Professional Documents
Culture Documents
2014
Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don't understand this will eventually learn it the hard way. - Morgan Housel
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MACRO VIEW
The Good Fed Chairman Yellen's remarks that the Fed remains short of its employment and inflation targets created a feeling that the Fed might taper a bit more slowly Auto sales are strong ISM manufacturing and service are in expansion territory The market expects Beijing to launch a series of policy measures to stabilize growth and stop the loss of momentum in its economy. The Bad Earnings warnings are at record highs Inflation in Eurozone lowest since November 2009 Junk bond issuance is reaching record highs, while both the yields and the quality of the debt issued have never been lower. China's growth is slowing Delaying the rebalancing process in China, thanks to countercyclical policy of support to growth, increases hard landing risks in years to come Ukraine situation remains a big concern
The Ugly Continued weakness in China's economic numbers could offset economic gains in the U.S. and elsewhere
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US Employment
Last employment data have changed nothing to the global picture: Since 2011, job gains have been oscillating around 200K per month. This is too tight to drive real GDP above the 2-3% range
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US Employment
US employment is experiencing a secular change The employment-population ratio (ratio of the number of employed people to the total civilian population age 16+) is under 59%, a level similar to that of the one-income household period in the early 1980s At 63%, he labor force participation rate (the number of people who are either employed or are actively looking for work, as a percentage of working-age persons) is back to the 70s level, just before the massive entrance of women in the labor force.
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US Employment
We see another major shift on the employment front: The post-recession duration of unemployment has remained very high at 35 weeks
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Household Income
An upward trend is clearly evident in real median household income since mid 2011 However, real household incomes remain in worse shape than they were at last recession end. In real terms, median household income almost never exceeded the purchasing power of 2000!
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US PMI
ISM Manufacturing Index has now regained a part of the decline it saw from Nov. 13 to Jan. 14 (dropping from 57.0 to 51.3) Internals showed strength in new orders and employment
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Factory Orders
The factory orders estimates for February were among the worst of this cycle The last 2 years trend in factory orders does not point to any sustainable growth. We are back to levels last seen during the first phase of the GFC
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Housing
Residential construction is clearly recovering. Construction spending has increased by around 50% over the last 3 years
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US GDP
GDP ex-inventory draws an ugly picture of the US economy According to Alhambra IP, we are experiencing the longest period of low non-inventory growth outside of recession times since 1967
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EM Growth
EM manufacturing is underperforming. Growth remains weaker in EM
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Chinas Growth
Chinas growth is slowing China's Markit Purchasing Managers' Index (PMI) dropped from 48.5 in March to 48.1 in February, an eight-month low The official M-PMI shows 2 disturbing points: the orders index was low at only 50 the employment index remained in recession territories for near 2 years
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Fund Flows
In EM, and after months (21 straight weeks) of outflows, this last week saw a light inflow. Within DM equity funds, inflows continue for the 39th week in a row into Western European funds.
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EQUITY
Nothing new since our last update. Markets are back to their highsThe LT structure for the S&P500 still looks very bullish. Stocks are seen as the only asset class offering significant returns. But, markets defensive attitude points to a possible correction Stocks are already discounting a benign environment and should go through a consolidation phase, unless a true growth surprise emerges Poor earnings revisions and rising bond yields are the headwinds we should care about. In our March report, we have been for a replay of the Jul/Aug 2013 episode with a pull back to the Jan. 15th high at 1,851 and even a break of this resistance. But the S&P500 stopped its downside around 1850. A clear break below 1850 would change the picture We continue to think that any further upside on the S&P 500 should be driven by profit growth rather than P/E expansion
Bottom line : We remain Neutral equities. We keep our UW on (deflationary) Europe and EM vs. US and Japan We keep our bias to defensive high-yielding stocks. A severe unwind appears to be underway in high-beta areas like Biotech and Social Media.
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Stock market breadth is declining Markets appears to be driven higher by fewer and fewer stocks. Usually, this is the signature of a major market top. Unlike the previous rallies where participation approached 90%, less than 75% of stocks are above their 200 day MA.
Stocks are on the high side of fair value at this point but not into bubble territory yet.
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Earnings
S&P500 reported earnings for the trailing twelve months (TTM) show an upward sloping structure
But earnings have continued to be revised down with the exception of Japan.
