Diary of a Financier

Top Newsstuffs (July 14-20)

In Capital Markets on Sun 20 Jul 2014 at 05:55

I like my burgers medium rare…

Macro

Retail sales: Accelerations despite idiosyncratic warnings (June 2014) | US Government Census
Headline: +4.3% y/y, +0.2 m/m vs +0.6e  (miss due to May upward revision from +0.3 to +0.5 m/m)
Core (ex-autos): +4.6 y/y, +0.4 m/m vs +0.5e (miss due to May upward revision from +0.1 to +0.4)
[What looks like misses actually beat expectations when considering May’s upward revisions; great sign as Q2 earnings season starts amidst profit warnings from retailers like $BOBE $FDO $GPS $LL $TCS $WMT, who all cited weak consumer trends.]
#Bullish $XLY $XLP

Rail traffic weekly: Trend growth maintained | Association of American Railroads (AAR)
Weekly traffic: +4.0% y/y
Growth ytd: unch @ +4.6%
Carload groups: 9 of 10 posted gains; motor vehicles/parts +64.7%, petroleum +16.2, minerals +14.2, metals +6.5; coal -5.3
[14th consecutive week prolongs an unheralded rally; autoparts surge is real.]
#Bullish! $XLE $USO $DBA $XME

White paper: Generations X & Y facing economic and financial challenges in the shadow of the Baby Boom | Federal Reserve Bank of St. Louis (FRED)
– Cause: Tech Bubble increased the supply of educated workers (college degrees) and IT infrastructure (PCs/Internet), resulting in:
1. Demand fell for lower-skilled jobs in favor of higher cognitive skills
2. Costs rose for college tuition
3. Wages fell for college-educated labor (oversupply)
4. Job opportunities “de-skilled” for college grads (underemployed or crammed-down)
5. Low-skilled workers exit job market
– Effect: Thus, in the build-up to the Great Recession, debt accumulation and housing exposure were highly correlated to age, education, and race, so older/educated/whites fared better in both the crisis & recovery due to higher savings & more asset diversification.
– Conclusion: Wealth disparity has increased post-crisis with the median & below suffering real income stagnation.
– Recommendations:
1. Kids should invest more in education & training
2. Adults should diversify by choosing financial assets (stocks/bonds) over homes
3. Policymakers should tighten credit (supply-side approach to lowering household leverage)
[In other words: ‘Keep on doing what you’re doing, and we’ll keep trying to make it harder for you.’]
#Demographics #Income gap #Wealth inequality #Austerity

Sentiment

Investor sentiment survey: Back down to norms (July 16, 2014) | American Association of Individual Investors (AAII)
Respondents’ expectation for equity performance over next 6 months (through 12/2014):
– Bullish: -5.3pp w/w @ 32.4% (39.0 historical avg & 45 extreme high)
– Bearish: -0.2pp @ 28.5 (30.5 LT avg & 25 extreme low; 18.5 postcrisis low in January)
Neutral: +5.5pp @ 39.2 (30.5 LT average); back within 1σ above mean
– Bull/Bear ratio: @ 1.13 vs 1.28 avg
[Renewal of Small Cap ($RUT $IWM) correction puts a bullish twist on this week’s report; large Neutral cohort persisting.]
#Bullish

Quant/Fundamental

Quant study: The history of long winning streaks in the stock market | A Wealth of Common Sense
Analyzes historical duration of rallies in which $SPX hasn’t undergone a correction (10% drawdown):
Sample size: 10 postwar bull markets (1950-2014)
Average duration: 36.3 months (3.04 years)
Today’s: 32 months (2.7 years from 11/2011 – 7/2014)
Average subsequent drawdown: -20% mean, -14% median
[More evidence that today’s secular bull market is still young. Previously: Complete guide to bull & bear markets]
#Bullish

Janet Yellen says momentum stocks are overvalued | Congressional testimony (Fed Semiannual Report on Monetary Policy, 2014.07.15)
Fed Chairwoman chimes in with some fundamental analysis:
“Valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms ($IWM) in the social media ($SOCL) and biotechnology ($IBB) industries, despite a notable downturn in equity prices for such firms early in the year… with ratios of prices to forward earnings [FwPEs] remaining high relative to historical norms…
“Including speculative-grade corporate bonds ($HYG) and leveraged loans ($BKLN)…
“However, valuation measures for the overall market ($SPY) in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”
[Echos of Alan Greenspan’s Irrational Exuberance speech, whereafter $DJIA rallied +81% over 4 years (1996-2000) before the Tech Bubble burst; $SPY -0.2%, $QQQ -0.35, $IBB -2.2, $SOCL -1.1.]
#Neutral #Risk-off? #Momo

Interest

Interview: Jeffrey Gundlach (DoubleLine Funds) | Barry Ritholtz (Masters in Business, Bloomberg Radio)
Discusses the New Bond King’s start, training, and PM strategy:
Look for investment opportunities that are not just unpopular, but unanimously opposed (e.g. rising rates at YE13); don’t fear “career risk” — the cancerous idea that ‘it’s better to fail conventionally than succeed unconventionally.’
Overtime podcast includes fascinating discussion about global demographics (i.e. laborforce growth & fertility rates): the next crisis will be demographics (before 2025), specifically asset-rich baby boomers have to sell real estate (big capital gains) to downsize, with income-poor millenials unable to afford the new supply; will lead to huge growth in multigenerational family homes; do not expect generationally low single family housing starts or new home sales to mean revert.

Analogue: Are fossil fuels the subprime mortgages of this cycle? | Yves Smith (naked capitalism)
US oil & gas investment @ $200B/year (20% of private fixed investment) now equals domestic home building; global investment has more than doubled in real terms from 2000 to $950B in 2013; subprime was $1.3T total at its peak, including leveraged & synthetic products.
Return on projects has fallen to +8.6%.
Stranded assets & writeoffs will trigger with $CL_F < $80 and $NG_F < $4.50 Henry Hub (currently $100 and $4.50, respectively).
[Just because gross dollar figures are in the same ballpark doesn’t mean that a crash is near.  Previously:  US energy renaissance is a bubble in its early innings & Energy accounts for most of SPX CapEx]
#Anchoring bias $UNG $USO $IEO $XOP $OIH $AMLP

–Romeo

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  1. […] streak: SPX has gone 32 months without a correction, which is still below the average of 36.3 among all 10 postwar bull markets — despite bears’ repeated claims that […]

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