Some very interesting trends/divergences emerging:
1. Staples/Tech or cyclicals/defensives or low vol or correlations all falling completely off a cliff in spectacular fashion.
2. Forward P/Es in Japan vs in China and Korea massively diverging (fx-driven earnings drain, effectively, but only affects fwd PE this much if street is dramatically dramatically underestimating the fx impact on earnings)
3. You all know, Apple, GE, IBM vs S&P, etc.
Meanwhile consider the backdrop:
1. GE was a ‘shoot the messenger’ situation where their own ‘global growth market share’ looks fine but they say global leading indicators are poor so the market takes them down 5% and everyone else untouched
2. Weak USD, Strong commodities, China, and MOST IMPORTANTLY A MASSIVE US DEFICIT were fundamental drivers for US Equity performance for a long time. All are now pushing the opposite way. I am seeing ppl forecasting just 400+b for deficit within 2 yrs. Ppl still had 1T for this year a few months ago. It’s a STAGGERING, stealth development. It’s bad for stocks even if it’s from good growth. People thought the Fed was pumping stocks with ‘liquidity.’ There might have been some weak-USD effects but the FEDERAL BUDGET DEFICIT was the big driver. **Much of the deficit was winding up as corporate earnings the past few years rather than household income** Thus median incomes were flat, overall were up small, overall growth was small, and equity free cash flow and earnings growth has been chugging along at 7,8,9%. Where do you think that came from? Not from the Fed. That was blogoshpere nonsense. IT CAME FROM THE DEFICIT.
The biggest issue of course, is that free cash flow yields still make equities look dramatically cheap to bond-like alternatives… but they also are much more sensitive (over-sensitive) to turning points in things. If only as a punt on reactionary-ism stuff, I don’t like them here. Short for a trade. G’LUCK!
Category Archives: Equities
Japanese equity rally
Not that the presumptions will turn out to be right, but just based on the presumptions:
The presumption is that the BOJ’s action will weaken the currency, stocks are up due to the weaker yen, which is presumed to support exports and restrain imports, and help with earnings translations
So the presumed increase in exports/higher stocks is not about total global sales/profits increasing. The presumed increase in exports is just about Japan gaining market share.
Which means the same presumptions lead to the further presumption that the equity gains in Japan from increased exports are at the expense of the ‘rest of world’s’ sales/profits/equity valuations/etc.
In other words, the equity rally in Japan is not based on the presumption that Japan will be an ‘engine of growth’ for the rest of world. Quite the opposite, in fact.
CSRCs Guo Says Intervention in Stock Market Necessary: Xinhua
Not that a stock market is ‘necessary’. And not to forget that a 30% corporate income tax, as in the US, is at least as good as owning 30% of all taxable enterprises. If govt, want’s a larger share of corporate profits, it can just hike the tax rather than buy the stock.
If govt cares about stock prices, the question has to be why. If it’s because lower stock prices cause people to spend and consume less out of fear, you’d think cutting taxes on people working for a living would be more attractive than the govt buying stocks? If it’s due to an attack on a fixed fx currency, like HK, I’d rather float the currency than buy stocks.
CSRCs Guo Says Intervention in Stock Market Necessary
January 22 (Bloomberg) — China Securities Regulatory Commission Chairman Guo Shuqing said at the national securities
and futures supervision meeting that its necessary to intervene in Chinas stock market at key moments, the official Xinhua
News Agency reports.
* Chinas stock market is not mature, Guo was cited as saying
Friday update
So just like Japan, as soon as the economy starts doing a bit better we hike taxes. Still too early to say how the FICA hike will impact sales and profits, but it will. And spending cuts are on the way, though they may be delayed.
Not to forget the debt ceiling thing about to be kicked 3 months down the road as it stands guard to ensure ‘meaningful’ spending cuts.
Oil firm, but can still go either way. WTI converging to Brent indicates the seaway pipeline capacity increase may be enough to drain the surplus at pad 2, bringing wti up to brent, but too soon to tell for sure. And looks like the demand for saudi crude is dropping some, but not enough to dislodge them from being
swing producer/price setter.
Looks to me like the whole world is becoming ‘more competitive’ so it all cancels out. Bad for people, ok for stocks, with profits running at record highs as a % of GDP. Meaning the federal deficit has to be that much higher, all else equal, to fill the output gap.
