Diary of a Financier

Top Newsstuffs (September 1-7)

In Bookshelf on Sun 7 Sep 2014 at 06:15

Kickoff…

Macro

Rail traffic weekly (Week 35, 2014) | Association of American Railroads (AAR)
Rally continues to wane, settling-in at a healthy +3% trend; volumes are comp-ing off a reasonably high base from 2013, which will get more difficult over next 2 weeks, particularly for autoparts, which collapsed this week; coal (38% of total volume) still weighing on overall performance:
Weekly traffic: -0.1pp @ +3.1% yoy
Growth rate: unch@ +4.6% ytd
Carload groups: 5 of 10 posted gains for the week yoy
    Petroleum: +21.2%
    Metals: +15.7
    Grain: +12.8
    Minerals: +10.5
    Coal: -7.1
   
Motor vehicles/parts: -9.7
#Bullish $XLE $USO $XME $DBA $XLI

Purchasing Managers Index (August 2014) | Markit Economics
Global manufacturing activity remains strong despite the same headline risks; buoyed by US:
Global Manufacturing PMI: +0.2 @ 52.6
Australia: -3.4 @ 47.3, reverses August’s recovery from YE13 crash
Japan: +1.7 @ 52.2
China: official -0.6 @ 51.1, off a 27-week high; unofficial -1.5 @ 50.3
Rest of Asia: screaming higher
    South Korea: +1.0 @ 50.3, but export orders vote weakening global trade
    Taiwan: +0.3 @ 56.1, still a leader
    India: -0.6 @ 50.2
Eurozone: -1.1 @ 50.7 (miss 50.8e), still in expansion despite 12-month low
    Germany: -1.0 @ 51.4
    Netherlands: -1.8 @ 51.7
    Italy: -1.1 @ 49.8
    France: -0.9 @ 46.9
    Spain: -1.1 @ 52.8
UK: -2.3 @ 52.5, lowest in 13 months
Brazil: +1.1 @ 50.2, “rebound following the disruptions caused by the FIFA World Cup soccer”
US PMIs:
    Manufacturing: +2.1 @ 57.9, highest since 4/2010
    Services (ISM): +0.9 @ 59.6 (beat 57.7e), highest reading ever (since 2008 inception)
US ISM: +1.9 @ 59.0 (beat 57.0e), accelerates again to highest since 3/2011; confirms the healthy flow-through of orders to shipments displayed by durable goods, in addition to continued inventory moderation:
    New orders: +3.3 @ 66.7
    Production: +3.3 @ 64.5
    Inventories: +3.5 @ 52.0
    Deliveries: -0.2 @ 53.9
    Exports: +2.0 @ 55.0
    Employment: -0.1 @ 58.1
#Bullish

Quant/Fundamental

Quant study: Charting the average year in the stock market ($SPX daily, 1983-2013) | MKM Partners
Evaluates market seasonality, revealing that maxims like “Sell in May & go away until Labor Day” or September as the worst month of the year — while true — are very nuanced.
Charts the average year in the stock market, derived from historical average daily returns:
Data: SPX average daily returns, 1983-2013SPX average year derived from daily historical returns (1983-2013)
    January through mid-March: unch
    mid-March through April: +4.0% rally
    May through mid-October: -2.5% drawdown
    mid-October through year-end: +4.6% rally
    September: +90bps through 9/16, then -1.6% through 9/30 
For background, this August 2014 was the best since 2000.
#Unconventional wisdom

Quant study: Price range compression (1995-2014) | Michael Melissinos
Evaluates multiple asset classes’ variances, which have substantially & persistently lowered since 2011 (QE2) in a sign of complacency; such artificial suppression of natural price fluctuations make me worry that this is “the blasting cap at the end of a generation-long experiment with disinflationary credit boom”:
Rolling 6-month price range (high – low)Price range compression (multiassets, 1995-2014)
Multiassets (33 total):
    1995-2011: avg < 30% range; extreme 30-55%
    2011-14: avg <5% range; extreme 10%
[Previously: Bubble indicators, Vol is not a timing mechanism, How the stock market resembles the heartbeat of a dying patientFrom mediocristan to extremistan & Price controls never work]
$VIX #Unconventional monetary policy #FX $DBC $AGG $SPY $ACWI

