Boeing’s 737-Max issues highlight index construction issues

Boeing’s 737-Max issues highlight index construction issues

The latest flight tragedy involving Boeing’s (BA) 737-8 Max plane has reignited air travel safety concerns that could pressure Boeing’s business in the near-term. Demand for its aircraft has been and is expected to continue to be powered by international air travel, particularly out of Asia, which fits very well with our Rise of the New Middle-class investing theme. This means the recent drop in BA shares could present an opportunity for investors but depending on what we learn in the coming days we could see the shares trend lower. The issue plaguing the company and its shares is the crash of two 737-8 MAX planes in a relatively short time causing several countries and regions to ground those planes as the causes of the most recent crash are sought.

This has raised several questions for Boeing – How long will those planes be grounded? What does it mean for future 737 family orders and production levels that drive revenue, profits and earnings? The 737 family is an important one for Boeing, as it accounted for 80% of its aircraft backlog entering 2019 and 58% of its January order book. In the past Boeing has quickly dealt with situations such as these, and it has already announced an extensive change to the flight-control system in the 737 MAX aircraft.

Still, we are in a period of uncertainty for the shares, and uncertainty has never been a friend for the stock market or individual stocks. Now to see what comes next.

On a different note, the Boeing issue highlights a key difference in how the major market indices are constructed. These tend to be bench marks by which we and others judge their performance, but there are several differences and intricacies between them. For example, we know the Dow Jones Industrial Average is limited to just 30 stocks, while the S&P 500 is roughly 500 stocks spread across 11 sectors, yielding a more broad based view of the market. For that reason, the S&P 500 tends to be the benchmark of choice for most investors even though the media still tends to focus on the Down.

No matter how many constituents an index has, who the constituents are, and their weightings make all the difference. As we know, the Nasdaq Composite Index tends to be weighted toward technology stocks, while the Russell 2000 is focused on stocks with smaller market capitalizations. Inside the Dow, the weighting of BA shares is just under 10%, which makes it the largest holding inside the index. The next closest constituent is UnitedHealth Group (UNH) at 6.52%. This means moves higher or lower in Boeing shares can have a pronounced impact on the overall index. We’ve clearly seen that over the last few days as Boeing’s shares have fallen more than 10%  the Dow’s performance has been markedly different than the rest of the market indices as the Dow has less than 1% while the S&P 500 has risen nearly 2.5%

In examining the S&P 500, we see the reason for that different performance. While nearly 10% of the Dow is represented by Boeing shares, exposure inside the S&P 500 is far more limited at 0.9%. Even though that is more than 1/500thof the S&P it is far, far lower than the weighting contained inside the Dow. The point of this is that to truly understand the movements in the major market indices one needs to understand how these market indices are constructed.

One of the key parts of that understanding is knowing what the holdings and their weightings. This same understanding should also be applied to ETFs as well, especially ones that are based on passive indices. While two ETFs may appear to have a similar strategy and practically the same constituents, the weighting mechanisms between an equal weighted, market cap weighted or a capped market weight approach can produce different returns as well as generate different risk parameters.

As far as the constituents themselves, it goes without saying an investor should be more familiar with the constituents. In the case of Boeing, there are a number of ETFs that hold the shares, but one with sizable exposure is the ETFMG Drone Economy Strategy ETF (IFLY). That ETF, which looks to invest in drones, holds 4.96% of its assets in BA shares, it’s second largest holding. That ETF, which looks to invest in drones, holds 4.96% of its assets in BA shares, even though its revenues from drones and other autonomous systems are so small they aren’t even broken out by the company in SEC filings. We can debate the rationale behind Boeing being the second largest holding, but until the current situation at Boeing is resolved, odds are those shares will have a meaningful impact on both the Dow and IFLY shares.

Weekly Issue: A Number of Our Thematic Leaders Well Positioned for the Holidays

Weekly Issue: A Number of Our Thematic Leaders Well Positioned for the Holidays


Normally we here at Tematica tend to shut down during the short week that contains Thanksgiving, but given all that is going on in the stock market of late, we thought it prudent to share some thoughts as well as what to watch both this week and next. From all of us here at Tematica, we wish you, your family, friends and love a very happy Thanksgiving!

