

Comment

As the chart above shows, the market has priced in a June rate hike as a virtual certainty. There is no need for the qualifying language used below. At this point, the market would only be shocked if the Fed failed to hike.

 

  • The Wall Street Journal – Fed Minutes to Offer Clues on Debate Over Path of Rate Increases|
    Federal Reserve officials left their benchmark short-term interest rate unchanged within a range between 0.75% and 1% at their meeting May 2-3, and minutes of that gathering could indicate whether they are preparing to lift it by a quarter percentage point at their next meeting June 13-14. The minutes, to be released 2 p.m. EDT Wednesday with the usual three-week lag, are likely to provide more detail on the internal debate over the path of rates. They also could shed light on evolving plans to shrink the Fed’s holdings of bonds and other assets. Here are five things to watch for.
  • Reuters – U.S. rate hike in June ‘a distinct possibility’ -Fed’s Harker
    “I think June’s a distinct possibility … quite possible,” Patrick Harker told reporters. But “if we get another surprise on inflation to the downside, that would worry me a little,” he said when asked what might delay that policy tightening.

Posted in Newsclips, Samples

The Problem With Trump’s Economics Forecast

 

  • The Wall Street Journal – Greg Ip: Nice 3% Target, Mr. Trump. How Will You Get There?

    Yet there are good reasons independent economists think the U.S. can’t return to its historic growth of 3%. The U.S. working-age population grew 1.2% a year from 1950 through 2000. With the baby boomers retiring and families shrinking, it will grow less than 0.3% a year over the next decade. To make a credible case for 3% growth, Mr. Trump has to identify some wellspring of workers or productivity, that is output per worker, that his predecessors have missed. Mr. Mulvaney thinks prodding many people off social safety-net programs and back to work will be good for them, and for growth. In principle, that’s true, but the magnitudes are doubtful. About half of household heads on food stamps and three quarters of those on Medicaid already work, says Robert Moffitt, an economist at Johns Hopkins University. At most, 13 million recipients of Medicaid and 6.5 million recipients of food stamps don’t work (and the two groups overlap). The growth of people on disability insurance can be slowed with tougher eligibility, but experience suggests getting existing recipients off is almost impossible.

Posted in Newsclips, Samples

What Is Trumponomics?

  • MarketWatch.com – Caroline Baum: What exactly is Trumponomics?

    Already we are hearing references to “Trumponomics.” But what exactly are the priorities or objectives of a president who seems to make things up as he goes along, who says one thing one minute and contradicts himself the next, and who is neither a policy wonk nor remotely interested in policy details? That isn’t to say President Donald Trump is wishy-washy about all aspects of economic policy. He has been a strong and unrelenting critic of “free trade” as far back as the 1980s, refashioning the accepted wisdom on trade as a win-win into a win-lose. And in his book — literally and figuratively — America has been on the losing end for decades. (Trump insists he supports free trade, as long as it is fair.) Trump has long been opposed to immigration, both legal and illegal, preferring a policy of America First and Only. Such nationalism may sell well in the Rust Belt, where many blue-collar workers are no longer able to earn a middle-class wage, but it deprives the U.S. of one key input to growth: young, able-bodied workers.

Posted in Newsclips, Samples

The 2/10 Spread Is At Its Lowest Level Since October

 

  • CNBC – Bond market warning? A closely watched economic indicator just hit a postelection low

    The short end of the yield curve is “rising on expectations of tighter monetary policy, while the low end is more correlated to growth … so I think the case could be made that the curve continues to narrow,” Oppenheimer technical analyst Ari Wald said Monday on CNBC’s “Trading Nation.” Yet this doesn’t worry Wald, who noted that the yield spread turned fully negative before each of the four most recent recessions. “We don’t think the flatter curve is a warning,” he said. “As long as banks can borrow short[-term debt] and lend long[-term debt], we think the economy can do just fine and the stock market can do just fine.” “The flattening ties into the fading of expectations for some kind of fiscal push this year,” Caron said Monday on “Trading Nation.” “This is the broader representation of a resetting of expectations, in the United States at least, and the expectation for maybe slower growth than what we expected just after the election.”

