FinLight Research - Market Perspectives - Oct 2013
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Transcript of FinLight Research - Market Perspectives - Oct 2013
Market PerspectivesOct 2013
October 2nd, 2013
2FinLight Research
MACRO VIEW
� The Good� The Chinese flash PMI rose to 51.2, a six-month high. � Personal income and spending edged higher than expectations. � Households' financial health shows a continuous and significant improvement� Durable goods new orders and ISM appear to be recovering
� The Bad� Inflation remains too low. With inflation continuing to undershoot the Fed's inflation target, and
millions remaining unemployed, policy action is needed more then ever� Clear weakening in pending home sales: The housing recovery has slowed, but it is still ongoing � Consumer confidence continues to disappoint on both the Conference Board and Michigan
measures. The September reading of the Michigan Consumer Sentiment is at its lowest level since April. The confidence gap is higher then ever.
� ISM-NY current business conditions index fell to 53.6 last month from 60.5 the previous month� September’s U.S. ADP jobs data (ex-agriculture and government) missed expectations (+166k vs.
+170k) and August’s gains were revised lower (to +159k from +176k)� This month, the government of Poland confiscated all bond holdings of the private pension funds in
the country to transfer them to the state pension vehicle (ZUS). In this scheme, new confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio.
� The Ugly� US budget crisis: The two themes, the shutdown and the debt ceiling, have become linked. A
shutdown might cut GDP by as much as 1.4%. Consumers, foreigners, and markets may lose confidence if the debt ceiling deadline is approached
� Syria, although the reduced chance of military action against it, at this stage
3FinLight Research
Households’ Financial Health
� Household net worth now stands at $74.8 trillion, up some $4.5 trillion from the previous (March '13) estimate, and up $18.4 trillion from the recession low. Virtually every metric (Debt, real estate, financial assets) of households' financial health has shown significant improvement over the past several years.
4FinLight Research
Consumer Confidence
� The University of Michigan Consumer Sentiment final number for September came in at 76.5. This is a 4.6 decline from the August final reading of 82.1.
5FinLight Research
Consumer Confidence
� Although more volatile, the broad pattern and general trends of the Conference Board Index are remarkably similar to those of the Michigan Index.
� The NFIB Business Optimism Index shows that small business owners are in a similar mood
6FinLight Research
Confidence Gap
� The following chart from Bespoke tracks an interesting breakdown in consumer confidence -- those with incomes of $35K versus $50K+. It clearly shows that the confidence gap is higher then ever.
7FinLight Research
Unemployment
� There was a dip in the Consumer Confidence Index in September. However, the percentage of respondents to this survey who agreed that “jobs are hard to get” dropped to 32.7%, the lowest reading since September 2008
� Improving jobs-hard-to-get survey sees jobless rate under 7% soon
8FinLight Research
Unemployment
� Good news: the average unemployment duration is going down.
9FinLight Research
Disposable Personal Income (DPI)
� The August nominal 0.38% month-over-month and 2.03% year-over-year numbers put us approximately back to the trend we saw near the end of last year prior to the forward pull of income and subsequent plunge to manage expected tax increases.
� However, when we adjust for inflation, the real MoM change is trimmed to 0.25%, and the real YoY is a discouraging 0.87% � An economy without real disposable income growth is heading for trouble.
10FinLight Research
Personal Consumption Expenditures & DPI
� DPI and PCE are still in line. Their growth rates look however sluggish.
11FinLight Research
Big Four Indicators
� The overall picture of the US economy remains one of a ploddingly slow recovery from the Great Recession
12FinLight Research
Big Four Indicators
� A zoom on the average of the big four indicators confirms that the economic improvement is still here but slowing…
13FinLight Research
Capital Spending
� YoY percentage changes in orders for capital goods (ex-defense and aircraft) shows that capital spending appears to be recovering, which should feed through to better earnings for the industrial and technology sectors
14FinLight Research
ISM
� the ISM manufacturing index rosefrom 55.7 in August to 56.2 inSeptember while the Markitmanufacturing PMI’s headlinedeclined from 53.1 to 52.8
� The ISM nonmanufacturing index’sheadline fell from 58.6 in August to54.4 in September, which was thelargest monthly decline sinceNovember 2008
� The drop-off in September broughtthe ISM down to a level which ismore or less consistent with 2.0%real GDP growth in 3Q.
15FinLight Research
Economic Surprises
� Citigroup Economic Surprises Index appear to have reached a high and turning lower.
16FinLight Research
GS - GLI
� The September Final GLI placesthe global industrial cycle on theborder of the ‘Slowdown’ phase,characterized by positive but fallingMomentum.
17FinLight Research
EQUITY
� The short-term setup for stocks is difficult to read.
