MORNING BID – ‘You don’t wanna go long into the weekend’

Aug 8, 2014 12:50 UTC

Get ready for one of those days where people say a lot about not wanting to be “long going into the weekend.” Except perhaps in bond markets, where the rush to government debt intensified with President Obama’s remarks that the US is ready to provide air support through airstrikes against ISIS, which now controls a big swath of Syria and Northern Iraq. That’s forced a big move into U.S. and German yields, among other things, which is undermining some of the recent strength in the dollar as well. (That’s not to say it’s a strong-euro move, more of a weak-dollar move, given the declines in the dollar against the yen as well.)

What’s striking here about the rallies in U.S. debt and German debt is that even though there’s a substantial safe-haven bid behind both markets, the difference is the German 2/10 spread has narrowed from about 1.73 percentage points to 1.04 percentage points since the beginning of the year thanks to a big move in the 10-year, a bull “flattening” trade that reflects ongoing concerns about economic growth in Germany, and more broadly, in Europe.

The United States has also seen a flattening as well, and also about 60 basis points, from 2.59 percentage points to 1.97 percentage points. There’s a slight rise in the two-year note embedded in this move, though, and while the 60-basis-point move in the US 2/10 isn’t as big as the 70-bp move in Germany, it’s still significant.

The US yield curve remains relatively steep.

The US yield curve remains relatively steep.

The difference is that the difference of two percentage points is still closer to the historic norm that suggests a stronger economic outlook. Short-dated rates are of course being held back by the Fed and ECB, but that’s becoming less so on the U.S. side of the equation. Either way, the move below 2.40 percent and the big increase in central bank custody holdings ($28 billion this week) supports the idea that there are growing worries, mostly of a global political nature, that are affecting markets right now that’s likely to persist in a vacuum where earnings season is winding down and economic figures have been relatively consistent.

So where might the market go next? Analysts at CRT Capital see the likely strongest performance in the 5-7 year area, in part because next week’s supply of 3s, 10s and 30-year bonds will likely imply a concession in those maturities that will keep a bit of a lid on the strength there.

However, CRT suggests that the 10-year yield would find support at about 2.55 percent (if it ever gets that high again) and likely resistance around 2.35 percent. Watch for the weekly CFTC data late in the day as well – short positions in the 10-year have been steadily worked off (or beaten out of those stubborn enough to keep those positions on) to a point where net shorts were nearly even last week at short 5,800 contracts, smallest since a long position in July 2013. If all of that is worked out that short-covering may finally have run its course.

The stock market is an odder duck right now. Futures are higher, having rebounded from big post-Iraq-worry losses during the night, but it’s hard to imagine any kind of buying power taking the market all that much higher on a Friday and uncertain situations in Ukraine, Israel/Gaza and Iraq/Syria. The total revenue of U.S. companies to most of those areas is very, very small, but at times like this that’s not the calculus investors are using.

MORNING BID – On GDP, the Fed, Argentina, and lots of other things

Jul 30, 2014 13:45 UTC

To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.

Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.

The good data overall has given the dollar a jolt, continuing a strong run for the U.S. currency that strategists believe will be maintained for some time now. The euro hit a low of $1.3369 overnight and is at levels not seen since November, and the dollar is at one-month highs against the yen.

The dollar in coming days and months clearly will hinge on data and how the Federal Reserve and bond yields react to it, particularly when you see the differential between U.S. and European rates. Spain’s 10-year note yield dropped through the U.S. rate as of yesterday, and Germany’s annual inflation slowed to a 0.8 percent rate of growth, which should keep the lid on the euro. Net short positions in the euro have been increasing, with nearly 89,000 in short positions among speculators as of last week, according to CFTC data, while dollar/yen short positions are slowly being liquidated, dropping to 53,000 last week from about 82,000 in mid-June.

That’s a notable shift, and similar things are happening in sterling; Marc Chandler of Brown Brothers Harriman said this morning that the dollar is “turning,” with the next technical breach on the euro coming around $1.3325, and he says it could fall to $1.3230. Again, the attractiveness of the U.S. dollar when weighed against super-low European yields should keep some funds coming into Treasuries, so the lower-for-longer argument persists, and money will keep rushing in as yields become more attractive – the two year note is now at 0.57 percent, highest since May 2011, and the CME Group’s Fed Watch puts odds on a rate increase by April at 42.7 percent today versus 38.8 percent yesterday.