Sentiment

Investor sentiment survey (2014.09.03) | American Association of Individual Investors (AAII)
Sentiment moderates slightly but remainse at extreme levels indicative of exuberance; hard to imagine that bull/bear ratio was 0.80 only 4 weeks ago:
Bull/Bear ratio: +76bps @ 1.86 (vs 1.28 historical average & 1.8 extreme high)
Bullish: -7.2pp wow @ 44.7% (vs 39.0 avg & 45 extreme high)
Bearish: +4.7 @ 24.0 (vs 30.5 avg & 25 extreme low)
Neutral: +2.5 @ 31.4 (vs 30.5 avg)
Measures respondents’ expectation for equity performance over next 6 months (through 3/2015).
[Previously: Fund managers’ exposures nearing extreme levels & Margin debt at extreme highs]
#Bearish #Contrarian #Procyclical

Asset allocation survey (2014.08) | American Association of Individual Investors (AAII)
Asset class allocations remain near average levels, cash underweight:
– Stocks: -0.2pp @ 67.3% (vs 60% average & 70% extreme high); above average for 17th consecutive month (longest post-crisis streak), but still below extreme
Bonds: -0.1 @ 16.6 (vs 16 avg & 10 extreme low); highest since 1/2014
Cash: +0.2 @ 16.0 (vs 24 avg & 15 extreme low); below avg for 33 consecutive months & nearing 15% low-end extreme
#Neutral

Interests

Trigger risk: Hidden timebomb in single family rental securitizations | Yves Smith (naked capitalism)
Private equity homebuyers paid cash for blocks of crisis-era distressed/foreclosed homes, rented them out, then effectively flipped them via securitized rental cash flows.
The scheme has degenerated recently, creating a number of risks:
1. Rollover/refinance risk: despite paying cash at closing, they subsequently took advantage of low rates & other people’s money by mortgaging the entire securitization, matching their fixed lease assets with short term (5 year) floating rate loans that require 3rd party interest rate caps (i.e. swap agreements)
2. Geographic concentration: no diversification with 78% of properties in 3 Sunbelt states; 36% in top 3 cities
3. Spread inversion: cap rates have fallen materially from 6.4% to 5.2%, leaving spreads so tight that deals could go underwater if rates rise to normalized levels
[Previously: Buy-to-rent investors driven by QE/ZIRP hunt for yield]
#Asset-liability mismatch #Unintended consequences #Financial innovation #PE #CMBS

International pressure mounts on US to ease energy export ban | Reuters
Foreign delegations from South Korea to Mexico to Europe are lobbying the US House of Representatives Energy Committee to lift the Department of Commerce’s hydrocarbon export bans that date back to the 1970s oil crisis:
“Increasingly being questioned in the context of oft-touted free-trade agreements.”
[Previously: Export Administration Regulations Commerce Control List & US allows condensate exports]
#Energy renaissance $CL_F $NG_F $USO $UNG

Chinese shadow bank bailout | Sara Hsu (SUNY)
Whereas China’s central government once insisted it wouldn’t rescue shadow banks, a bailout in 1/2014 set a new precedent of implicit guarantees, taking the government’s contingent liabilities from RMB 71.9T (traditional bank loans) to 110T (traditional + shadow bank loans). Regulators are now preparing new rules to control off-balance sheet lending:
This week, we learned that the two state-owned enterprises — Huarong and the Industrial & Commercial Bank of China (ICBC) — bailed-out the “Credit Equals Gold” Trust Product with a RMB 3B loan in January.
[My characterization of China’s Wealth Management Products (WMPs) as a “Grey Swan” was apt. Previously: The complete guide to China’s Trust Product problem]
#Shadow banking $FXI $GXC #Liquidity #Insolvency

–Romeo

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  2. […] group by -1.77pp), 63.22% success rate (underperforms control group by -1.16pp) [Previously: For best results, buy in mid-October & hold until year end] #Bullish #Sell in May & go away until Labor Day #Conventional […]

  3. […] -0.1% mean; 53% winners Charts SPX’s average monthly returns & success rate. [Previously: Charting the average year in the stock market (daily) & SPX’s historical 6-month rolling returns] #Bullish […]

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