Yet, the valuation has been inflated by a collapse in profits for oil companies. Because analysts expect little in the way of earnings over the next year, but a recovery later, the ratio of price to year-ahead earnings for oil stocks is elevated. The energy sector stands at more than 30 times Thomson Reuters IBES’s estimate of operating earnings over the next 12 months, higher than any time from when the sector data started in 1995 up to last year—when it briefly reached an extreme of almost 60 times.
5.That’s a Ton of Displaced Jobs in 15 Years….Populism?
23 Million People Remain Outside Confines of Labor Force-David Rosenberg.
How would you advise President Trump?
We have 23½ million Americans age 25 to 54 who reside outside the confines of the labor force. It is not that they’re unemployed. They by definition have disengaged from the entire economy, and that number has never been that high. The irony is that we have a record level of job openings. There is a skills mismatch.
So we need a WPA-type program, except with education?
Yes—education, training, skills development, apprenticeship programs. We have to find a way to retool these disenfranchised prime working age folks. Enrollment in universities and colleges is going down, and we do not have nearly enough engineers, scientists, and mathematicians. The No. 1 priority should be redressing the single biggest constraint on the economy outside of the fact that we have excessive debt loads.
As commodity prices stabilize, two developing countries should be winners: Russia and Indonesia.
Among major emerging markets, commodities as a percentage of exports are greatest in Russia, at roughly 70%, followed by Brazil (51%), India (35%), and Indonesia (35%), according to World Trade Organization data provided by Pavilion Global Markets. But India imports half of its commodities and food needs, and the rise in oil prices may weigh on its economy, as will the lingering negative of last fall’s rupee demonetization. And Brazil is still struggling with high interest rates and debt, as it recovers from a deep recession.
But stronger commodity prices should benefit Russia and Indonesia. Driving demand are two factors: The first is China, which could spend close to $800 billion over the next three years on transportation improvements alone. The second is the U.S,, which also is likely to undertake infrastructure projects that will drive commodity consumption.
Exports from emerging markets have risen over the past six months, helping to boost foreign currency reserves in half of them, says François Boutin-Dufresne, a global strategist at Pavilion, an independent research and brokerage firm in Montreal. He’s bullish on buying the MSCI Emerging Markets Index over the next three to six months. The iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM) is up 11% this year.
8.5% Rally From Here Would Make Us Second Strongest Bull of All Time
Feb 24, 2017
When it comes to rankings, a “ten” is typically considered as good as it gets. In many sports, a “ten” is considered the best possible score. In 1976, Nadia Comaneci was the first gymnast to ever score a perfect ten when she was flawless on the uneven bars. Then, in 1979, Bo Derek also taught us that a ten was perfect.
In 1984, the “perfect ten” was one-upped when ‘guitarist’ Nigel Tufnel from Spinal Tap introduced the world to amps that had a volume control that topped out at eleven. His reasoning was that every once in awhile there are those times where you have the volume up to ten and everything is going great but there is nowhere else to go from there. To solve the problem Tufnel tells the interviewer (played by Rob Reiner) that his amps go to eleven for those times when the band needs the “extra push off the cliff.”
This week, the DJIA was more than perfect, and like the amps from Spinal Tap, it pulled an eleven. And it did so in dramatic fashion, as the only time that the DJIA traded in positive territory was in the final seconds of the trading day. So where do we go from here?
Along with the DJIA this week, all of the major averages hit new bull market and all-time highs, as one of the most unloved bull markets of all time continues to chug along. For the S&P 500, the current bull ranks as the second longest and third strongest of all time. While it will be some time before the current bull makes a run for the top spot in either category, in strength terms, a gain of 5% from here will put the current bull into second all-time as well.
After reading Alan Greenspan’s book, I was shocked how much the FED monitored the financial press, but I am even more surprised that they are watching the VIX.
The Fed is worried about a key measure in the stock market
Frank ChaparroJanet L. Yellen, Chair, Board of Governors of the Federal Reserve System, looks over her notes as she testifies before the United States Senate Committee on Banking, Housing, & Urban Affairs on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, DC on Tuesday, February 14, 2017.AP
The Federal Reserve said January 22 it is worried about the “low level of implied volatility in equity markets”
The VIX, a gauge of market fearfulness, has been bouncing around at historic lows
That seems at odds with the “considerable uncertainty” the Fed expects in US policy
The Federal Reserve is worried that the stock market might be showing signs of complacency.
That uncertainty doesn’t seem to be showing up in the stock market, however. The Chicago Board Options Exchange volatility index, which gauges investor anxiety (technically, implied expectations for volatility in the stock market) and is widely known as the VIX index, has been trending down.