Now let’s get started…

Key points in this issue

  • Despite the recent market pain, I continue to see a number of holdings being extremely well positioned for the holiday season including Amazon, Costco Wholesale (COST), United Parcel Service (UPS), McCormick & Co. (MKC) and both businesses at International Flavors & Fragrances (IFF).
  • I’ll continue to heed our Thematic Signals and look for opportunities for when the stock market lands on solid footing.
  • Later this week, Disney’s (DIS) latest family-friendly move, Ralph Breaks the Internet, hits theaters and we’ll be checking the box office tallies come Monday.
  •  Taking a look at shares of Energous Corp. (WATT), a Disruptive Innovator contender


The stock market so far this week…

There is no way to sugar coat or tap dance around it – this week has been a difficult slug ahead of the Thanksgiving holiday as the pressures we’ve talked about over the last two months continue to plague the market as the impact has widened out. Oil prices have continued to plummet, pressuring energy stocks; housing data continues to disappoint, hitting homebuilding stocks; and we’ve received more new of iPhone production cuts as well as potential privacy regulation that has rippled through much of the tech sector. Retail woes were added to the pile following disappointing results from Target (TGT) and L Brands (LB) that pressured those shares and sent ripples across other retail shares.

The net effect of the last few weeks has wiped out the stock market’s 2018 gains with both the Dow Jones Industrial Average and the S&P 500 down roughly 1.0% as of last night’s market close. While the Nasdaq Composite Index is now flat for the year, the small-cap heavy Russell 2000 is firmly in the red, down 4.3% for all of 2018 as of last night.

The overall market moves in recent days have weighed on several constituents of the Thematic Leaders and the Select List, most notably Apple (AAPL), Amazon and Alphabet/Google (GOOGL). Despite that erasure, we are still nicely profitable those positions as well as AMN Healthcare (AMN), Costco Wholesale (COST), Disney (DIS), Alphabet (GOOGL), ETFMG Prime Cyber Security ETF (HACK), and several others. More defensive names, such as McCormick & Co. (MKC), and International Flavors & Fragrances (IFF) have outperformed on a relative basis of late, which we attribute to their respective business models and thematic tailwinds.

As I describe below, the coming days are filled with events that could continue the pain or lead to a reprieve. As that outcome becomes more clear, we’ll either stay on the sidelines collecting thematic signals for our existing positions or take advantage of the recent market pain to scoop up shares in thematically well-positioned companies at prices we haven’t seen in months.


What to watch the rest of this week

As we get ready for the Thanksgiving holiday, we know before too long the official kick-off to the holiday shopping race will being. Some retailers will be open late Thursday, while others will open their doors early Black Friday morning and keep them open all weekend long. As we get the tallies for the shopping weekend, the fun culminates with Cyber Monday, a day that is near and dear to our hearts given our Digital Lifestyle investing theme.

Given the market mood of late, as well as the disappointing results from Target and L Brands earlier this week, we can count on Wall Street picking through the shopping weekends results to determine how realistic recently issued holiday shopping forecasts. The National Retail Federation’s consumer survey is calling for a 4.1% increase year over year this holiday season, which they define as November and December. The NRF’s own forecast is looking for a more upbeat 4.3%-4.8% increase vs. 2017.

Consulting firm PwC has a more aggressive view — based on its own survey, consumers expect to spend $1,250 this holiday season on gifts, travel and entertainment, a 5% increase year over year. One of the differences in the wider array of what’s included in the survey versus the NRF. In that vein, Deloitte’s inclusion of January in its findings explains why its 2018 holiday shopping forecast tops out among the highest at a 5.0%-5.6% improvement year over year. That Deloitte forecast includes a 17%-22% increase in digital commerce this holiday shopping season compared to 2017, reaching $128-$134 billion in the process. That’s a sharp increase but some estimates call for Amazon (AMZN) to increase its sales during the period by at least 27%.