� The bulls still hold a slight but discernible advantage over the bears. For how long ? This is the question…
� There are increasing signals of a material top building
� In term of secular trend, the current level of Tobin’s Q-Ratio is close to the vicinity of market tops, with Tech Bubble peak as an extreme outlier.
� UW US stocks, OW VIX
� OW EM stocks and European stocks vs US stocks
� The rebound in global manufacturing is confirmed by September’s global PMI, implying a OW position on Cyclical vs. Defensive sectors.
� We prefer to keep a long volatility bias into October, given policy uncertainties…
18FinLight Research
Secular Trends: Q-Ratio
� The Q Ratio (developed by J. Tobin) is the equity market value divided by the replacement cost of all its companies. The calculation is done with the Federal Reserve Z.1 Financial Accounts of the United States
19FinLight Research
Secular Trends: Q-Ratio
� The current level is close to the vicinity of market tops, with Tech Bubble peak as an extreme outlier.
20FinLight Research
Secular Trends: Crestmont P/E
� Crestmont P/E is similar to the Cyclical P/E10 ratio� Its current level of 23.5 is 70% above its average of 13.8. It puts the current valuation at the 96th
percentile of these 140 years.
21FinLight Research
Equity : Value vs Growth
� The market is playing the divergence between a maturing cycle in the U.S., and Europe where we are leaving the double dip
22FinLight Research
Equity: Quality-Index Ratio
� The S&P 500 High Quality Rankings Index comprises those constituents in the S&P 500 with a Quality Ranking of A- and above.
� The S&P 500 Low Quality Rankings Index comprises those constituents in the S&P 500 with a Quality Ranking of B and below, excluding companies with scores of D or in liquidation.
� The S&P500 seems in line with the High-to-Low Quality Rankings ratio, but approaching a top
23FinLight Research
US Stocks
� The bulls still hold a slight but discernible advantage over the bears
� The behavior of the higher beta small cap Russell 2000 Index confirms the bullish trend. The Russell 2000 has achieved double breakouts and remains in an uptrend
� The 50-day MA has acted as technical support, which the index has not breached yet
24FinLight Research
US Stocks
� But the momentum of the S&P500 uptrend remains poor. There a real risk of another retrace towards the uptrend from the Nov. ‘12 low at 1,665. Going below that point seems unjustified, at this stage.
� If a break below 1665 coincided with a break of the June peak on the VIX (21.9), it could be a bearish signal.
� Bulls would feel more comfortable if S&P500 close back above the recent highs (1710)
25FinLight Research
US Stocks
� Our trading model became massively short as soon as we breached 1722. Under 1700, it became long, targeting 1722 again. However, 2 systems are still short with a target at 1638 and 1622.
� There is a little bias to be long, at this stage, as far as the 1655 level is preserved.
26FinLight Research
EU Stocks
� We see a steady increase in demand for equities from European investors. Driven by improvements in the data. The flows we are seeing are consistent with the pick-up in the survey data
27FinLight Research
EU Stocks
� The CAC is still testing the 4170-4360 pivot area. There is, however, no reason to be aggressively bullish …
28FinLight Research
US Stocks
� Since its high of May 22nd, the risk appetite index (RAI) has been drifting lower, driving down the 6m-momentum in US stocks. The RAI stands in neutral territories.
29FinLight Research
US Stocks
� VIX is now oscillating between the low and medium regimes. It has been doing so since the beginning of 2013 (similar to 2004 but with more uncertainty in macro data).
� Since Aug 15th, VIX is back in Medium Regime. The probability of being in Low Regime is going down.
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Source : Bloomberg & FinLight Research calculation
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30FinLight Research
US Stocks
� Factory orders (a good proxy for the physical side of the economy) seems to validate the performance of the equity market. It is less the case for Durable Goods Orders
31FinLight Research
FIXED INCOME & CREDIT
� On the short term, overall risks seem skewed towards lower rates in the US. Some signals point to increased chances of a material retrace of the recent up move in UST yields
� We stay biased towards higher yields over the medium-term, but wait for better levels to put on our shorts.
� The curves appear to be set to flatten over time. The UST curve has started to flatten quite significantly. We should keep the US 10yr-2yr spread on the radar.
� On the medium term, the downside risk looks predominant in HY
� Bottom line : OW Govies and wait for better levels to enter shorts, set curve flatteners, OW European High Yield vs High Grade because of continued good economic news in Europe, OW EM sovereigns
32FinLight Research
FIXED INCOME & CREDIT
� Some signals point to increased chances of a material retrace of the recent up move in UST yields : The 10y UST yield broke the uptrend from May 3rd, and failed in preserving the 2.70 support.
� A clean weekly close back below 2.65 (old primary downtrend from 2700) could start a more significant retrace
� Next big pivot / support to watch ~ 2.53, then the 2.42-2.35 area
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FIXED INCOME & CREDIT
� Current CFTC net speculative positions are highly skewed to the short side, suggesting limited appetite to enter new shorts… That points to an imminent upward movement in treasuries. Short-covering could accelerate the move.