The Fed minutes said: “They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.”
What is implied volatility, and why is it so low?
The VIX is commonly read as a gauge of market fearfulness, and measures the market’s expectation of volatility implicit in the price of options on the Standard & Poor’s 500.
One way to think of it is like the cost of an insurance policy. When the market is expected to be volatile, there are more buyers of insurance, and so the cost of that insurance rises. When the market is relaxed, nobody’s interested in buying insurance against a wild swing, so the protection offered by options is inexpensive.
Lately, the VIX has barely been moving, only breaking 20 on a handful of occasions, and generally trending below 13.
10.Mark Cuban…Next Job Growth will be About Interpreting the Data.
After Job Skill
The billionaire investor predicts one crushing reality of automation.
Now his latest prediction about the future of jobs is picking up steam. In a recent interview with Cory Johnson on Bloomberg TV, Cuban presented an interesting argument against people pursuing so-hot-right-now computer science degrees or attending learn-to-code bootcamps.
“What looks like a great job graduating from college today may be not be a great job graduating from college five years or 10 years from now,” Cuban said.
He predicts the next wave of innovation will be “the automation of automation.” By that, Cuban means software will soon begin writing itself, which will ultimately eliminate those lucrative software development jobs. About writing software, Cuban said: “It’s just math, right?” Humans will no longer be needed.
Though it’s ironic, Cuban believes technology will eventually kill tech jobs themselves. “There are no manufacturing jobs coming back. There are no coal mining jobs coming back,” Cuban said. He thinks software development jobs are next on the chopping block.
The next most in-demand job skill
If Cuban’s prediction does indeed come true, with the need for coders, developers, and engineers eventually evaporating, what sort of workers will be in demand? Those who can make sense of the data that automation is spitting out. No, not data scientists. Cuban believes employers will soon be on the hunt for candidates who excel at creative and critical thinking.
“I personally think there’s going to be a greater demand in 10 years for liberal arts majors than for programming majors and maybe even engineering,” Cuban said. He cited degrees such as English, philosophy, and foreign languages as being the most valuable. “Maybe not now,” Cuban acquiesced. “They’re gonna starve for awhile.” Their day, though, is likely coming, he says.
Cuban went on to voice his support for programs such as AmeriCorps, which engage young people in public service work across the United States. “Having people come in and have a social impact and making it a real job is what we’re gonna need.”
1.$28 Trillion in Debt is Based Off Libor….The Rate has been Moving Up Since July 2016
BREAKING DOWN ‘LIBOR’
LIBOR (or ICE LIBOR) is the world’s most widely-used benchmark for short-term interest rates. It serves as the primary indicator for the average rate at which banks that contribute to the determination of LIBOR may obtain short-term loans in the London interbank market. Currently there are 11 to 18 contributor banks for five major currencies (US$, EUR, GBP, JPY, CHF), giving rates for seven different maturities. A total of 35 rates are posted every business day (number of currencies x number of different maturities) with the 3-month U.S. dollar rate being the most common one (usually referred to as the “current LIBOR rate”).
1.Low Liquidity Among Hedge Funds and Holding the Same Names Like Never Before
(Bloomberg) — There’s safety in numbers. Until a stampede starts.
That’s the theory underlying a study of hedge fund holdings by Novus Partners Inc., which sought to calculate how easily the market could absorb concerted selling by large money managers. Using an analysis that turns mainly on how much volume is occurring in stocks favored by professional speculators, Novus says liquidity is at an all-time low.
3.BHP +121% Off 2016 Lows…Commodities Tell? Global Growth Tell?
Buoyed by a resurgence in commodity prices, BHP Billiton (NYSE:BHP) swung back into the black during the fiscal first half of 2017, posting a net profit of $3.2B, compared with a loss of $5.7B in the same period a year earlier. The company said it would also raise its interim dividend to $0.40, up from $0.16, on the back of the uptick in earnings. BHP +1% premarket. www.seekingalpha.com
4.VIX in Bottom Decile is not that Dangerous…When VIX gets in Top Decile “Buy”
They say you should never short a dull market –>”when the VIX is in the bottom decile of historical readings, as it is now, the S&P 500’s forward returns are a hair below average but still solidly positive (1.2% in one month, 5.7% in six months and 10.5% in 12 months.) He also concludes it’s even more foolish to short a wild market: when the VIX is in its top decile, returns over the next year are a whopping 24% “
From Dave Lutz at Jones.