I continue to see a number of holdings being extremely well positioned for the holiday season including Amazon, Costco Wholesale (COST), United Parcel Service (UPS), McCormick & Co. (MKC) and both businesses at International Flavors & Fragrances (IFF).

Also this week, Disney’s (DIS) latest family-friendly move, Ralph Breaks the Internet, hits theaters and we’ll be checking the box office tallies come Monday.


What to watch next week

As mentioned above, next week will bring us the full tally of holiday shopping results and begin with Cyber Monday, which means more holiday shopping data will be had on Tuesday. As we march toward the end of November, we’ll have several of the usual end of the month pieces of economic data, including Personal Income & Spending as well as New Home Sales and Pending Home Sales for October. We’ll also get the second print for the September quarter GDP, and many will be looking to measure the degree of revision relative to the initial 3.5% print.

As they do that, they will likely be taking note of the forward vector for GDP expectations, which per The Wall Street Journal’s Economic Forecast Survey sees current quarter GDP at 2.6% with 2.5% in the first half of 2019 and 2.15% for the back half of 2019. Taking a somewhat longer view, that means the economy peaked in the June quarter with GDP at 4.2%, due in part to the lag effect associated with the 2018 tax reform, and has slowed since due to the slowing global economy, trade war,  strong dollar, and higher interest rates compared to several quarters ago. As tax reform anniversaries, that added boost to the corporate bottom lines will disappear and in the coming weeks, we expect investors will be asking more questions about the likelihood of the S&P 500 delivering 10% EPS growth in 2018 vs. 2017.

With that in mind, perhaps the two most critical things for investors next week will be the minutes to the Fed’s November meeting and the G20 Summit that will be held Nov. 30-Dec. 1. Inside the Fed minutes, we and other investors will be looking for comments on inflation and the speed of rate future rate hikes, which the market currently expects to be four in 2019. And yes, the December Fed policy meeting continues to look like a shoe-in for a rate hike. Per White House economic adviser Larry Kudlow, US-China trade is likely to come to a head at the summit. If the speech given by Vice President Pence at the Asia-Pacific Economic Cooperation summit – the United States “will not change course until China changes its ways” – we could see the current trade war continue. We’ll continue to expect the worst, and hope for the best on this front.

On the earnings front next week, there will be a number of reports worth noting including those from GameStop (GME), Salesforce (CRM), JM Smucker (SJM) and a number of retailers ranging from Dick’s Sporting Goods (DKS) and Tiffany & Co. (TIF) to PVH (PVH) and Abercrombie & Fitch (ANF). Those retailer results will likely include some comments on the holiday shopping weekend, and we can expect investors to match up comparables and forecasts to determine who will be wallet share winners this holiday season. Toward the end of next week, we’ll also hear from Palo Alto Networks (PAWN) and Splunk (SPLK), which should offer a solid update on the pace of cybersecurity spending.


Taking a look at shares of Energous Corp. (WATT)

In our increasingly connected society, two of the big annoyances we must deal with are keeping our devices charged and all the cords we need to charge them. When I upgraded my iPhone to one of the newer models, I was pleasantly surprised by the ease of charging it wirelessly by laying it on a charging disc. Pretty easy.

I’m hardly alone in appreciating this convenience, and we’ve heard that companies ranging from Tesla Inc. (TSLA) to Apple Inc. (AAPL) are looking to bring charging pads to market. That means a potential sea change in how we charge our devices is in the offing, which means a potential growth market for a company that has the necessary chipsets to power one or more of those pads. In other words, if there were no such chipsets, we would not be able to charge wirelessly. This coming change fits very well inside our Disruptive Innovators investing theme.

Off to digging I went and turned up Energous Corp. (WATT) and its WattUp solution, which consists of proprietary semiconductor chipsets, software and antennas that enable radio frequency (RF)-based, wire-free charging of electronic devices. Like the charging disc I have and the ones depicted by Apple, WattUp is both a contact-based charging and at-a-distance charging solution, which means all we need do is lay our wireless devices down be it on a disc, pad or other contraption to charge them. In November 2016, Energous entered into a Strategic Alliance Agreement with Dialog Semiconductor (DLGNF), under which Dialog manufactures and distributes IC products incorporating its wire-free charging technology.

