Monday March 14 Daily Market Primer
In
case you have a foggy memory from the move to daylight savings time this
weekend, the US markets had a good day on Friday, with the Dow up 218
(1.3%), the S&P up 32 (1.6%), and the NASDAQ up 86 (1.8%). Stocks
rallied in Asia Monday, with Shanghai up 1.7% and most other markets up
.5 to 1%. China’s positive day is in spite of weak industrial
production data released over the weekend. China’s National
People’s Congress is still meeting this week, and we can expect a raft of
press releases when they conclude on Wednesday. Stocks are trading up
across the board in Europe, 142 (1.5%) in Germany, 21 (.5%) in France, and
29 (.4%) in the UK.
Barron’s
ran a cover story this weekend on rebounding value stocks. Those
of us using size/value factor funds are rooting for
it. While there is strong evidence of the value premium over the long
run, as the article points out, there are times when value underperforms and
those periods can last for years. Barron’s also makes some
interesting comments on the movement from active to passive investing in
the industry: http://bit.ly/ValueRebound.
The
Federal Reserve meets this week, and while no one expects them to raise
rates, the market is pricing in an increased probability of a rate hike by
June: http://bit.ly/Ratehikes
China
continues to assert itself in global investing, as Anbang Insurance Group
announced a $6.5 billion deal for Blackstone holding Strategic Hotels and
Resorts, owner of iconic Hotel del Coronado and New York’s JW
Marriott Essex House. Blackstone bought the hotel group in December for
$6bn. Not bad for Blackstone – a $500 million profit for a 3 month
investment: http://bit.ly/Anbangdeal
The
US isn’t the only country with political protests and unpopular
politicians, as citizens in Brazil turned up the heat on President Rousseff
and German Chancellor’s Angela Merkel’s Christian Democratic Party is
loosing support in regional elections.
I
saw famed investor Howard Marks of Oaktree Capital Group speak last
Thursday at the ALTSLA conference. Even though his firm runs
sophisticated distressed debt strategies, Howard speaks in very plane English
without using jargon. Howard’s views on the markets and investments
included:
·
Markets
are not perfectly efficient, and he believes that the market reflects what
everyone thinks, right or wrong. And markets can be wrong.
·
“The
market doesn’t know much in the short run”. He talked about his own
company stock moving up and down every day for no reason.
·
He
lamented the talking heads who constantly invent reasons for market movements
after the fact.
·
Oaktree
clients want 7-8% per year. You are out of luck (he used a more colorful term)
in the current market environment with traditional investments, you have to go
with alternatives.
·
Unsurprisingly
for a purveyor of traditional debt funds with lockups and quarterly or longer
liquidity, Howard is not a fan of liquid alternatives.
Now
that you are up to speed with the thinking of one of the most famous investors
of our generation, here’s the news:
China stimulus
China's Shanghai Composite Index shook off the weakest industrial output numbers
since 2009 to close 1.8 percent higher, the biggest advance in a week. The
rally came after the new head of the securities regulator signaled that he will
keep propping up the equity
market. Even as China stock market bulls have reason to
celebrate, yuan bears are licking their wounds as bets that the currency would
continue to decline following last August's shock devaluation fail to pay off.
At least $562 million of options that pay out if the currency drops below 6.6
per dollar have expired worthless
since then, with a further $807 million due to elapse in the coming three
months.
Iran oil production increase
Iran plans to increase production to 4 million barrels a day,
an increase of 33 percent over February's output, before it will join other
suppliers in seeking to balance the global oil market. West Texas
Intermediate for April delivery fell 73 cents to $37.77 a
barrel on the New York Mercantile Exchange at 9:55 a.m. London
time. As Iran promises to pump more oil, production is set to continue to fall
in the U.S. with the EIA forecasting an 8.19 million barrels per day drop in
output next year, prompting increased bets on a price
increase.
Brazil
By some estimates, there were as many as 3 million people
on the streets of Brazil yesterday protesting at political scandals and the
on-going recession in the country. As pressure on President
Dilma Rousseff increases, she could lose the support of the
biggest party in her governing coalition following a motion at
the Democratic Movement Party's convention over the weekend that sets a
30-day deadline for the party to re-evaluate its alliance
with her administration.
