Diary of a Financier

Top Newsstuffs (December 1-7)

In Bookshelf on Sun 7 Dec 2014 at 06:24

Good to be home.  Top reads from the week that was…

Macro

Rail traffic weekly (Week 48, 2014) | Association of American Railroads (AAR)
Having weathered an erosive trend due to high yoy comps, Thanksgiving week showed a welcomed recovery in sequential growth as we enter YE holiday season, when traffic seasonally wanes:Weekly rail traffic 2014.12.04
Weekly traffic: +6.0pp @ +6.2% yoy
Growth rate: +0.1pp @ +4.3% ytd
Carload groups: 8 of 10 posted gains for the week yoy
    Minerals: +23.1%, spike due to favorable yoy comp
    Metals: +16.3, spike due to favorable yoy comp
    Farming: +6.0
    Coal: +5.6
    Petroleum: +2.0, multiyear boom goes out with a whimper amidst $CL_F price collapse
    Motor vehicles/parts: +1.7
    Grain: -5.7
#Bullish #Latent indicator $XLE $USO $XLB $KOL $XME $XLI

Purchasing Managers Index (November 2014) | Markit Economics
The US remains incredibly strong, anchoring global composite, which remains resilient overall despite deceleration, although growth is getting more fragile with key regions (China & Europe) nearing contraction:
Global PMI (Composite): -0.3 @ 53.2, still strong despite a 7-month low after July’s postcrisis high
Global PMI (Services): -0.1 @ 53.5, after July’s postcrisis high
Global PMI (Manufacturing): -0.4 @ 51.8, a 14-month low, but remains in expansion for 24th straight month
– US ISM (Services): +2.2 @ 59.3 (miss 57.7e), 4th best alltime reading after August’s alltime high
US ISM (Manufacturing): -0.3 @ 58.7 (beats 58.2e); “Holiday Season continues to exceed expectations… corresponds to a 4.2% [ytd] increase in GDP on an annualized basis… In addition, [November] corresponds to a 5.1% increase in GDP”:
    New orders: +0.2 @ 66.0
    Production: -0.4 @ 64.4
    Inventories: -1.0 @ 51.5
    Deliveries: +0.6 @ 56.8
    Exports: +3.5 @ 55.0
    Employment: -0.6 @ 54.9
Australia: +0.7 @ 50.1, completes recovery from YE13 crash
Japan: -0.4 @ 52.0
China: official -0.5 @ 50.3 (misses 50.6e); unofficial -0.4 @ 50.0
Rest of Asia: positive
    India: +1.7 @ 53.3
    South Korea: +0.3 @ 49.0, a sign of weakening global trade, but expect another BoK policy rate cut in 2015q1 (last was 10/15)
    Taiwan: -0.6 @ 51.4
    Vietnam: +1.1 @ 52.1
Eurozone: -0.5 @ 50.1 (miss 50.4e), a 13-month low
    Germany: -1.9 @ 49.5, crashes into contraction & a 17-month low
    Netherlands: +1.6 @ 54.6
    Italy: unch @ 49.0
    France: -0.1 @ 48.4
    Spain: +2.1 @ 54.7, a post-crisis high
    Greece: +0.3 @ 49.1
UK: +0.2 @ 53.5
Brazil: -0.4 @ 48.7, inflation concerns creeping-in
#Bullish

Correlation study: Energy industry spending vs. WTI crude oil prices | Deutsche Bank
Since total capex is 9% of US GDP & energy is a fraction of that, higher consumer spending (due to lower gas prices) will offset lower energy services spending in an overall net positive to economic growth; most importantly, the US is still a net energy importer.
Compares Oil prices to Energy capex spending (lagged 2-quarters), finding high correlation that suggests significant spending cuts coming in 2015:WTI crude oil vs Energy capex- correlation
Correlation: 0.71
Implied capex cuts: -20% yoy decline
Gross impact on GDP: -20bps FY15 real growth rate
[Previously: Energy responsible for more than half of SPX capex]
$XLE $OIH $CL_F $USO #Quant

Credit

High yield energy credit crisis may be coming at worst possible time | James Ferro & Josh Brown
Energy sector junk bonds could trigger a systemic contagion that freezes the entire high yield market:Energy sector's share of HYG (2005-14)
HY energy sector performance: -1.28% ytd, 7.5% over 3-months, -3.38% in November (total return)
HY energy sector index weighting: +5.1pp ytd @ 15.4%, 2nd highest sector (next to Telecomm, which are stable, cash flowing businesses)
“Energy debt could go bidless for a while and take the entire high-yield market with it, resulting in a halt to debt issuance being used for buybacks [instead of capital expenditures]… which have been a major factor behind higher stock prices.”
[Previously: HY & energy top checklist of bubble indicators, E&P reserve misrepresentations a hallmark of pre-crash fraud & Energy bubble?]
$XLE $HYG $JNK $SJNK

