Happy Easter to all. A few world markets are open today but as there is a euro area holiday today its very quiet. I thought I’d use the time to post up a few end of quarter comments and charts as well a few specific trade monitoring screens that I use regularly, in the interests of sharing practice and knowledge.
Tracking through them the long J-reit trade has been + beta trade in the wider Japanese equity bull run. The trick here to achieve a double + beta was the fx side of things. Its one thing to get the sector correct its another to get the fx correct ie either long or borrow and its another then to get the stock selection within the sector correct. Allow me to enjoy some success on this trade as a tick in all three boxes occurred over the quarter though i did let the US$s go a little to early in hindsight. Soros apparently 1bn us$ this quarter alone from a very similar trade. Its my understanding he bagged the alpha, of course, by being long some specific Japanese industrial stocks with borrowed Jpy. This was the highest paying trade in the market in Q1 2013. My hat off to Soros who regularly seems to bag such trades. The other greats in the business must be slightly envious of freedom of movement. Ie Einhorn and many of the greats are hamstrung by the focus of their various funds. Soros and his family are trading their own capital now across the world’s markets so can opportunistically take these macro trades. Anyway well played Soros and his team.
Of course i could get all philosophical here on this Easter Friday, for a moment i will. We should note finance is a zero sum game. Japanese pensioners and savers have transferred their wealth to speculators this quarter due to their government’s jpy debasement strategy. Their purchasing power will be debased by Kuroda and his team at the BOJ. I make no judgement here on Soros, or myself for that matter. I could quote Austrian school economists as to why such speculator actions are actually functional as actually such trades thwart government expropriations. Ie if all Japanese pensioners had taken the same trade the government could not have debased in the way they had. Speculator’s actions are market enhancing and free markets are what protects liberty. It does not destroy it, contrary to what the central planning, Neo Keynesian, progressive doctrine tell us. Enough of the philosophy.
On the macro and micro economic news front everything has been consistent with the weak ‘recovery’ story. Understatement of inflation continues so theoretical growth occurs. Real incomes keep falling, although disposable incomes is apparently rising given debt servicing costs have been pushed down so aggressively by the Fed’s debt monetization programs. Debt servicing costs for the US consumer to income is at an all time record low.
(Although its also worth noting that the US 15 and 30yr mortgage rates are refusing to fall further and now rising, in spite of Ben buying as many as he can each month. Has the tailwind turned and is now becoming head wind on disposable income?).
World trade economic indicators keep bouncing around a neutral position indicating continued weakness. World pmi indicators remain very subdued/weak. We got the US enforced budget cuts. 2013 cuts amount to 85bn which is the same amount as Ben prints off every month note. Therefore the effect on ‘growth’ is limited and the markets understood this. More meaningfully in terms of fiat monetary confidence, an important issue for holders of gold we got savings confiscations inside the developed world and also very harsh capital controls. The euro has taken a small hit and bullion hasn’t moved on the news and is down over 5% in the quarter. Sometimes markets don’t appear rational and this is one of the those moments. Optimism that Ben and the neo keynesians have discovered alchemy and so re-capitalize the system via money printing is at a high at present. Economic data for now seems benign lets say. Here the WF economic roundup for the last week. They have a positive bias towards the data they review but its nonetheless a useful report here:
WeeklyEconomicCommentary_29032013
Also in the quarter private investors have started coming back to the market as seen in the Lipper fund flow data, note, at the closing of tired wave 5 move off the back of a 4yr 250% rally in equity indexes. The US consumer’s balance sheet wealth due to housing and stocks as been enhanced sufficiently that they are consuming again and running down savings (5yr low of 2.2% in Feb) to enable their consumption of consumer goods once more. (Although increasingly the US consumer is needing to use the reduced savings and debt servicing tail winds to purchase food and gas, note).
Such things as private investor confidence, record low savings, huge government deficits and large consumer debt to gdp ratios are usually timed with market tops. I would certainly not chase this market here and now but many private investors are it seems chased out of savings by negative interest rates created artificially by their governments.
Below a useful selection of euro sector indexes. Professional markets like the ones we have today dominated as they are by large institutional players demands that we look for the “wood in the trees”. There are times when price momentum trading works and other times, such as these, where it is simply not enough as the professional conceal their capital moves by order book manipulation. We have to look inside the market at the intra or inter market to understand what is occurring. Here price analysis of the sectors can be useful as can market breadth ie how narrow or wide the market move is. The wider the more meaningful and the narrower the less likely it is to sustain.
