Wednesday
Aug062014

Incredible Shrinking Yields

Remember a few years back when everyone used to look at the 1% yields on long-term Japanese sovereign debt and write it off as a phenomenon specific to Japan?  Well that so-called Japan specific issue is now firmly entrenched in Germany and Japan, and with a yield of 2.08% Canada is not far behind. Meanwhile, Japan has graduated down to the sub 1% club!  

 

With the exception of Russia, long-term sovereign yields across the G8 are at levels that were unthinkable a few years ago.  Even in Russia, where the current geo-political situation would make you think the country would have trouble borrowing money in the capital markets, 10-year sovereign debt is yielding just 5.29%.  Keep in mind that this is a country that defaulted on its debt 16 years ago and is also being threatened with increased sanctions over its aggression with the Ukraine.  Elsewhere in the G8, the US is in the middle of the pack at 2.44%, while Great Britain (2.51%) and Italy (2.80%) are both also under 3%.

The table below lists the current 10-year local currency sovereign debt yields of each G8 country, as well as their changes over the last day, week, month, three and six months.  As you can clearly see, everywhere except Russia (and Italy in the last week), yields have been on the decline.  Even as calls for a peak in fixed income have been around for months now, the appetite for sovereign debt hasn't been satisfied.

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Wednesday
Aug062014

The Bespoke Morning Lineup: 8/6/14 Commentary

The below commentary excerpt is an example of what Bespoke Premium subscribers receive every morning in The Morning Lineup in addition to three pages of key headlines, charts, trends, and technical indicators.  We will be posting a sample of our commentary here each morning for the next several weeks.  If you're interested in receiving this report and our many others via email, try a 5 day free trial to Bespoke Premium today!

Global markets are in churn and burn mode this morning as European data has drastically under-delivered and the specter of conflict in the Ukraine hangs dark over the continent. Risk markets are hitting bids all over the place, and the selling in credit (European investment grade CDS indices 3 bps wider, high yield 15 bps wider, financial CDS 4 bps wider), equities (EuroStoxx -1.63%), sovereign debt markets (Italian, Portuguese and Greek debt all 10 bps wider to bunds), and currencies (virtually every major cross lower versus the USD; JPY also performing strongly), is notable.

European trading is getting hard to watch as Italy is just off its lows but still down more than 3% following horrible data this morning. The UK is outperforming but still off over a percent (-1.17%) on Industrial and Manufacturing Production misses and higher-than-expected home prices. France, Spain, and Germany are all puking up gains from yesterday in sympathy with the Italian market where equities are down 2.93%. Portugal is off over 3% and Greece is toying with a loss of almost 5% today. The two best-performing markets in Europe at this hour, both off 95 bps, are the Netherlands and Poland; literally every other market in Europe is down at least 100 bps.

The wide-ranging economic data released today for Europe was a series of misses, with very little to look to for comfort about the prospects for the EU. Factory orders in Germany fell 3.2% month-over-month in June, versus expectations of 0.9%. Retail PMIs are in full-blown rout mode, missing expectations this morning for Germany, France, Italy, and the Eurozone as a whole. Finally, there was the Italian GDP release which actually fell year-over-year by 0.3% versus expectations of 0.1% growth. The economic data out of the Eurozone is screaming for further action from the ECB, but it’s still not clear if the central bank has the legal ability to start buying bonds in order to expand the money supply. It’s also not clear how much support QE would offer a eurozone whose economic conditions are rapidly deteriorating.

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Tuesday
Aug052014

The Closer Commentary 8/5/14 - Stop, Get On The Floor

The below is an excerpt from tonight's edition of The Closer, sent to Bespoke Premium and Institutional clients each night along with graphs, analysis, and timing models for both single name equities and the market as a whole.

US equities sold off aggressively today after….nothing, really.  There was no credible catalyst for the lightning quick move down from 1930 on the S&P 500 at 1:30 PM to 1917 at 1:44 PM and eventually the lows of the day at 1913 around 2:10 PM.  The moves today were disorderly, choppy, and didn’t feel sensible to us; not to say that the market ought to have been higher today, or that it ought to have been down less.  Rather, we were surprised at how markets were moving all day today, right from the start.