Leveraged loan market closed until 2015 | Bloomberg
The exuberant market for leveraged loans is drying-up, potentially freezing until YE14, and I’m considering buying:
Yields: 6.2%, highest since 2012
Weighted average price ($BKLN): 97.99
New issuance: $6.5B in November, slowest since 2008 credit crisis
Fund flows: -$15.5B ytd outflows vs +$62.9B in 2013
Volume: $473B ytd vs $700B in 2013; -3% mom in November
[Previously: Calling the top in floating rate bank loans]
#Bullish #Contrarian $HYG $JNK $SJNK $BKLN

Fundamentals

Quant study: Free cash flow yield vs. dividend yields | Capital Market Laboratories
Compares levered free cash flow yield to dividend yield (ttm), wherein a number of $SPX components (non-financials) are paying-out more than they’re earning, which suggests they’ll likely have to cut/reduce dividends; 12-months is too narrow a timeframe and I’d like to see this within historical context:SPX free cash flow yield v. dividend yield (2014q4 ttm)
“Is it fairly common, over a one-year period, for companies to pay out more in dividends than they generate in free cash flow? Yes.
“Is it possible that dividends will be cut as certain sectors face declining revenue and earnings? Yes.”
Also compares energy sector components, in light of the recent crash in oil prices.
#Bearish

Technicals

Technical study: S&P 500 long term regression & standard deviation (inflation-adjusted, 1871-2014) | Doug Short (dshort)
SPX trading over 2 sigmas from its LT trend, which has historically marked a top — a sign of excess where bull markets turn into bears:SPX LT real regression 2014.11
– Mean: +1.75% (average annual real return)
Standard deviation (σ): ±40.6%
Variances:
    Currently: +93%, reversion to trend is -47% @ 1062
    Panic of 1907: +85%
    Great Depression: +81%
    Tech Bubble: +149%
    Great Recession: +88%
#Bearish #Mean reversion #Secular

Sentiment

Investor sentiment survey (2014.12.04) | American Association of Individual Investors (AAII)
Sentiment moderates again, slipping back under exuberant extremes, finally shattering retail investors’ bout of complacency, exercised by buying the internal correction’s double dip in a show of countercyclical confidence:
Bull/Bear ratio: -85bps wow @ 1.64 (above 1.28 historical average, but below 1.8 extreme high)
Bullish: -9.5pp @ 42.7% (over 38.9 avg, but under 45 extreme high)
Bearish: +5.1pp @ 25.9% (under 30.4 avg, but above 25 extreme low)
Neutral: +4.3pp @ 31.4% (over 30.7 avg)
Measures respondents’ expectation for equity performance over next 6 months (through 5/2015).
[Previously: Fund managers report average risk exposures, Strategist sentiment remains a bullish signal & Recent volatility increases retail’s willingness to buy]
#Neutral #Contrarian

Asset allocation survey (November 2014) | American Association of Individual Investors (AAII)
Asset class allocations remain at neutral levels:
– Stocks: +3.1pp @ 67.2% (between 60% average & 70% extreme high); remains above average for 20th consecutive month (longest post-crisis streak)
Bonds: -1.2 @ 16.0 (meets 16 avg, but above 10 extreme low); 4th consecutive month back above average
Cash: -1.9 @ 16.8 (between 24 avg & 15 extreme low); below avg for 36 consecutive months
Special question: “53% of respondents said the end of QE had no impact on their bond allocations”
#Neutral $AGG #QE tapering

Interests

Generation Flux’s secret weapon | Fast Company
The “four Ps” (in order of importance):
1. Purpose: new, existential, environmentally/socially conscious mandate for today’s founders
2. People
3. Products
4. Process
“If you choose the right purpose, certain people will be attracted… They will be motivated and unified. They require less management oversight. Those people will then conceive and execute products, products that fit the purpose. The process fills in the open spaces. But strong purpose ties it together. You have to excavate the purpose first… It’s the best way to keep talent.”
#Entrepreneur #Startup #Management strategy #Business plan

–Romeo

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  1. […] expectation for equity performance over next 6 months (through 5/2015). [Previously: Retail asset allocations remain neutral, Fund managers report average risk exposures, Strategist sentiment remains a bullish signal & […]

  2. […] expectation for equity performance over next 6 months (through 5/2015). [Previously: Retail asset allocations remain neutral, Fund managers report average risk exposures, Strategist sentiment remains a bullish signal & […]

  3. […] already receded [Previously: Household debt/credit is healthy, Senior loan officer survey bullish, Leveraged loan market thankfully closed until 2015 & High yield energy sector credit enters correction] #Bearish #Latent […]

  4. […] like Amazon’s Kiva Systems warehouse robots.  Either employees share your sense of purpose and long term vision, or they […]

  5. […] forget the most important of the “4 Ps,” purpose, which Jeff Bezos thinks is incentive enough for his […]

  6. […] already receded [Previously: Household debt/credit is healthy, Senior loan officer survey bullish, Leveraged loan market thankfully closed until 2015 & High yield energy sector credit enters correction] #Bearish #Latent […]

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