How U shaped recovery will reliquify the markets and how JP is allocating asset
A Phased Market Recovery as Liquidity and Fundamentals Return (Pimco, 14 min read) Forced selling has eased in high-quality segments of the bond market, such as U.S. Treasuries and U.S. agency mortgage bonds. Over time, other sectors will recover, but this depends on the trajectory of economic recovery. Pimco sees deep but short-lived recession and a U-shaped recovery by the end of the year.
WHAT DOES COVID-19 MEAN FOR REAL ESTATE? (JPM, 2 min read) U.S. office market will transition to flexible office space as employees will work from home. JP Morgan is also bullish industrial space relative to retail as they expect a sharper rise in e-commerce.
Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations (NBER, 33-page read) Study finds valuation gap for firms from developed markets increased by 31% after the GFC – a reversal of financial globalization – while the gap for firms from emerging markets (excluding China) stays stable.
Bullish S&P and how US senators are bad stock pickers
62% of SP 500 Market Cap Might Have Better Earnings Than You Think (Fundamentalis, 7 min read) Some of the most substantial market cap sectors, technology (25% of SP 500), healthcare (15%), financials (11%), and communication services (11%), are poised to experience less adverse EPS growth due to their fundamentals or nature of their industry.
My New Theory About Future Stock Market Returns (Wealth of Common Sense, 5 min read) Markets have become macro inefficient due to repetitive Fed’s interventions to smooth market crashes. This has made the stock market (artificially) safer and valuations to rise over time. Creating a potential trade-off – the magnitude of future crises will be lower, but the frequency will be higher
The Emerging Emerging-Markets Crisis (Advisor Perspective, 8 min read) Investors have ignored the vulnerabilities faced by emerging market (EM) countries; synchronized global slowdown, EM debt risk, falling reserves, capital flight risk and COVID cases rising in EM. Proof of investor complacency is visible in the largest emerging markets bond exchange-traded fund. Currently, this ETF yields 5%, similar to the beginning of the year.
Relief Rally: Senators As Feckless As the Rest of Us at Stock Picking (NBER, 14-page read) The study examines the stock trading behavior and returns of U.S. Senators from 2012 to 2020. Stocks purchased by senators on average underperform stocks in the same industry and size (market cap) categories by 11 basis points, 28 basis points, and 17 basis points at the 1, 3, and 6-month time horizons.
Valuation does poorly in a bear market and pandemics are worse than war for asset returns.
Why Valuations Don’t Always Matter in a Bear Market (Wealth of Commonsense, 5 min read) Argues that valuations are not good guides to equity market bottoms. In the past, bottoms have occurred with both low and high valuations.
Aggregate and Firm-Level Stock Returns During Pandemics, in Real-Time (NBER, 17-page read) A study finds that unexpected changes in predicted infection cases during the SARS and COVID-19 pandemic led to a 4-11% decline in stock prices of Hong Kong and the USA. The volatility of stock prices also decreases as the trajectory of pandemic becomes clearer.
The Unprecedented Stock Market Impact Of Covid-19 (NBER 5 page read) Using textual analysis going far as 1900 (including the Spanish flu), the study finds no previous infectious disease outbreak impacted the equities (large daily price movement) as strongly as the COVID-19 did. Current containment efforts are more extensive than the past, hence more detrimental to the economy. This could explain the current volatility.
Longer-run Economic Consequences of Pandemics (NBER, 13-page read) Study analyses rates of return on assets using a dataset going back to the 14th century, focusing on 15 major pandemics and major armed conflict where more than 100,000 people died. Finds significant real rates of return remain depressed and this can last up to 40 years. War has the opposite effect.
How to rebalance back to 60/40 and why muni bonds are still a good investment
Why We Favor Re-balancing Portfolios (BlackRock, 3 min read) Falling stock prices and declining bond yields have pushed portfolios even further from the 60/40 benchmark than in 2008. Rebalancing can be done by, buying US equities rather than Japanese, given the high quality and large fiscal support, and in fixed income by reducing TIPS to neutral.
Municipals Versus Treasuries – a Tale of Two Cities (Advisor Perspectives, 3 min read) High-quality muni bonds with limited duration risk remain a viable investment despite the recent dislocation between municipal bonds and treasuries driven by Fed stimulus.
