Crisis Gauge Rises to Record High as Swaps Avoided – Bloomberg 02-26-14

Salient to Investors:

The spread between the 2-yr China sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, last week reached the widest in Bloomberg data going back to 2007.

George Soros and Bill Gross have drawn parallels between the situation in China and that in the US before the 2008 financial crisis. Nomura said Li’s efforts to curb leverage by driving up borrowing costs need to be handled carefully to avoid wrecking confidence in the financial system.

Patrick Perret-Green at ANZ Banking sees increasing parallels between China and the US in the run-up to the global financial crisis – Shibor-repo is similar to Libor-OIS, shadow banking is subprime, credit spreads are widening as they did in 2007, and money growth is softening as tightening bites.

Wee-Khoon Chong at Nomura said there is a big flight to quality: in times of stress, you sell credits, sell longer-dated bonds into shorter ones and you are going to the government bond market. Chong said if the default situation gets out of control, yields are going to fall a lot, and forecasts the central bank will cut reserve-requirement ratios for lenders to 19 percent this year from 20 percent as higher borrowing costs cool economic growth.

Bin Gao at Bank of America Merrill Lynch said a consistent rally in sovereign debt will be more likely if we see more defaults in shadow banking or credit products, which will lead to flight-to-quality flows and likely PBOC easing.

Yii Hui Wong at BNP Paribas said increased money-market turmoil and the outlook for slowing growth are serving as catalysts for a rally in government bonds as banks increase buying – the rise in the short-end will spread to 5-yr notes. Wong said offshore investors take a longer-term view, and do not feel that the government cannot handle the situation because it is still a very controlled economy. Wong said government bonds at these levels are very attractive.

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CGM’s Heebner Bets Against Apple Shares as Institutions Cut – Bloomberg 02-26-14

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Kenneth Heebner at CGM Focus Fund shorted Apple during Q4 2013.

Morgan Stanley said institutional ownership of Apple shares has been declining as funds question the company’s ability to increase revenue long-term – the 30 largest stockholders own a record low 30 percent of shares outstanding, versus the peak of 40 percent in 2009.

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Foreclosures Surging in New York-New Jersey Market – Bloomberg 02-26-14

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The MBA said New Jersey has surpassed Florida in having the highest share of residential mortgages that are seriously delinquent or in foreclosure, with New York third, whereas hard-hit areas such as Arizona and California have some of the lowest levels after allowing banks to quickly foreclose after the 2007 property crash.

Michael Fratantoni at MBA said loans made pre-crisis have been in a state of suspended animation for a number of years and we are beginning to see the pace of resolution pick up.

RealtyTrac data show it takes 1,029 days on average to foreclose in New York, the highest in the US, followed by New Jersey at 999 days and Florida, at 944 days.

Lawrence Yun at NAR said price increases that are occurring in the rest of the country are not likely to happen in the New York-New Jersey area, with the potential inventory that can come at any time.

Private-equity firms such as Blackstone, which helped drive up prices by buying single-family homes to rent in Arizona, Nevada, California and Florida, have avoided the Northeast. Sam Khater at CoreLogic said large investors favor markets with newer construction and demographic growth rather than the Northeast’s aging homes and higher property taxes.

Jeff Taylor at Digital Risk said the sooner that this foreclosure inventory gets to the market the quicker you’re going to see more home price appreciation.

Jeffrey Otteau at Otteau Valuation said investors are generally avoiding hard-hit neighborhoods in cities such as Newark, Irvington, Elizabeth, Trenton and Camden, and 21 percent of New Jersey foreclosures are in urban areas, 18 percent are in towns hit by Sandy, and only 4 percent are in the southern suburbs and 2.5 percent in the northern ones. Otteau said the crisis will play out in inner, urban neighborhoods where unemployment is highest, credit scores are lowest and investor appetite is non-existent.

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Rail Stocks to Lag Behind Earnings as U.S. GDP Help Fades: EcoPulse – Bloomberg 02-25-14

Salient to Investors:

John Larkin at Stifel Nicolaus said:

  • Railroad stocks are overvalued at 10.9 times enterprise value to EBITD on a trailing 12-month basis versus an average of 9.4 since 1993. The biggest gains are behind them.
  • Their cyclical earnings power will diminish, especially in a mediocre economic environment, and has no buy recommendations on companies in the index.
  • The margin boost rail operators enjoyed from re-pricing their legacy contracts has run its course, making it more difficult to surprise investors, while coal volumes have been weak – hurting profitability in a permanent way.
  • In-line performance relative to the market since 2012 coincides with the decline in coal volumes.