In a fiat market, capital light, perpetual money supply growth system finance is all important as is housing and consumer consumption. So these sectors must be watched and the breadth within these sectors must also be tracked. (Of course the flip side of perpetual money supply growth systems is usually inflation and currency debasement. You cannot create more capital via debasement of your currency. Its a zero sum game in which all you achieve is the transference of wealth from one group to another).
Here a chart i’ve used more recently and referred to on the forum pages of this website. Its the Euro Health Care sector index which is almost entirely pharm cos. The sector has been one of the performers during this epic 4 year bull market. But as we can see one of the largest pharmas in the euro area has significantly under performed. This is unusual as the co in question, GSK is large. She obtains a quarter of her revenues (this sector growing rapidly) from emerging markets. She has some world leading consumer staple brands. Her R&D budget for new drugs is one of the largest in the world. She pays a large divi and enjoys good divi cover. She has increased divi payments for as long as i can remember above the rate of inflation. Her pipeline for the rest of 2013 and early 2014 is significant if successful. Of course if the pipeline uniformly fails her under performance will continue but this current breakdown in the correlation demonstrates much pessimism is priced in to the stock.
GSK is far from a ‘screaming’ buy especially as we are over bought on equities at present but on dips i would certainly be seeing to add. If GSK was a smaller pharma player of course the under performance could extend. Private investors always love to try and buy – beta, ‘fallen angel’ stocks which is usually a receipt for disaster as their capital sits in stocks that the insiders ignore waiting for the bounce that never comes. But GSK is not a smaller player. She is a huge player in the industry. If her sector under performance sustains, the management and all the R&D spend will have been in vain. This can occur especially in fast moving industries. E.g. Nokia in her fast growing consumer technology sector for one. But its a reasonable trade to take as regards GSK as usually the correlation will, at least, revert or close the gap considerably to the mean unless something is seriously wrong in the co. The technical chart above. For disclosure i hold and added some more a few weeks ago.
Lastly above here the Euro telcos. FTE stands out, in my mind as a useful addition. Again not a screaming buy due to euro government interference issues but in a world of negative interest rates and great yield compression and optimism i find a lot of pessimism is priced into FTE and euro telcos. Assuming we don’t have a new k-wave spring at all and this is a false dawn then high yield consumer staple infrastructure type stocks are actually not a bad place to park some capital so long as they are as beaten up as many in this sector are. I picked up FTE and the euro telco index off the lows a month or so ago.
Its been a reasonable Q1 but an under performance of my book to the trade weighted US index performance. We have seen a strong US$, strong US indexes, with new all time, nominal, highs. Inflation adjusted it all looks so different of course. Against this positive back drop we have seen weak commodities, bullion and emerging markets. The combination has lead to me struggling to keep pace with the trade weighted US indexes as I spread my capital across world markets and instruments with a bias to the ‘inflationary’ scenario.
This bull market is in her wave 5 according to UBS which is associated with a narrowing of the rise in asset prices and sectors and stocks. This is text book so far so i’m relaxed on the ‘struggle’. I do hold some shorts on the US consumer as the sector and charts of specific issues are very extended. I’d mention the US maul owner reit Simon property here. Bring up her chart. Also SPF on the US index, the home builder. I am expecting Ben to be successful in creating another short lived housing bubble in the US but the market has likely got ahead of herself as can often occur. Tactical shorts. The US savings is back to historic lows and mortgage interest rates and high yield instruments are indicating higher rates not lower and their inverse correlation to equities is again non confirming at present. Indications of, at least, a pull back in this group soon. I remain light of shorts in general as per the comments re a lack of price indication that this narrow bull market wave 5 is done. As we comment week on week here there are more and more non confirmations of this wave 5. I’ll leave you with the complete breakdown, the first time in this entire 4yr rally, of the US high yield bond chart and the S&P500.
The two are positively correlated but recently have become inversely correlated. This is not a timing sell signal in itself but it is a clear indication that yields have compressed as far as they can go and the trend seems to have reversed. The US mortgage market, in spite of Ben’s aggressive and endless monetization of debt is showing the same characteristics, which is meaningful. I await clear price signals before getting aggressively short this market. We have dividend season in front of us for now so unlikely to get a market collapse here, for the moment.
I’m out of time for now so enjoy the holidays whatever you are up to. And see you bright and early next week.
All the best
Rich
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