Opinion (171)

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Credit Spreads And Earnings Estimates. Random Thoughts

This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.

In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!).

As always, your feedback is welcomed and appreciated.

RANDOM THOUGHTS

When the spread isn’t the thing. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly cited, when that gap is widening in a pronounced way bad things tend to happen both to the economy and financial

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Admin

Fed Speak Shakes Market

Tranquility that has enveloped global markets for more than two months was upended as central banks start to question the benefits of further monetary easing, sending government debt, stocks and emerging-market assets to the biggest declines since June. The dollar jumped.

The S&P 500 Index, global equities and emerging-market assets tumbled at least 2 percent in the biggest rout since Britain voted to secede from the European Union. The yield on the 10-year Treasury note jumped to the highest since June and the greenback almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy. German 10-year yields rose above zero for the first time since July after the European Central Bank downplayed the need for more stimulus.

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Fed Bank of Boston President Eric Rosengren’s comments moved him firmly into the hawkish camp, sending the odds for a rate hike this year above 60 percent. He spoke a day after ECB President Mario D

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Admin

Paper Trading Is Obsolete

1291340?profile=originalI don't actually embrace this headline.  In my experience, yes, emotions exist while paper trading.  It's merely that you can sleep at night knowing your bank account didn't go up in flames but that's just me.  It's also essential in my book that you determine what "type" of trader you want to be.  It's one thing to say you want to invest like Warren Buffett but just what does that entail?  Do you rally know?  It's also super easy to be sucked in by get-rich-quick ads and bloggers who entice you to sign up for their premium edition (none of which I recommend).  Don't underestimate the market.  It's NOT easy, even if you believe you've got a plan and everyone loses.  Everyone.  The trick is not to be fooled.  Ignore the headline newsfeed hype and learn to invest without emotion.  You'll be going up against high-frequency programs and number crunchers with degrees.  Are you truly ready to put up your hard earned cash against them?   Remember, if it were simple, everyone would be doing it

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Admin

Is Brexit Truly The End Of The EU Itself?

The vote has come and gone. A major European nation has chosen to leave the EU. The markets have had their obligatory decline. A weekend has passed. It is time to think about what exactly has happened… and what it means, if anything.

The real drive to leave had little to do with economics. It had a great deal to do with immigration. The EU’s economy has been in wretched condition since 2008.

The EU has been unable to forge a plan that would fix dire unemployment in southern Europe and revive the stagnant economy. The EU’s founding treaty promised prosperity. It has failed. Germany has the healthiest economy in Europe, but even it struggles to grow.

The case for staying in the EU was that leaving would ruin the British economy. This assumed, of course, that staying in a broken union would help the economy. The logic of that escaped me. It is hard to see any economic benefits that would be lost. As I put it in my book Flashpoints, “Britain will avoid the destabilization in Europe by pull

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Admin

Bonds Are 'Housing' All Over Again

As German bond yields breach unthinkable levels, BK was struck by a chart from Deutsche Bank – it is a chart of German yields since 1807.

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Take a moment to reflect on this chart – in over 200 years, German bond yields have never been lower. This period of time includes such notable and notorious events as:

  • US Civil War
  • The British Railway Mania Bubble
  • The Panic of 1873 and The Long Global Depression
  • Industrial Revolution
  • Thomas Edison’s Invention of Electric Light
  • Invention of the Automobile
  • Stock Market Panic of 1907
  • World War I
  • 1929 Stock Market Crash
  • The Depression of the 1930’s
  • World War II
  • Japan’s Real Estate Bubble and Crash
  • The Dot-Com Bubble
  • 1987 US Stock Market Crash
  • 1997 Asian Currency Crisis
  • 1998 Russian Default and Long Term Capital Management Bailout
  • 9/11
  • The US Housing Bubble and 2008 Great Financial Crisis

During each of these spectacular and horrific events, German bond yields managed to stay in a range of roughly 4-10% with the occasional spike up or down. However du

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Admin

Business Loan Delinquencies At 2008 Levels

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Energy defaults have been heavy on my mind as their Bankruptcies are expected to increase greatly in the second half of 2016.  I didn't even touch on farms and other exploding debt. Clearly I'm not alone in this concern.  It's not housing this time; it's much worse.  If rates rise, what will happen? Emphasis in bold mine.  Read on.

