Boots on the Ground for the Next Economic Leg Up

By Kevin Muir

[biiwii comment: okay macro tourist, you got me with your most disturbing pic yet!]

We’re now eight years into an economic expansion. Not only that, the financial system is far from a shining beacon of stability. Global central banks are trying to push and pull at the same time with the Federal Reserve desperately trying to raise rates and wind down their balance sheet. All the while, the ECB and the BOJ continue their monumental quantitative easing.

With good reason, as the moment the ECB even hints at slowing down their purchases, the EU economic train comes off the rails. Japan has been stuck in a perpetual state of quantitative easing that seems even longer than sitting through your least favourite boring movie. On top of it all, the root cause of the last crisis (too much debt), has been met with more debt. Add it all up and it’s easy to see why veteran market strategists like David Rosenberg are preaching caution.

I must confess being partial to Rosie’s view of the current environment. It feels late in the cycle with the risk/reward increasingly looking less and less favourable. I find myself looking for signs confirming the economy is sputtering from US rate hikes.

Continue reading Boots on the Ground for the Next Economic Leg Up

Fate Of ECB QE Hangs In The Balance…

By Heisenberg

…As Policymakers Say Decision On When To End Program Could Come Next Week

Apparently, the deceleration in eurozone economic activity in Q1 and the political turmoil in Italy isn’t enough to prompt the ECB to take next week’s meeting off the table when it comes to making a potentially momentous announcement about when APP will ultimately be wound down.

Reports on Tuesday confirmed that next week’s pow wow is indeed “live” and that gave the euro a boost. Well fast forward to Wednesday and a trio of ECB officials were out noting that the debate will be front and center next week.

There was Chief Economist Peter Praet, who said “it’s clear that next week the Governing Council will have to make the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases.”

There was Weidmann who, in a video call following Praet’s speech, said the following:

It doesn’t come as a surprise that for some time now, financial market participants have been expecting net asset purchases to end before 2018 is out. As things stand, I find these market expectations plausible.

This will be the first step on a long path towards monetary policy normalization. Inflation is now expected to gradually return to levels compatible with our definition of price stability.

Then there was Klaas Knot (who back in January was a bit reckless with the hawkishness) who told Dutch members of parliament in The Hague that “it’s reasonable to announce the end of the net asset purchases soon.”

All of that has the euro at a two-week high:

EURUSD

Continue reading Fate Of ECB QE Hangs In The Balance…

Buy in May and Stay Invested

By Charlie Bilello

It is their job to entertain. It is your job to ignore…

“Sell in May and Go Away.”

Perhaps the catchiest of all market sayings and one we hear repeated year after year. But how has it actually served investors over the years? Let’s take a look.

Since 1928, the S&P 500 returns from May through October have lagged the returns from November through April.

Case closed, then, sell your stocks at the end of April and buy back at the end of October?

Not so fast. Why not?

Because the returns from May through October are still positive, with the average May-October up 3.9% and the median up 5.3%. Needless to say, “staying away” from positive returns is not the best investment strategy.

At 71%, the odds of a positive May through October are only slightly below the odds of a positive return from November through April (73%).

Still not convinced that Sell in May is a bunk theory?

Below is a chart of $10,000 invested in 1928 with a “Sell in May” strategy versus buy and hold. If you sold each May, put the money under your mattress, and bought back at the end of each October, your $10,000 would grow to $2.2 million (6.1% annualized return) versus $33.2 million (9.4% annualized return) for buy and hold.

In the short run, the day, week or month in which you choose to buy stocks will invariably lead to different returns. This inherent randomness in markets will sometimes work in your favor and other times work against you. But at the end of the day, it is just noise.

It is the media’s job to promote that noise as a source of entertainment. And it is the job of the long-term investor to ignore it. There is simply no evidence that a particular month is the best or worst time to invest.

The key to earning really large returns is investing long enough to experience the magic of compounding. Which is why a much more helpful saying than “Sell in May and Go Away” would be “Buy in May (and every other month) and Stay Invested.”

I won’t hold my breath waiting to see that in the headlines anytime soon.

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Another Confesses The Impossible, We Might Not Have Known What We Were Doing

By Jeffrey Snider

When you go around claiming that central bankers don’t know the first thing about money, people tend to think you are crazy. It’s not really their (people’s) fault. Not only have we been conditioned to believe in a technocracy of sorts, it is raw human nature to immediately suspect such a radically contrarian view.

It would be one thing to say, well, central banks screwed up and were behind, making a few big mistakes along the way and we had the pay the price for it. Even that would be hard for some to really accept. But to make the indictment that they really don’t know what they are doing even on the most fundamental level just cuts way too deeply against convention. Your natural instinct is to believe there is no way that could possibly be true.

The Maestro, after all.

Yet, if you actually take the time to listen to what they say, and have said in the past, they do admit as much. It’s never summarized in that fashion, of course, and any potentially negative implications are downplayed or dismissed.

Since the Great Inflation monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the sixties), so Economists just gave up trying. This is no small thing, but in Economics it is treated trivially.

Continue reading Another Confesses The Impossible, We Might Not Have Known What We Were Doing

What’s Wrong With This Picture? Citi Macro Surprise Versus NASDAQ and Fed Funds Target Rate

By Anthony B. Sanders

Italy 10-year Yield UP 26.6 BPS

One of these indicators isn’t like the other one.

Take Citi’s Macro Surprise Index for the US and compare it to the NASDAQ index and The Fed Funds Target Rate (Upper Bound).

macru

In 2018, both The Fed Funds Target Rate (upper bound) and NASDAQ Composite index have risen.  But the Citi Macro Surprise index has fallen over 2018.