Earning recessions and timing the stock market
What Will An Earnings Recession Look Like? (JPMorgan Asset Management, 2 min read) Given what could be a double-digit decline in earnings, companies with low leverage, strong margins and some pricing power are preferred in the short-to-medium term. Longer-term investors should focus on stocks where valuations look cheap, such as financials, energy and other cyclical sectors.
What If You Buy Stocks Too Early During a Market Crash? (Wealth of Common Sense, 4 min read) Buying too early, or too late, after a stock market fall can still lead to sizeable returns, albeit less than in the unlikely event you could time the low perfectly. Keeping cash on the sidelines for too long could be much more costly.
A history of the term bear market and how the stock market is a coincident indicator
Looking at the Bulls and the Bears (EconLife, 2 min read) The idea of bull and bear markets can be tracked back to the 18th century with the warning not to “sell the bearskin before the bear is caught”. During the past century bull markets have lasted significantly longer than bear markets and the latest bear market comes after a bull market that saw equities gain 400%.
How Much Recession Warning Did You Expect? (Money Maven, 2 min read) Rather than a leading indicator the stock market is instead a coincident indicator of sentiment towards stocks. The coronavirus was a trigger but cannot be blamed for the recent sharp declines with earlier tax cuts and Fed stimulus the culprits.
Why the earlier run up in stock prices is the problem and earnings estimates little changed
The Problem is the Bubble, Not the Pin (Advisor Perspectives, 6 min read) The roughly 35% gain in stock prices since December 2018 left the market vulnerable to any unexpected shocks. The huge falls over the past few weeks reflecting the size of the initial bubble.
How 2020 SP 500 Sector Growth Estimates Have Changed (Trinity Asset Management, 2 min read) The 300bps decline in S&P expected earnings growth since the start of the year is actually lower than during the same period a year ago. Tech earnings have held up while healthcare is down ‘just’ 100bps.
Analysing the fastest market correction in history
Should I Be Concerned About The Correction In U.S. Equities? (JPMorgan AM, 2 min read) Corporate profits will be hit harder than the wider economy from COVID-19 given the S&P500’s reliance on overseas revenues and international supply chains. With valuations now less stretched investors looking to add risk may see this as a good buying opportunity.
What Happens to Stocks After a Big Down Month? (Advisor Perspectives, 2 min read) Equities rebounded within a one-year horizon more than 50% of the time following previous months of large loses and by nearly 75% of the time three-years later. Most of the outliers were around the Great Depression.
Market Correction: What Does It Mean? (Advisor Perspectives, 3 min read) Only four of the 22 market corrections since 1974 have turned into bear markets, and even when bear markets have occurred they have lasted around 17 months on average.
Reinhart & Rogoff on euro underperformance plus opportunities in EM
Buffett Talks Investing, Takeovers and ‘Dancing with the Stars’ in Letter (CNBC, 7 min read) Berkshire Hathaway’s CEO remains upbeat about the long-term prospects for equity markets, assuming rates remain around current levels, but urges shareholders to focus on company earnings rather than quarterly price gains. Full letter can be accessed here.
A Multi-Asset Approach to Assessing Risk and Opportunity in Emerging Markets (Advisor Perspectives, 5 min read) Franklin Templeton’s multi-asset team are constructive on EM, favouring local currency debt over hard currency due to better liquidity in times of stress and in particularly short-dated Mexican paper.
Why is the Euro Punching Below its Weight? (CEPR, 62 page read) Reinhart, Rogoff and Ilzetzki determine the absence of a safe Eurozone asset, the lack of unity on monetary policy and no European capital markets union as the main factors preventing the euro from rivalling the US dollar as the international currency of choice.
What Do You Like More, Value Or Growth? (JPMorgan Asset Management, 2 min read) Growth stocks have tended to outperform value stocks in moderate growth environments like the current period, or in high growth >5.5% expansions. But with increasingly stretched valuations investors continuing with a growth strategy should analyse each stock individually.
Negative real yields and the impact of Tesla’s eventual stock correction on national security
Treasury Market Flashes New Warning As Real Yields Go Negative (The Capital Spectator, 4 min read) From inverted (nominal) yield curves last year to sub-zero real yields in 2020, the US bond market is again signalling looming economic weakness. But the debate over the current power of these signals continues, especially for the less liquid TIPS market.