Money is also rushing into Argentina’s bonds this morning as the talks continue to head off a default, although that’s a bit of a fuzzy situation. Simply not paying bondholders is the definition of a default, while ISDA’s determinations committee is the one that rings the bell on a default for those holding the $1 billion or so in insurance contracts for those who are holding those things. Talks went through all day on Tuesday, and Wednesday will be the day of more and more and more talks as people keep watching this situation with interest.

Investors who like playing some single-share volatility got their wish with Twitter earnings yesterday. The stock is up more than 20 percent following those results, a relief for those who saw the Netflix, Apple and Google releases all come out and fizzle in terms of big moves in individual shares.

Ryan Vlastelica pointed out in a story yesterday that it looks like investors are still expecting bigger moves in Expedia, Tesla Motors, 3D Systems and others, just because while harvesting, or selling, volatility is ok in a market as steady and dull as this one, when it comes to high-growth shares with much of their value wrapped up in their future growth, one never knows. Twitter ranks in Starmine’s bottom decile when it comes to its enterprise value-to-sales ratio and other ratios, so it’s a big bet on growth.

MORNING BID – Tango de la default

Jul 29, 2014 13:00 UTC

Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.

First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.

The spot rate is about 8.1 pesos to the dollar – its two-decade chart looks like a double-black diamond ski run – while the black-market rate is more like 12 pesos to the dollar. Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option. As Hugh Bronstein noted in a June story, Argentina is also a big soybean exporter – third in the world – and farmers there plan on hoarding the product in case of a default. The cost of immediate soybean exports from Argentina is up 6.3 percent in the last week or so; similar Brazilian exports are up 5.3 percent, and on the Chicago Board of Trade, soybean futures have risen 4.7 percent.

The peso continues to weaken.

The peso continues to weaken.

The second option, and this one is even less likely, is that the holdouts blink in some way. The holdouts haven’t changed their position in some way, and as Dan Bases points out in a story today, their years-long pursuit of payment on similar obligations in Peru, and the fact that this has been going on for 12 years already, suggests they’ve got some serious staying power (nimble trading is great in some markets; in others, the more important characteristic is extreme stubbornness). It’s still unclear just what the holdouts stand to make out of this, but the $1.33 billion-plus-interest judgment in their favor has the Argentines saying that’s a 1,600 percent return, which isn’t a bad day at the office if it all works out.

The holdouts would also be likely to wait until January when certain clauses that would put Argentina on the hook for a lot more money from other undeclared holdouts and then perhaps any bondholders who did negotiate might want to come back and wrangle again and extend the process. Some legal experts say that this clause isn’t going to be triggered by Argentina being forced into paying the holdouts, but try telling the Argentines that. The only recent blow to the holdouts? The hanging judge in this whole thing, Thomas Griesa, allowed the nation to pay certain obligations (or rather, for Citigroup to pay certain obligations on the nation’s behalf) that would have potentially upset a settlement earlier in the year with Repsol – the holdouts argued against this as it cracks the door to other relief somewhere, though of course the odds are pretty thin.

The third scenario, which in some ways seems equally unlikely (we’re starting to think an asteroid will hit the Earth before any other real option), is that there’s some kind of negotiated agreement that allows the exchanged bondholders to say they’re not worried about additional restitution provided they can just get their scheduled coupon payments.

Then, everyone gets paid, there are no additional claims – per what Argentina wants to happen after December 31, 2015 – and the whole thing finally finishes – the hedge funds have their victory, Argentina can claim it didn’t put itself on the hook for any more money than what the judge forced them into paying, and it will all stop there. (And then of course Argentina can sell more bonds in two years or so, because bond markets have shorter memories than people think.)

MORNING BID – Next for Puerto Rico, Argentina and the Fed

Jul 8, 2014 13:02 UTC

The market’s recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.

The answer: yes, but probably by not that much. Jobs growth of 288,000 for June was better than expected, and that 6.1 percent unemployment rate looms large for those who figured the Fed would be ready to start raising rates after at least 6.5 percent was surpassed. So we’re there on that, but as Kristina Hooper of Allianz points out, the wage growth seen hasn’t been terribly strong, and the types of jobs being created – a lot of which are in lower-paying industries like retail – don’t portend the same kind of economic strength that might have been manifest by now in other iterations of U.S. recoveries.

So there was some hoopla on Monday over a prominent economist like Jan Hatzius shifting his “first rate hike date” figure dramatically. In moving from early 2016 to late 2015, he’s really only joining the consensus here on this. With the Fed meeting minutes due out on Wednesday, considerable attention will be paid to how the Fed is now viewing the economic situation, particularly given their penchant for a go-it-slow approach.