The yen keeps going down. Looking more and more to me it’s off the radar screen intervention by the likes of insurance co’s, pension funds, and other quasi govt agencies got the note to buy fx denominated bonds in size. Not sure how far they will take it, but they have a serious herd instinct that has formed serious multi year bubbles in the past.
Europe? They fixed the solvency issue, sort of, and now just have the economy thing to deal with. Problem is the ECB grants solvency only with conditionality. Good luck to them.
Early Thought follow up… A follow up conversation with Warren Mosler
Please click here to listen to a conversation with Warren Mosler. We did an audio call with Warren in late June and he was spot on. So I thought it was a good time to circle back with him. Topics include: US stocks (they look good…deficit to GDP in US a support for market/econ), US rates, Europe and China.
more on the cliff
Stocks down again yesterday but interestingly bond yields up a tad, dollar down a tad, oil and metals up, and even long BMA ratios holding steady, etc.
The cliff isn’t nearly as large and threatening as the debt ceiling cliff would have been in 2011 if that thing hadn’t been extended, and we’d gone cold turkey into an immediate and forced balanced budget. But that event is the stock market’s ‘recent memory’ of stock market reaction functions.
And this time GDP is being supported by a private sector credit expansion/housing expansion, with private debt service ratios substantially lower due to cumulative federal deficits adding to nominal ‘savings’. And the federal deficit remains well above 5% of GDP, which historically has been more than enough to reverse a recession.
And then there’s the election factor. Post election I’m hearing (anecdotally) distraught Romney supporters thoroughly convinced the President is a ‘socialist’ bent on destroying capitalism, taxing the rich ‘job creators’ and giving it to what Romney called ‘the 47%’ dependent class, etc. etc. etc. Merits of this ‘belief’ aside, it looks to me it’s driving portfolios to shift out of equities. However, if not supported by an actual decline in earnings, which is how I see it, it’s all a case of ‘pushing on a spring’.
Yes, the euro zone is a problem, with Q3 GDP just reported at -.1%. But that’s an ‘improvement’ from q2’s -.2% as larger deficits are acting counter cyclically to cushion the austerity driven decline. And Rehn was just quoted on Spain favoring not adding to austerity measures, perhaps indicating a move to ‘let it be’ for a while, which will allow GDP to stabilize at modestly positive levels.
And China is no longer going backwards, so that negative has been reversed as well.
Back to the cliff, in fact letting tax rates go up for high income earners should have little effect on GDP, as the marginally propensity to spend for that segment is reasonably low. (of course that means there’s no point in taxing that income in the first place, but that’s another story). Nor does it mean investment or employment will suffer since investment is driven by sales prospects. And with higher tax rates, and business expense tax deductible, the after tax cost of investment goes down with higher tax rates. For example, in the 70’s, when my tax rate was around 70%, I clearly recall making very high risk investments figuring it was better than giving 70% to the govt. Point is, taxing income and savings that isn’t going to be spent is about social engineering, and not ‘funding the deficit’ or altering aggregate demand, and is intellectually honestly framed as such. So point here is, I score the effect of raising the highest tax rates at 0 regarding aggregate demand.
This all supports my take that the stock market has over discounted the cliff, partly for ideological reasons, partly due to the recent memory of what stocks did during the debt ceiling debacle, and partly from fear of what’s going on in the rest of the world.
So as we get through it all with modest top line and earnings growth continuing, I’m looking for valuations to quickly return to at least where they were before the election.
feels like time to buy equities in general
I’m thinking it’s about that time for portfolio managers to buy stocks and go play golf for a few years,
with the following very caveats.
1. A serious spike in crude oil/gasoline prices that undermines consumption
2. The euro zone could break down socially under the stress of continued austerity
3. Congress opting for ‘meaningful’ proactive deficit reduction
But apart from that it looks like relatively clear sailing to me
The Republicans are now softening on revenue increases to get past the fiscal cliff.
And in any case the fiscal cliff may already be up to 50% discounted, as business has slowed due to delayed contracts, etc. with top line growth still remaining modestly positive as the cyclical housing ‘recovery’ begins its multi year upward grind, providing a powerful ‘borrowing to spend’ force for growth. I call it a drop in ‘savings desires’ as borrowing is in fact ‘negative savings’.