Dialog happens to be the exclusive supplier of these Energous products for the general market and Dialog is also a well-known power management supplier to Apple across several products, including the iPhone. Indeed, last week Dialog bucked the headline trend of late and shared that it isn’t seeing a demand hit from Apple after fellow suppliers Lumentum Holdings Inc. (LITE) and Qorvo Inc. (QRCO) cut guidance earlier this week.

On its September quarter earnings call, Dialog shared it was awarded a broad range of new contracts, including charging across multiple next-generation products assets, with revenue expected to be realized starting in 2019 and accelerating into 2020. I already can feel several mental carts getting ahead of the horse as some think, “Ah, Energous might be the technology that will power Apple’s wireless charging solution!”

Adding fuel to that fire, on its September quarter earnings conference call Energous shared that “given the most recent advances in our core technology” its relationship with its key strategic partner – Dialog – “has now progressed beyond development, exploration and testing to actual product engineering.”

If we connect the dots, it would seem that Energous very well could be that critical supplier that enables Apple’s wireless charging pads. Here’s the thing: We have yet to hear when Apple will begin shipping those devices, which also means we have no idea when a teardown of one will reveal Dialog-Energous solutions inside. Given that there was no mention of Apple’s wireless charging efforts at either its 2018 iPhone or iPad events, odds are this product has slipped into 2019. That would jibe with the timing laid out by Energous.

Based on three Wall Street analysts covering WATT shares, steep losses are expected to continue into 2019, which in my view suggests a ramp with any meaningful volume in the second half of the year. That’s a long way to go, and given the pounding taken by the Nasdaq of late, we’ll put WATT shares onto the Contender’s so we can keep them in our sights for several months from now.



Caution still warranted as we book a big win with Chipotle

Caution still warranted as we book a big win with Chipotle

Key points in this issue

  • Despite the market’s improved mood over the last few trading days, we are not out of the proverbial woods just yet. As such, we are sticking with our current plan of sitting on the sidelines until calmer market waters emerge.
  • We are booking another win with our Chipotle Mexican Grill (CMG) Jan 2018 450.00 calls (CMG190118C00450000) that closed last night at 34.76, up almost 73% from our 20.10 buy-in in mid-October.

Last night we closed the books on the month of October, and what a month it was for the stock market. In today’s short-term focused society some will focus on the rebound over the last few days in the major domestic stock market indices, but even those cannot hide the fact that October was one of the most challenging months for stocks in recent memory. All told, the Dow Jones Industrial Average fell 5.1% for the month, making it the best performer of the major market indices. By comparison, the S&P 500 fell 6.9% in October while the technology-heavy Nasdaq Composite Index dropped 9.2% and the small-cap focused Russell 2000 plummeted 10.9%. In short, the month of October wiped out most the market’s year to date gains.

As I write this, we are just over halfway through the September quarter earnings season, which means there are ample companies left to report and issue updated guidance. Candidly, those reports could push or pull the market either higher or continue the October pain. Some may be tempted to put on some short-the-market positions as we did in late September, which paid off handsomely for us, but that was when there was a clear risk to the downside. Today, that downside view is far less compelling. Don’t misunderstand, there are still ample risks in the market to be had as the current earnings season winds down. These include the mid-term elections; Italy’s next round of budget talks with Brussels; upcoming Trump-China trade talks, which have led to another round of tariff preparations; and Fed rate hikes vs. the slowing speed of the global economy.

Most of those factors will unfold over the coming weeks and then we’ll be in the thick of the holiday shopping period. As we navigate these must-watch events, I’ll be watching option plays in companies like Amazon (AMZN) and United Parcel Service that are riding our Digital Lifestyle theme in the upcoming holiday shopping season.