This could not have come at a more perfect time, with the Fed once again flip-flopping about raising rates. After appearing to wipe rate hikes off the table earlier this year, the Fed put them back on the table, perhaps as soon as June, according to the Fed minutes. A coterie of Fed heads was paraded in front of the media today and yesterday to make sure everyone got that point, pending further flip-flopping.

Drowned out by this hullabaloo, the Board of Governors of the Federal Reserve released its delinquency and charge-off data for all commercial banks in the first quarter – very sobering data.

So here a few nuggets.

Consumer loans and credit card loans h

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Admin

Buyers Stay Home; See You Next Fall

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(Click image to enlarge)

There's nothing here that even remotely makes me want to make a purchase. These are weekly shots of the main indexes so what do you see?

We rallied up over weeks like crazy madmen, squeezing out weak shorts and even had the heaviest shorted sectors help out with a short covering rally; getting the weekly into 'overbought' levels. We came up right against the long term column trend line resistance, hit overbought levels...........the weekly is rolling over. Another failure. Sorry boys. So much for that.

Certainly day traders and short-term swing traders will make their long plays but who has time for that............and why go against the trend of 'this' market......which is down. That's rhetorical.

  • We know the market is stretched on a valuation basis.
  • Don't even throw out the strange valuation approaches.
  • We know there's no more QE coming out of Washington.
  • We know earnings are a disappointment and guidance has for the most part been completely uninspiring.
  • T

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Admin

screen%20shot%202015-09-14%20at%2010.41.35%20am.png?width=300The computers have won.

Institutional Investor just released its annual list of the top-earning hedge fund managers, and six of the top eight are quants, or managers who rely on computer programs to guide their investing.

The list includes Ken Griffin of Citadel, Jim Simons of Renaissance Technology, and John Overdeck and David Siegel of Two Sigma.

In 2002, by contrast, just two computer-driven investors were included in the ranking, according to Institutional Investor.

The list highlights just how hedge fund investing has changed over the past 15 years.

It is not that the brash, characterful traders of old are a dying breed. There are still plenty of alpha-male risk-takers in a company gilet wandering around New York and Greenwich, Connecticut.

It's just that they're losing ground to tech specialists who program robots to play air hockey in their spare time.

The rise of quant-driven hedge funds is really just a part of the evolutionary shift that is taking place on Wall Street that en

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Admin

1291310?profile=RESIZE_1024x1024After writing “Here’s The Perfect Metaphor For Recent Fed Policy,” I had to pick up a copy of The Dao of Capital. Mark Spitznagel just has a unique way of looking at the markets that really resonates with me.

One thing that really jumped out at me while reading it was Spitznagel’s research regarding Tobin’s Q, (though he calls it, “The Misesian Stationarity Index”). It struck me for two reasons. First, I haven’t seen much research like this elsewhere and second, the opinions I have seen regarding it are all of a dismissive nature.

Just Google “Tobin’s Q” and you’ll find all sorts of pieces proclaiming, ‘Don’t worry about Tobin’s Q,’ and, ‘Tobin’s Q is not an effective way to time the market,’ etc. Actually, both of these sentiments are incorrect.

Spitznagel’s research published in the book shows investors should be worried about the extreme level of Tobin’s Q today for the simple fact that is a very good way to time the market.

But before I get into that I should probably explain w

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Admin

Investors, advertisers, and business leaders around the world are still trying to understand millennials, the generational group that will shape commerce for the foreseeable future. In the past, that’s why we’ve looked at millennial investing and banking preferences, their favorite brands, and even what real estate professionals need to understand about the generation.