High rates are the hallmark of the increasingly bizarre debt situations engulfing both Puerto Rico and Argentina. The two nominally couldn’t be more different – one a sovereign nation that defaulted 12 years ago and yet still has created enough drama to fill a lifetime of Chekhov, the other a commonwealth and a territory of the United States.

The former for years was a no-go zone for anyone who likes their debt holdings boring. The latter was a celebrated gathering place for muni buyers because all of the island’s debt was tax-free, so New Yorkers and Californians alike could jump into the fray there.

What’s notable as well is the way in which there are bifurcations now in both situations.

In Puerto Rico, debt that had been expected to have a quasi-guarantee from the government or the Government Development Bank of Puerto Rico, like its electric company or sewer utility bonds, are now cast adrift. They are floating in the wind and seeing their bond prices drop to somewhere around 35 to 40 cents on the dollar, while the more protected general obligations are trading at something more normal (but still not all that awesome) 80 to 85 cents on the dollar.

The recent passage of a law that lets the corporations “restructure” has now brought in distressed players and hedge funds – kind of the exact people the Argentines found themselves in bed with after their restructuring took place and led to the imbroglio that they’re now involved in. They can’t pay their restructured holders, but send money to the custody bank anyway to seem like they have the intention to pay were it not for a meanie of a judge (nobody has used the word “meanie,” and he’s probably a lovely man who likes dogs and kids). And if they do pay the holdouts too, they open another can of worms, a $15 billion can of worms (their numbers). The latest development is that the Argentines asked a mediator to stay the judge’s ruling, which is kind of their 20th run at this.

Has Puerto Rico created a similar mess here? The Barclays Muni High Yield Index suggests so. Or as Dan Burns, Reuters Americas markets editor, points out, it was up 9.5 percent year-to-date on June 11, and now it’s just up 5.7 percent, with all but 0.2 percentage point of that retracement having taken place since the restructuring laws surprisingly passed about two weeks ago. The stock market has taken notice too, as MBIA Inc, one of the guarantors of Puerto Rico’s “corporation” debt, has seen its stock fall more than 19 percent since the law’s passage on June 25, while Assured Guaranty, considered a bit less exposed, is down 11 percent in that time period.

MORNING BID – Climbing the Wall

Jun 26, 2014 12:56 UTC

Eventually, lack of volatility, rock-bottom rates and this accommodating monetary policy will realize the build-up of excesses that causes some kind of market crack that devastates people – particularly in areas where many do not expect it. But it won’t be today, and investors should continue to ride that so-called Wall of Worry through the 2,000 mark on the S&P 500 before long.

Goldman Sachs strategists note in a piece overnight that volatility is likely to remain lower for longer, but the slowness of the economic expansion and the additional regulations as a result of the financial market crisis of 2008 mean that the buildup of those speculative excesses is happening at a much slower rate. That’s not to say they aren’t out there – Brian Reynolds of Rosenblatt Securities is adamant that we are now in a “runaway bull market,” which of course usually ends in tears for someone, but again, not today.

But back to Goldman: their head of credit strategy, Charlie Himmelberg, notes that bank regulation and other issues have reduced that so-called accelerator, where activity in the economy amplifies risk-taking in credit markets and use of leverage, and vice versa. So that’s adding some drag to the system, which can be seen through, well, the fact that the economy plods along – contracting by a ridiculous 2.9 percent in the first quarter – without any real sign of taking off. Again, there’s merit to this in that it means a recession is far off because we’re so far only about midway through the business cycle, at best.

The emerging signs of additional spending on capex are there, and investors, per Bank of America/Merrill Lynch, are practically begging for more capex – the long-term spending that follows lots of buyback and dividend activity and then after the M&A activity that we’ve seen a lot of in 2014. The company’s global fund manager survey currently shows a net 60% plus that want more capex — and the last 12 months capex growth rate is up to 5.6 percent from 2.2 percent in the previous quarter, so investors are getting what they want.

What that portends, though, is an eventual shift in volatility. That hasn’t happened yet, and some measures, like Credit Suisse’s measure of fear, where they look at the cost of put options versus call options, show a lot of fear – but that’s because the price of calls has collapsed, meaning investors just don’t see a reason to bet on higher markets. They’re not really increasing bets on lower markets – so that’s the ultimate signal of boredom. Which is a merit of sorts.

