As summer arrives, both sand and dollars are presenting themselves…
May is now in the books and it was only forgettable if you were investing in non-US dollar equities, bonds or commodities. US stocks did fine and some managers found a few big hits in the many takeovers that hit the tape. The most important move during the month was the bounce in the dollar which was treading on thin ice at mid-month. But as Greece continued to falter, Spain voted Left and the US economic data started sending stronger signals, and the dollar bounced to reclaim its 50 day moving average which will ease the trending global macro investors. With the US dollar bounce, the April gains in oil and energy based stocks, bonds and emerging markets reversed. US bonds continued lower as American investors felt the pain of 5-10% declines in their longer duration bonds – and they didn’t like it. As we grab the sandals and beach towels from the seasonal closet, investors will hit the beach looking at their mobile devices for both the weather forecast and the last reported economic reading. If the numbers continue to strengthen in the US then it will pay to stick to US dollar based investments while hedging your International bets. Have fun watching the data and don’t forget to use sunscreen.
To the relief of billions of $ in trend following hedge fund assets, the US dollar finds a trampoline in May…
NYSE:UUP Chart:
For the shortened week, all US sectors were in the red with energy and industrials losing the most –
(go ahead and blame the strong US dollar)…
US dollar strength and company specific worries means the Industrial sector and transportation sub-sector might just take the summer off…
The industrials sector came under pressure this week. Machinery/capital equipment names were hit particularly hard with Terex Corporation (NYSE:TEX) (13.9%), Oshkosh Corporation (NYSE:OSK) (8.5%), Joy Global Inc (NYSE:JOY) (7.9%) and Manitowoc Company Inc (NYSE:MTW) (7.7%) some of the big decliners. Much of the blame was chalked up to cautious comments from equipment rental companies at the KeyBanc Industrial conference. KeyBanc said that both United Rentals Inc (NYSE:URI) (15.2%) and H&E Equipment Services Inc (NASDAQ:HEES) (11.1%) noted a near-term soft patch in May utilization and rental equipment rates, pointing to challenging weather and more onerous E&P headwinds.
The Transports (2.2%) also came under scrutiny given the perceived read-throughs for the underlying economy. Airlines only put in a mixed performance after last week’s selloff on pricing and capacity concerns despite an aggressive sell-side defense. Rails were hit with Canadian Pacific Railway Limited (TO:CP) (6.8%), CSX (NYSE:CSX) (3.9%) and Northern Sun Mining Corp (TO:NSC) (3.7%) some of the big decliners. Worries about the weak volume backdrop seemed to be the big headwind after NYSE:TCK (7.9%) said that it would reduce capacity. A number of trucking stocks sold off on Friday. BofA Merrill Lynch downgraded Knight Transportation Inc (NYSE:KNX) (4.3%), ArcBest Corp (NASDAQ:ARCB) (4.3%), Con-way Inc (NYSE:CNW)(3.6%) and JB Hunt Transport Services Inc (NASDAQ:JBHT) (1.4%). It cited a rapid decline in its macro transport statistics and continued weakness in its proprietary Truck Shipper Survey.
What ails the rails? How about plunging coal volumes as utilities continue to switch over to other sources…
For the month of May, US Sector investors were rewarded everywhere but in energy stocks…
Geographically, May was friendly to US investors and hostile to Emerging Market ones…
More specifically in May, Biotech helped Healthcare and, combined with the Semis, also helped the NASDAQ and Small Caps outperform. At the bottom, any asset that touched energy prices or the US dollar had a difficult time…
Looking at the Morningstar Style boxes shows that May was anything but “sell and go away”. Small Cap growth crushed it…
A look at the top performing $10b+ market caps showed the power of M&A as 6 of 9 top May performers were involved in deals. Even Avago Technologies Limited (NASDAQ:AVGO) (which bought Broadcom Corporation (NASDAQ:BRCM)) posted huge gains, which is another sign that the market wants to reward use of capital.
