Welcome to the sequester, long live sequestration…
Putting credit’s bull market into perspective | Vincent Reinhart & Matthew Hornbach (Morgan Stanley)
The cyclical bull market in high yield credit isn’t a bubble:
1. Relative spreads on HY vs Treasuries are at historical norm (500bps), far wider than lows (<300bps) in 1998 & 2007
2. Junk bond proceeds have gone more toward productive uses (refinancing & dividends/buy backs) than in 2007 (LBOs)
3. HY issuer cash/debt (12%) is near 15 year highs
Bubble on the margin: NYSE margin balances nearing 2007 highs | Zero Hedge
Compares perfectly correlated NYSE margin debt & Dow Jones Industrial Average (DJIA), which suggest we’re near a market top a la 2000 & 07. January’s $364B in gross debt is nearing the $381B record from 7/2007, just before the crisis.
[Unfortunately, I think margin debt can exceed 2007’s alltime high before a bust, adjusting for inflation, given the low cost of capital & considering the net margin balances, for which investors’ -$77.22B negative net worth is on par with lows from 2007 & 11 corrections, but far from 2000’s -$130B.]
Video: Stanley Druckenmiller on US entitlements, “I see a storm coming” | Bloomberg TV
Druckenmiller is campaigning to raise awareness of ballooning US entitlement costs (Social Security/Medicare/Medicaid), which will bankrupt the next generation.
Also, while equities are cheap relative to bonds, he says that ZIRP has subsidized everything from real estate to gold & investors will “rue the day.” He prefers trading FX (a relative market) instead of risk assets.
Rail traffic weekly: Settling in to steady trend growth | Association of American Railroads (AAR)
Weekly traffic +4.1% (vs. this week last year), bringing total ytd volume to +0.6% y/y.
4 of 10 carload groups posted gains: Petroleum products +66.4%; grains -17.3 & ores/metals -10.
[After the calendar-related blip to start the year, volumes have settled into a slow-growth velocity.]
Global Purchasing Managers Index (February 2013): Global slowdown still underway, but US saves the day | Business Insider
Global PMI decelerating (down to 50.8 fm 51.4 last month, >50 indicates growth):
Japan recovers to flat (50.0 fm 47.7) amidst Yen devaluation.
Chinese growth decelerates to brink of contraction (50.1 fm 50.5), along with the rest of Asia.
Australia’s contraction continues (up to 45.6 fm 40.2), with exports still near historic lows (31.2 fm 31.1).
Europe still contracting (47.9 unch), with a big recovery in Spain & Germany offset by continued weakness in Italy & France.
UK surprised to downside (47.9 fm 50.5), with deepest contraction since 11/2012.
US ISM beats expectations again (54.2 fm 53.1).
[SPX -50bps before rallying into black upon US ISM report.]
Quant study: Buy high, sell higher | Mebane Faber (World Beta)
In a study of returns between 1791-2012 & 1950-2012, Meb found that stocks at 52-week highs outperform those at both 52-wk lows & the SPX over 1y holding period (+9.6% v 5.6 v 0.1).
[The data sample has a design flaw that taints the results: they use monthly data & they arbitrarily chose “within 6%” as the qualifying criteria for 52 wk lows.]
Quant study: What happens following VIX spike of 30%+? | Woodshedder (iBankCoin)
In 19 historical occurrences after a single day 30%+ spike in volatility, SPX languishes (down 1-2%)for an average of 5 weeks, then rallies until the 2 month mark. VIX peaks +2% after only 2 weeks, before falling -15% by the 2 month mark.
Myth of the “Great Rotation”: Fund flows actually chase performance | Goldman Sachs (GS)
Study of correlation between weekly equity fund flows & SPX returns shows that fund flows don’t lead performance, in fact, if anything, they lag.
[The correlation for leading fund flows is almost zero, but even the lagging results are pretty insignificant (0.21-0.35).]