MORNING BID – Two to Tango

Jun 25, 2014 12:52 UTC

Wednesday’s version of reading tea leaves involves Argentina’s economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina’s debt situation. In case the U.N. missed it, Argentina defaulted a while back – 12 years ago – and they’ve been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There’s a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.

So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it’s the kind of thing that comes down to the July 30 wire – when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he’d have solved this mess a long time ago).

Argentina is worried about being on the hook for as much as $15 billion and not just the $1.33 billion-plus-interest owed to the holdout hedge funds – Moody’s puts the number closer to $7.5 billion, maybe up to $12 billion, per an overnight story from Dan Bases. Neither is a number Argentina wants to deal with, hence their reluctance to participate in any kind of negotiation that amounts to a gun to their heads.

There’s going to be a lot of face-saving going on. Whether the holdouts will get their $1.33 billion is in question – it’s likely to be something less than that, with some kind of provision that allows it to be implemented, perhaps, after the expiration of a deadline at years-end that would obviate the need for the South American nation to consider paying the rest of the bondholders something additional.

Given the need to finance ongoing activities (that is, a recession), time is of the essence. Nobody is going to get entirely what they want – by now the opportunity cost for the hedge funds has to have been significant (they could have hung back and bought a bunch of Greek debt and stakes in Icelandic banks and been done with this), and Kicillof can ill afford to go home and say he caved into the “vultures” that officials blame for the country’s economic strife. So a meeting in New York may not be on the calendar, but one never knows.

MORNING BID – All bonds, all the time

May 29, 2014 14:16 UTC

There’s nothing dull these days about the bond market, which is exhibiting an unforeseen, profound level of strength that’s spread through the various asset classes on the fixed income side, and that continues to remain unexpected for the most part.

As of Wednesday the Barclays US Aggregate Index had notched a year-to-date return of 3.62 percent; the 10-year-plus index was up a crazy 9.39 percent, and the Barclays Intermediate High Yield Index was up 4.05 percent. Looking at one of their competitors, the Bank of America/Merrill Lynch Corporate Index has so far netted a 5.39 percent return year-to-date while the Merrill High Yield CCC and Lower Index is up 4.45 percent. So that’s pretty solid returns across the board – comparing favorably with the S&P 500’s total return of 4.3 percent so far this year. Explaining how it’s all happening in the bond market is the more difficult task, but let’s give it a whirl.

The Barclays US Aggregate Index had a duration of 5.62 years as of Wednesday – duration declines throughout the month as various maturities in the index slowly mature, and then the figure bounces back up again on the first of the month following the Barclays rebalancing of that index.

So at the beginning of May it was 5.70 years and at the beginning of April was 5.72 years – as long as the duration has been since 1979 and reflective of the Federal Reserve’s steady move away from its monthly bond buying and the recent decline in auction sizes for two- and three-year notes. Estimates from traders on Wednesday were that the next extension would boost that duration to about 5.75 years, still taking us back to the Carter Administration in terms of overall duration.

Taken together that’s affecting the buying in the long end of the curve in a way that some other factors, including pension fund purchases or the effects from Europe may not be (generalized fear and big, big short positions still arrayed against more gains in bonds are also contributing, however). Notably the 10-year hasn’t been able to break through what some analysts identified as resistance around 2.45 to 2.47 percent. This is the second time that’s been tested in recent days (there’s no technical strategy that abides by the ‘third time is the charm’ adage, just FYI).

Furthermore, we might also start to see some convexity-related buying out of the MBS sector in coming days: Vitaliy Liberman, portfolio manager of mortgage-backed securities at DoubleLine Capital, said on Wednesday that he sees another 20 basis point drop in the 10-year Treasury yield, telling Jennifer Ablan that “at that point, you might see some scrambling to hedge out convexity.” (When interest rates fall and homeowners refinance, investors of mortgage-backed securities get back their principal, which they have to reinvest at lower rates. To offset the resulting shortening of their portfolios, they buy non-callable Treasuries.)

Either way, though, most of the reasons offered up for bond yields sinking are undercut in some fundamental way: it’s hard to argue that the safe-haven rally is what’s keeping bond yields dropping as sharply as they are – volatility indexes, be it the VIX or the MOVE Index, are all pretty much saying that there’s no volatility right now. Valuation doesn’t quite explain it – if anything, the move in the bond yield puts it at 400 basis points less than the S&P 500’s earnings yield of about 6.45 percent right now, which is way past the usual difference of about 138 basis points.