Today’s infographic from Adweek is of particular interest, because it focuses on a very particular subset of millennials. The data in the graphic is from a survey of nearly 500 nominees for the Forbes 30 Under 30 list. While the subject range is broad, it’s a good snapshot of how some of the brightest millennials in business think.

blue-ribbon-millennial-infographic-copy.png

What’s interesting is that there on some topics there was a surprising consensus, while others had a diversity in responses.

In terms of consensus, 97% of the brightest millennials agreed that they were optimistic about the future, and 80% said they still believed in the “American Dream”. In

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Admin

The Global Economy: April 2016

The global economy has regained some composure, according to asset management firm Schroders. In their view, markets have regained a risk appetite following action by central banks, the normalization of commodity prices, and a lack of materialization for tail risks such as a U.S. recession or a Chinese hard-landing:

economic-infographic-apr-2016.jpg

While volatility is indeed near its YTD low with the benchmark VIX down 32% since the start of the year, we would point out that this is potentially some calm before the storm.

Here are some upcoming waves, and we’ll see how they break:

Earnings and Buybacks: The blended earnings decline for the S&P 500 so far in 2016 Q1 is -8.9%, according to Factset. When earnings season is done and if this stays on target, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. That said, companies are doing whatever they can to stifle these declines via share buybacks. S&P Dow Jones says that nearly

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Admin

The Bloomberg US Financial Conditions Index and the S&P 500 tend to move in pretty close unison. In March, however, they started to move apart in a manner similar to late last year, before the market took a nosedive. Once again, either financial conditions improve or the stock market corrects.

bloomberg financial conditions spx
Source: Bloomberg

Shown below we see a similar wide divergence when looking at credit spreads (inverted in red) compared to the S&P 500 (in black). When financial conditions are healthy, credit spreads narrow since investors require less compensation for the risk of holding non-government securities. As financial conditions deteriorate and default risks increase, credit spreads widen. The credit markets were confirming the message of the stock market up until mid-2014 and have continued to diverge ever since. Either credit spreads narrow or the stock market adjusts.

BBB spread spx
Source: FinancialSense

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Admin

1291314?profile=RESIZE_480x480

Another one that says what could cause a collapse; of course they never say "when" it will happen.  Another reason to remain cautious and take winners where you can.

According to CNBC, the S&P 500 is close to its record high as earnings season heats up, but one of the major drivers of the market's advance - stock buybacks - looks to be sagging.

U.S. companies announced about $182 billion in buybacks in the first quarter, according to Birinyi Associates research, putting buybacks on pace for their weakest year since 2012. Strategists link this, in part, to falling cash flow, a trend that is expected to worsen in coming quarters.

First-quarter earnings per share are expected to fall 7.8 percent, but more importantly for the outlook for buybacks, revenues are set for a fifth consecutive quarter of decline. Thomson Reuters data forecasts a 1.1 percent revenue drop.

Cash flow is a better indicator of buybacks prospects than earnings, as per-share earnings can be managed through cost-c

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Admin

Stock-Market-Bubble.jpg?zoom=1.5&fit=800%2C540&ssl=1&width=600

Of course, no where does it say how long this can continue but it's important to be aware. No, it can't go on forever.

We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.1291333?profile=RESIZE_1024x1024

This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.

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For the trailing twelve months earnings are now back to 2011 levels…

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…even while stocks remain 75% above their own levels from back then. Taken together you get a price-to-earnings ratio of 24, higher than any other time over the past several years.

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It should go without saying that extreme valuations and falling earnings are not a bullish recipe for stocks.

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So the fundamentals are not supportive of higher prices. What then has been driving them higher in recent weeks?

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And the greater fools are none other than the companies themselves…

1291590?profile=original

…for now. If earnings don’t turn around soon (and corp

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Admin

On a Letter from an Expatriate

234447967_516894d7fc_o.jpg?width=440A friend I haven’t heard from in many years since he left the USA wrote me. He closed the letter in an unusual way, saying:

PS — USA has gone completely bonkers these days? or what the heck is going on over there? would love to pick your mind over a glass of wine. someday!

