MORNING BID – The economic state of things

Aug 1, 2014 13:19 UTC

The jobs report takes a bit of heat off of Thursday’s selloff, which was predicated in part on some nonsense out of Europe and more importantly some kind of growing consensus that the economy is getting hot enough that it might force the Federal Reserve to start raising rates a bit earlier than expected, given a sharp and unexpected rise in the employment cost index on Thursday. And while it’s fair to suggest the stock market has gotten a bit ahead of itself when the Fed is rapidly moving toward the end of its stimulus policies, it’s also possible that stocks have gotten ahead of themselves for a far more prosaic reason – the economy isn’t strong enough to support the kind of valuations we’re seeing in equities right now.

That’s not to say we’ve got bubbles all over the place in stocks – they’re pretty few and far between – but credit standards in various places have loosened, and if the Fed starts raising rates we’re going to see a pretty quick reversal of that before long. There are significant signs of concern emerging in places like the high yield market, which has dropped off sharply in recent days, particularly among the weakest credits, and the housing and auto markets, which are better leading indicators than the jobs data, also suggest that the slack credit standards may end up hitting a wall before long.

Jim Kochan at Wells Fargo Fund Management pointed out that with the U-6 unemployment rate picking up to 12.2 percent this month, it conforms to what Fed Chair Janet Yellen has said in the past – that the “report is consistent with Ms. Yellen’s view that it is too early for the Fed to be contemplating a ‘liftoff’ in the fed funds rate.” That’s caused the expectations for a rate hike – per CME Fed Watch – to back off a bit, with April odds now down to 37 percent (from 43 percent a couple days ago) and June down to 52 percent from 58 percent a couple of days ago.

The U-6 rate ticked up as more people entered the workforce.

The U-6 rate ticked up as more people entered the workforce.

As the labor market improves, there are growing concerns about leading economic areas that point to a slackening in activity and will serve as the real test of the economy’s ability to survive as monetary policy recedes from the picture and interest rates start to rise (even with the Fed still at near-zero and expected not to raise rates until April at least, if not thereafter).

The Detroit team of Bernie Woodall, Ben Klayman and Paul Lienert teamed up for a piece that notes how a minority of groups are seeing real concerns about credit standards being loosened to a point that suggests auto sales demand is being driven by too-easy money. People have long talked about how auto loans tended to be on average about five years – matching approximately a value of a car (to a point) and now the average loan has risen to about 66 months, which means there are plenty more people offering terms to seven or eight years.

Cars are made to last longer than years ago, but it still represents an extension of debt payments over a longer period of time that’s worrisome. Car sales figures are due out later today – July auto sales are expected to show a slight dip to a 16.7 million annualized rate from 17 million in June, and full-year forecasts are set to hit their highest rate since since 2006. Similar action can be seen in the housing market as well, where the four-week moving average of the MBA’s purchase index has been steadily declining for several weeks now. That’s probably to some extent a summer effect but that index now sits far below levels seen in mid-2013 when it rose to a four-year peak.


That said, again – it’s a bit early to conclude that the leading areas of the economy have given up the ghost and we’re now headed for an inexorable descent into a recession – housing and auto sales fluctuate quite a bit, and even in expansions sharp declines can be seen. The 12-month moving average of U.S. housing starts are still on an uptrend from a year-over-year basis.

On the other hand, the 12-month average of existing home sales has slipped to 4.908 million. Sales of existing homes have had long periods of stagnation amid economic expansions before – they were weak from mid-1994 to mid-1995 and were slack from mid-1987 to mid-1989 as well. The most recent experience in housing – boom-and-bust – seems overstated of yet. So give it a few months.