Why Bonds Are Still a Good Hedge (Blackrock, 2 min read) Despite UST yields below 1.6% bonds remains a good insurance against equity risk. The correlation remains negative and during any pronounced spike in volatility long duration bonds significantly outperform.
Central Bank Dovishness and Good Fundamentals Create Opportunity in Spread Sectors in 2020 (Advisor Perspectives, 3 min read) Both spread products and emerging markets should outperform government bonds this year with the Fed keeping rates firmly on hold and the global economy picking up pace.
How a Stock Bubble Could Unwind America’s National Security (Defense One, 8 min read) The eventual reversal of Tesla’s meteoric stock price rise will bring many other stocks crashing down with it and leaves the potential for higher interest rates (and government financing costs), a weaker dollar and stepped up deglobalisation.
Why stock splits are a thing of the past to an end to the earnings recession
Corporate Debt: Where is the Danger? (Munich Personal RePEc Archive, 66 page read) Authors perform debt sustainability analysis for US corporates. Based on liquidity needs and embedded leverage, rather than net repayments, shows some sectors are more resilient that often assumed. The utilities sector is, however, significantly exposed through interest rates and profitability shocks.
Stock Splits – What Happened to Them? (Trinity Asset Management, 2 min read) Whether it’s less rich valuations compared to the 1990s (and reduced need for perceptions of cheaper valuation), the growth of passive funds or fewer companies compelled to keep shares available to loyal fans, the accounting exercise of stocks splits is increasingly rare.
Regression to Trend: Another Look at Long-Term Market Performance (Advisor Perspectives, 2 min read) The inflation-adjusted S&P reached 133% above its long-term trend at the end of January, an all-time high and more than three standard deviations above trend. The 2007 peak was around two standard deviations above trend.
Earnings Recession Set to End, as S&P 500 Earnings Growth Turns Positive (Fidelity, 1 min read) Fourth quarter earnings are on track to eek out a positive performance ending three consecutive quarters of contraction in corporate earnings. But only once earnings season is complete can the earnings recession be fully assessed.
EM benefitting from ongoing balance sheet expansion and Azerbaijan’s oil comeback
Fed’s Printing Press Favors Emerging Markets (Blackrock blog, 2 min read) Emerging market equities have outperformed since the Fed restarted its balance sheet expansion late last year. With the Fed, ECB and BoJ all committed to further asset purchases in 2020, EM equities should continue to benefit, with China looking particularly cheap.
The U.S. Dollar and Emerging Market Assets (Blackrock blog, 2 min read) The US dollar is poised for a stable-to-weakening trend in the next 6 to 12 months as interest rate differentials move in favour of EM, and the trade truce reduces the safe haven demand for the dollar. Geopolitics and an unexpectedly hawkish Fed are the risks to watch.
The Oil Boom You Haven’t Heard of (OZY, 3 min read) Azerbaijan once accounted for half of all global oil output. Three oil booms later the country no longer ranks among the world’s top producers but Baku is looking to position itself back on the oil map. If previous transformations are anything to go by, don’t rule them out.
How to capture credit ahead of rating action plus two metrics to help tech investors
Rating Events: One Theme to Follow in Global Credit Markets in 2020 (PIMCO Blog, 3 min read) By individually rating issuers and their capital structures investors can identify value in credits ahead of rating agency moves and position accordingly. Particularly important to capture rising stars (credits upgraded to investment grade) and avoid fallen angels (those downgraded to junk).
