John P. Hussman
4/17/17 - The Value
of Dry Powder
“The chart below shows
the most reliable market valuation measure we identify, nonfinancial market
capitalization to corporate gross value added, on an inverted log scale (blue
line, left scale), along with the actual 12-year nominal annual total return
for the S&P 500 Index (red line, right scale). As we observed during the
severe market retreats that followed the tech bubble and the mortgage bubble,
substantially higher expected returns are likely to emerge over the completion
of this market cycle, as a result of interim losses in the next few years. Dry
powder has considerable value here, not because of the return it currently
generates, but because of the opportunity it may afford to establish
constructive and even aggressive market exposure over the completion of this cycle,
at higher prospective returns than are currently available. For that reason,
whether investors choose hedged alternatives or cash, I strongly encourage
investors to maintain a regular, disciplined saving plan.”
Business Insider
4/18/17 - Banks are
suddenly scaling back lending, and Wall Street isn't sure what to make of it.
“Bank lending to
consumers and businesses is slowing down.
As of last week,
commercial and industrial lending had not increased since September 7, the
first six-month period of declines since the aftermath of the financial crisis,
Bank of America Merrill Lynch said.
Consumer-loan growth
has also slowed, up by 1.4% since the November election versus 3.1% during the
same period a year earlier.
Depending on who is
asked, this slowdown is either an expected response to some preceding
indicators or another reason to be worried about the economy.”
“The slowdown seemed
to be a bit of a puzzle at the outset. One explanation, for businesses at
least, was that they were awaiting the outcome of the election, and then of
policies like tax reform and immigration, before deciding to borrow for big
investments.
But that argument doesn't
necessarily hold up for consumers, whose spending decisions are less reliant on
Capitol Hill.”
“But from a
business-lending perspective, the slowdown is a bit of a lagging indicator,
considering the big drawdown in inventories last year, he said. Inventories, a
major part of gross domestic product, slowed economic growth during much of
2015 and 2016.
Additionally, the
first quarter was solid for bond issuance, suggesting that companies are
relying less on bank credit, Baird said. High-grade companies issued a record
$414.5 billion of debt in the first quarter, according to Dow Jones.
And from the supply
side — why banks aren't lending as much — David Schawel, a fixed-income
portfolio manager at New River Investments, argues that banks don't stand to miss
out as much by not earning interest on lending.”
Mohamed A. El-Erian: Bloomberg
View 4/19/17 - High
Stock Prices and Low Bond Yields Can't Last
“Unless you believe
the Federal Reserve will ease monetary policy, which I don't, it is getting
harder to reconcile what are still historically low bond yields and relatively
high stock prices. More consistent and sustainable levels probably lie
somewhere in the middle. Exactly where, as well as when and how we would get
there, depends primarily on the balance between geopolitical and
economic-policy influences.
Stock markets
repeatedly have proven extremely resilient in shrugging off both political and
geopolitical worries. In doing so, they have relied on deeply anchored market
beliefs regarding stable growth, supportive central banks and further
liquidity injections. As a result, they view the prospects for stronger
corporate earnings and economic growth as compensations for geopolitical
fluidity.”
“The same isn't true
of government bond markets. There, yields on 10-year Treasuries have languished
recently below the 2.30–2.60 percent range that was established after the
November presidential elections, as geopolitical worries have been compounded
by concerns about both low inflation and subdued growth.
This is not the first
time that government bonds and stocks have sent conflicting signals, and it
won't be the last. Moreover, this inconsistency coexists with several others,
including the divergence between emboldened measures of business/consumer
confidence and hard data that remains sluggish.
Also, let us not
forget the asymmetrical upside/downside prospects. Simply put, at current
levels, stocks heavily dominate bonds when it comes to most current assessments
of the upside return potential segment.
Yet this particular
market inconsistency has persisted for some time, and it has outlasted many
explanations, including those emphasizing the technical positioning of markets.
Indeed, the only proper way to reconcile the two competing market signals at
this stage is through a forecast of renewed monetary policy easing on the part
of the Federal Reserve.
Absent a major economic
downturn that would also rout stock markets, such easing is highly unlikely.
Indeed, while the balance of risk may be shifting, the baseline still favors
two additional interest rate hikes this year, together with an action plan for
balance-sheet normalization.