5.More Volatility Comments…Here’s What Volatility Reveals About This ‘Expensive’ U.S. Stock Market
The big money in markets is often made by seeing what others don’t. It’s about resisting the gravitational pull of consensus, treading lightly where consensus is right, while spotting subtleties where the herd might be wrong.
Where Consensus Could Be Wrong: Volatility
One subtlety we’ve been watching recently is volatility. Volatility, of course, is the measurement of the daily market fluctuations. In times of fear, the volatility of an asset rises. In times of buoyancy, all is well. The market simply floats higher and volatility falls.
We have a nuanced view of volatility here at Hedgeye. Conceptually, there are two types of volatility we’re looking at, realized volatility (i.e. the volatility of an asset historically) and implied volatility (i.e. investors’ expectations of future volatility that’s embedded in options markets).
These volatility readings are painting a clear picture for investors today. As the stock market continues to make all-time highs, historical or realized volatility is falling to cycle lows. Meanwhile, fearful traders expect rising future volatility in the stock market and are buying downside protection in options markets to stave off the pain of an impending correction.
The Chart of the Day below from today’s Early Look is a visual representation of precisely that. The S&P 500 implied volatility premium on a 30-day basis is 52.2%. That’s a fancy way of saying investors are fearful of downside risks as historical volatility continues to fall. Note: A premium this high in the stratosphere hasn’t been hit since before Election Day.
Where Do We Go From Here?
#Economy #RetailSales #Inflation
Investors must put this volatility measure in the context of where we’re at in the economic cycle. Unsurprisingly, U.S. economic growth and inflation drive financial market returns. We believe both growth and inflation are accelerating.
With this positive backdrop, we think equity markets can head higher from here. In other words, investors betting on significant future downside will get squeezed out of those positions.
It might actually be more risky piling into sectors like Consumer Staples (XLP) and Utilities (XLU), which are typically equity exposures investors buy when future downside is expected. In these sectors, implied volatility premiums are infinitesimal, 0.3% for Consumer Staples and 4.8% for Utilities. Implied volatility premiums this low suggest investor complacency.
The prevailing market trends say stick with U.S. equities here.
6.Auto Loan Delinquency Up But Not Big Enough to Move Macro Needle.
I’m getting questions from clients asking if the recent increase in subprime auto loan delinquency rates is a problem. Delinquency rates for people with credit scores lower than 620 have moved higher but for households with credit scores above 620 delinquency rates are moving sideways, see the first chart below. Also, while subprime auto loan origination has increased to 2006 levels we have seen an even bigger increase in origination and amount outstanding for prime borrowers, see the second and third chart. Finally, it is important to remember that total household net worth currently stands at $90 trillion, and in that perspective, total outstanding subprime auto loans at less than $300bn seems very small. The 2006 subprime mortgage market was much bigger than today’s subprime auto loan market, and there was much more leverage in the financial system in 2006 compared with today. The bottom line is that the increase in delinquency rates for subprime auto loans may be a worry for those holding the debt, but it is not a problem for the macro economy.
Let us know if you would like to add a colleague to this distribution list.
Torsten Sløk, Ph.D. Chief International Economist Managing Director Deutsche Bank Securities 60 Wall Street New York, New York 10005 Tel: 212 250 2155
7.Rents Slowing Down…Banks Pulling Back on Apartment Lending.
Banks Retreat From Apartment Market
A pullback in lending is forcing builders to scramble for financing to finish projects; ‘I haven’t seen anything this seismically different since 2008’
New apartment construction is seen underway in St. Petersburg, Fla. Photo: Scott Keeler/Tampa Bay Times/Zuma Press
The Wall Street JournalThe apartment sector, which contributes some $284 billion to the economy annually, has been a winning bet for investors since the housing crash, as the economy recovered and more renters sought out units. Since 2010, average U.S. apartment rents have increased by 26%, according to data tracker MPF Research, a division of RealPage.“Our business has radically changed,” said Toby Bozzuto, president and chief executive of the Bozzuto Group, which owns or manages 59,000 apartments in cities across the U.S. “I haven’t seen anything this seismically different since 2008, when credit dried up.”
Now banks are in retreat, forcing developers to look to nontraditional lenders and seek more expensive types of financing to complete projects, said apartment executives, industry analysts, mortgage brokers and bankers.
“We had fairly robust growth in our construction, real estate construction book, and that’s slowing now,” said P.W. Parker, chief risk officer of Minneapolis-based U.S. Bancorp, during an earnings call last month. “Multifamily is an area that, if you look at the forecasts, there are forecasts pretty broad-based of potential rent declines in a lot of the major cities. So we’re being more cautious there.