Allocation Views: Taking a Nimble Approach to 2020 (Advisor Perspectives, 5 min read) Franklin Templeton’s multi asset team see risks skewed to the downside this year with lingering concerns over weakness in business investment, spillovers from the manufacturing recession in Germany and disconnect between equity market performance and corporate profits. PMs see fatter tails and a need to be nimble and diversified. [Bearish equities]
Most Tech Companies Aren’t WeWork (Tech Crunch, 4 min read) A delve into 21 US Software-as-a-service-startups (SaaS) shows cash burn and revenue growth + profit margins are two useful metrics to determine whether a company can achieve high growth while maintaining margins. [Bullish tech stocks]
Differing views on the outlook for US equities plus the role of ETFs in raising Ems exposure to the global cycle
How ETFs Amplify the Global Financial Cycle in Emerging Markets (FED, 61 page read) Investors holding exposure to EM markets through ETFs rather than mutual funds is dramatically increasing the sensitivity of cross-border capital flows and market returns to global financial conditions. [Bullish EM volatility]
Trends Diverge as Markets Enter 2020 (Advisor Perspectives, 5 mins read) Last year, manufacturing lagged services, and profits lagged stock performance. Authors think positive growth outlook is priced and bonds are underpricing inflation. [Bearish equities and bonds]
Nothing To Fear But Nothing To Fear (Dr. Ed’s Blog, 5 mins read) Ed Yardeni is positive on US equities in the year ahead. Earnings growth is set to improve with forward revenues at a record high. Any correction due to concerns over high multiples should be used as a buying opportunity. [Bullish equities]
A crypto focus this week with a basketball star launching a token-based investment platform and a new comprehensive guide to everything crypto
Introduction To Cryptocurrency (Nakamoto.com, 4 min read) A new website that brings together all things related to Crypto. It includes a free guide compiled by Dragonfly Capital’s Managing Partner, Hasseb Qureshi, that explains blockchain, cryptography and all that goes with it. Except, of course, the identity of Satoshi Nakamoto.
NBA’s Spencer Dinwiddie Set to Roll out Tokenized Investment Platform Next Monday (The Block, 1 min read) The scheme will allow the player to instantly collect up to $13.5 million off of his $34 million guaranteed three-year contract. Token holders would then receive monthly payments in the next three years with a 4.95% base interest rate. [Bullish Crypto]
Predicting Intraday Jumps in Stock Prices Using Liquidity Measures and Technical Indicators (arxiv.org, 45 page read) Researchers at Nanjing University and the University of Texas successfully model intra-day stock price moves on the Shenzen stock exchange using information within liquidity and technical indicators. Their data-driven approach is portable to predict price moves in individual stocks.
New highs for the S&P in 2020 or a market correction as the US economy cools?
Stock Market Performance by President (macrotrends, 2 min read) Useful interactive chart that allows you to add/subtract Presidents. The stock market performance of Trump’s first term is worse than Clinton and Obama’s but better than Reagan and Bush Senior.
Market Remains Overvalued (Advisor Perspectives, 5 min read) Blog provides a range of valuation measures for the US – all are showing an overvalued market. [Bearish equities]
2020 Sector Outlook: High Yield Corporate Credit (Loomis, 2 min read) The asset manager notes that corporate leverage is stretched but flows into the market are positive. They remain positive on credit, positive GDP growth, continued profit growth, steady rates, and below average issuance. [Bullish credit]
Why It’s Tough to Make Stock Market Predictions (Econ Life, 2 mins) The article argues that the stock market fluctuations echo the business cycle and that it is impossible to predict the business cycle in a timely manner (e.g., NBER confirmed the 2007-2009 recession in 2010). Both notable economists John Maynard Keynes and Irving Fisher’s investment strategy based on the business cycle failed because it was impossible to forecast the trajectory of the economy. [Bearish momentum, timing the market]
Putting Private Equity Dry Powder Into Perspective (A Wealth of Common Sense, 4 mins) This article highlights how PE firms’ cash pile works differently from other investment vehicles. This cash pile is not invested in the money market nor held in an account of PE firms. In fact, it resides in the portfolios of the investors (i.e., endowment, pension funds, soverign wealth funds). This, in effect, hammers their ability to exploit cheaper valuation during downturns. [Bearish PE]
Some investment strategies that contradicted theory are now starting to conform though with an unexpected twist. We all know equities deliver solid returns in the long-run, but that’s not always the case. And watch the rise of green investing, especially from Europe.
The Fama Puzzle at 40 (Econbrowser, 4 min read) Traditionally, FX carry trades have performed well, despite violating theory – uncovered interest rate parity (UIP) and rational expectations. The currency with higher interest rates should depreciate to wipe out the carry, but in reality that doesn’t happen. However, since the financial crisis, the theoretical relationship is correctly predicting the real-life direction of currencies. The trouble is that they are now too sensitive to interest rates. (Bearish FX carry trades)
Charting the World’s Major Stock Markets on the Same Scale (1990-2019) (Visual Capitalist, 3 min read) If you invested $100 in the U.S. market in November 1990, you would have over $1,000 today (+980%). However, if invested in Japanese stocks in 1990, you would have made $10 return (or 1%).
