Diary of a Financier

Top Newsstuffs (June 9-15)

In Bookshelf on Sun 15 Jun 2014 at 07:12

House hunters…

Investor sentiment survey: Neutral cohort still swelling (June 11, 2014) | American Association of Individual Investors (AAII)
Respondents’ expectation for equity performance over next 6 months (through 12/2014):
– Bullish: +5.2pp w/w @ 44.7% vs 39.0 historical avg & 45 extreme high
– Bearish: -1.0pp @ 21.3 vs 30.5 LT avg & 25 extreme low; 18.5 postcrisis low in January
Neutral: -4.2pp @ 34.1 vs 30.5 LT average; remains 1σ above mean
– Bull/Bear ratio: @ 2.10 vs 1.28 avg
[Bulls, bears & their ratio are now all at extremes.]
#Bearish #Contrarian

White paper: How International ETFs work | KraneShares
“International ETFs differ [from domestic US] in that the underlying securities’ markets tend to be closed during US trading hours. In order to facilitate buying and selling in international ETFs, Authorized Participants often hold an inventory of ETF shares. By owning shares of the ETF, the AP will hedge the exposure through a variety instruments such as futures, shorting the underlying basket of stocks, or other similar ETFs.”

Retail sales: Trend growth continues with upward revisions (May 2014) | US Government Census
Headline: +4.3% y/y, +0.3 m/m vs +0.6e  (miss due to April upward revision from +0.1 to +0.5 m/m)
Core (ex-autos): +2.8 y/y, +0.1 m/m vs +0.4e (miss due to April upward revision from unch to +0.4)
#Bullish $XLY $XLP

Rail traffic weekly: Boom continues despite petroleum growth levelling-off  | Association of American Railroads (AAR)
Weekly traffic: +6.0% y/y
Growth ytd: +0.1pp @ +4.4%
Carload groups: 9 of 10 posted gains, including grain +15.5%, minerals +12.2, motor vehicles +8.9; petroleum -0.3
[9th consecutive week prolongs an unheralded rally; law-of-large-numbers catches-up to petroleum, with a high base hurting y/y comps, undoubtedly a headwind for growth hereafter.]
#Bullish! $DBA $XME $XLY $XLE $USO

Something surprising happened during the market’s internal correction | Ed Yardeni (Dr. Ed’s Blog)
During April/May’s “internal correction” ($IBB $IWM $QQQ), valuations obviously moderated, but in the subsequent retracement rally to new alltime highs, multiples haven’t fully recovered because analysts have increased Street consensus earnings to record highs.
Small Caps ($IWM)– 17.9 vs. 17.6 – 19.3 (current vs. low – high ytd)
Mid Caps ($IWR)– 17.0 vs. 16.7 – 17.7
Large Caps ($IWB)– 15.3 vs. 14.3 – 15.5
[See also: The truth behind 2014’s “size divergence” & The phenomenon of downward consensus revisions]
#Brown noise #Upward revisions $RUT

Hypocrite: Bullard’s double-speak ignores bubbles developing “under our noses” again | Wolf Richter (Testosterone Pit)
James Bullard (President, St. Louis Fed) just admitted that the Fed missed every sign of bubbles being blown precrisis, hence the tightening cycle from 2004-06 was “too methodical and did not react sufficiently to economic developments.”
With the Fed closer to its dual-mandate targets than 75% of prior periods, the same could be said today, considering objective data signaling exuberance:
1. Financial Stress Index– alltime low
2. Margin debt– just off alltime high
3. Volatility ($VIX)– lowest level since 2/2007; half its historical average
4. Unprofitable IPOs– 83% of 2014q2 IPOs were pre-profit vs. an alltime high of 84% in 2000q1
5. Junk bond spreads ($HYG)tightest since 10/2007
6. Leveraged loan issuance ($BKLN)record issuance ytd after a record FY2013
7. Commercial loans– record issuance [nominal data is meaningless]
8. Housing– home prices at records [in select cities]
9. Corporate profits / GDP ratio– alltime high [counterpoint]
10. Money supply– alltime high [again, non-inflation-adjusted]
11. Stock markets– alltime highs; no corrections in 2½ years; record corporate buybacks
12. Tech 2.0/M&A– rediculous buyouts & tech valuations
[The Fed’s modern tightening strategy — well-telegraphed, slow & steady rate increases — dates back to 1994’s bond market massacre and a subsequent pledge of ultra-transparancy, but why do we need to give investors more certainty, considering zero-sum capital markets’ limited resonance to the secular economy? See also: The Wall of Worry & How to spot a bubble in real time]
#Cognitive dissonance? #Great Moderation #Complacency

Presentation: “Penny for your thoughts” (2014q2) | Jeffrey Gundlach (DoubleLine)
– Currencies- bullish $DXY still after secular bottom made in 2011; $USD has been reserve currency for 94 years (1921-2014), which is historical average tenure for prior regimes (Spain was longest @ 110 years), but power now being usurped by China’s Yuan ($CNY)
– Emerging Markets- $EEM should breakout here, but China ($GXC $FXI) holds the key; watch $CNY for hints
– Equities
– record margin debt is “the most alarming thing in US stock market… almost impossible [to avert $SPX correction]”; Homebuilders ($XHB) are overvalued & diverging from Lumber ($LB_F), new home sales should slow, but homeprices should be fine
– Interest rates- Eurodollar futures say ST rates ($IRX $LIBOR) won’t reach 1% until 2016q2
– Treasuries- $TNX range between 2.20% – 2.80% in 2014, but no higher; pension reallocations into bonds & massive speculator short squeeze in Tsy futures ($IRX $FVX $TNX) responsible for ytd rally
– Demographics- developed markets’ global dependency ratios are bad, and the US (60% dependence in 2012) will be average over the next 2 decades (+15pp in 2012-30), but the first to recover thereafter (-0.9pp in 2030-50)
[See also: Slides]

Global sovereign bond supply shortage | JP Morgan (JPM)
Global $AGG yield should -40bps in FY14, according to the precedent of demand surpluses in 2008, 2011 & 2012:
The BOJ & ECB’s accelerating QE plus improving private sector demand will offset the Fed’s QE tapering, so there’s $460B excess demand for G4 sovereign bonds ($2.26T demand v $1.8T supply).
[Undoubtedly the intended consequences of extraordinary central bank monetary policy.  See also: The bond market is wrong]

The truth behind America’s plummeting labor force participation | Bill McBride (Calculated Risk)
Optimists blame the baby boom retirees (“aging labor pool”) for the decline in labor force participation, but a long term chart of participation among “prime, working-aged men” (40-44 years old) shows a steady declining trend from almost 96% in 1978 to 90% in 2014 — as does every other age demographic except 65+ year olds.
[The rise of technology & automation play a big role here.]
#Creative destruction #Youth unemployment

Loans & leases in commercial bank credit: Massive surge (May 28, 2014) | Federal Reserve Bank of St. Louis (FRED)
Commercial credit outstanding: +0.78% m/m, +4.86% y/y @ $7.65T; fastest annual expansion since 2012
[The Fed is watching & will tighten if this accelerates, but this velocity of credit expansion will boost GDP growth.]


¹S&P indices (not Russell)

  1. […] Retail sales +4.3% headline, +2.8% core – Commercial bank credit +4.8% – Durable goods orders +10% annualized so […]

  2. […] Perhaps the best thing that came from the internal correction was multiple compression.  During the correction, Street consensus estimates were revised higher, leaving FwPEs at cheaper […]


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