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
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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.”
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.
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.”
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.
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.
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.
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.
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.
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%.”
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?
ChinaIncreased Its US Treasury Holdings To $1.09 trillion in March.