The Green Deal Will Make or Break Europe (Project Syndicate, 4 min read) The proposed “European Green Deal” by new EC president Ursula von der Leyen could lead the EU to dominate the issuance of “safe assets” and green bonds. This could help the euro become the top reserve currency. However, the path to this is fraught with politics. (Bullish green bonds and Euro)
More 2020 outlooks. Most are bullish on risk with the usual caveats of trade war escalation. Some are even suggesting assets to buy if a recession materialises.
There’s Always a Bear Market Somewhere (A Wealth of Common Sense, 4 min read) Three areas of the market that have been left behind during the current bull market: energy stocks (ticker: XLE) have fallen 13% versus the overall S&P gain of 200%, precious metals & mining stocks, VGPMX is down 50% and value stocks. Excluding the tech bubble, valuations of value strategy are at their cheapest levels ever. [Bullish energy, value and precious metal/mining]
What to Watch in 2020 (Advisor Perspectives, 5 min read) Lazard analysts expect slow growth, but no recession. Their base case view is to expect the US 10-year yield to be in a 1.25%−2.25% range, though 2.25% could be breached if the US-China trade situation is resolved. US and Europe ex-UK stocks are expensive to trend, while rest of the world is around trend. [Bullish global equity, bearish US and EU, neutral UK]
Investing in an Economic Downturn (Advisor Perspectives, 5 min Read) Investing in real estate debt investments may be a lucrative way to invest during contractionary periods. These funds locate distressed real estate assets that are in the process of getting foreclosed but which have strong ARVs (After Repair Value), allowing the buyer to benefit from a tremendous upside once the management and economic conditions are improved. [Bullish distressed real estate]
The Safety Premium of Safe Assets (San Francisco Fed, 21 Pages) Fed academic research tried to find out whether safe-haven assets have a premium for their safety or for their liquidity. Using Swiss Confederate bonds which are extremely safe but not particularly liquid, they find such assets have a significant safety premium. Therefore, safe-haven premiums are not just due to liquidity. [Bullish safe haven assets]
Alongside increased reasoning for equity market corrections, this week we have a piece for bullish selective EM debt and complications of the CLO market.
We Don’t Need a Recession For a Reset in the Stock Market (A Wealth of Common Sense) Ben Carlson crunches the numbers and finds that 60% of double-digit equity market corrections take place outside of recessions. Therefore expect a big correction even if the US doesn’t formally enter a recession. [Bearish US equities]
Does The Return Of QE Mean Big Gains For Stocks In 2020? (Advisor Perspectives) Some argue that the stock market gains of the past 10 years were largely attributable to the massive expansion of central bank balance sheets. So the return of “QE-lite” by the Fed could be viewed as a positive for stocks. However, investors should be cautious. On a rolling 12-month basis, historic data shows no consistent relationship between central bank balance sheets and stock markets. Watch economic growth indicators instead. [Bearish US Equities]
Remain Selective on EM Debt (Variant Perception) This piece argues that the top performing EM debt markets will be those that have simulative monetary policies, but contained inflation. The markets that stand out are India, Mexico and Indonesia. [Bullish Selected EM Debt]
Leveraged Loans – History Rhyming? (In The Long Run) The article draws a parallel between GFC’s CDOs mismanagement and today’s leveraged loans build-ups (particularly CLOs products). Author argues that CLO asset quality is underestimated. [Bearish US Credit]
Many are calling for weak markets in 2020, including Nouriel Robini. But there’s now names for such bears from Armageddonists to perma-bears. There are some who bullish too who cite higher US wages as a factor. One view that is becoming more common is that the dollar will weaken.
Two Reasons US Equities May Keep Climbing into 2020 (Franklin Templeton) Cites two factors to support further US equity upside. First, higher wage growth will boost consumer spending. Second, US corporates will benefit from a rebound in global growth (40% of profits for multi-national companies comes from overseas) [Bullish US stocks]
Why Financial Markets’ New Exuberance Is Irrational (Project Syndicate) Nouriel Roubini lists nine bearish factors for 2020. These include weak Chinese growth, the risk of a hard Brexit and trouble in the Middle East. [Bearish equities, bullish bonds]
Dollar to Come Under Growing Pressure (Variant Perception) Cites 3 reasons for dollar weakness: foreign central banks to ease less than the Fed, foreign investors buying fewer US assets and investors are already long USD (vs DM FX) [Bearish USD]
The 5 Types of Market Crash Predictions (A Wealth of Common Sense) Fun piece that categorises people who call market crashes. Meet the “Armageddonists,” the perma-bear market crash callers, the overdramatic financial reporters, political market crash callers and marketers who feel smarter by calling for a market crash.