Posted in Newsclips, Samples

Pricing In Reflation

 

  • Blackrock Blog – Jeffrey Rosenberg: What the bond markets tell us about reflation
    We see stable global growth and inflation helping the Federal Reserve make good on its promise to Normalize normalization. Global developed bond yields appear vulnerable to further increases as French political risk fades, leaving improving fundamentals as a longer run driver for eventual global policy normalization. We remain overweight U.S credit for its income potential, but prefer investment grade debt given elevated credit market valuations. We are underweight European credit and sovereign debt amid tight spreads and improving growth.

Posted in Newsclips, Samples

Gaming Earnings

  • The New York Post – John Crudele: How companies lie about earnings to meet Wall Street expectations

    Everyone knows by now that companies can — and do — manipulate their per-share earnings to meet Wall Street expectations. But I’ve always worked on the assumption that corporate revenues were pure numbers — without much manipulation going on there. Well, it turns out that I was wrong. In the current issue of Accounting Horizons, put out by the American Accounting Association — I read it so you won’t have to — a story with the can’t-put-down title of “Revenue Benchmark Beating And the Sector Level Investor Pricing of Revenue and Earnings” details “the propensity of companies to exactly meet or slightly beat analysts’ forecasts in conformity with the priorities of investors.” Still don’t understand? Companies are fudging their revenues as well as their earnings. And that should make investors very nervous.

Comment

Gaming earnings is a topic we have covered extensively. Back in 2009 we offered the following explanation on how GE massages their earnings:

Let us quote from Jack, Straight From the Gut (2001 edition) by Jack Welch:

Page 224
I was getting ready to leave the office for a long weekend on Thursday night, April 14, 1994, when Mike [Carpenter, Head of GE Capital] called with one of those phone calls you never want to get. “We’ve got a problem, Jack,” he said, We have a $350 million hole in a trader’s account the we can’t identify, and he’s disappeared.

Jack continues:

I didn’t yet know who Joseph Jett was, but over the next few days I would learn more then I cared to about him. Carpenter told me that Jett, who ran the firm’s government bond desk, had made a series of fictitious trades to inflate his own bonus. The phony trades artificially boosted Kidder’s reported income. To clean up the mess we would have to take what looked like a $350 million charge against our first quarter earnings.

The quarter had ended and Jack was given the bad news that GE was going to miss its numbers. What was Jack’s response?

The news from Mike made me sick: $350 million, I couldn’t believe it. It was overwhelming.  I rushed to the bathroom, and my stomach emptied in awful spasms.

Let there be no surprise, the “GE culture” is all about beating the street’s quarterly estimates by a few cents. What makes the head of GE throw up? Products that kill? Laying off employees? Bad strategic decisions? Apparently not. What makes him throw up is missing street estimates by a few cents. His division heads understood this and would go to any length to prevent it from happening.  More from Jack:

Page 225
That Sunday evening, I called 14 of GE’s business leaders to deliver the bad news and apologize to each of them for what had happened. I felt terrible, because this surprise would hit the stock and hurt every GE employee. I blame myself for the disaster.

The previous year, 1993, when Jett’s phantom trades accounted for nearly a quarter of the profits made by Kidder’s fixed income group, Jett had been named Kidder’s “Man of the Year.” We had approved Mike’s request to give Jett a $9 million cash bonus, a huge award even for Kidder. Normally, I would have been all over this. I would have dug into how one person could have been so successful, and I would have insisted on meeting him.

The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said the could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise.

Please re-read the last highlighted passage. It sure sounds like Jack just described SEC and FASB violations as an integral part of the GE culture. Didn’t we create Sarbanes-Oxley in 2002 to stop such cheating?

 

Posted in Newsclips, Samples

How ‘Buy-The-Dip’ Became A Learned Response Function

 

  • The Wall Street Journal – ‘Buy the Dip’ Is Becoming a Pavlovian Reflex
    Mr. Chan notes that five standard-deviation stock declines are happening more often. There have been three such declines in U.S. stock market in less than a year, a frequency nearly 20 times higher than the long-term average. One struck following the “Brexit” vote last June and the other hit on Sept. 9.  Here’s the buy-the-dip aspect: Not only are stocks abruptly falling, they rebound with atypical haste. The S&P 500 recouped the bulk of its 5.3% two-day post-Brexit decline in five days; it took nine trading sessions after September’s 2.5% one-session drop. In only three days, S&P 500 recovered nearly all of last week’s 1.8% drop, the second-fastest rebound following a five standard-deviation drop on record, according to Mr. Chan. “Market shocks have come to be viewed by investors as alpha opportunities rather than marking the onset of rising uncertainty,” Mr. Chan wrote. “Initially, a clearly visible and high strike Fed put taught the market to ’buy the dip’; now, however, this behavior has simply become a learned response function.”