And then there is Italy which is threatening to leave the Euro. Its 10-year sovereign yield is up 26.6 basis points today.

italy10.png

Vesuvius Redux?

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What is the PE10 telling us about Emerging Market Equities?

By Callum Thomas

Forecasting is hard, especially about the future, but with the right indicators we can make it at least a little less hard.  In today’s article I show how important valuations can be in shedding light on long term expected returns for emerging market equities.  It’s a unique angle on what is generally a well-understood principal in asset allocation.

The chart comes from a piece of research I did which looked across global equity markets at the relationship between the PE10 and expected returns. The chart shows the 10-year forward price change across time against the PE10 valuation metric.

Continue reading What is the PE10 telling us about Emerging Market Equities?

European Inflation Concerns Also Rising?

By Michael Ashton

In this space I write a lot about inflation, but specifically I focus mostly on US inflation. However, inflation is substantially a global process – a paper by two ECB economists in 2005 (and our independent followup) found that nearly 80% of the variance in inflation in the G7 and G12 could be accounted for by a common factor. This observation has investment implications, but I’m not focusing on those here…I’m just presenting that fact to explain why I am about to show a chart of European inflation.

Right, so technically it’s my second article in a row in which I mention European inflation. In last Friday’s “Potpourri for $500, Alex”, I noted that core European inflation rebounded to 1.1% after being counted for dead at 0.7% last month. But what is illustrated above is the inflation swaps market, and so is forward-looking. I think this looks a lot more dramatic: investors expect 5-year European inflation to average 1.5% over the next 5 years (a year ago, they were at 1.1% or so and two years ago the market was at 0.7%), and to converge up towards 1.8% where the 5y, 5y forward inflation swap indicates the approximate long-run expectation since it’s not significantly influenced by wiggles in energy.

Continue reading European Inflation Concerns Also Rising?

So I Get This Question About Millrock Resources (MRO.v)…

By Otto Rock

…on Twitter yesterday:

And yes, after about 15 seconds on the internetwebpipes indeed turns out that this Nick Hodge is another mining stockpick wealth make-yer-rich guru who plies his knavery on the green and foolish of this world (I’d pay more attention to them all but I can’t be arsed these days), he runs something called “The Outsider Club”* and yes, he’s pumping Millrock Resources (MRO.v) to his merry band on knownothings and doing this to the stock:

It won’t last. It never does. And guess who’s selling to the new buyers?

Continue reading So I Get This Question About Millrock Resources (MRO.v)…

Here We Are Again! More Than 75% Of Loans Backing CMBS Deals Are Interest-only Mortgages

By Anthony B. Sanders

Similar Level To Late 2006 and early 2007

While interest-only mortgages have almost disappeared in the residential space (thanks in part to the Consumer Financial Protect Bureau’s efforts), they are growing again in the unregulated commercial space.

(Bloomberg) – Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody’s Investors Service, a warning sign that the $517 billion market may be headed for harder times. More than 75 percent of the loans backing the bonds a re interest-only mortgages, a similar level to late 2006 and early 2007, Moody’s said. Those loans are riskier because borrowers don’t pay any principal early in the debt’s life. When that period expires, the property owners are on the hook for much higher payments.

cmbsredux

The percentage of interest-only loans in a commercial mortgage bond is an “important bellwether” for the industry, according to Moody’s analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do. Underwriters aren’t taking steps to fully offset the rising risks, the ratings firm said.

Continue reading Here We Are Again! More Than 75% Of Loans Backing CMBS Deals Are Interest-only Mortgages

New Issue Promotions

By Bob Hoye

hoye

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The Strength Of Two Unfilled Up Gaps & A 50-Day High

By Rob Hanna

One interesting study that I discussed in last night’s subscriber letter considered the fact that SPY left an unfilled upside gap for the 2nd day in a row while closing at a 50-day high. The results table I shared can be found below.

2018-06-05

The size of the follow-through isn’t terribly large, but it has been quite consistent that some follow through was achieved in the next few days. The market is certainly overbought here. But overbought does not always mean an immediate reversal. While evidence is mixed, (for instance, an expected substantial SOMA decline this week is creating a bearish headwind this study suggests the kind of strength we have seen over the last couple of days is often followed by more strength. And it can serve as a nice little piece of evidence for traders to consider as they establish their market bias.

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Chart of the Week: Eurozone Credit Risk

By Callum Thomas

This week it’s a look at credit risk pricing in the Eurozone. This is a chart I’ve been using a lot in recent months, of course as of the last week it’s looking a bit more interesting now!  The reason why I’ve highlighted this chart in the past is that post-financial crisis, sovereign credit risk pricing did calm down, but to a new plateau.  In contrast, corporate credit risk pricing just got back to business down to pre-crisis lows.

The chart comes from a report on Eurozone equities, where I discussed the revised outlook based on changing signals from valuation, risk pricing, economic sentiment, and the earnings/macro backdrop.  I think this chart is certainly one of the key risk monitor charts investors should have on their radar.

Briefly, on the actual detail, the black line is European high yield credit spreads, and the blue line is the spread between the benchmark Eurozone 10-year government bond yield, and that of Germany.  For both indicators, I have taken the Z-Score in order to standardize them and put them on a comparable scale.

The reason I think this chart is so important, is firstly I would say that European high yield credit risk pricing is simply too complacent at these levels.  We know that obviously the ECB played a part here in that QE purchases of corporate bonds have artificially suppressed credit spreads.  But the key is the relative aspect (corporate credit looks too relaxed vs sovereign credit risk pricing).  And the final point to note, tactically speaking, is that flareups in these indicators can take some time to play through, so it’s probably too soon to call the all clear on the current flareup.

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