34FinLight Research
FIXED INCOME & CREDIT
� Given the technical setup in place, the curve should flatten quite materially over time.
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FIXED INCOME & CREDIT
� Italian 10-yr yields seem to be forming a reverse head & shoulders. There is a bias towards higher yields on Italian bonds. The opposite with regard to Eurozone sentiment.
36FinLight Research
FIXED INCOME & CREDIT
� HY looks a bit expensive to IG now. This situation should persist for a while as we expect the high-yield default rate to remain well below its 4.0% long-term average over the next year (unless exceptional tail risk crisis).
37FinLight Research
FIXED INCOME & CREDIT
� Given the rolling default rate of barely 1%, there seems to be good medium-term value in US high yield spreads.
38FinLight Research
FIXED INCOME & CREDIT
� However, High Yield has never been so expensive compared to equities.
39FinLight Research
FIXED INCOME & CREDIT
� An upgrade-to-downgrade ratio degradation should give the signal for an upturn in default rates (like end 2007). On the medium term, the downside risk looks predominant in HY
40FinLight Research
EXCHANGE RATES
� Last week, we saw commodity linked currencies losing their luster. This week, EM currencies were the key movers, all shifting back towards strength
� EURUSD remains around 1.35, which is quite a high level relative to Treasury-bund spreads. Keep an eye on the 2y spread between Germany and US. It would give a strong signal on the EURUSD spot
� Neutral EUR vs USD between 1.33 and 1.37. Given the configuration of DXY, the 1.3711 resistance should hold.
41FinLight Research
EUR-USD
� Two things are acting against the UD dollar:� The US budget crisis, government shutdown and debt ceiling� Fed's decision to delay tapering
� The Commitment of Traders speculative positioning in the CME currency futures shows that:� The net long euro (vs US$) position is the largest since May 2011.� The euro has the largest gross long speculative position of almost 130k contracts.
42FinLight Research
EUR-USD ?
� Net non-commercial futures positions is more compatible with a level of 1.40-1.50 on the EUR-USD
43FinLight Research
EUR-USD
� Compared to the sovereign spread between Germany and US, EUR-USD stays too expensive.
44FinLight Research
EUR-USD
� When the 2-year spread does eventually make a clean break from its multi-year consolidation (0bps and -35bps) it will probably give a very strong signal on the EURUSD spot
45FinLight Research
EUR-USD
� Based on its historical behavior since 2010, a weekly close of EUR spot back below the 200-wma (1.335) would indicate a reversal to the downside.
46FinLight Research
COMMODITY
� On precious metals (gold and silver), the market seems increasingly at risk of resuming its prior trend lower � UW gold & Silver. Wait for a trend to develop before entering the market
� The rebound in PMIs justifies our OW in commodities as a whole, but also in energy and base metals (copper in particular). � Take profit from the high roll premium of over 1% per month in BRENT futures (half in WTI futures)
� OW grains as supply expectations continue to be revised down sharply
47FinLight Research
Grains
� Corn, wheat and soybeans cost 28% less today than they did a year earlier, as supply expectations continually surprised to the upside.
� Agriculture prices have stabilized somewhat over the last couple of months � The downside trend seems to be coming to an end.
48FinLight Research
Precious Metals
� Last week we saw one huge withdrawal out of COMEX eligible gold stocks that led to a new cyclical low for total COMEX gold inventories, and brought them down to a level not seen since 2005.
� This large withdrawal, done in one day from the HSBC warehouse, represents more than 5 tonnes of gold, 3% of total COMEX gold inventories, and 5% of all gold held at the HSBC warehouse. This move is curious enough to be worth noting… Is it the beginning of a new hemorrhage?
Source: http://www.sharelynx.com
49FinLight Research
Precious Metals
� After the corrective move from the Jun. 28 low to the Aug. 28 high, the market seems increasingly at risk of resuming its prior trend lower.
� 1275 is the important pivot to watch.
� If the downturn is confirmed, 1180 would be the short term target.
Source: http://www.sharelynx.com
50FinLight Research
Precious Metals
� � Our theoretical price (using US$, sovereign CDS and Real Rates) stands at 1260, versus a market price 5% higher.
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Source : Bloomberg data, FinLight Research calculations
� Real yields increase explains a big portion of the downside move on gold �
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Source: Bloomberg.data & FLR calculation
51FinLight Research
Bottom Line: Global Asset Allocation
� OW EM stocks and European stocks vs US stocks
� OW position on Cyclical vs. Defensive sectors.
� Keep a long volatility position
� OW Govies and wait for better levels to enter shorts, set curve flatteners, OW European High Yield vsHigh Grade because of continued good economic news in Europe, OW EM sovereigns
� Overweight commodities, base metals, energy and grains. Underweight precious metals