Looking at the bottom of May’s large cap performers shows the big reversal in the Energy space:
Good thoughts from JPMorgan’s Trading desk on where the market stands heading into the beach…
More of the same. Volumes are still light, liquidity remains super-thin, incremental news is essentially non-existent, and conviction levels are low – these dynamics have been present for weeks and the addition of month-end machinations made for an environment prone to chasing and violent “squeezes” (on the upside and downside) but little net progress (the S&P 500 continues to find it very difficult to move meaningfully away from the 2K level). Looking at the bigger picture, the path forward still looks the same as before. Greece is a nuisance (as far as stocks, especially in the US, are concerned) and even assuming a full and immediate resolution to its debt drama (which is far from a foregone conclusion) it’s hard to envision the macro landscape looking enormously different (Greece has been far on the periphery of the US narrative for a while now). More important is the Fed and the timing around liftoff – it still seems like the market is resting too much on cynicism (“bad is good”, “secular stagnation”, “perpetual ZIRP”) and needs to transition towards a healthier world view (stabilizing inflation, decent growth, mild policy tightening, etc) – this transition process will most likely be a temporary negative but any such dip should be bought.
One area of prices which refuses to take a vacation is housing prices.
Also, hotel prices which are limit up as demand has significantly outstripped capacity.
Kids born today will not know what an incandescent light bulb is. And this is great news for your utility bill…
According to Goldman Sachs, lighting represents 14% and 38% of total electricity demand in the residential and commercial end markets. So as LED lighting rises from 8% this year to 65% in 10 years, your bills will be sliced (not to mention the frequency of your bulb changing). Goldman also believes this could cut both coal and natural gas demand by 5%. That is huge.
(GoldmanSachs)
Mary Meeker’s Annual Internet Trends Report is out and this chart shows how we can’t wait for our self-driving cars. Seriously, who has a spare 1 hour per day to manually drive their cars?
Just when you thought that you had seen everything… Governors and State lawmakers who still believe they can earn 7-8% for the next 30 years, and have little understanding of basic pension fund accounting, are going to attempt to time the financial markets with their constituents’ retirement dollars.
Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places. And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs…
The deals are generally pitched to state and local officials as an arbitrage play: The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money. But that’s just on paper. In reality, the investment-return assumption is just that — an assumption, and a deceptive one at that because it does not take risk into account
Meanwhile, future pension fund investment returns are going to be much more difficult to achieve if Goldman is correct about US Equities…
If David Kostin’s calculations are right, the fizz is out of the stock market’s Champagne. Mr. Kostin, Goldman Sachs Group’s chief US stock strategist, last week forecasted no price gain at all for the S&P 500 over the next 12 months, with the index’s only return coming from dividends. For the coming 10 years he projected just 5% yearly total returns, with nearly half from dividends. That means the index value would rise only about 2.7% a year for a decade. Many money managers say he is a little on the pessimistic side, but they widely agree that future US stock gains probably will be limited, simply because stocks have gotten so expensive. “We, too, think that investors should temper their enthusiasm for stock returns. They will be mid-to-high single digits and not the double digits we have all enjoyed historically,” said Lori Heinel, chief portfolio strategist at State Street Global Advisors, which oversees $2.4 trillion in Boston.
Let’s just hope these hedge fund families are all running different strategies.
The world’s largest hedge fund managers are dominating the capital invested in the asset class, according to Preqin. The data provider found the top 11% of managers controlled 92%—or $2.78 trillion—of total hedge fund assets at the end of Q1 2015. These 570 managers also each held at least $1 billion in assets, qualifying their membership of the “$1 billion club”. “The $1 billion club has continued to grow over the past 12 months, both in terms of the assets they command and their influence on the hedge fund industry,” said Amy Bensted, Preqin’s head of hedge fund products.
Tweet of the Week:
When booking your next vacation airfare: 1) open an incognito window in Google Chrome and 2) check the price of a first class ticket.
First-class seats have come down out of the stratosphere. Airlines are dropping fares to entice shoppers to buy more first-class tickets. They also are tempting frequent fliers with round-trip upgrades for as little as $100 or $200 on domestic trips. The catch: Frequent fliers used to get many more upgrades to first class free. For airlines, the shift in strategy is squeezing more revenue out of their best seats. “Airlines are recognizing that if they are going to have these seats, they should be using them for something other than upgrading frequent fliers,” said Bob Harrell, a consultant who tracks fares at his firm Harrell Associates LLC. A sampling of heavily traveled routes for American, Delta and United airlines found that the number of discounted first-class fares airlines loaded into reservation systems in the week of May 4 was up compared with the same week last year, Mr. Harrell said. He also found the lowest price for first-class seats in each market studied was down.
School’s out. Time to go make some footprints!
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