One could point to lack of inflation, which is to say it’s possible that expected low inflation – as seen in the five-year/five-year forward rate that still only puts inflation at about 2.5 percent five years from now – as a likely enough catalyst. And rising rates and weak demand would certainly explain that combination – mortgage demand is low, wage growth is weak, overall economic growth came in at -1 percent in the first quarter (even if the weather had something to do with it – which it did).

That mélange of stuff lines up relatively smoothly with the notion that the market is discounting a weak economy in the future that market players just don’t believe right now, and volume in the last couple days has been high enough to warrant this a second look as an explanation. Where it falls apart, of course, is the possibility that the equity market is the one that’s correct here, and that economic growth is about to take off (we’ve heard this before, no?) and with that the bond market gets whipsawed into oblivion.

MORNING BID – The Fed, on the minutes

May 21, 2014 12:55 UTC

Investors will get a look at the Federal Reserve’s thinking later on Wednesday in an otherwise quiet week when the Fed releases minutes from its April get-together. There may be a bit in the way of more up-to-date thinking in some of the scheduled Fed speeches, notably Bill Dudley of the New York Fed, along with Fed Chair Janet Yellen later in the week.

The minutes from February’s meeting were instructive – they clung to the Fed’s typical modus operandi in suggesting that economic difficulty early in the year was largely due to weather-related issues and pointed to improved outlooks in various areas, while still noting weakness in housing and consumer spending.

Whether the Fed alters that guidance in this go-around will be interesting to see. They tend to be overly optimistic on the economy and inflation, and slowly come in line with reality as conditions remain somewhere short of what they’re expecting.

With the Fed months away from ending its extraordinary stimulus program, you could get the impression it’s trying to run out the clock on QE before even turning to the greater manner of managing the federal funds rate and all the other attendant rates that the Fed will tweak using various tools it has brought into being in the last few weeks.

As Richard Leong noted in a recent Reuters article, the Fed is using a term deposit facility, reverse repos and the overnight interest on excess reserves to vacuum money out of the banking system.

What’s unclear is if the Fed can do what it intends to do, which is to draw down the massive $2.5 trillion in excess reserves without causing major market hiccups, freak-outs, panics or collapses.

So far (and it’s early – very early), the Fed’s done okay, but the real test has to come at some point down the road – to expect that we’ll be able to leave and “assume it all went to plan,” to cite Austin Powers’ Dr. Evil, is farcical.

MORNING BID – Europe and the bond market

May 16, 2014 12:43 UTC

The markets are in a bit of an odd spot right now, with the biggest quandary that of the bond market, where U.S. yields have gone into a dive in recent days to touch their lowest levels since October.

What’s unclear is how much to attribute to fears of a slowing economy, changing dynamics like reduced mortgage securities issuance or increased pension fund liability-driven purchases. There are also technical factors like the rallies in sovereign debt markets like Spain, Italy and Ireland, none of which have the credit profile of the United States, big short positions among those who still believe this can’t continue much longer, and the overarching “quantitative easing forever” stance out of the European Central Bank and Bank of Japan, to say nothing of a few other central banks that are still on an easing path. (Really, it’s not as if the U.S. Fed is all that stingy right now when it comes to stimulus. Yes, it’s pulling back, but it’s pulling back from negative territory, basically.)

Among those factors, rallies in overseas markets are an interesting part of this, and relates to the QE stance as taken by the ECB that’s likely to result in lower rates and extra stimulus in June and further on from that bank. April car sales were lousy in Europe, yet another data point supporting lower yields on the continent.

At one point on Thursday, Spain’s 10-year was only about 35 basis points higher than the U.S. 10-year, as that 10-year yield has dropped by more than 40 percent in the last year. That changed in the morning after some saber-rattling out of Moscow again, causing a quick selloff that widened the spread between the U.S. and peripheral European debt.

But it’s fair to say that many are confounded by the moves in bond markets, and the opinions vary between those who believe the sharp fall in long-dated yields speaks to increased concern about the economic outlook (with Appaloosa’s David Tepper on Wednesday night even saying the ECB is behind the curve), those who see it as supply and demand related, and those who think it’s an anomaly that will correct before long.

The opportunities in this market are varied for bond-fund managers, then, and a bit difficult to suss out. Long-dated Treasuries have been winners of late, of course, while the five-to-seven year area hasn’t been so much, but with yields dropping in the face of reduced Fed stimulus and economic data that would seem to suggest rates should be higher, expecting lots of people to pile into government debt at this point seems far-fetched.