8.The amount Americans threw away on lottery tickets was $7.4 billion more than what was spent on all other forms of entertainment combined.
New York Times bestselling author, Washington Post columnist, higher education strategist, LinkedIn Top 10 Influencer
In the last few weeks I attended several higher education conferences where the talk among campus officials in the hallways and in sessions was usually centered around the same topic: President Trump. What’s clear in these conversations is that the much-discussed education divide that separated the electorate last fall between those with a college degree and those without has not dissipated since the election.
But the disdain academics exhibit for Trump these days ignores the role that their own colleges and universities played over the past two decades in fueling the working-class anger that led to his 2016 victory.
The story begins in the 1990s, when a college degree became increasingly necessary for economic success. The manufacturing sector, with its middle-class jobs requiring only a high-school diploma, had mostly collapsed the previous decade.
This shift in the economy coincided with a sea change in college admissions. The ease of travel and declining cost of communications meant that admissions was no longer a local game where even selective colleges with large endowments and strong brand names recruited mostly in surrounding states. When the U.S. News & World Report rankings became an annual publication in the late 1980s, colleges jockeyed to move up the rankings in order to gain prestige. To do that, they had to find better students outside their usual recruitment zone. And for schools a few rungs down the rankings ladder, it required luring top-notch students with boatloads of financial aid—even if their families didn’t need the money to send their kids to college.
Access to higher education for students at all income levels, which had been prevailing policy since the signing of the Higher Education Act in 1965, was shoved aside. In the drive for prestige, selective colleges in particular became less economically diverse, full of wealthy students and a few smart kids lucky to get a Pell grant (which mostly go to students from families making less than $50,000 annually). In 2013-14, only 22 percent of students received Pell grants at top universities, compared to around 38 percent everywhere else. Students on Pell grants tend to be clustered at less-selective public and private colleges, and poor-performing for-profit colleges.
Pell Grants by undergraduate enrollment, 2014
Source: Arizona State University
This economic disparity is well known in higher education, but the extent of it became clear last month when researchers released the most comprehensive look to date at the financial background of students on college campuses. The results of the study—gleaned from analyzing the tax records of some 30 million students born between 1980 and 1991 and linked to nearly every college in the country—were startling.
At 38 colleges, including five in the Ivy League, there are more students from families in the top 1 percent in income than the bottom 60 percent. What’s more, about 25 percent of the richest students attend a selective, elite college. By comparison, less than one-half of 1 percent of children from the bottom fifth of U.S. families by income attend an elite college.
Where today’s 25-year-olds attended college, based on parents’ income
Source: New York Times
As the economic divide grew ever wider among students on campuses over the last two decades, countless students graduated from college without the benefit of ever really knowing classmates from working-class families. Some of them then came to Washington to work on Capitol Hill, in the White House and in federal agencies to develop policies that would impact people without a college degree. They had little idea what it was like to lack a credential that carried so much weight in the job market.
Instead of being shocked by Trump’s win, higher education leaders should look internally at their own strategies that focused on gaining prestige and often exacerbated the growing economic divide by favoring students from wealthy and middle-class families.
This effort is a good start to reverse the trends of the last two decades, but it might be too little, too late. Higher education lost an entire generation of students who will become leaders in the future and missed out on an opportunity to have an undergraduate experience full of students from different economic backgrounds.
What could the sport of running teach us about the secrets of self-leadership and reaching our business finish lines?
I’ve been a fan of Dean Karnazes ever since I read his book Ultramarathon Man several years ago, so I eagerly devoured his newest, The Road to Sparta, which tells the story of history’s first-ever marathon.
Some of us know the popular version of the story, where after the Athenians defeated Persian invaders at the battle of Marathon 490 B.C., a messenger ran 26 miles to share the exciting news.
But Karnazes shares the real story, where the runner, whose name was Pheidippides, actually ran more than 150 miles all the way from Athens to Sparta, then back again, before the battle.
That’s 300 miles.
Why would a person willingly go through something like that?
“Western culture has things a little backwards right now,” Karnazes said. “We equate comfort with happiness. And now we’re so comfortable we’re miserable. There’s no struggle in our lives.”
That observation doesn’t just apply to running. That applies to all of life, including leading our organizations. When it comes to work, comfort equals boredom.
Engagement and even happiness come when we’re gunning toward major goals. I’m talking about the kind of achievements that push us outside our comfort zone.
Maybe it’s launching a new product line, starting a new career, or growing a sales channel by double digits. If staring down the goal makes you feel uneasy, you’re on the right track.