Posted in Newsclips, Samples

More On Zillow’s Zestimate

  • The Upshot (NYT Blog) –  Angry Over Zillow’s Home Prices? A Prize Is Offered for Improving Them

    It’s one of the oldest tricks in an internet company’s playbook. Concoct a tool that gives the public new statistics on something — the quality of a restaurant or a toaster, say. Then watch visitors flock to the data and worry about accuracy later. Few such tools have been as controversial as ones that show people the market value of homes, using software algorithms to do the estimates. Homes are typically the most valuable asset in people’s lives, so emotions run hot when these estimates are seen as too high or too low. The best known of these tools — the Zestimate, from the online real estate website Zillow — began on the internet 11 years ago and has since amassed a huge audience of homeowners, shoppers and nosy neighbors. Sellers say unfair Zestimates can kill offers on their homes. About 171 million people visit Zillow each month, according to the company.

Comment

We wrote about Zillow’s home price estimates in a post yesterday:

Zillow’s estimate is providing buyers of real estate with a different anchor, and one that is arguably more objective than the seller’s asking price. We’re not surprised a home builder finds the new anchor too low for their taste (highlighted above). And there are certainly instances where Zillow’s estimate could be misleading. Nonetheless, Zillow’s predictive model for estimating the sales price reduces the anchoring power of the asking price and levels the playing field between buyer and seller.

Posted in Newsclips, Samples

Robert Shiller On The Markets

 

  • CNBC – Nobel winner Robert Shiller: Stay in the market because it ‘could go up 50 percent from here’

    Nobel Prize-winning economist Robert Shiller believes investors should continue to own stocks because the bull market may continue for years. CNBC’s Mike Santoli spoke with Shiller in an exclusive interview for CNBC PRO. Santoli asked Shiller about his market outlook. “I would say have some stocks in your portfolio. It could go up 50 percent from here. That’s what it did around 2000, after it reached this level, it went up another 50 percent. So I’m not against investing in the stock market when you consider the alternatives. But I think if one wants to diversify, US is high in its CAPE ratio. You can go practically anywhere else in the world and it’s lower,” Shiller said. “We could even set a new another record high in CAPE, that’s not a forecast.”

Posted in Newsclips, Samples

Fed Communication And The Markets

  • Bloomberg View – Mohamed A. El-Erian: How Central Bankers Get Their Communication Timing Wrong
    Comments by the president of the St. Louis Fed encouraged the markets’ belief that the Fed is their BFF.

    By suggesting that the Fed may need to be more stimulative than it has signaled recently, the comments spoke directly to many years of market conditioning and over-indulgence — — specifically, Bullard observed that recent economic developments “may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data.” The issue wasn’t the content of Bullard’s remarks. The views he expressed in his well-crafted speech are understandable given the recent patch of soft economic data, together with lingering uncertainty as to whether this is truly temporary or indicative of a persistent structural headwind. Indeed, there is room for genuine discussion, debate and further research. But it is the timing that is more problematic, as it fuels — once again — the deeply-ingrained view that central banks are the markets’ BFFs. Bullard’s comment, made in the context of ample market liquidity (both actual and perceived) — short-circuited any meaningful market consideration regarding the prospects for pro-growth fundamentals. And this is a needed and important process, especially given the degree to which asset prices have already been decoupled from fundamentals.

