It has been one of those decades for the Bears…
As the chart below illustrates, there has only been one other time since the 1950′s that the market has diverged so much from its 50-day moving average without a cyclical bear market occurring. If you moved to protect capital on the pullback, then you missed one heck of a party. Do the bears dare to leave their homes in the face of strong U.S. economic data and a ready-to-act Fed? Or, will they get the courage to come charging out of the darkness with teeth and claws ready to eat a Fed that might be getting behind the curve to prevent future inflation? With Equity valuations full and the VIX at 14, the safe bet seems to be getting long volatility again.
Last week’s U.S. Economic Data looked good…
The ISM Services data was much better than expected with New Orders jumping to 62.0; and U.S. Auto Sales hit 10-year highs.
…And then there was Friday’s much better-than-expected Jobs data…
@NickTimiraos: Last month: Uh oh, recession coming. This month: Uh oh, Fed is behind curve.
Putting the numbers to a chart of the S&P 500…
The September mixed jobs data didn’t move the market. The weak October data helped the market. So what will the strong November data bring?
While one month does not make a trend, the Fed will be paying closer attention to the jump in hourly wages…
The markets moved quickly to place their chips on a December meeting rate hike…
@Macr0man: Under 30′s, you’re about to see what a “rate hike” is…
Chairman Yellen dropped some words last week to hint that the Fed’s rate hike path will be a smooth and gradual one…
…and San Francisco Fed President Williams would like to get the first rate hike data point on the board…
“An earlier start to raising rates would also allow a smoother, more gradual process of policy normalization, giving us space to fine-tune our responses to any surprise changes in economic conditions….If we were to wait too long to raise rates, the need to play catch-up wouldn’t leave much room for maneuver
…the Fed’s Bullard is already thinking ahead to the debates for raising rates further…
The much better-than-expected data set a fire under all Treasury yields, but especially to the 2 year yields…
Rising rates have lit the fuse of CFO’s and Finance departments to get their debt to market before rates rise even further…
A spate of jumbo corporate debt offerings has lifted U.S. issuance to a record high as companies seek to lock in financing to fund multibillion-dollar acquisitions before the Federal Reserve lifts rates for the first time since the financial crisis.
U.S. multinationals have raised more than $132bn in so-called jumbo-deals — debt offerings above $10bn in size — in 2015, more than a fourfold increase from a year earlier as companies including Microsoft (O:MSFT), HP Inc (N:HPQ) and UnitedHealth Group Incorporated (N:UNH) take advantage of low interest rates, according to data from Dealogic.
The offerings have buoyed overall corporate debt deal values in the U.S. to a record of $815bn, with more than a month and a half to go before yearend. The figure surpasses the previous high set in 2014 of $746bn
Better than expected data and ripping U.S. interest rates launched the U.S. dollar to break out of its recent consolidation. This will only reignite discussions about weaker commodity and emerging market values…
Stan Druckenmiller nailed the call in a weak euro. This was the best interview of the week. Watch the full reel for several other ideas to think about…
“I’m shorting the euro again…I have never seen a currency move of this much intensity in the last 11 months. The nice thing about currency moves is that they tend to last 2-3 years. But they usually take a timeout somewhere in the middle. If you remember the yen went from 80 to 105 and then took a timeout for 8 or 9 months. I have thought we’re in a timeout like that for the Euro and now look at what’s happening…”
A strong U.S. dollar also helps Small Caps. Will this be enough to clean up the market’s breadth?
Many of us have been worried about breadth. Last week’s move helped to heal some of the wounds but the market could still use more Band-Aids here.
A more amazing stat on the lack of breadth in the market… basically 100% of the 2015 price gains in the iShares Russell 1000 (N:IWB) have come from Amazon (O:AMZN), Microsoft and 1/2 of Alphabet Inc (O:GOOGL)…
The Russell 1000 (IWB) is +2.0% on a Price basis and +3.4% on a Total Return basis YTD.
Why is Amazon the largest contributor to performance in 2015? Because most all investors focused on Amazon the retailer and not Amazon the cloud…
“Measured by revenues, AWS is approximately 6x larger than its biggest rival Microsoft Azure and is arguably the greatest disruptive force in the entire enterprise technology market today.”
(DeutscheBank)
On the week, soaring interest rates had a big impact as Financials led sectors while Utilities lagged…
The Energy sector put in a bounce last week even as Crude Oil underperformed…
Could energy stocks work from these levels with the U.S. dollar moving up pressuring commodity prices? They should have difficulty, but do not dismiss the idea of how oversold they are and how much more M&A could occur in the space.
If you would like to get your bear out of its cave, in addition to a Fed raising interest rates, start feeding it some of the following data points…
Valuation sensitivities can’t be ignored either – moving materially above 2100 would require the SPX to sustain a multiple of 17x+, something it has struggled to do in the past (and while the ’16 SPX EPS estimate range of ~$123-125 has been cut a decent amount already, Corporate America’s currency and to a lesser extent wage headwinds don’t show signs of dissipating).
JP Morgan
And what is up with the inventory build? All Caterpillar (N:CAT) mining equipment and Volkswagen (DE:VOWG) steering wheels?
@AmbroseEP: Now this is certainly sobering, (from Bank of America (N:BAC)), and runs against my arguments. Fed thinks it will wash out.
Maersk is the world’s largest shipping line and they see GDP at worse levels than the IMF is projecting…
“We believe that global growth is slowing down,” he said in a phone interview. “Trade is currently significantly weaker than it normally would be under the growth forecasts we see.”… “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe – than other people expect in 2015,” Andersen said. Also for 2016, “we’re a little bit more pessimistic than most forecasters.”
SPDR Barclays (L:BARC) High Yield Bond (N:JNK) Bonds continue to slide lower (although outperforming Treasuries)….
Can the High Yield Bond markets move through a default cycle in Energy and Commodities?
As you can see in the chart above, high yield spreads in the energy and mining sectors (which collectively account for nearly 20% of outstanding junk bonds) have already blown out to levels last seen during the Great Recession, reflecting elevated default rates in the high single digits. With defaults still running below 3% in the overall high yield market, it would be easy to dismiss the distress in commodity-related sectors as isolated events; but not only are spreads creeping higher in non-commodity sectors, qualitative signs of stress are clearly beginning to show in firms that should be benefitting from low commodity input costs (e.g. Walmart (N:WMT)). There is clearly more to this story than the largely priced-in resource slump.
As troubles in Commodities and Energy flow through to the Emerging Markets, one founding manager of the phrase shutters its BRIC fund…
If you know anyone that needs an Emerging Market to invest in that appears to be uncorrelated, slide them this chart of Argentina…
@JLyonsFundMgmt: FYI, Argentina’s MerVal looks like it’s ready to go donkey again…$ARGT
A good, quick summary of Food Inflation comments from the grocers earnings calls…
Starbucks (O:SBUX) would say “Who cares about food deflation?”
“You may recall that last year, one in seven Americans received a Starbucks Gift Card over the holidays, generating over $1.6 billion in card loads in our first quarter of fiscal year 2015.”
Finally, it looks like we are going to need a boatload of robots…
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