Diary of a Financier

Top Newsstuffs (February 29 – March 6)

In Bookshelf on Sun 6 Mar 2016 at 05:49

Top reads from the week that was…

Macro

Purchasing Managers Index (February 2016) | Markit Economics
Global growth decelerates again to the brink of stagnation with internals weakening; markets rally on expectation of further stimulus…
Global PMI (Composite): -2.0 @ 50.6 (below 53.9 LT average); a 40-month low
Global PMI (Services): -2.1 @ 50.7
Global PMI (Manufacturing): -0.9 @ 50.0US ISM PMI Composite 2016.03
US ISM (Composite): unch @ 52.9
– US ISM (Services): -0.1 @ 53.4 (beats 53.1e); despite the headline deceleration & employment dipping into contraction, expansion beats expectations with healthy internals & a big pickup in trade; corresponds to +1.8% real GDP (annualized)
    New orders: -1.0 @ 55.5
    Production: +3.9 @ 57.8
    Exports: +8.0 @ 53.5
    Imports: +9.5 @ 55.5
    Employment: -2.4 @ 49.7; lowest since 2/2014
US ISM (Manufacturing): +1.3 @ 49.5 (beats 48.5e); stronger report with internals suggesting a tailwind; corresponds to +2.0% real GDP (annualized)
    New orders: unch @ 51.5
    Production: +2.6 @ 52.8
    Inventories: +1.5 @ 45.0
    Backlog: +5.5 @ 48.5
Eurozone (Composite): -0.6 @ 53.0 (beats 52.7e); corresponds to +0.3% real GDP (annualized)
Eurozone (Services): -0.3 @ 53.3 (beats 53.0e)
Eurozone (Manufacturing): -1.1 @ 51.2 (beats 51.0e); deceleration to 12-month low led by a collapse in Italy & German/French descents to near stagnation
UK: -2.1 @ 50.8; a 34-month low
Japan: -2.2 @ 50.1; continues descent fm 20-month high
China: official -0.4 @ 49.0 (misses 49.4e); unofficial -0.4 @ 48.0
India: unch @ 51.1
South Korea: -0.8 @ 48.7
Taiwan: -1.2 @ 49.4
Brazil: -2.9 @ 44.5
#Neutral

Rail traffic monthly (February 2016) | Association of American Railroads (AAR)
The decline in railroad volume decelerates thanks to easy yoy comps; still indicative of the collapse in manufacturing activity, led lower by energy & materials amidst the commodity supercycle’s bust…Railtraffic monthly 2016.02
Monthly traffic: +8.2pp @ +0.5% yoy
Growth rate: +3.7pp @ -3.6% ytd
Carload groups: 9 of 20 posted gains for the month yoy
In particular, the secular decline of coal volumes (~40% of carloads makes it the largest category) is negatively skewing the data.
#Bearish #Irrelevant? $IYT $XLB $XLE $DBC

Fundamentals

SPX’s inexplicable multiple expansion & the growing GAAP/non-GAAP gap | ZeroHedge
Despite SPX’s price correction (-3% ytd), PE ratios have actually expanded (fm 16.6 to 16.8x ytd on 2016e) due to downward EPS revisions, but it’s even worse if you look at GAAP vs non-GAAP earnings, which spread reached a postcrisis record in 2015, when GAAP earnings were the lowest since 2010…
– SPX components reporting non-GAAP (#): 232 in 2009 vs 334 in 2014
– SPX PE (2015): 21.2x GAAP vs 16.5x non-GAAPSPX EPS- GAAP vs non-GAAP (2007-2015)
SPX GAAP vs non-GAAP spread (2015FY): +89% yoy @ $26.5B, highest since 2008
    GAAP EPS: $91.5, lowest since 2010
    non-GAAP EPS: $118
The SEC & Warren Buffett have warned about “excessive creativity” in non-GAAP reporting (e.g. $GRPN)…
“If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?”
Adjusted EBITDA and non-GAAP metrics are intended to provide a smooth, normalized “run-rate” for financial data — controlling for one-offs.  So, not only are items writedowns/FX headwinds/etc. one time hits, but they can also flip to a tailwind.
[Previously: Tortured rationalizations & Beware hidden ball tricks in financial accounting (Klarman)]
#Bearish

Technicals

Commitment of Traders (COT): S&P 500 net speculative positioning (2016.03.04) | Commodity Futures Trading Commission (CFTC)
Despite the market’s recovery, shorts remain at extreme levels, maintaining the chance of short-covering to prolong the rally…SPX futures- net speculative positions (non-commercial longs less shorts) 2016.03.04
Net speculative positioning: -49.3k wow @ -208.1k contracts short (below -150k extreme)
Measures difference between non-commercial longs & shorts in SPX futures (# contracts).
#Bullish! $ES_F $SP_F

Technical study: S&P 500 long term regression & standard deviation (February 2016) | Doug Short (dshort)
The correction underway in SPX has returned it within 2 sigmas from its LT trend, above which it hovered for 20 of the last 22 months — historically marking a market top…
Historical variances:
    Currently: -7pp mom @ +73% (vs SPX trend @ 1098, -44% drawdown)
    Panic of 1907: +85%SPX long term regression & standard deviation (2016.02)
    Great Depression: +81%
    Tech Bubble: +149%
    Great Recession: +88%
– Mean: +1.78% average annual real return
Standard deviation (σ): ±40.6%
Uses $SPX real (inflation-adjusted) prices with exponential regression starting in 1871.
#Bearish #Mean reversion #Secular

Sentiment

Retail investor sentiment survey (2016.03.03) | American Association of Individual Investors (AAII)
Sentiment completes recovery from near historic lows back up into neutral territory…
Bull/Bear ratio: +11bp wow @ 1.10 (below 1.30 historical average, but above 1.00 extreme)Retail investor sentiment survey- bulls & bears 2016.03.03
Bullish: +0.8pp @ 32.0% (below 39 avg, but above 30 extreme)
Bearish: -2.2pp @ 29.2% (below 30 avg); lowest level ytd
Neutral: +1.4pp @ 38.8% (above 31 avg)
Measures respondents’ expectation for equity performance over next 6 months (through 8/2016).
[Previously: Institutional allocations send bullish signal & Strategist sentiment still a buy signal]
#Neutral #Contrarian

Asset allocation survey (February 2016) | American Association of Individual Investors (AAII)
Allocations maintain neutral signals, but cash & equities are at levels not seen in 3-years, nearing bullish signals…
– Stocks: -1.0pp @ 61.5% (between 60% average & 70% extreme high); lowest since 3/2013
Bonds: -0.1pp @ 17.2% (above 16% avg & 10% extreme low)
Cash: +1.1pp @ 21.3% (below 24% avg; above 15% extreme low); highest since 3/2013
#Neutral #Contrarian $SPY $AGG

Interests

What is the actual unemployment rate? | Nate Silver (FiveThirtyEight)
Controlling for demographics & structural trends, the “real” unemployment rate is a lot closer to the nominal one, with very little of the decline in Labor Force Participation Rate due to economic forces…
Headline unemployment: 4.9%Labor Force Participation Rate- segmentation (2009-2015)
Core unemployment: 5.8%
    1/ Aging (-1.6pp to LFPR): i.e. Baby Boomers
    2/ Residuals (-1.3pp): i.e. influx of stay-at-home dads
    3/ Cyclical (-0.2pp): i.e. economic weakness
The White House just completed a study echoing much the same: 5.2% actual unemployment (i.e. 500k unemployed slack).
[See also: Context suggests decline in LFPR is more of a structural trend than economic weakness (Calculated Risk)]

–Romeo

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