Exiting our Chipotle calls with a hefty win

Last week I cautioned patience with our Chipotle Mexican Grill (CMG) January 2018 450 calls (CMG190118C00450000) and that coupled with the market rebound these last few days drove those calls higher. With last night’s close, the underlying CMG shares hit 460.33, well above our 450.00 strike price and that share price rebound led our CMG calls to close at 34.76 – up just shy of 73%. Not bad for a position that was added just two weeks ago.

Given my comments above, I’m taking the quick win on this trade and putting the returned capital and profits into the war chest as we wait for a calmer market to emerge.

  • We are booking another win with our Chipotle Mexican Grill (CMG) Jan 2018 450.00 calls (CMG190118C00450000) that closed last night at 34.76, up almost 73% from our 20.10 buy-in in mid-October.
Bulls Buck Bob Farrell Rule #5

Bulls Buck Bob Farrell Rule #5

An article in the WSJ today reminded me of Bob Farrell’s rule #5:

 The public buys the most at the top and the least at the bottom.

Eight years into the bull market with more than a tripling of the major indices and the retail investor has decided to jump in with both feet, plowing nearly $80 billion into U.S.-based equity funds since the election with $6.7 billion of that coming in last week alone. Sentiment is so high that the Investor Intelligence survey shows the bulls at 63.1 percent, the highest reading since January 1987! The bears at a hibernating 16.5 percent, l four leaving us with four bulls for every bear. Can you heard the herd of hooves?

In the WSJ article we learn of just how bullish retirees have become.

One of Ms. Gugle’s clients has increased his stock allocation to around 80% from 70% in recent months after cutting back on bonds amid concerns about low returns.The client, George Bohmfalk, a 69-year-old retired neurosurgeon in Charlotte, says he has faith that remaining loyal to a low-cost passively managed portfolio is more productive than trying to pick winners and losers. But he’s concerned about what the Trump administration may do, and he worries about U.S. stocks’ lofty valuations.

So what kind of returns can these folks expect? When forward-looking P/E ratios are in today’s range, between 18x and 20x, the coming year on average generates around 1.1 percent with a whopping 4.5 percent over the next five years, ouch. While P/E ratios don’t serve as an accurate signal for a market top, they do suggest a cap to returns.

I know, I know, I keep blowing the bubble bugle but bulls hear me out.

  1. Margin debt is now at $513 billion, which is the highest level ever recorded. That’s a sure toppy sign and when we get some pullbacks, all that leverage makes wee little moves a lot more painful.
  2. We are seeing declining breadth, with more new 52-week lows than highs in the past four sessions, the longest streak since November 4th – another toppy indicator.
  3. The small-cap Russell 2000, which is often a leading indicator, is now flat for the year and 4 percent below its highs.
  4. The S&P 500 has gone 57 days without a 1 percent intra-day swing, something we have not seen in at least 35 years and recalls to mind the mantra of Raoul Pal of Global Macro Investor and Real Vision, “Suppressed volatility leads to heightened volatility.”
  5. Survey data is veritably giddy with excitement over an expected economic acceleration while actual economic growth is barely treading water at just over 1 percent annual rate, a classic end-of-cycle divergence.
  6. We’ve only seen households’ exposure to the stock market at or above the current 21.1 percent level fives times in the past 16 years. Bob Farrell’s number five is screaming out on this one.
  7. U.S. high-yield corporate bond (aka junk) yields approached cycle lows recently but are now starting to widen in a more risk-off trend and as the saying goes, bonds lead stocks. Pay attention!

Source: Individuals Tiptoe Further Into Long-Running Stock Rally – WSJ

But those economic indicators are so HOT!

But those economic indicators are so HOT!

Economic data has been coming in more positive lately, which has led some to get a wee snarky with yours truly over my finger-wagging warnings that the market is exceptionally pricey.  Ok then, game on!

The chart below is the Economic Research Institute’s Weekly Leading Index, which according to ECRI, “has a moderate lead over cyclical turns in U.S. economic activity. Historical data begins in 1967.” It is widely considered one of the better leading indicators for the economy.