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Earnings
According to John Butters, senior earnings analyst at FactSet, 93 out of the 111 companies in the S&P 500 that have issued an earnings outlook for the first quarter have guided below consensus estimate. This is the second highest level of negative guidance ever recorded (since 2006)
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Profit Margins
Corporate profit margins are at all-time highs Corporate profitability depends on its negotiating power in the labor market and its interest expenses An improving labor market and rising interest rates will have a negative effect on corporate profits and, in turn, on corporate valuations. But the timing is harder to assess
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Equity Valuation
The gap between dividend yields and real bond yields remains high, supporting the relative valuation of equities
The valuation gap between equity and fixed income is still balanced
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S&P500 vs EPS
The great re-rating of stocks over the last two to three years allowed the S&P500 to catch its EPS No further re-rating should be expected For stocks to rise further, we absolutely need progress on the earnings front.
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S&P500 vs USTs
The S&P500 and UST yields moved higher in sync as long as growth expectations were good. Divergence was driven by disappointing US data The S&P 500 has rebounded with the data, rates have lagged
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Investor Sentiment
Citis News Implied Sentiment Indicator (NISI) aims to capture investor sentiment via the number of news stories on Bloomberg containing the keywords Bullish / Bearish. The index appears to be correlated to the detrended S&P500 NISI seems near a turning point. The S&P500 should follow
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EM Equities
EM stocks look linked to growth stabilization / rebound in China, and should benefit from the countercyclical policy of Chinese authorities. So far, EM equities are priced for weak Chinese growth
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EM Equities
EM stocks show an attractive valuation: MSCI Emerging Markets Indexs price-to-book ratio is below 1.5 MSCI EM is 30% cheaper than the MSCI World Index. This is the biggest discount in a decade
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Risk Aversion
At -0.32, the RAI remains in neutral territories. The correction is not significant. Equity 6m-momentum is still too high to be sustainable.
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FinLight Research
We keep our short positioning on UST We continue to OW Eurozone vs. US and UK given disinflationary risks in Europe. Within the Eurozone, we stay neutral Peripheral vs Core as we see lasting spread compression to be very limited if any.
We stay neutral on TIPS but go short 5yx5y Eurozone inflation as a hedge against the risk of Eurozone deflation. As a tail hedge, we keep our 10y bund swap spread receiver swap
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In corporate credit, we think that investors become less risk averse and more prone to seeking out risk on the margin. Investors continue to move down in quality in search for higher returns. The search-for-yield is likely to remain strong and may push spreads a bit tighter over the rest of the year. But the risk of a liquidity shock is significant. Given the rising government bond yields, we choose to stay Neutral (but may move to UW very soon) on credit as a whole. Regionally, we are Neutral between the US and Europe. European credit has a much stronger potential for returns but this is mainly due to its much higher exposure to banks and peripheral credit. Main change in our views: On a risk-adjusted basis, we now prefer IG over HY. According to our Fair Value Spread Model, the compensation for risk looks now more attractive for IG (versus HY) where spreads are considerably wider than pre-GFC. We see value in EM external debt compared to US corporate credit, especially on some single names (Brazil, Indonesia) that should benefit from improving macro and rotation out of Russia. Bottom line : Still UW Govies, Neutral credit, neutral TIPS, become UW High Yield vs High Grade
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Peripheral Europe FI
Peripheral Europe sovereign debt is outperforming BBB EM sovereigns. Yield on Spanish debt is at parity with USTs for the first time, the least since October 2007.
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Eurozone Inflation
Deflation threat in the euro area is real. Similarities exist with Japan in the mid-1990s Deflation risk could explain European stocks relative cheapness and bond yields current low level We suggest to go short the EUR 5yx5y inflation as an effective hedge.
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Corporate Credit
According to credit spreads, economic fundamentals appear reasonably healthy Investment grade and high-yield CDS spreads are not very far from their pre-recession lows. The same is true for the spread between high-yield and investment-grade CDS
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Financials Credit
Although HY corporate credit is back at pre-crisis levels, the current level on financials shows that the market is still demanding considerable excess premium to hold them. iTraxx Senior Fins Index seems to price a substantially higher volatility.
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CDS Positioning
DTCC data for net positioning in on-the-run CDS indices show that non-dealer positioning in the US remains net long (selling protection) and reaches new highs this year, driving spreads lower.
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EM External Debt
EM bonds are back in vogue! A record $487 million poured into the worlds largest USD EM bond ETFs An unprecedented flows
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EM External Debt
The divergence between Barclays EM USD aggregate (sovereigns and corporates) Baa rated spread and Barclays US Baa corporate debt spread is at a historical high EM external debt looks attractive compared to US corporate debt.