It’s that time of the year, when analysts start pontificating about the year ahead. Most seem cautiously bullish. And the interest in shiny new investment themes continues whether in the internet of things or insect protein.
Intermarket Gauges Suggest Recession or Risk-On (Variant Perception) Over past 12 months, markets have behaved defensively (high-yield credit underperforming investment-grade, small cap stocks underperforming large cap stocks, copper underperforming gold and equities underperforming bonds). Variant believe an unwind of these could see a risk-on move. [Bullish US stocks]
2020 Predictions – The Avalanche Begins (Fundamentalis) By examining S&P 500 data that goes back to 1928, Brian Gilmartin argues that after a 25% return in S&P in 2019, the next year is unlikely to do as well. [Neutral US stocks]
What’s Ahead for Tech, Media and Telecom in 2020? (Morgan Stanley) Advertising on streaming platforms, 5G network sharing, fintech-infused smarter payments, fibre networks and the internet of medical things (IoMT) – are the ones worth expecting. [Bullish tech]
Insect Protein: Bitten by The Bug (Barclays) Confronted with challenges around the sustainability of our food production, especially with respect to meat, Barclays believes insect protein could disrupt the food industry landscape in the future. They estimate that the insect protein market could be worth up to US$8bn by 2030 (+24% CAGR). [Bullish alt meat markets]
Despite equity markets climbing up in the past month or so and a rise in long-dated bond yields and steeper yield curves, the overall sentiment in this week’s blogs is negative. Fund managers fear a recession, the credit boom might be a predictor of an equity crash and to top it up, we have the 30 most extreme risks for the year. At least Scott Sumner says bubbles are fiction.
The Bubble in Phony Bubble Calls (EconLib) Scott Sumner claims bubbles don’t exist yet there are constant ungrounded warnings of them across the media. Canada’s housing market never crashed despite years of scary headlines. [Bullish stocks]
Extreme Risks 2019 (Thinking Ahead Institute) Comprehensive report that lists 30 extreme risks ranging from anarchy to hyperinflation to tech singularity. [Bullish volatility]
Year-End Fixed Income Survey 2019 (Russell Investments) Survey of fund managers finds that bond managers expect only one more Fed cut, while credit managers fear a US recession and FX managers are bearish euro [Bullish rates, bearish credit]
The Leverage Factor: Credit Cycles and Asset Returns (Davis, Taylor) Credit boom periods tend to be followed by equity return underperformance in the near future, thus credit growth signals can be useful input in asset allocation. [Bearish equities]
This is another tough week for big name start-ups and their major stakeholders. Are the anticipated bubbles around ‘fake’ tech start-ups finally going to bust? The outlook for the overall market is still heavily affected by uncertainties and a lack of faith, but maybe there’s an unexpected silver lining lying in the increased interest around ESG or green investing.
Exorcising Phantom FDI (VOX EU) This paper proposes a clever technique to identify the true investors behind FDI data. US companies actually account for 10% of FDI into China, rather than the officially reported 1%. Meanwhile, the EU accounts for around 30% of FDI into the UK, rather than the official 40%. [Bullish US large-cap, bullish GBP]
Alternative Proteins and the Future of Meat (McKinsey) Across different economies, health is the common driver of demand for alternative proteins. Alternative protein is a niche market, but McKinsey believes it is sizeable enough to disrupt the food industry in the future. [Bullish alt meat markets]
10 Key Investor Takeaways From the 2019 Annual Meetings of the IMF and World Bank (PIMCO) Geopolitical uncertainties such as the 2020 presidential election and the US-China trade tension were the biggest concerns. Meanwhile, ESG investing has become the trendy topic as a result of increased awareness of climate changes. [Bullish ESG stocks]
Unsurprisingly, this week’s woes around Adam Neumann and his WeWork have been all the hype, raising some worries around a bubble forming. No need to be too concerned, however, as we don’t see a dot-com style crash on the horizon – private markets are learning from their mistakes.
The Not-Com Bubble is Popping (The Atlantic) Sees the recent tech company IPO failures are the exact opposite of the dot-com bubble. Now public investors do the hosing instead of getting hosed. That said, true tech companies, especially software ones, are showing little sign of crisis. Suggests shorting ‘fake’ tech companies and going long ‘true’ tech companies.