This ‘Discomfort Advantage’ is only one of the lessons running can teach us. Here are three leadership takeaways I discovered when I read The Road to Sparta:
Leverage your unique abilities.
When Karnazes was a child, he went to a basketball camp coached by the legendary John Wooden. A small kid, Karnazes struggled to get rebounds like the bigger children. But Wooden could see his spirit and gave him some advice: “Do what you can.” Instead of going for rebounds, he started playing the backcourt. And he dominated.
When we compete head-to-head as if our abilities are the same as others, we sometimes miss playing to our strengths. It’s like we tilt the playing field against ourselves. Instead, we need to focus on what makes us unique. Steve Jobs is one of the best examples of this in recent years. Apple played its own game and rose to dominance.
Let passion outrun balance.
We have to be careful that our jobs don’t dominate our lives, but there’s a natural tension in play if we really love what we do. “People speak of finding balance,” says Karnazes. “To me, that’s a misplaced ambition. If you have balance, you do everything okay. … Balance doesn’t lead to happiness—impassioned dedication to one’s life purpose does.”
What else could lead a person to run 153 miles through Greece? What else could lead an entrepreneur to do what the market believes is impossible? Balance is desirable, but it’s not the endgame. Finding and achieving your life’s purpose is.
Celebrate your wins.
When we reach our goals, we need to take the appropriate time to celebrate. That’s a critical way to honor our work. But it’s also a key component of living a full life.
Hosting another run in Greece called the Navarino Challenge, Karnazes was surprised at how the townspeople came out to celebrate the winners. “These people were all willing to put aside what they were doing and join together,” he remembered, “rejoicing in the moment.”
“If we always made decisions with our heads instead of our hearts, we’d probably live much more orderly lives,” he says, “but they would much less joyous. … How many people spend their entire lives striving for something with their nose to the grindstone, only to wake up one day and realize they haven’t really lived at all?”
Trade on your unique abilities, stay fueled by passion for your work, and take time to celebrate your accomplishments.
Those three takeaways might serve an athlete. But I’m confident they’ll serve leaders even more.
1. Margin debt has increased 193% since the bull market began—the same as the rise from 2002 to 2007.
Michael Belkin called the 2000 market top. Now the publisher of the Belkin Report, an institutional newsletter on asset allocation, and the Belkin Gold Stock Report is waving a warning flag about the level of margin debt on the New York Stock Exchange.
Margin debt is the loans banks and brokerages make to investors, using their stock- and bond-holdings as collateral. In November, it neared an all-time high of $507 billion and has hovered close to that level since. “It’s something that’s hanging over the market,” he says. “The market is addicted to debt.”
There’s precedent for a high level of margin debt foreshadowing a market collapse. It peaked in March 2000, congruent with the market’s March 24 top and subsequent 49% decline. And it peaked again in July 2007, a few months before the market top in October. Another disturbing factor: The percentage rise in margin debt over the latest bull market is 193%, exactly the increase from 2002 to 2007, when the financial crisis began and the Standard & Poor’s 500 index later fell 57%.
The problem with margin debt is that it causes a cascade effect. As the market falls, investors get margin calls on their loans and have to sell stocks to maintain their margin-debt minimum.
Ed Yardeni, president of Yardeni Research, says, “As long as the market is going up, margin debt tends to go up as well.” And margin debt exacerbates a bear market. But Yardeni doesn’t know of any time when margin debt triggered a bear market. That’s a relief.
The NYSE has released new data for margin debt, now available through December. The latest debt level is down 2.2% month-over-month. The current level is 3.5% below its record high set in April 2015. The December data gives us an additional sense of investor behavior during the election rally.
“I want to know healing An American prayer I want to know the meaning Of American prayer I want to believe in American prayer But I can hear children screaming American prayer”
Is Money Moving Again to More Expensive Markets?
It looks like investors are buying expensive markets and selling cheap markets again. In my August post “Gimme Shelter,” I pointed out that money was flowing into an expensive fixed income market and out of a reasonably priced equity market. At the time, I observed that recency bias and negativity bias were leading investors to shift money “under the mattress” into traditionally safe bonds or cash. I cited a Wall Street Journal article reporting that investor demand for bond funds relative to stocks was at the highest level on record. According to the article, investors had poured $202 billion into global bond funds and withdrawn $57 billion from stocks. In just the U.S., China and Japan alone, a stunning $55 trillion was sitting idle in bank deposit accounts that were yielding essentially zero interest. “Never before in history have individual investors been so bearish on stocks when the stock market is at a record high,” I wrote.
Since my August 2016 “Gimme Shelter” article The S&P +6.38% vs. AGG (bond index) -3.69%