Diary of a Financier

Top Newsstuffs (June 23-29)

In Bookshelf on Sun 29 Jun 2014 at 06:08

Last week’s [lack of] news apparently spilled-over into this week, because I found a lot of interesting tidbits…

Rail traffic weekly: Velocity maintained | Association of American Railroads (AAR)
Weekly traffic: +4.2% y/y
Growth ytd: unch @ +4.4%
Carload groups: 8 of 10 posted gains; grain +15%, forestry +12.2, minerals +6.7; coal -4.8
[11th consecutive week prolongs an unheralded rally.]
#Bullish $DBA $KOL

The future is still so bright! | Bill McBride (Calculated Risk)
Catalysts for continued US economic growth:
1. Housing recovery continues 
2. Releveraging- household balance sheets repaired & capable of borrowing more
3. Federal, state & local governments- aggregate budget austerity has ended, stopping the fiscal drag
4. Commercial real estate (CRE)- small positive contribution to GDP
5. Demographics (long term)- having started its decline in 2008, the prime working age population (25-54 years old) will resume growth in 2020

Quant study: 25 worst quarterly US GDP prints in history (1947-2014) | J Lyons Fund Management & Marginal Idea
2014q1’s GDP growth [contraction] of -2.96% ranks 17th worst alltime, and all of the top 25 resulted in a recession.
However, $SPX’s forward 12-month returns average +16% with 79% wins.
[See also: Economic data confirming anecdote of pent-up demand after Q1 weather]
#Multivariable analysis #Context

White paper: Rising interest rate risk at US banks | Federal Reserve Bank of Cleveland (FRB)
Analyzes financials’ interest rate risk (2000-13):
Small banks: duration risk surging @ 2.9%, driven by assets & an increase in loans since 2009 (i.e. aggressive, competitively priced products)
Large banks: duration risk steady @ 1.4%, still far below 2007 levels; better asset/liability management despite being more dependent on deposits; loans have plummeted since 2008, displaced by securities (i.e. Treasuries)
[Duration = ±2% move in interest rates.  Study excludes TBTFs’ derivative hedges. Previously: Commercial bank balance sheet composition & risks]
$XLF $KBE $KRE #Asset/liability mismatch

US loosening 40 year old energy export ban | The Wall Street Journal (WSJ)
The Commerce Department approved $PXD & $EPD to export “condensate,” an ultralight oil that may be refined into gasoline, diesel & jet fuel, starting 8/2014.
[Actually, this has nothing to do with liberalization of US energy export policy: this announcement was the Commerce Department’s clarification of the law, interpreting condensate as a “sufficiently processed petroleum product” that’s legal for export because it’s been “split” into a broken-down form of raw crude. See also: Condensate is a work-aroundProducers win, refiners lose; Previously: US prohibits hydrocarbon exports]

Manufacturers’ durable goods orders, shipments & inventories: More beats despite upward revisions (May 2014) | US Department of Commerce
– Orders:
    Core durable goods (ex-transportation) +3.4% y/y, -0.1% m/m (beat +0.3e m/m)
    Core capex (nondefense, ex-aircraft capital goods) +3.0, +0.7 (beat +0.5e)
– Shipments:
    Core durables +3.9, +0.3
    Core capex +3.0, +0.4
– Inventory:
    Inventories +5.6, +1.0 @ $401.8B, another nominal record
[All beats despite April data being unanimously revised higher.  Q2 orders tracking a healthy +10% annualized, indicative of capital spending pickup, but keep watching inventory oversupply. Previously: Watch for oversupply]

Global fund manager allocation survey: Nearing extreme levels (June 2014) | Bank of America Merrill Lynch (BAML)
Net portfolio positioning of global PMs (60/30/10 benchmark):
Equity: +9pp @ +48% net; nearing +55% extreme
Bonds: -7 @ -62; under -60 extreme
Cash: -0.5 @ +4.5; at 4.5 extreme
US: +4 @ +10
Europe: +7 @ +43; most preferred region for 3rd consecutive month, near postcrisis record of +46 (10/2013)
Japan: +14 @ +21; massive increase
EM: @ +5; highest since 4/2013
[While bonds & cash are already there, equity allocations are still only approaching extremes.]

