Diary of a Financier

Top Newsstuffs (May 18-24)

In Bookshelf on Sun 24 May 2015 at 06:56

Top reads from the week that was…

Macro

Rail traffic weekly (Week 19, 2015) | Association of American Railroads (AAR)
Volumes dip deeper into contraction; this feels even worse since we should be seeing a snap-back as evidence of pent-up demand; again affirms my thesis that we won’t see that Q2 recovery in 2015:
Weekly traffic: -0.6pp @ -2.9% yoyRailtraffic 2015 week 19
Growth rate: -0.2pp @ -0.3% ytd
Carload groups: 1 of 10 posted gains for the week yoy
    Motor vehicles/parts: +1.0%
    Farm: -3.6
    Grain: -3.6
    Forestry: -3.7
    Chemicals: -5.0
    Petroleum: -7.2
    Minerals: -10.6
    Coal: -15.3; heavily skewing data, even off weak yoy comp base
    Metals: -16.5
Given the secular decline of coal volumes (~40% of carloads makes it the largest category), traffic doesn’t seem able to stand on its own without the tailwind of energy boom; I considered that the fuel price collapse might’ve reallocated some traffic to trucking, but volumes there are declining too.
#Bearish $IYT

Housing permits, starts & completions (April 2015) | US Government Census
Big beat & acceleration manifests the first sign of pent-up demand after a weak end to Q1 amidst tough weather:Housing starts 2015.04
Monthly housing starts:  +11.7pp @ +9.2% yoy, +20.2% mom @ 1.135M saar (beats 1.029M exp); prior month revised higher
Growth rate:  +1.6pp @ +5.5% ytd
#Bullish #Green shoots

Inflation: Consumer Price Index (April 2015) | Bureau of Labor Statistics (BLS)
While headline dips into deflation, core stays stable, nestling closer to the Fed’s 2.0% target; energy price collapse is still weighing on headline, which teeters on brink of deflation:
Headline CPI: -0.1pp @ -0.2% ttm, +0.1 mom (meets +0.1e)Core inflation- PCE, CPI, Median CPI, trimmed mean CPI 2015.02
    Energy: -19.4% ttm, -1.3% mom; comp & sequential drag somehow failed to stabilize the slide
Core CPI (ex food & energy): unch @ +1.8% ttm, +0.3% mom (beats +0.1e)
#Neutral #Disinflation

Credit

Loans & leases in bank credit, all commercial banks (2015.05.20) | St. Louis Federal Reserve (FRED)
Lending growth remains at healthy trend, slightly above historical average:Loans & leases in bank credit, all commercial banks 2015.05.20
Weekly loan growth: +7.9% yoy
Expect continued expansion due to household & corporate balance sheets being most deleveraged since 1970s.
[Previously: Total consumer indebtedness sends netural signal]
#Bullish #Releveraging $XLF $KBE $KRE

Fundamentals

Quant study: Market valuation correlating equity earnings yield & bond yields | The Brooklyn Investor
During the Great Moderation of Fed/central bank interventions, the so-called “Fed Model” of stock market valuation is statistically significant (i.e. there’s a high correlation between SPX earnings yields vs. TNX bond yields):SPX ttm earnings yield vs TNX 10y bond yield (1970-2014 & 1980-2007)
SPX EP ratio (ttm) vs TNX bond yield:
    R² (1970-2014): 0.4809
    R² (1980-2007): 0.7686 (removes outliers of 1970s, 2008, 2014)
Current:
    Earnings yield: 5.10% (parity < 4.3%)
    10y yield: 2.21% (parity = 6 – 8%)
“Stock prices are cheap at current interest rates, but the thought is that they may become expensive if interest rates normalize… even if long term interest rates pop up into the 4 – 6% range, the stock market is still in the fair value range [since] the market is trading now at just about exactly the average level it has traded at when interest rates were between 4 – 6% since 1955.”
#Bullish

Technicals

Study: What happens after oil price gets cut in half? | Wells Fargo
Investigates what to expect as oil bounces back per history:
“While S&P 500 earnings often remain stuck in the mud 12 months after an oil crash, the stock market itself has been able to shrug it off each time… [but] energy stocks themselves are among the worst way to play a bounce back.”
Sample size: 4 events since 1980
    2 during recessionOil crashes since 1980- recovery from bottom
    2 during expansion
Oil performance: +70% ntm avg
SPX performance: +21% ntm
SPX earnings (EPS): -3.6% ntm
XLE performance: -4.8% ntm
XLE earnings (EPS): -30% ntm
#Bullish $XOP

Sentiment

Retail investor sentiment survey (2015.05.20) | American Association of Individual Investors (AAII)
Sentiment remains a buy signal; neutral cohort increases again, now a significant indication of healthy uncertainty:
Bull/Bear ratio: unch wow @ 1.01 (below both 1.28 historical average & 1.80 extreme high)
Bullish: -1.5pp @ 25.2% (under both 38.9 avg & 45 extreme high)
Bearish: -1.4pp @ 25.0% (meets 25 extreme low & under 30.4 avg)
Neutral: +2.9pp @ 49.8% (over 30.7 avg)
Measures respondents’ expectation for equity performance over next 6 months (through 11/2015).
[Previously: Retail allocations are neutral & Strategist sentiment remains a bullish signal]
#Bullish #Contrarian

Global fund manager allocation survey (May 2015) | Bank of America Merrill Lynch (BAML)
Risk allocations moderate again after March’s extremes, but safe assets are at dangerously extreme underweights; the record flight of capital out of US into International markets hasn’t really reverted:
Equity: -7.0pp @ +47.0% OW (under +50% extreme, above +15% buy signal); has remained OW uninterrupted for longest period in history; still OW highest beta/cyclical sectors too
Bonds: -6.0pp @ -60.0 UW (meets -60 extreme)BAML fund manager allocation survey- equity/fixed income/cash 2015.05
Cash: -0.1pp @ +4.5 OW (meets +4.5 extreme)
Commodities: +6.0pp @ -16.0 UW
Regions:
    US: unch @ -19.0 UW
    Europe: +3.0pp @ +49.0 OW; back near alltime high
    Japan: +4.0pp @ +42.0 OW
    Emerging Markets: +12.0pp @ -6.0 UW; recovery from 2-year low
Surveys a sample of 200+ PMs with $700B+ in AUM, asking for portfolio positioning (overweight/underweight) relative to 60/30/10 benchmark.
#Contrarian
#Bearish: $XLY $XLF $XPH $EFA $FEZ $EWJ $DXY
#Neutral: $SPY
#Bullish: $XLB $XLE $EEM $XLP $AGG $DBC

Interests

Exchange Traded Fund closings spike in 2015 | Invest with an Edge
ETF & ETN shutdowns are a good think for market stability — not to mention an obvious catalyst for active management’s renewed outperformance vs passive indexing:
Total listed ETF/ETNs: -22% ytd @ 1,712
[See also: Eaton Vance introduces NextShares exchange-traded managed funds]

–Romeo

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