A Citigroup survey conducted earlier this week showed their clients are looking to make money through roll-downs (when you buy one part of a yield curve to see yields fall and prices rise as they “roll down” in maturity to become shorter-dated debt; this works well when the yield curve is shaped pretty much as it is) and also in credit (where investors have been making hay for some time) and stocks.

Those ways – along with more dynamic hedging, if possible, depending on who you are – have been cited as more popular choices than simply going long, or worse, going short.

How this shakes out is unclear.

The U.S. economic figures are still on the mixed side – inflation does seem to be picking up, however modestly, but industrial production figures were weaker than expected and housing has become more of a thorn than a helping hand in the economy right now.

Retail sales aren’t all that exciting, unless you’re counting big auctions of art at the major New York houses, and that’s not exactly indicative of a broader economic upswing but ongoing stratification that usually ends with market debacles (in the U.S.) or heads on lances (in Westeros).

If the improvements noted in some indexes does prove to have staying power, then, as Heather Loomis of J.P. Morgan Asset Management told us, yields will go higher from here – though she now sees a 3.25 percent 10-year yield by year-end instead of 3.50 percent. For her part, Loomis said: “I do believe every round of quantitative easing has had a more diminished impact,” and if that holds true for the ECB, then those rallies in peripheral countries aren’t really something to hang on central bank largesse.

MORNING BID – “Omaha! Omaha!”

May 2, 2014 12:21 UTC

If the U.S. economy indeed is going to shake off the weather-related problems and push higher in coming months, one of its biggest bettors is likely to remain Warren Buffett, whose Berkshire Hathaway reports results this weekend in addition to its Omaha confab that brings in investors, fans and interested parties alike, where Warren and Charlie Munger will sip Coke, talk up their investments and reveal what else it is they’re looking at about now. Buffett famously couldn’t find a bear on Berkshire this time around (bears on Berkshire being the market’s equivalent of the Washington Generals, just looking to be a punching bag), so they’ll have other analysts asking them questions, with one of the more pertinent ones surrounding what companies Buffett might be eyeing for potential acquisitions in the coming years.

That’s not an easy one to suss out. Buffett famously hates newfangled stuff that strikes of a fad. He partnered with 3G Capital last year to buy Heinz in a $23 billion deal, and so he may not go alone if he hunts for another “elephant” as he likes to put it. He told Luciana Lopez last week that such a template could be used again, saying “If I live long enough we’ll do another one.”

Buffett’s underperformed in the last five years, and it’s not hard to see why; the S&P’s total return from 2008-2013 was 128 percent; Berkshire saw its net worth grow 91 percent during that time period. It’s the first time in nearly half a century that the Berkshire book value over five years trailed the S&P 500.

It’s hard to count him out, though (50 years is a pretty damned good track record, and it’s not like there’s a comparable group that’s been investing over a period of time to compare to, because many of them are probably dead). His acquisition strategy is laid out in a Berkshire regulatory filing this year that says, of course, that “our long-held acquisition strategy is to acquire businesses at sensible prices that have consistent earning power, good returns on equity and able and honest management.” That’s part of it, but some of it is also that he’s usually getting into businesses that are embedded like a tick in the American landscape. Heinz is the very definition of ketchup; BNSF is the largest operator of U.S. rails, Geico recently became the second-largest car insurer in America; Lubrizol, another Buffett holding, was in 2010 the top performing chemical company among Fortune 500 companies based on earnings per share and total shareholder return figures. He’s of course a big holder of Coca-Cola and IBM, which, well, y’know.

Trying to figure out who might be next on his list is a tricky one – a screen of companies with a low P/E, high return on equity and low debt-to-capital ratios (around 25 percent) yields only a handful of names, and most of them are pretty small. That’s not to say smaller companies aren’t something he’d like, but they’d better have a market leading position. Still, Buffett’s boosterism of the U.S., which he highlighted a few years back, comes at a time when capital expenditures are starting to rise and strategists have noted rising bank loans to smaller companies as well.

That’s a potential positive – it shows, as Rich Bernstein of Richard Bernstein Advisors LLC noted, that companies are ever-so-slowly expanding their time horizon to spend money on longer-term projects, such as M&A (big this week obviously) and capex. Even though the expansion has run for about five years now, Bernstein believes the slow, steady pace of growth means putting an artificial “sell-by” date is a bit premature: “Today we’re in a mid-cycle environment – there’s a tug-of-war between rising rates and fundamentals,” as the Fed ever-so-slowly starts to end stimulus, while earnings improve and data gets better. That’s generally the kind of environment Buffett still likes for shopping, if not for an elephant like Heinz or BNSF.