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EXCHANGE RATES
We keep our view for a stronger USD index in 2014 based on higher US rates and non-US fundamental weakness On the EUR-USD, the pull back to 1.31-1.25 we were waiting for has not materialized. We expect EURUSD to trade sideways in Q2. EUR depreciation requires higher relative real rates abroad. We stay Neutral and wait for a clean break below 1.3688/1.3602 to become UW and target 1.31 - 1.28.
On the USD-JPY, we stay Neutral, watching for signs of a clean break above the area 103.93-104.34 to become OW (and target 105.60 and 106.10) Given fundamental trends, we stay short EM currencies (on countries with the largest current account deficit) vs USD
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Dollar Index
USD Trade Weighted index is expected to continue its rebound from the bottom of its multi-year channel
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Dollar Index
According to CFTC data (FX futures and options), the aggregate USD net positioning is now slightly short and may drive the DXY index down.
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EUR-USD
Yield differential between US and Germany implies a forex in the 1.20 1.25 range
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EUR-USD
The president of the German Central Bank, Jens Weidman stated recently, "For now, there was no need to act, but if the outlook for inflation changed, for example as a result of a stronger euro exchange rate, the ECB could step in, most likely with another interest rate cut, and possibly even QE. Less EU resistance to monetary easing opens the door to increased euro supply. Better growth perspectives in the US vs EU should also favor the US dollar..
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EUR-USD
EUR-USD is reversing back below the downtrend from 2008 high, opening the door to more downside Target ~ 1.31 before 1.28 The picture is not clear enough to become UW again.
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USD-JPY
Fundamentally, we still look for a weaker Yen as further lifting from BOJ is expected to counter the economic deteriorating data We stay Neutral, watching for signs of a clean break above the area 103.93 104.34 to become OW (and target 105.60 and 106.10)
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EM Forex
After the significant adjustment experienced in 2013, EM FX are now very attractive on a valuation basis. Feds tapering effect is already priced in EM currencies.
Source: Barclays * Vulnerable 5 are TRY, ZAR, INR, IDR and BRL; FX value is calculated using Barclays real effective FX rates; the overall score is the average of the z-scores for all 5 currencies from 2004 to present
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COMMODITY
Last month, weve decided to move commodities from OW to UW on the short run. We keep this view. We still see significant downside potential for gold (due to rising real interest rates), copper and iron ore (due to increasing supply), and upside potential for soft commodities (coffee and cocoa) Over the short run, We remain Neutral on Energy. Crude oil prices remain well supported by tight supply in the near term We are Neutral to moderately UW on Agriculture (because of higher supply) except premium coffee and cocoa (where we are OW) We are UW on base metals because of overabundance of supply, especially for copper We stay UW precious metals (targeting 1180-1150 on gold and 17 and then 12.50 on silver) because of rising real interest rates and strengthening of the dollar. Reaching a base will give a buying signal not only on physical gold but also on gold miners. Over the MT, we stay UW copper, despite the strong sell off in copper last week . The downside risk due to increasing supply is too significant to be ignored. We target 6600, and ultimately 6000.
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Commos
A perfect environment for commodities would be a combination of: high inflationary expectations pickup in demand
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Crude Oil
Oil prices remain well supported by tight supply as inventories appear very low.
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Gold
Diminishing fears and stronger macro data should make gold re-converge with commodity prices, probably lower
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CFTC Data
According to CFTC data, WTI longs reached new local highs. On gold, last week data showed some unwinding of the long positions
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Soft Commos
Soft commodities see a strong quarter as weather and lower supplies fuel higher prices.
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ALTERNATIVE INVESTMENTS
We are always OW on AI as we expect a 10% return in the coming year versus 5% on a traditional balanced portfolio (stocks + bonds+ cash). Our remain OW on Commercial Real Estate We are still OW Equity long-short market-neutral, Convertible arbitrage. In spite of their poor performance YTD, we keep our OW on CTAs and Global Macro as a diversifier and tail hedge
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HF Industry
Top performers in Feb. 2014: Event Driven +2.63%, Distressed +2.61%, Equity Long/Short +2.54%, Multi Strategy at +1.62%. Bottom performers: Dedicated Short -4.24%, Equity Market Neutral +0.96%, Fixed Income Arbitrage +1.07%.
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HF Performance
Event Driven and Market Neutral funds performed the best in Q1, up 3.11% and 2.46% respectively, when the S&P500 was up 2.01%.
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HF Positioning
According to BoA regression model, Macros funds: decreased (very marginally) their long exposure to S&P500 and NASDAQ. Increased their long exposure to US Dollar, EM exposure and commodities covered their short exposure to 10y USTs.
HF long positions, as measured by GS Hedge Fund VIP Basket (equity HFs), fell sharply in March
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