One thing that caught our eye, which we touched on in our commentary on The Morning Lineup, was the idea that equity futures were under pressure from something other than Europe this morning.  The pattern over the last month or two has been for S&P 500 futures to track Europe closely until the open in US cash markets or often the close in Europe (11:30), at which point the US market regains its footing and trades on its own.  But this morning we saw the precise opposite: Europe got off to a solid start on the back of good PMI data but instead of rising with the eastern side of the Atlantic, US futures fell.

The pre-market price action was confirmed at the open when the cash market zig-zagged.  While the S&P 500 was able to climb off its lows to within 5 index points of breakeven, it couldn’t hold either of the high-on-days put in between 10:30 and noon.  But after selling off moderately through the afternoon, stocks looked like they were angling for a run higher when a sudden wave of selling came out of nowhere.  At right is a chart showing just how aggressive the move was for the S&P 500, the Dow,  and the Russell 2000. 

To continue reading, subscribers can click here.  Non-subscribers can gain access by signing up for a five day free trial.

Tuesday
Aug052014

A Year To Forget For The Oracle

Back in April, we looked at how some of the big holdings for Berkshire Hathaway were performing in 2014, and compared them to the S&P 500.  As of April 7th, this year was a tough one for Warren Buffett's top holdings at Berkshire; his 15 largest S&P 500 investments were trailing the S&P 500 by about 0.8% year to date.  Since then, though, things have gotten worse.  

Below is a table detailing Warren Buffett's 15 largest investments since the start of the year and over the past 12 months.  While Buffett measures his book value versus the S&P 500 instead of the price of his underlying shares, we can take a look at the market's assessment.

On both a simple (dividends excluded) and total return (including reinvestment of dividends) basis, the top 15 equity holdings of the Berkshire Hathaway portfolio (as of 3/31/14) plus Bank of America (BAC), which Berkshire owns warrants on, have noticeably underperformed the S&P 500.  For the purposes of our analysis, we assumed that Berkshire is long 700 million shares of BAC, which is basically equivalent to returns on deep in the money calls that the warrants replicate.

While some of Buffet's picks have been marvelous (including his largest investment, Wells Fargo- WFC), and a large position in DirecTV- DTV), others have dragged down his returns including Coca-Cola (KO), which has faced uncertainty over demand headwinds as fewer Americans consume carbonated beverages.  General Motors (GM) has also gotten smoked this year as recall after recall has poured in; this despite a boom in US auto sales.

One thing is certain: over the long run, Buffett's track record is second to none.  Like any investor, though, his returns can really swing and even underperform the market over shorter time periods.  It's also worth noting that there are dozens of other businesses bolted on to Berkshire Hathaway besides its equity portfolio.  Those businesses are the reason that BRK shares have returned 8.35% year-to-date, or almost double the return of the S&P 500, despite the underperformance of his portfolio.

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Tuesday
Aug052014

Less Pricing Pressure in ISM Commodities Survey

Whether you want to look at the various official inflation measures or the anecdotal stories of companies raising prices, concerns over an uptick in inflation have become more prevalent in the past few weeks.  At the surface, last Friday's ISM Manufacturing report seemed to support those concerns as the Prices Paid component increased from 58.0 to 59.5.  As we noted last week, though, underneath the surface we actually saw a decline in the number of commodities that were rising in price.

In Tuesday's ISM Services report, we saw a similar decline in the number of commodities rising in price.  During the month of July, respondents in the services sector noted increases in 20 commodities while 3 declined in price. At a net of 17, this represented a decline of four from June's level.  On a 3 month moving average basis, the net number of commodities rising in price now stands at 16.7, which is down 1 from last month and is the lowest reading since March.  While we are not implying that worries over inflation should be brushed aside, it is notable that just as inflation and rising prices are starting to make the headlines, the ISM surveys of commodity prices in the ISM reports are showing that the situation has not gotten any worse.