Airbnb’s WeWork Problem (Tech Crunch) Wall Street might have greater patience with Airbnb despite its massive Q1 2019 loss. Airbnb has more capital in the bank than it’s raised in the previous 11 years, some “cumulatively” positive free cash flows, and positive EBITDA for two consecutive years. Bullish AirBnB view.
How a Weapons Dollar Could Backfire (Project Syndicate) The dominance of the dollar is at risk. Many countries are looking to non-dollar currencies and alternative payment mechanisms to protect themselves from the Trump administration’s exploitation of the currency’s global supremacy. Bearish dollar argument.
Holding a good old diversified equity and bond portfolio won’t make the cut any longer – at least according to BAML. ETFs are hotter than ever and sweeping away active investing; but watch out for gig economy companies. They are ignoring the law.
A Eulogy for the 60/40 Portfolio (A Wealth of Common Sense) A tongue-in-cheek “obituary” piece to celebrate the life and recent death of the long-standing 60/40 investment strategy, declared obsolete by BAML recently. Despite it’s ever-healthy performance and simplicity, it’s now largely replaced by ETF trackers and rebalancing.
Corporate America’s Second War With the Rule of Law (Wired) In-depth historical perspective on whymore and more gig economy (and other) firms are opting to disobey the rule of law. Think Uber refusing the order to start formerly employing its drivers and Facebook misusing data. Predicts a looming “techlash” by public servants.
Optimists and Pessimists in the Housing Market (New York Fed) Extrapolation of beliefs or i.e. assuming that a rising asset price will continue rising can be a source of market bubbles. Analysis shows that optimists on future house prices extrapolate twice as much as the median household and artificially influence prices.
As we discussed more widely in our latest exclusives letter, politics and markets are becoming more and more interlinked. The impact of the impeachment process, Brexit and global unrest are likely to shake up indexes.
Would the Market Care if the President Was Impeached? (A Wealth of Common Sense) Looks at last two US President Impeachments. For Nixon, markets were already slumping before the proceedings and for Clinton, indexes barely took any notice.
Momentum Under Fire as Confidence Softens (Variant Perception) Momentum in stocks is highly correlated with consumer confidence. The latter is falling, so weakness in the momentum factor.
SP 500 “Earnings Yield” Back to 6% with New Quarter(Trinity Asset Management)Looks at upside surprise factors for the S&P 500 . Growth estimates are very subdued, so the possibility of an upside surprise looms.
Following WeWork’s sky-high valuation and its consequent IPO break-down, the market seems to be waking up to the unjustified unicorn rush. Where will all the free capital pour into now?
IPOs Have Been Crushed in 2019. Why That’s Actually Good News for Stocks.(Barron’s) Amidst the many IPO disappointments recently, investors have become more discriminating, and that’s good for everyone. Most recently, WeWork has caused abrupt sobering up and return to focus on fundamentals and a credible path to profitability. Great piece dissecting all the techy unicorns.
Softbank’s Vision Fund is Just Too Damned Big(Barry Ritholtz) Softbank isn’t about diversification – it’s making a few, big bets, often on more established companies. It’s flooding ventures with capital, but is it paying enough attention to fundamentals? Or simply driving a race to bubble?
Are CLOs the New CDOs? (Conversable Economist) Last week we shed light on Collateralised Loan Obligations, which have very similar structure to CDOs but in this case, the debts are corporate loans rather than subprime mortgages. This is another good analysis on why they have now reached sizes close to those of CDOs in 2008. And why we shouldn’t worry too much yet but keep an eye on the space.
The Great Fee War of the 2010s (A Wealth of Common Sense) Fund fees get lower by the year and access to instruments gets higher for individual investors. Investment firms are going to have difficult business decisions to make in the years ahead as their margins slowly erode and investor behaviour might get more reckless.
Is the US Dollar Fading as the World’s Dominant Currency? (Conversable Economist) Runs through FX reserve, OTC trading and SWIFT data and finds that dollar remains the dominant currency.
Structured Finance Then and Now: A Comparison of CDOs and CLOs (BIS) Just as CDO’s declined after 2008, Collateralised Loan Obligations (CLOs), which are pools of high risk loans, have exploded in popularity. They are less complex and more transparent than CDOs, but could create systemic risk through prime brokerage channels and liquidity risk.