The more likely
outcome is a reconciliation of market signals with government bond yields
moving up and stock prices down. When this happens, where the two settle, and
the orderliness of the process will be mainly a function of two influences: the
extent to which geopolitics has an adverse effect on the outlook for growth,
and the extent to which U.S. policy reforms improve the prospects for actual
and potential growth. In the meantime, investors should be increasingly wary
about betting on durable market inconsistencies.”
CNBC 4/19/17 - Santoli:
Stocks have been in a 'quiet correction' for months
“Yet by last week,
nearly half of all stocks in the broad S&P 1500 were down at least 10
percent from their 52-week high, the popular bank sector remains down that much
and economically attuned groups such as transportation and steel have lagged
badly.
Since around the time
of the market high, the 10-year Treasury yield has ebbed to 2.2 percent from
2.6 percent, the CBOE S&P 500 Volatility Index (VIX) has climbed into the
mid-teens from around 11 and the Atlanta Fed's GDPNow forecast model for
first-quarter growth has tumbled to 0.5 percent from 2.5 percent. Investor
attitudes have also run from excessive bullishness to a warier outlook, with
weekly investment-advisor polls, the CNNMoney Fear & Greed Index and the
Bank of America Merrill Lynch Global Fund Manager Survey suggesting that the
so-called wall of worry is gradually being rebuilt.
This subtle but
noteworthy change in market character means we're again at a point where market
handicappers are asking whether the market's internal weakness has been
dramatic enough, with enough "oversold" conditions popping up, to set
up a strong rebound. So far, according to close students of tactical market
clues, the answer is "Close, but not quite."
Katie Stockton,
technical strategist at BTIG, says last Thursday's high-volume sell-off sent
some of her preferred indicators to extreme readings that often set up a good
rebound. Yet, she concludes that "down-volume was strong enough to suggest
the pullback still has a hold on the market." Confident that the
longer-term market uptrend remains intact, she says, "We remain on the
lookout for a buying opportunity, which appears more likely after a shakeout in
high-beta areas of the market."
Similarly, BAML's Stephen
Suttmeier sees this little downside reset in the market as incomplete. One
notable shift is the arrangement of the short-term and longer-term VIX futures
prices, with immediate volatility expectations appearing puffed-up relative to
more distant ones. Without getting into the statistical weeds, it's another
"oversold" condition, one that says traders are paying up
aggressively for a possible sudden spike in market risk, despite the
still-placid behavior of the indexes themselves.
While this is a start,
Suttmeier argues that broader measures of downside hedging with options
"are nowhere near the oversold levels that have coincided with important
S&P 500 lows." He figures the index has another 2 to 4 percent of risk
to the downside in the fairly near future based on the weight of the evidence.
The quirk this time is
that when the VIX makes a five-month high (as it did in recent days), the
S&P 500 is usually down a whole lot more than 2 or 3 percent from an
all-time high. Does this mean traders are overreacting to modest weakness, or
are the options guys foretelling a stormier period ahead? Worth watching is the
corporate-credit market: It remains firm, but risk spreads have modestly
widened in recent weeks, slightly weakening one of the stock market's key
sources of strength in the past year.
Even the strongest
years tend to have one or more declines of more than 5 percent from a high, so
this would be consistent with the rhythm of an ongoing market advance – one
that is strongly suggested, based on historical patterns, by the impressive
start to the year. If the late-March lows were as deep as this quiet correction
gets, it might be comforting, but it also likely means the market won't have
built up sufficient fear or reloaded with enough fresh buying power to vault
the market too quickly on a powerful new leg higher. This is often the
trade-off traders face – muted volatility can contain the market in both
directions for long stretches of time.”
OilPrice.com (via The
Fiscal Times) 4/20/17 - Why
the Oil Markets Are Headed for a ‘Decade of Disorder’.
“But investment fell by over $300 billion in the two-year
period of 2015 and 2016 – “an unprecedented occurrence,” the IEA noted in a
2016 report on energy investment. 2017 could show marginal increases in
spending, but the industry is not returning anywhere close to the pre-2014
levels of investment.
That could set the world up for a supply shortfall by the
end of the decade when large deepwater projects that were not given the
greenlight over the past three years would have started to materialize. The
lack of new production will mean that suppliers struggle to keep up with
demand.