Marker #1

January 28, 2000, the index hit a top of 128.9.  From that date to the end of September 2001:

  • S&P 500 lost 23.6 percent
  • NASDAQ lost 61.9 percent
  • Russell 2000 lost 21.1 percent
  • Dow Jones Industrials lost 17.7 percent

Marker #2

October 19, 2001, the index hit a low of 112.6. From that date to when the index topped out again on June 8, 2007:

  • S&P 500 gained 40.5 percent
  • NASDAQ gained 54.0 percent (Note that it had not yet recovered prior losses)
  • Russell 2000 gained 9.2 percent
  • Dow Jones Industrials gained 45.9 percent

Marker #3

On June 8, 2007, the index hit a peak of 143.7. From that date to March 6, when the index bottomed out:

  • S&P 500 lost 55.1 percent
  • NASDAQ lost 50.7 percent
  • Russell 2000 lost 58.9 percent
  • Dow Jones Industrials lost 51.2 percent

Marker #4

March 6, 2009, the index hit a low of 105.7. From that date to when the index topped out again on April 30, 2010:

  • S&P 500 gained 73.7 percent
  • NASDAQ gained 90.2 percent
  • Russell 2000 gained 104.1 percent
  • Dow Jones Industrials gained 66.1 percent

Marker #5

On April 30, 2010, the index hit a peak of 135.2. From that date to October 7, 2011, when the index bottomed out:

  • S&P 500 lost 2.6 percent
  • NASDAQ was flat
  • Russell 2000 lost 8.4 percent
  • Dow Jones Industrials was flat

In the weeks and months before each time this leading indicator peaked, along with many other similar ones, the headlines were all about how the economy was moving along so well, champagne and caviar all around and frequently the stock markets were accelerating as well. Only in hindsight could one have seen that we were heading for a major turn and the markets were going to experience a painful pullback.  On the flip side, where the indicator has bottomed out, that was time to get seriously bullish.

Bottom Line: A rising leading indicator is not necessarily a bullish sign for stocks. Stock market returns are in the end, about valuation. Buy cheap and sell expensive. Today stocks are priced at Louis Vuitton levels. Can they go higher? Absolutely, they likely will as we often see an acceleration to the upside just before a major turn. But know that downside risks are rising and upside potential shrinking with every step into more expensive territory.

Market Recap May 27th

Market Recap May 27th

Markets Meh DogSince the start of the month, the U.S. equity markets, to use a technical term, have been pretty much mehhh. By Friday’s close the S&P 500 (large cap) was up +0.85%, the Russell 2000 (small cap stocks) was up +0.84% for the month. Tech stocks finally started to show a little hutzpah with the Nasdaq up +2.41%. While Yellen and company at the Fed have been giving lots of lip service to raising rates at the June meeting of the Federal Open Markets Committee (FOMC), longer dated treasuries, as measured by the iShares Barclays 20+ Year Treasury Bond ETF (TLT) rose +1.6% since the start of May.
Even year-to-date stock indices have been mostly meh with oil, gold and bonds giving us a lot more to cheer about:

  • S&P 500 +2.7% (thanks to a 2.3% gain last week)
  • Nasdaq -1.5%
  • Russell 2000 +1.3%
  • Dow Jones Industrials +2.6%
  • Gold +14.0%
  • iShares Barclays 20+ Year Treasury Bond (TLT) +7.7%
  • Brent Crude Oil Spot +30.5%

This chart of the S&P 500 shows how the major market index continues to oscillate within a fairly narrow band and is right back where it was about 18 months ago.

2016-05 SPX

Taking a look at the broader market, the Dow Jones Transports remain in a steady downtrend (green line).

2016-05 Trans

The Russell 2000 (small cap stocks) had been in a steady downtrend for much of the past year, but recently broke above that trend line in April, which is often a positive sign.