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Tuesday
Aug052014

Upside Surprise in ISM Services

Today's ISM Non Manufacturing report for the month of July hit its highest level since November 2005 and showed that the pace of economic activity continued to improve during the first month of the third quarter.  While economists were expecting the headline index to come in at a level of 56.5, the actual reading came in at 58.2.  That 2.2 point beat relative to expectations was the widest since last September.  

Combining Tuesday's ISM Services report with the ISM Manufacturing report from Friday and accounting for each sector's share of the economy gives us a combined reading of 58.3, which is also the best reading since November 2005.  While these numbers are certainly encouraging, they probably won't give any comfort to those investors who may already be skittish about the Fed.

The table below breaks down July's ISM Services report by each of the index's subcomponents.  Compared to last month, breadth in July's report was positive with five components increasing, four declining, and one unchanged.  The biggest increases relative to last month were in Business Activity (+4.9) and New Orders (+3.7).  The increase in New Orders brought that component to its highest level since August 2005.  Compared to last year, this month's report was even more positive as six components increased and three declined.  On a year/year basis, the biggest increases were in New Orders and Backlog Orders.  Finally, the two point decline in export orders in this month's report is a potential sign that weakness in foreign markets is crimping demand in those regions.

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Tuesday
Aug052014

The Bespoke Morning Lineup: 8/5/14 Commentary

The below commentary excerpt is an example of what Bespoke Premium subscribers receive every morning in The Morning Lineup in addition to three pages of key headlines, charts, trends, and technical indicators.  We will be posting a sample of our commentary here each morning for the next several weeks.  If you're interested in receiving this report and our many others via email, try a 5 day free trial to Bespoke Premium today!

One possible catalyst for Treasuries today is the JPM Client Duration Survey, which showed short covering of interest rate risk from both active clients and all clients. Although net longs are still negative, this could be a factor in some of last week’s large end-of-week yield swings. Net shorts remain at elevated levels, and are only back to where they were as ofJune 23rd.

Turning to earnings, ADM (+0.82% yesterday, +0.02% pre-market) beat EPS but missed on the top line, where revenue shrank 4.6% year-over-year. In e-commerce, retailer Blue Nile (NILE, -0.27%, flat pre-market) managed to miss on EPS, deliver a revenue miss and year-over-year revenue declines, and guide down revenue and EPS for both Q3 and the full year; all in all a disastrous report from the online retailer. Although not earnings related, Target (TGT, +1.42% yesterday, -3.21% pre-market) announced an increase in costs related to the data breach reported earlier this year. The guidance hit EPS by 7 cents per share, down to 78 cents in Q2 versus $0.85 - $1.00 and an estimate of $0.91.

Turning to economic data, the US iteration of Markit’s PMI Services is due at 9:45 AM, with a 60.8 print expected versus 61.0 prior. ISM Non-Manufacturing follow at 10:00, with an expansion to 56.5 expected versus 56.0 prior. Also at 10:00 are factory orders, expected to expand by 0.6% after a 0.5% decline last month.

Subscribers, please click the thumbnail below to access the full Morning Lineup. 

Monday
Aug042014

The Closer Commentary 8/4/14 - Turning European?

The below is an excerpt from tonight's edition of The Closer, sent to Bespoke Premium and Institutional clients each night along with graphs, analysis, and timing models for both single name equities and the market as a whole.

There were no major economic releases today but one under-appreciated indicator that came out was the Federal Reserve’s Senior Loan Officer Survey.  The survey assesses credit conditions using a wide-ranging assessment of various loan markets as seen by loan officers at banks around the country.  This quarter’s release was very good news with respect to credit conditions, with increased demand for loans across commercial & industrial, mortgage, commercial real estate, and consumer lending verticals.  While the release isn’t extraordinarily useful as a stand-alone assessment, it does offer a nice qualitative support to our observation of loan growth acceleration; not only is the supply of loans growing, their demand is as well.

After a vertiginous selloff late last week (and partially fueled by large amounts of equity volatility) credit spreads as measured by the Markit CDX High Yield index of credit default swaps traded on a range of high yield companies came off recent highs.  It’s not clear whether this is a rally driven by profit taking on short positions or possibly a pause on the way to more aggressive widening, but the charts at right show the key takeaway: credit had a good day today relative to its recent history.