Central banks
This week is going to be a huge for central banks. The Bank of
Japan announces its latest monetary policy decisions tomorrow, with analysts expected no change
following January's shock move to negative rates. On Wednesday, the Federal
Reserve holds its policy meeting,
and while only three of the 90 economists surveyed by Bloomberg expect a rate
hike to be announced, market based expectations show that a hike by June
is now a 50/50 call. Then on Thursday, both the Bank of England and the Swiss
National Bank unveil their latest policy decisions.
China's industrial
production and retail sales data were terrible. While industrial production
rose 5.4% year-over-year for January and December (two months due to the Lunar
New Year), it was shy of the 5.6% gain that economists were forecasting. The
number was a downgrade from the 5.9% print in December and the worst since
November 2008. Retail sales might have even been more disappointing, climbing
10.2% in January against an expected gain of 10.8%. The December
reading was reported at 11.1%.
German Chancellor Angela
Merkel's Christian Democratic Union party lost support in all three states that
held regional elections on Sunday. The results were a sign of voter displeasure
with Merkel's "open-door" policy towards refugees. That was evident
as the far-right, anti-immigration party, Alternative für Deutschland (AfD)
party made key gains in Saxony-Anhalt (24.2%), Baden-Württemberg (15.1%) and
Rhineland Palatinate (12.6%). Germany's 10-year yield is down 2.2 basis
points at 24.7 bps.
The private equity firm has
agreed to sell Strategic Hotels & Resorts to China's Anbang Insurance Group
for $6.5 billion. Blackstone paid $3.93 billion for the high-end hotel chain in
December, but that number rose to about $6 billion when taking into account
debt. According to Reuters, the 16 properties owned by the chain include
"Ritz-Carlton locations in California, the Fairmont Scottsdale in Arizona,
and the Four Seasons Resort in Jackson Hole, Wyoming."
German exchange Deutsche
Boerse could increase its offer of more than £10 billion for the London Stock
Exchange as soon as today, the Telegraph reports. The initial deal called for
ownership of the combined entity at a 56%/44% split favor of Deutsche Boerse,
but that might not be good enough considering the interest from rival
Intercontinental Exchange. According to the Telegraph, "Under Takeover
Panel rules Deutsche Boerse has until 22 March to make any formal bid while ICE
has until 29 March."
A
Last Stand
GOP voters are at a key moment in the presidential race that
will decide whether Republican front-runner Donald Trump secures his lead over
his challengers or if the party heads for a contested national convention in July. Home
wins tomorrow for Ohio Gov. John Kasich and Florida Sen. Marco Rubio would
likely chart such a course, with each candidate hoping that he can prevail at a
convention where no one enters with a majority. Mr. Trump appears to hold a big
lead in the Sunshine State ahead of Mr. Rubio, whose longtime supporters are hoping for a miracle. But in Ohio, polls
suggest the businessman is behind Mr. Kasich, who is
betting his entire candidacy on winning his home turf. Meanwhile, rivals and
many high-profile Republicans have united to decry the recent violence at Trump rallies as an
alarming extension of Mr. Trump’s rhetoric.’
Deadly Attacks
For the second time in less
than a month, Turkey’s capital has come under violent attack. A car bomb struck central Ankara last night,
killing at least 37 and wounding more than 120, raising fears that the country
is heading into war. While there were no immediate claims of responsibility,
officials in Ankara said the attack appeared to be the work of the PKK,
Kurdish separatists entangled in a conflict with Turkish security forces over
rights and autonomy. Hours after the bombing, Turkish jets carried out
airstrikes on PKK positions in Iraq. The bombing is likely to further
complicate the fight against Islamic State in which Turkey is an unenthusiastic
ally, as it prioritizes its own wars against Bashar al Assad and Kurdish
forces. Meanwhile in West Africa, gunmen attacked beachgoers in the Ivory Coast
resort town of Grand Bassam yesterday, killing at least 16 and confirming fears
that terrorists in the region are widening their operations. Al Qaeda in the
Islamic Maghreb, which was behind similar attacks in recent months in Mali and
Burkina Faso, claimed responsibility for the assault.