The S&P Supercomposite Railroads Index has beaten the S&P 500 Index by 2.9 percent over the last 12 months after being ahead by almost 500 percent since 2000.

Robbert Van Batenburg at Newedge said:

  • The strength of rail stocks earlier in the economic recovery that began in mid-2009 relative to the broader market showed investors were betting on accelerating GDP, but with the Fed tapering being overweight the group is no longer as viable.
  • Rail stocks need better-than-forecast economic growth to resume their outperformance of  the market on a longer-term basis.
  • The economy won’t expand at a rate that causes the volume of cyclical shipments to rise much beyond the current level.
  • The decline in car purchases means slower earnings growth for railroads, which transport large volumes of them.
  • Any boost to stock performance from a pick-up in weather-related coal volumes will be temporary.
  • The slowing Chinese economy is a potentially serious problem because many commodity exports are transported by rail.
  • Approval of the Keystone XL pipeline would further diminish the volume of rail-shipped commodities and hurt rail companies’ performance.

Andrew Burkly at Oppenheimer said railroad stocks offer a domestic play on the US economy, though are not universally attractive.

Jeffrey Kleintop at LPL Financial is still positive on the group, particularly in the midst of this unusually harsh winter, as railroads could see a reversal of years of declining coal shipments as stockpiles are depleted and the price of natural gas rises amid colder-than-normal weather.

The median economist expects Q1 GDP to rise at an annual pace of 2.2 percent versus an annualized gain of 3.2 percent Q4 2013 and 4.1 percent in Q3 2013.

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Gold to Coffee Drive Bullish Bets to 17-Month High – Bloomberg 02-25-14

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Hedge funds’ net-long positions of 18 US-traded commodities rose 18 percent last week to the highest since September 2012. Investors tripled the net-long position in arabica coffee this month to the most bullish since May 2011

Barclays said weather is the big driver of commodities.

EPFR Global data show commodity funds are headed for the first monthly inflows since September 2013.

Brazil is having its weakest rainy season in decades, just when moisture is needed the most for coffee tree roots to absorb soil nutrients.

Rabobank Intl said yields and quality for arabica beans will be constrained during this season and the next, and prices will be supported by longer-term concern that output will be limited.

Rabobank said soybean production in Brazil and Argentina is still projected to climb 10 percent, even with the dry weather. The USDA said corn and soybean harvests in the US in 2014 will be the biggest ever, meaning an increase in stockpiles before 2015’s harvest.

Dan Cekander at Newedge USA said grain fundamentals themselves do not suggest a bull story – not without a significant Northern Hemisphere problem in 2014.

Goldman Sachs said the S&P GSCI Enhanced Commodity Index will fall 4.3 percent in the next 12 months, agriculture will decline 9 percent, and precious metals will fall 14 percent.

Gold bets climbed 31 percent to the highest since October 29.

David Mazza at State Street Bank & Trust said assets in the SPDR Gold Trust are heading for the first monthly inflow since December 2012.

Cameron Brandt at EPFR Global said commodity funds are heading for their first monthly inflows since September.

Mark Luschini at Janney Montgomery Scott said the decline in prices last year has helped re-establish equilibrium between supply and demand, so better growth should pull industrial commodities higher, though we are not back in the middle of a commodities super cycle yet.

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Investors See “No Alternative” to Stocks – Bloomberg 02-24-14

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Strategas Research Partners said stocks are cheap. Of the respective 15-year average, their value in P/E ratio terms is 95%, in enterprise value to cash flow is 85%, in oil terms is 65%, and in gold terms is 58%. Jason Trennert at Strategas said a number of their institutional clients see stocks as an asset class for which there is no alternative thanks to negative real interest rates.

Central banks are effectively paying investors to take risk, while US corporations offer the only real opportunity for growth. Investors say they have no choice but to buy stocks.

G-20 says monetary policy needs to remains accommodative, Britain says it won’t take risks with recovery, and the IMF recommends economic support for the Ukraine.

Technically, stocks remain in a rising channel.

The S&P 500 at 1,836 is below even the lowest year-end target of the 21 strategists tracked by Bloomberg.