Posted in Newsclips, Samples

More On The Fed’s Inflated Balance Sheet

  • The Financial Times – Reminder: A “normalised” Fed balance sheet won’t be normal-sized

    Even before the Fed addresses the tougher questions — how it wants to control interest rates, and who it wants to trade with — the balance sheet should probably be around $2.1tn, Logan says. (For context, the Fed currently owns about $2.5tn of Treasuries and $1.8tn of mortgage-backed securities. With our emphasis, and explanation in brackets: “In projecting the size of the normalized balance sheet, one can make assumptions about the long-run trends that will determine future levels for each of these non-reserve liabilities, subject to various kinds of uncertainty. Even taken at today’s levels, the TGA [the Treasury’s account with the Fed], other deposits, and the foreign repo pool alone account for about $600 billion of the Federal Reserve’s current balance sheet size. Adding on currency outstanding brings this set of non-reserve liabilities to $2.1 trillion today, and this set is likely to grow as the economy continues to expand. This sum does not yet consider reserves or ON RRPs.

Posted in Newsclips, Samples

Corporate Debt

 

  • The Financial Times – Why investors downplay US debt binge risks

    Outstanding US corporate debt has swelled more than 275 per cent over the past two decades to $8.5tn, with credit ratings broadly deteriorating over that period. In 1996, roughly two-thirds of groups rated by S&P Global held an investment-grade rating. That has fallen to less than 45 per cent today, alongside the surge in the junk debt industry.  The report from the IMF singled out companies with $4tn of assets that it identified as vulnerable should interest rates rise, particularly should the Federal Reserve tighten policy faster than expected to tame inflation. Interest coverage, a key metric that measures the earnings companies have to cover debt payments, hovers near its lowest level since 2010 for investment-grade US companies, according to Bank of America Merrill Lynch.

 

Posted in Newsclips, Samples

Bank Revenues

 

  • Business Insider – A definitive breakdown of the gloomy state on Wall Street

    Don’t be fooled. While Wall Street bank revenues appeared to bounce back in the first quarter of 2017, with banks posting strong results in fixed income trading in particular, industry-wide revenues were still down on the same period from 2012 to 2015. According to data from industry consultant Coalition, investment bank revenues at the top 12 banks totaled $42.4 billion in the first quarter, up 14% from the previous year, but still down sharply on previous years.

Posted in Newsclips, Samples

Moody’s Downgrades China

  • Bloomberg Business – China Hit by First Moody’s Downgrade Since 1989 on Debt Risk

    Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3 on Wednesday, with markets paring losses in the afternoon. Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative. It’s “absolutely groundless” for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to a response released by the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said.

Posted in Newsclips, Samples

Magellan Financial Group Founder Calls Uber A “Ponzi Scheme”

  • Business Insider – Australian who runs $37 billion investment fund calls Uber a ‘ponzi scheme,’ claims it’ll be broke in a decade

    Hamish Douglass, the co-founder of the Magellan Financial Group with more than $37 billion USD under management, thinks ride share service Uber has a less than 1% chance of surviving the next decade. “It’s constantly losing money and its capital-raising strategy is a ponzi scheme,” he said at the annual Stockbrokers and Financial Advisers Conference in Sydney. Douglass says Uber is under threat from the arrival of autonomous cars where the ride sharing business has no advantage. “When I look at Uber … I think of it as one of the most stupid investments in history,” the Australian Financial Review reported him saying. “The probability of this business going bankrupt in a decade is 99%.”

Posted in Charts of the Week, Samples

Merger Arbitrage (Human) vs Algo Hedge Fund Returns: The two charts below show the ends of the spectrum. The first chart shows the “algo and bot” driven hedge funds are doing poorly relative to the S&P 500 (blue). The second chart shows arguably a human-based activity, merger arbitrage. Of the more than 30 categories HFR tracks, this is the best performing category over the last three years, beating the global bond market (orange) and the MSCI world index (light green), but lagging the S&P 500 (blue). 

 

 

         

Apple, Disney and Berkshire Hathaway are regarded as three most highly thought of stocks to hold for the long-term. The charts below show a ratio of the stock price to the S&P 500 on a total return basis. All three have peaked years ago against the S&P 500 and collectively have been in-line to under-performing the S&P 500 for many years. Is this yet another reason to give up on stock picking and buy a passive index fund?

 

 

 

     

Heavy Long Positioning In EM Currencies Finally Losing Ground To Developed Currencies? 

 

 

China Increased Its US Treasury Holdings To $1.09 trillion in March.