Going
in Reverse
The term “subprime loan” strikes fear into the heart of many an investor. But forget, if you can, the mortgage loans that were central to the last financial crisis, it is early defaults in subprime auto loans that are now raising concerns. We report that some of these loans packaged up in recent bond issues are showing cracks, with high levels of missed payments and in a small number of cases where borrowers have filed for bankruptcy or had vehicles repossessed. Bond issues backed by U.S. subprime auto loans topped $27 billion last year, the highest in a decade and a 25% increase from 2014. Some say the appetite for auto debt is what is fueling the boom, and expect defaults to rise. But many analysts brush off suggestions of a subprime auto-loan bubble, pointing to low gas prices and stable unemployment rates.
The term “subprime loan” strikes fear into the heart of many an investor. But forget, if you can, the mortgage loans that were central to the last financial crisis, it is early defaults in subprime auto loans that are now raising concerns. We report that some of these loans packaged up in recent bond issues are showing cracks, with high levels of missed payments and in a small number of cases where borrowers have filed for bankruptcy or had vehicles repossessed. Bond issues backed by U.S. subprime auto loans topped $27 billion last year, the highest in a decade and a 25% increase from 2014. Some say the appetite for auto debt is what is fueling the boom, and expect defaults to rise. But many analysts brush off suggestions of a subprime auto-loan bubble, pointing to low gas prices and stable unemployment rates.
The
Other, Other Reality
Virtual reality has been long thought of as the next great technological frontier. But, as our Keywords columnist Christopher Mims writes, it is its often misunderstood cousin that offers a more exciting prospect. Nearly every major tech company is investing in augmented reality, or AR—its expected usefulness in business applications being a major driver. AR creates displays that exist only in front of one’s eyes, opening up the possibility of infinitely portable workspaces and a screenless world. AR’s technical challenges are possibly even greater than those with VR, and engineers say a really good version would require computing power equivalent to that of a self-driving car. Though the most famous example of AR, Google Glass, has largely been a failure, technologists believe the ability to project a virtual screen on to any surface will be possible within five years.
Virtual reality has been long thought of as the next great technological frontier. But, as our Keywords columnist Christopher Mims writes, it is its often misunderstood cousin that offers a more exciting prospect. Nearly every major tech company is investing in augmented reality, or AR—its expected usefulness in business applications being a major driver. AR creates displays that exist only in front of one’s eyes, opening up the possibility of infinitely portable workspaces and a screenless world. AR’s technical challenges are possibly even greater than those with VR, and engineers say a really good version would require computing power equivalent to that of a self-driving car. Though the most famous example of AR, Google Glass, has largely been a failure, technologists believe the ability to project a virtual screen on to any surface will be possible within five years.
Stock markets around the
world are mostly higher. China's Shanghai Composite (+1.8%) led the way in Asia after
Beijing pledged it would support the market. In Europe, Germany's DAX (+1.7%)
paces the advance. S&P 500 futures are lower by 4.00 points at 2016.00
.
US economic data is absent.
However,
data flow for the week is heavy. Retail sales, Empire Manufacturing, CPI,
housing starts and building permits, Philly Fed and University of Michigan
Consumer Sentiment highlight the week's releases. The US 10-year yield is down
1 basis point at 1.98%.
There's only one buyer
keeping the S&P 500's bull market alive.
The slump in European banks is fading as fast as it came.
Ignored for years, a radical economic theory
is gaining converts.
Hedge funds use satellites to monitor the Chinese economy.
A funny thing happened on the way to the latest round of easing
from the European Central Bank: after a short-lived bout of strength against
the euro, the U.S. dollar weakened. In fact, the ECB’s focus on stimulating
the economy through expanded bond purchases and new bank financing measures,
and President Mario Draghi's barring of further interest rate cuts that would
devalue the euro, has many analysts talking about the end of currency wars and
more. “The end of beggar thy neighbor currency quid-pro-quo,” as Deutsche Bank
analysts put it, “suggests greater stability for the dollar and inflation
expectations.” On that note, this week’s Federal Reserve meeting should be an
interesting one. While almost no one expects the U.S. central bank to raise
rates at this particular gathering, it is possible that a less than resurgent
dollar (and more stable oil prices) could encourage some policy makers to press
for rate hikes soon rather than later.
Source:
Bloomberg, BI, WSJ, FT
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Labels: DailyMarketPrimer, News
posted by Rich Barnett @ 6:50 AM
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