This is fundamentally supported by continuing federal deficit spending that, while down from the peak, is still looking more than high enough to support a growing credit structure.
And the 4 years of ‘larger than ever’ federal deficits have added exactly (to the penny) that much in dollar net financial assets to the global economy, with much of that being added here domestically. This is evidenced by the full recoveries, and then some, of macro debt service ratios of all types. In short, ‘savings’ has been, for all practical purposes, more than sufficiently restored for a ‘normal’ recovery.
This kind of underlying strength will quickly cause the Fed to reevaluate policy as unemployment drops towards 7%, leading to a ‘normalization’ of policy, which means a fed funds rate at a ‘normal’ premium over ‘inflation’ for a ‘neutral monetary policy.’ In fact, as this happens, the higher rates from the Fed further support the expansion via the interest income channels.
The output gap is wide enough for this to go on for a long time without excess demand issues, again with the caveat of crude oil.
Growth has already caused the federal deficit to come in lower than expected, which is helping put off proactive deficit reduction efforts.
Yes, eventually, the automatic fiscal stabilizers will bring the deficit down too far for it to support the credit structure, and serve to end the cycle. But this is WAY down the road.
The first Obamaboom came from the ‘stimulus’ which wasn’t nothing, but was far too weak to remove the sudden drag on demand from the private sector credit contraction.
The ‘crime against humanity’ was not implementing the likes of my proposed ‘payroll tax holiday’ in mid 2008 to support demand at full employment levels at that time.
Instead, the govt allowed demand to collapse/output gap to widen. This did not have to happen. It was a total failure of govt.
Also, timing is also important, so mind the technicals!
Payrolls: Bleak with 1 Silver Lining
Karim writes:
Payrolls: Bleak with 1 Silver Lining
Highlights
- Most of the key headlines of the survey were weak
- Payrolls up only 69k with net revisions of -49k (April now +77k not 115k)
- Unemployment rate up from 8.1% to 8.2% (labor force up 622k and household survey up 422k)
- Average hourly earnings up 0.1% and index of aggregate hours -0.2%
- Median duration of unemployment up from 19.4 weeks to 20.1 weeks and U6 unemployment rate up from 14.5% to 14.8%
- The silver lining is that the Diffusion Index (# of industries adding jobs less those cutting jobs, indexed on a 0-100 scale) rose from 56 to 59.4
- Downside shifts were heavily concentrated in 3 sectors (Construction -5k to -28k; Retail 27k to 2k; and Business services 37k to -1k)
- Construction and retail (which includes leisure and hospitality) likely reflect the weather payback that Bernanke has highlighted; business services cuts likely reflect the late nature of tax season this year and some of those layoffs may not have taken place until May.
Conclusion
- The diffusion index improvement implies the underlying state of the labor market is somewhat better than the headline; probably in the 125-150k range
- Purely based on the economic data, additional Fed easing is unlikely
- But the worsening of financial conditions via Europe have increased the odds of a continuation of Twist (in its current form) for at least 2-3mths
Not to overlook the increase in the labor force participation rate from 63.6 to 63.8!
And Q2 gdp talk still about 2%.
Still looks to me good for stocks, not so good for people, though lower gasoline prices good for consumers as is weak consumption overseas.
Video from Venice presentation
Venice video link here.
Also, Trichet Friday, the German elections, and G8 reports seem to be setting the tone for the euro zone to do something about the solvency issue. This is very good for equities and the rest of the credit stack.
At the same time it does not seem likely that any growth proposals will include fiscal relaxation, so the euro zone will have to get by the best it can with the deficits it has, which I’d guess should mean flat GDP, +/- 1% or so.
The US should also continue to muddle through with modest top line growth, and inflation low enough and the output gap wide enough to keep this Fed from hiking any time soon.
Quick update
US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.
Lower crude prices should also help some.
I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.
But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.
So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.
But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.
It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.
Not to mention possible dislocations from the whale, which may or may not have run their course, etc.
And then there’s the news from Greece.
First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.
Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.
It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.
And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.
As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.
And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.
For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.
The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?
Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.