Business Cycles and Currency Returns (Colacito, Riddiough, Sarno) Academic paper finds buying currencies of strong economies and selling currencies of weak economies delivers high investment returns.
Modelling Yields at the Lower Bound Through Regime Shifts (BIS) Authors build an interest rate forecasting model that switches between a “normal” interest rate regime and “lower bound” regime. This better predicts recent rates dynamics and outperforms “shadow rate” models.
Financial Market Risk Perceptions and the Macroeconomy (Harvard) Authors build a risk perceptions measure based on the price of volatile stocks minus the price of low-volatility stocks. When risk perceptions are high then bonds outperform.
Recent market behaviour shows how much we just can’t predict – we have a bunch of articles that play on this theme whether on timing market crashes, day trading or the Fed’s ability to control rates. We also find cracks in some of the darling investment themes of the day – platforms. They’re being disrupted one-by-one.
Yes, the Stock Market is Going to Crash (A Wealth Of Common Sense) We know markets will crash, but the problem is no-one knows when. Metrics like valuations and yield gave poor signals in the 1940s, mid-1970s and early 1980s. Moreover, we could have a long stretch like 1938-1972 without a major crash (as opposed to a 20% correction).
As Long as Trump Tweets His Way Randomly through the Trade War, the Dollar Will Stay Strong (Econbrowser) Trump tweets = more trade uncertainty = dollar rallies on uncertainty
Repo Chaos Tests Wall Street Confidence in NY Fed’s Williams (Reuters) John Williams who runs the NY Fed has lost some key staff recently, which have contributed to this week’s repo debacle. Some are questioning his position.
Day Trading for a Living? (Chague, De Losso, Giovannetti) Academic paper crunch the numbers on day traders in Brazil and finds 97% lost money. They find no evidence that day traders learn with experience.
Platforms vs Verticals and the Next Great Unbundling (Andreessen Horowitz) Excellent piece that argues broad platforms like eBay, LinkedIn and YouTube risk being disrupted by narrow platforms that target narrow verticals like StubHub, Hired, and TikTok.
Explaining the Demise of Value Investing (Lev and Srivastava, academic paper) Clever paper that captures internally-generated intangible asset growth and adds back to book value. This improves the returns of value strategies
More on Low Long-Term Interest Rates (The Grumpy Economist) Argues that stable inflation should lead to an inverted yield curve much like the late 19th century.
Fat Tails, But Which Way? Up or Down? (Mish Talk) Makes the case that we may not see extreme market moves, but rather choppy declines.
A Crash Course On the Euro Crisis (Brunnermeier, Princeton) Excellent educational resources that runs through various factors behind financial crises from capital inflows to shadow banking.
The Best and Worst Case Scenarios for Bonds from Here (A Wealth Of Common Sense) Shows a strong correlation between starting bond yields and subsequent 5y returns and so although bonds have performed well recently – their long-term performance is likely to be poor.
Asset Allocation Outlook Midyear Update – Easing Into Slowing Growth (PIMCO, 9 min read) Equities: overweight US, underweight Europe, neutral the rest. Rates: long US and EM rates and linkers, neutral rest. Credit: long securitised (MBS) and EM, short IG and HY. FX: Short USD and EUR, long JPY and EM.
“Big Short” Investor Michael Burry Explains How Index Funds Will Trigger The Next Crash (Zero Hedge, 5 min read) Argues passive funds are removing price discovery from equity markets and over-promising liquidity. Likes small caps (under-represented in passive funds) and Japan stocks (owned by BoJ)
From FOMO to FONIR (Dr Ed’s Blog, 3 min read) Ed Yardeni reports back from recent client meetings and finds investors are favouring stocks on FONIR (fear of negative interest rates)
A Perspective on Secular Bull and Bear Markets (Jill Mislinkski, 4 min read) Looks at secular bull and bear markets in US equities. Finds that secular bear years make up 40% of years, that current rally looks extended and the ratio of peak earners to elderly population is turning down. Bearish stocks.
Fed Easing Sees Defensive Stocks Come Out on Top (Variant Perception, 1 min read) Over the last five Fed easing cycles consumer staples, healthcare and energy provide the highest average total return above the index one year after the Fed’s first cut (see chart). Financials and utilities the worst.
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