I’m not intending on writing on politics as a regular habit at Aleph Blog, and most of what I am going to say is economics-related, so please bear with me.  Hopefully this will get it out of my system.

To my friend,

There are a lot of frustrated people in the US.  Though you’ve been gone a long time, you used to know me pretty well; after all, I trained you on economic matters.

Let me give a list of reasons why I think people are frustrated, then explain how that affects their political calculations, and finally explain why they have mostly misdiagnosed the issues, and won’t get what they want regardless of who is elected.

The electorate is frustrated because:

  • Living standards have declined for the lower 80% of so

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Upgrading Your Kitchen on a Budget

When updating your home, you should always start in the kitchen.  The kitchen is arguably where most of a homeowner’s time is spent, and therefore should be able to cater to all the needs of the homeowner, while keeping up with the latest décor styles.  Perhaps the most difficult part of updating a kitchen is the cost behind most necessary kitchen upgrades.  The expense is definitely enough to cause homeowners to give up on the project, but before throwing in the towel, there are several ways you can upgrade your kitchen without the hefty cost.  All it takes is a little time and effort.  Here are a few affordable kitchen upgrades that you should consider.  

Counters and appliances

Countertops and appliances are the most expensive upgrades to make in a kitchen, but they are a worthwhile investment.  If you can afford stainless steel appliances, or granite countertops, these upgrades with substantially increase the value of your home as well as keep your kitchen feeling upgraded over time.

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Admin

Debt Doesn't Go On Forever

1291294?profile=RESIZE_480x480NYSE margin debt fell again during the month of February. After the selloff in stocks that kicked off 2016, this should come as no surprise. Investors are usually forced to reduce leveraged bets during these sorts of episodes in the stock market. In fact, this forced selling can actually exacerbate the volatility. And because margin debt is only now beginning to come down from record highs, surpassing those seen at the 2000 and 2007 peak, this should be of concern to most equity investors.

To fully appreciate this risk, I prefer to look at margin debt relative to overall economic activity. When leveraged financial speculation becomes large relative to the economy, it’s usually a sign investors have become far too greedy. As Warren Buffett would say, this is usually a good time to become more fearful, or conservative towards the stock market.

Not only did margin debt recently hit nominal record-highs, it hit new record-highs in relation to GDP, as well. In other words, over the past s

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Admin

fredgraph.jpg.png?zoom=1.5&fit=1272%2C763&ssl=1&width=750The chart above tracks the broad stock market against the spread of lowest-rated investment-grade corporate bond yields. They normally track each other very closely as they both reflect broad investor risk appetites.

When investors are hungry for risk stock prices move higher and corporate spreads get narrower. When risk aversion takes over, however, stock prices fall and spreads widen.

Another reason they closely track each other is corporations’ ability to access credit is very closely tied to the overall demand for equities. When it’s very cheap for companies to borrow, it’s very easy for them to fund stock buybacks and acquisitions of other companies.

Certainly, these two factors have been very important to the bull market of the past six years or so. Ray Dalio recently said he estimates that buybacks and M&A have roughly amounted to 70% of the total demand for equities.

As spreads widen, it becomes more expensive for companies to borrow and thus more difficult to fund stock bu

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Admin

Weekend Reading

In addition to charts I uploaded (which there are many more but I'm short on time, it being a holiday) here are a few of my weekend email reads I found interesting. Enjoy - and Happy Easter.

  1. Variant sees commercial and industrial lending to continue to fall.  No, not a good thing.
  2. The top 20 reasons start ups fail.  Visual Capitalist
  3. Think renewables will gain usage over coal and crude oil?  You may be surprised.  McKinsey
  4. Domo origato mr roboto Visual Capitalist
  5. Here we go again as banks ramp up and push home equity loans (because we didn't learn the last time).  WSJ
  6. Brookings says technology actually has not made up more productive (say what?)
  7. The richest and poorest countries in the world. Visual Capitalist

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