A market supporting the move lower in credit spreads was the volatility market for equities.  The index moved off three month highs from intraday Friday to more moderate 15.12 close today, a change of 1.91 index points, which means implied volatility over the coming month is 15.12% annualized.

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Monday
Aug042014

Plenty of Oversold Dow Stocks

The Dow as an index is in the red for the year, and the average performance of the 30 stocks in the index is right at the flat level.  Below is a look at our trading range screen for the 30 Dow index members.  For each stock, the black vertical line represents its 50-day moving average.  The red shaded areas represent overbought territory, while the green shaded areas represent oversold territory.

There are plenty of Dow names that have moved deep into oversold territory after last week's market pullback.  Blue-chip names like American Express (AXP), 3M (MMM), Merck (MRK), Travelers (TRV) and Wal-Mart (WMT) are all at extreme oversold levels, trading more than two standard deviations below their 50-days.  We see plenty of extreme situations for small-cap names in the Russell 2,000 throughout the year, but it's rare when so many big large-cap stocks are this oversold.  Buy-the-dip investors currently have plenty of opportunities if they're out looking, but based on sentiment, they may be few and far between right now.

Bespoke Institutional members have the ability to run their portfolios through our trading range screens on a regular basis.  To learn more about our Institutional offering, head on over to Bespoke Premium.

Monday
Aug042014

The Bespoke Morning Lineup: 8/4/14 Commentary

The below commentary excerpt is an example of what Bespoke Premium subscribers receive every morning in The Morning Lineup in addition to three pages of key headlines, charts, trends, and technical indicators.  We will be posting a sample of our commentary here each morning for the next several weeks.  If you're interested in receiving this report and our many others via email, try a 5 day free trial to Bespoke Premium today!

Global markets are quieter this morning than they were most of last week, and there’s been a relatively light slate of overnight news: some economic data in Europe, a few comments to Bloomberg News from a previous interview are hitting the tapes from Richmond Fed President Jeffrey Lacker, and there’s been renewed discussion of the effects of Russian sanctions, most specifically on Europe. But overall equity index futures are quiet for major US indices; despite their standard selloff at the European open, spoos have recovered to near Friday’s afternoon highs, 37 bps above their close Friday evening. The start of the trading session yesterday evening had seen a bit of buying pressure. Futures were extremely stable during the Asia-Pacific region’s trading day.

In US Treasury trading this morning, the curve is bear steepening (yields higher, led up by the longer dated tenors) but the move is marginal, led mostly by a 1.6 bps move in thirties. Most other issues are close to flat, with little catalyst for a move higher or lower until trading gets underway in US equities. The only data release today is the Gallup Consumer Spending measure. Overall this week will be a nice break from the torrent of data last week, with a relatively light schedule. There’s also a relatively light issuance schedule for the US Treasury, with only bills being auctioned. That said, there are announcements Wednesday for the next two quarters of expected US Treasury funding needs, the announcement of the ten year, three year, and thirty year note auctions, and a report on the amount of stripping (separation of future coupon/principal payments into zero-coupon bonds).

Subscribers, please click the thumbnail below to access the full Morning Lineup. 

Monday
Aug042014

Pick-up in Bearish Sentiment

Bearish sentiment picked up in our weekly Bespoke Market Poll over the weekend after the worst week for stocks in a couple of years.  As shown below, there were 46% bulls and 54% bears on the S&P 500's directional trend over the next month.  This is the second week in a row of more bears than bulls, and it's the most bearish poll participants have been since our May 5th poll.

Friday
Aug012014

The Closer Commentary 8/1/14 - End of Week Commentary

The below is an excerpt from tonight's edition of The Closer, sent to Bespoke Premium and Institutional clients each night along with graphs, analysis, and timing models for both single name equities and the market as a whole.

The worst week in US equities since 2012 is finally over, and the ocean of economic data reported this week is finally done. The dollar is higher, and it’s about the only thing as rates, credit, and commodities all sold off sympathetically with the huge rip in equity volatility.  While the massive selloff (relative to recent docile trends in volatility) of Thursday has taken us much closer to a moderate pullback of 5% or a 10% correction, we’re not terribly concerned about the bull market in US equities at present.  Earnings chugs along and remains positive, behind all the noise; the price to earnings ratio for large cap equities is now flat YTD.