Michael Cohen, head of energy markets research at Barclays,
told the Platts Capitol Crude podcast that a supply shortfall could hit as soon
as the 2020-2022 period, assuming annual oil demand growth of 0.8 to 1 mb/d,
which is lower than the 1.3 mb/d of demand growth the IEA expects for this
year. Of course, if demand grows each year at a more than 1 mb/d rate – not an
unreasonable scenario – the supply shortage would be even more acute. “The
question is whether the market will see that eventuality and try to price it in
beforehand,” Cohen said on the Platts podcast. “It is our view that prices need
to rise” in order to incentivize new supply coming online to cover that
eventual gap, he added.
Bloomberg 4/20/17 - The
Real World of Oil Has a Warning for Financial Markets
“The Brent physical
oil market is flashing signs of weakness again as dwindling Asian
purchases, an influx of American crude to Europe, and supplies flowing out of
storage all combine to recreate a glut in the North Sea.
The weakness comes at
a time when speculators have started rebuilding bullish positions after a
sell-off last month, betting the market will tighten in the second quarter.
Yet, Brent physical oil traders say the opposite is happening so far, according
to interviews with executives at several trading houses, who asked not to be
identified discussing internal views.
“We need to see the
market going really into deficit for oil prices to rise,” Giovanni Staunovo,
commodity analyst at UBS Group AG in Zurich, said. “If this is temporary, it
could be weathered, but it needs to be monitored.”
The weakness is
particularly visible in so-called time-spreads -- the price difference between
contracts for delivery at different periods. Reflecting a growing surplus that
could force traders to seek tankers as temporary floating storage facilities,
the Brent June-July spread this week fell to an unusually weak minus 55 cents
per barrel, down from parity just two months earlier. The negative structure is
known in the industry as contango.”
“In the world of
contracts for difference, which allow traders to insure price exposure for
their North Sea crude shipments week-by-week, the one-week CFD spread plunged
this week to minus $1.84 a barrel, the weakest since late November and just
before the Organization of Petroleum Exporting countries and allied nations
announced their first joint effort to manage supply in over a decade. A month
ago, the comparable CFD traded at just minus 50 cents barrel.
"It will not take
much before we see headlines about floating storage starting to increase
again," said Olivier Jakob, head of oil consultant PetroMatrix GmbH, in
Zug, Switzerland.”
“The differentials
between physical grades and benchmarks have also weakened in recent weeks.
Glencore Plc, the world’s largest commodities trader, on Thursday bought from
French oil giant Total SA a cargo of Brent crude at $1 a barrel below the main
North Sea benchmark, the widest discount in 22 months, according to a trader
monitoring deals.
Oil traders said OPEC
was initially successful, driving oil prices higher and tightening
time-spreads. But the group was a victim of its own success, as those same
spreads forced crude out of storage, flooding an already weaker physical market
with supply. Higher headline prices also boosted U.S. shale producers.”
“Through April 13,
only 30 percent of the 148 subindustries in the S&P Composite 1500 stock
index were trading above their 10-week, or 50-day, moving averages, noted Sam
Stovall, chief investment strategist at CFRA Market Advisor. “While this is
certainly an indication of recent weakness, it may also be viewed as a source
of near-term optimism, since it implies that the market may be oversold,”
argued Stovall.
He also noted that in
any given week since Dec. 31, 1995, 60 percent of the subindustries in the
S&P 1500 traded above their 10-week moving average. And whenever S&P
1500 had 30 percent or fewer of its subindustries trading above their 10-week
averages, the S&P 1500 outpaced its average for all periods over the coming
three, six, and nine weeks. “Indeed, the S&P 1500 rose in price 1.5
percent, 2.7 percent and 3.5 percent during the subsequent three, six and nine
weeks after touching 30 percent or lower,” Stovall pointed out.
And if you’re worried
that the market may weaken further, you have more gains to look forward to, he
added. That’s because whenever the percentage declined to 25 percent or less,
the S&P 1500 improved during the following three, six and nine weeks,
rising 1.7 percent, 3.2 percent and 4 percent, respectively, and posting higher
frequencies of advance during all periods.”
Joseph S. Kalinowski, CFA
Email: joe@squaredconcept.net
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
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