2016-05 Russell 2000

Oil (Brent Crude) is now well above the 50-day and 200-day moving averages and has been on a bull run for 103 calendar days with a gain of 89%, which is the ninth biggest gain in any oil bull market since 1983 and is nearly 27% stronger than the average and over 50% stronger than the median. All that has been accomplished over a period that is just half as long as the average bull market and nearly 40 days shorter than the median bull run. That’s a hell of a gain in an exceptionally short period of time, so a pullback here wouldn’t be surprising. Inventory levels still remain over 50% above their historical average for this time of year and oil rigs are now down to their lowest level since October 2009. We’ll be watching closely to see how crude responds if/as the dollar strengthens with the Fed taunting the markets about a rate hike.

2016-05 Brent

Strong Economy, Really?

Strong Economy, Really?

Last week I pointed out that the data coming in wasn’t exactly painting a picture of an increasingly robust economy that would warrant the Fed tightening rates.

Last Thursday we learned that initial jobless claims rose again the last week of February to 320,000, significantly above expectations of 295,000. We also learned that US Factory orders fell 0.2% versus an expected increase of 0.2%. Friday we received impressive headline jobs data, but it didn’t exactly jive with much of the rest of what we are seeing in the economy and upon a closer look, the fall in the unemployment rate was driven more by people leaving the workforce than by new jobs, and those newly filled jobs were skewed towards lower paying industries.

Today we learned that retail sales fell for the third consecutive month in February as a mix of bad weather and consumer caution outweighed an improving labor market and cheap gasoline prices.  Sales at retailers and restaurants decreased 0.6% last month to a seasonally adjusted $437 billion, the Commerce Department said Thursday. Retail sales fell 0.8% in January and 0.9% in December.  We also learned that business inventories growth was flat in January versus expectations for 0.1% increase… but what is even more concerning is the sales to inventory ratio, which is back to where it was back in the depths of the financial crisis!

Inventory to Sales

So much for the economy getting back on track.

In fact, Tuesday the Wall Street Journal ran an article entitled “Recession’s Impact Lingers for Many States,” which pointed out that 30 states are still below their peak, pre-recession tax revenue receipts. The states that are actually above their last peak include North Dakota and Texas, which are likely to suffer going forward with the impact of plummeting oil prices. We’ve also seen US GDP expectations for Q1 tanking, (today’s retail numbers reinforcing this) with many forecasting in the 1.5% range, which given the increasingly soft data coming in, seems wise. Prior forecasts were north of 2% at the beginning of the year.

Additionally, inflation expectations remain firmly muted with yields indicating that investors expect US consumer prices to rise in the neighborhood of 1.7% a year for the next 10 years, dropping from 1.9% just last week – more of that dropping price thing. In addition, consumer credit growth is moderating, auto sales appear to be topping out and the Case-Shiller 20 city price index shows home price inflation has slowed to 4.5% year-over-year from 13.4% last year. So far, nothing screams out a need for tightening, particularly in light of the defacto tightening resulting from the rising dollar. In fact, if the Fed did tighten in June, it would be the first time in the past 30 years that it has done so with a rising dollar. We do see tightening also occurring on the fiscal side where the federal deficit is shrinking significantly.

The Euro has now dropped below $1.05 for the first time in about 12 years and is down around 33% from its highs against the dollar, last seen in April 2008 and down around 12% since the beginning of the year.


Tale of QE


As the ECB gets cranking on its 10-year sovereign debt purchases, yields have once again hit record lows yesterday in Germany, Belgium, the Netherlands, Italy, Ireland and Spain. The 10-year US Treasury rate at 2.2% is over 9.5x the 10-year bund, a phenomenon never before seen. With the US one of the few places to get any kind of yield on sovereign debt, it is unlikely that dollar strengthening will cease. So not only do foreign investors get better yields in the US, the dollar is most likely strengthening against your currency, jacking up returns even more.


Diverging monetary policies are continuing to affect domestic equity markets as we see the US materially underperforming Europe and Japan in 2015, which is a complete reversal from 2014. Monetary policy clearly continues to dominate equity markets post-financial crisis. We believe this is likely to continue further into 2015, making international market indices more attractive. Investors can access these market easily through ETFs such as the relatively new Recon Capital DAX Germany (DAX), iShares MSCI France Index (EWQ) or MAXIS Nikkei 225 Index ETF (NKY).