To continue reading, subscribers can click here.  Non-subscribers can gain access by signing up for a five day free trial.

Friday
Aug012014

S&P 500 Higher or Lower from Here?

US markets had an awful week, leaving the Dow, S&P 500 and Nasdaq all below their 50-day moving averages.  So which way will the market head from here?  Please take part in our weekly Bespoke Market Poll below by letting us know whether you think the S&P 500 will be higher or lower one month from now.  We'll report back with the results on Monday before the open.  Thanks for participating and have a great weekend!

Looking for analysis of this week's sell-off and what it means for markets going forward?  Sign up for a 5-day free trial to any of our subscription services and read our just published Bespoke Report newsletter.  

Will the S&P 500 be higher or lower than its current level one month from now?
Higher
Lower
  
Free polls from Pollhost.com
Friday
Aug012014

High Yield Living Up To Its Name

Yields on High Yield corporate bonds (corporate bonds below BBB) are surging.  Part of it has to do with higher equity volatility; high yield bonds generally track equities closer than investment grade bonds do because of their risk profile, which is much more similar to equities than a highly-rated corporate.  The chart below shows the pain as measured by the spread between Treasuries and the bonds in the Bank of America Merrill Lynch High Yield Master II Index, a widely followed benchmark.

As a result, high yield bond-focused investments have been getting crushed.  Here's a chart of the HYG ETF, which invests exclusively in high yield bonds:

That 3.14% decline is equivalent to more than two-thirds of the 30-day yield on the ETF (4.52%). There have also been massive redemptions of high yield bond ETFs with HYG suffering $361mm (or 3% of assets) in net outflows yesterday (the second most of any ETF) and its competitor JNK seeing $122mm or 1.34% of its assets leave the building via redemptions. 

Interestingly, though, the chart of LQD, which invests only in investment grade bonds, doesn't look anywhere near as bad:

After matching performance for a long time, high yield is starting to give up returns to investment grade.  The below chart traces the ratio of HYG to LQD over the past year, and the underperformance of HYG is really starting to accelerate here.

And all you have to do to understand why is look at the yield spread on investment grade debt.  The below chart shows the same spread as we illustrated above for high yield, but this time uses the Bank of America Merrill Lynch Corporate Bond Master II index, which doesn't include riskier high yield bonds.

While high yield spreads have spiked, the spreads on corporate bonds have steadily trended sideways, and while they may be headed slightly higher, we aren't seeing anything close to the explosion in spreads the junk bond market is showing.

We don't see this move higher in junk bond spreads as a horrible sign for the economy, necessarily.  Spreads are near their all-time lows and would have to run much, much higher to be indicative of a jump in economy-wide default risk that comes with slowing corporate revenues in a recession.  Rather we see it as a healthy risk re-pricing off of all time lows in premiums demanded for some relatively speculative investments.  The high yield move is a negative for equities, though, as generally speaking high yield spreads and the S&P 500 are very negatively correlated.

Interested in more cross-asset analysis?  We sent Bespoke Premium and Institutional subscribers a B.I.G. Tip on the performance of high yield spreads and the equity market on July 23rd.  Sign up for a free trial now to access!

Friday
Aug012014

ISM Commodity Survey Shows Less Pricing Pressure

While the big jump in Thursday's Employment Cost Index has many investors concerned about potential inflation pressures down the road, today's ISM Manufacturing report had a glimmer of good news.  Although the Prices Paid component rose from 58.0 to 59.5, the survey of commodities prices showed the fewest net number of commodities rising in price so far this year.  According to the ISM, manufacturers noted that prices had increased for nine commodities and declined for three for a net reading of six.

The chart below shows the three month moving average of the net number of commodities rising in price going back to 1999.  Along with that, we have also shown the y/y reading in the Consumer Price Index.  Historically, the two indices have tended to move in similar directions, so with the three month moving average starting to roll over, there is some hope that the CPI will follow suit.

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