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Why Drug Lords and Criminals Are So Risk-Averse – Bloomberg 02-21-14

Salient to Investors:

Convicted felon Sam Antar says stock-picking sets you up as a mark for the unscrupulous because investors live on hope and it is the criminal’s job to take advantage of that hope. Antar said criminals are as short-sighted, if not more so, as the rest of us – nobody ever plans on failure and prisons are full of people who never planned on being there.

The number of FBI white-collar crime prosecutions has fallen by half since the 1990s. 

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Can Facebook make you sad? – BBC Future 02-14-14

Salient to Investors:

  • TS Eliot called TV “a medium of entertainment which permits millions of people to listen to the same joke at the same time, and yet remain lonesome”.
  • Ethan Kross et al at the University of Michigan and the University of Leuven found that Facebook use correlated with a low sense of well-being and that the kind of contact it provides does not make people feel better over time. The researchers found the opposite to be true of face-to-face contact.
  • In 1991, Scott Feld found that a child’s friends almost always had more friends than they did, on average. Nathan Hodas et al at the University of Southern California found this friendship paradox also held true for more than 98% of Twitter users.
  • Young-Ho Eom at University of Toulouse and Hang-Hyun Jo at Aalto University found that wealth and happiness can show the same paradoxical behavior, with a good chance of at least one significantly wealthier or happier person in your social network.

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O’Neill Says Emerging-Market Selloff Creates Buying Opportunity – Bloomberg 02-04-14

Salient to Investors:

Jim O’Neill said:

  • We are closer to a buying opportunity in emerging-market stocks than to joining in the panic.
  • While some places in the emerging world have real problems, to herald an emerging-market crisis is ridiculous. Ukraine, Thailand, Argentina and Turkey have some serious issues.
  • The Fed decision to taper is amplifying the selloff in emerging-market assets. Tapering is more problematic for emerging economics but affects everywhere, but is not to be confused with individual emerging countries having genuine problems.

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Goldman to Fidelity Call for Calm After Global Stock Wipeout – Bloomberg 02-04-14

Salient to Investors:

Catherine Yeung at Fidelity Investment Mgmt is advising calm, adding that profits are rising and shares just got a lot less expensive as being a contrarian and buying when things seem bad is often a good thing.

Goldman Sachs to AMP Capital Investors and JPMorgan Chase are advising clients to hang on.

Kathy Matsui at Goldman did not expect the US weakness, but sees no sufficient reason to change their fundamental earnings outlook and said the market remains attractive. Matsui’s 12-month forecast for the Topix is 1,450. The Topix is at 15 times earnings, close to its lowest valuation in 3 years.

21 strategists predict the S&P 500 will reach 1,956 in 2014.

Vladimir Tsuprov at TKB BNP Paribas said the optimism for Russia is long gone and the only surprise was how quickly the ruble had declined in January.

Nicola Marinelli at Sturgeon Capital said we have become addicted to having one decent month after another, but looking at 2011 and 2008, this correction is simply one of thousands – there is not a feeling of panic.

David Kelly at JPMorgan Funds said short-term forces in the US point to continued growth in all major categories of demand, while the long-term emerging market growth story remains intact Kelly said very low domestic interest rates for investors holding the vast majority of global financial assets should continue to pull money away from fixed income and towards equities.

Citicgoup said inflation-adjusted interest rates are still too low in developing nations to predict an end to the retreat in currencies.

Tim Schroeders at Pengana Capital said stock markets are vulnerable to a further correction that could surprise some people and sending the Nikkei 225 down as much as 25 percent from the peak.

Almost 200 stocks in the S&P 500 traded below their 200-day moving average yesterday, more than any time in 2013.

Investors are pulling money from emerging market ETFs at the fastest rate on record.

Losses among commodities have been less than equities. Bjarne Schieldrop at SEB said everyone and their grandmother have rolled into equities as they continued to get higher day by day, while there are not so many heading for the door in commodities when things look less optimistic.

The IMF predicts the global economy will grow 3.7 percent in 2014. Japan, Europe and the US are forecast to expand together for the first time since 2010.

The outlook for global earnings remains robust. Earnings for the MSCI All-Country World Index are forecast to increase 17 percent in 2014 and 11 percent in 2015 and 2016.

Nader Naeimi at AMP Capital Investors says people bailing now may regret it – the fear coming back into the market is good from a contrarian perspective and removes some froth from the market, reduces complacency and creates a buying opportunity.

Karim Bertoni at de Pury Pictet Turrettini said we are in a classic correction and should keep our calm as a 10 percent decline would not be surprising  and is something that happens a couple of times of year.

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