Japan’s growth strategy: “The Plan for Economic & Fiscal Reform” (2014) | The Wall Street Journal (WSJ)
5 takeaways from the nation’s annual budget & plan for medium term economic policy:
1. Corporate tax cuts- lower tax rate < 30% to offset some effect of sales tax increase & help global competitiveness
2. Pension fund reallocation- increase equity exposure to provide more risk capital to domestic businesses
3. Immigration reform- working parents allowed foreign nannies within special economic zone
4. Health insurance reform- lifing ban on mixed-medical care services (e.g. covered & non-covered by public insurance)
5. Labor reform- white collar overtime pay exemption (incomes > ¥10mm or $98k)
[Abe starting to rollout his “3rd Arrow.” Previously: Complete guide to Abenomics]

Quant study: Will Small Caps catch-up to Large Caps? | AllianceBernstein
$IWM decoupled from $SPY and has now lagged for 3 months, underperforming by -7.7% — 5th percentile of all rolling 3-month periods (1979-2014).
Historically, after a quarter of such underperformance, IWM’s subsequent, relative performance to SPY:
T+3mos = par
T+6mos = +2% (outperformance)
T+12mos = +4% (+10% ex-Tech Bubble)
[Previously: The truth behind 2014’s “size divergence” & Valuations have grown more attractive despite the market’s recovery from its “internal correction”]
#Bullish $RUT $IWB

Let’s not worry about inflation until we reach full employment | Cullen Roche (Pragmatic Capitalism)
The Street is worried about the Fed being too slow to tighten while ‘runaway inflation is setting-in,’ but putting this recovery in context reveals that “inflation is unlikely to surge any time soon”:
The Great Recession was not a garden-variety contraction, but a secular perfect storm (credit/housing/banking crises), so we shouldn’t expect a normal recovery.
Specifically, we’re still at 50-year highs in unemployment:
Labor force participation: down from 1999’s high ~67.5% to 60% mrq
U6 total unemployment: up from precrisis average ~9% to 12.1% mrq (high ~17% in 2010)
Median duration of unemployment: up from precrisis average ~7.5% to 15% mrq (high ~25% in 2010)
[Most pundits say “wage growth is the key to (hyper)inflation,” and now that we’re seeing signs of real income growth, the hyperinflationistas have started stirring again.  The Fed’s own econometric NAIRU says wage inflation won’t accelerate until 5.2 – 5.5% headline unemployment rate vs 6.1% reading in June, but the point is that wage inflation will have less impact on broad price inflation than in the past, due to a smaller labor pool. See also: PCE underwhelms expectations (5/2014) & Inflation expectations too high, growth consensus too low]
#Unconventional wisdom

“The Hum”: A mysterious sound driving people insane | Mic
A humming noise from an acoustic (as opposed to electromagnetic) source at Very Low Frequencies (VLFs) & Extremely Low Frequencies (ELFs) affects a small population who can barely hear it, but it’s resulting more & more “vibroacoustic diseases” — long-term exposure to large pressure amplitude and low-frequency noise  resulting in depression, mood swings, insomnia & stress.

Picture of the week:

Kayaker paddles near volcanic lava (Kilauea, Big Island, Hawaii) | National Geographic Traveler Photo Contest (2014)

Kayaker paddles near volcanic lava (Kilauea, Big Island, Hawaii) | National Geographic Traveler Photo Contest (2014 Entrants)


  1. […] Retail sales +4.3% headline, +2.8% core – Commercial bank credit +4.8% – Durable goods orders +10% annualized so far in Q2 (inventories are piling up but shipments just increased to +3.9% y/y) – […]

  2. […] spell doom, but rather risk-on (e.g. 10/2009, 3/2012, 7/2012, 4/2013, 5/2014).  In fact, IWM historically outperforms in subsequent periods, averaging +4%outperformance over 12 months (+10% excluding Tech […]

  3. […] (Q1): revised from -2.9% to -2.1% – Real GDP (2011-13): revised from +2.2% to +2.0% [Previously: Japan's growth strategy & Japan quantitatively/technically bullish] […]

  4. […] agreements.” [Previously: Export Administration Regulations Commerce Control List & US allows condensate exports] #Energy renaissance $CL_F $NG_F $USO […]

  5. […] +13pp to 25% Foreign stocks to 25% Japanese bonds -25pp to 35% Foreign bonds to 15% [Previously: Japan's plan for economic & fiscal reform & The complete guide to Abenomics] $DXJ +7% $USDJPY […]


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