MORNING BID – Speculating on a Hypothesis

Jun 23, 2014 13:18 UTC

A few thoughts as the market heads into a relatively quiet week featuring mostly Federal Reserve speakers and a few other random events that aren’t likely to knock the market to its knees:

  • Bear markets don’t just start “because,” as Dan Greenhaus of BTIG puts it. Usually there are a few factors, but most often it’s some combination of speculative excess, tightening rates, and a reduction in that bit of froth in an area that’s crucial to the bull market or economic expansion in question. When technology investing money dried up and the companies that sold shares to the public foundering on a lack of earnings, the tech bubble was unwound pretty quickly. The financial crisis came about as banks became unable to handle the volume of debt that had been sold and as the Fed raised rates, sapping demand in the “greater fool” housing market, and as the banks ate themselves under synthetic products that weren’t anything underlying. So with that in mind, what’s the speculative excess now? Probably the overall thing is ultimate low rates, because when that does go, the market is going to view growth differently.
  • The expectation for higher rates is a primary underpinning for overall investor nervousness. If rates are higher, the expansion is threatened, and inflation becomes an issue. It’s not that those conditions exist now, but the prevailing view for rising rates explains in many ways why this bull market is as loathed as it is. People remain wary of making bets in this market, even if retail investors would have been handsomely rewarded by getting in at any morn, so that’s point in favor of them rather than against.
  • Higher rates often do end up killing a lot of bull markets – and economic expansions – so the inflation figures and the Fed members’ beliefs related to the threat of rising prices are all important, and we’ll attempt to make sure of the chatter coming from the likes of Charles Plosser, Jeff Lacker and John Williams. So that’s the second team when it comes to Fed speakers (Bill Dudley also speaks, but the Puerto Rican economy is the topic) in terms of influence, but still, those views remain important.
  • Complacency isn’t a “thing.” As Luciana Lopez and Jennifer Ablan wrote about late last week, the VIX being low isn’t a workable assessment of the concerns thousands of investors have about the equity market and economy, particularly when the VIX really only reflects expectations for volatility in the coming couple of weeks and not in any long-term kind of way. So yes, the VIX around 10 doesn’t make a lot of sense until you remember it’s been about 45 cays where the index hasn’t even hit a 1 percent change – so realized volatility has been in the 4 percent range.

from Data Dive:

Low volatility: worrying trend or new normal?

Jun 2, 2014 17:05 UTC

Volatility in financial markets is low, and that concerns New York Fed president William Dudley. Reuters reported he said last week, "I am nervous that people are taking too much comfort in this low-volatility period and as a consequence of that, taking bigger risks."

For instance, Treasuries volatility is really, really low:

Treasuries volatility 6/2

As is equities:

Equities volatility 6/2

And foreign exchange:

FX volatility 6/2

The Fed is worried that stable prices are encouraging  investors to increase their borrowing and load up on risk, which could end poorly if the economy goes south. But what if this is simply the new normal? Izabella Kaminska has an interesting take:

We live in a world in which corporations as far afield as British Airways, Ocado and Google can anticipate your every wish before you’ve even signalled it.

This is not some cornucopian dream, but rather a reflection of how information technology is undermining the need for pricing because the allocation of goods is now so efficient that urgency, crowding and queuing — the very things that drive prices — have in some cases been eliminated entirely.

Should you really be surprised that volatility is dying?

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 – Stability, earnings, and Russia

Apr 25, 2014 12:43 UTC

The S&P 500 heads into the last session of the week less than 1 percent from an all-time closing high, corporate credit spreads have generally continued to shrink or at least stay stable, and overall investors remain enamored of riskier assets even though the momentum crowd has had its head handed to it for the better part of two months now.

Volatility is low overall, and while earnings estimates are coming down for the second quarter, they’re doing so at a pretty slow pace – with the second quarter expected to come in at 8.1 percent from 8.4 percent estimated on April 1. That’s pretty tolerable, though of course we’ve still got more than half of the earnings season left to get through.

There’s a lot of concern right now around the global growth outlook, though earnings from the likes of United Technology, General Motors and a few others have assuaged concerns about China’s lackluster demand – it hasn’t hit corporate profits all that much, at least.

The market’s signals are rather healthy right now, with Credit Suisse noting recent rebounds in global emerging markets and strength in other “cyclical” trades such as higher prices for iron ore and industrial metals and the improved performance overall in value stocks as well. Energy and health care names have been strong of late. Old technology giants like Microsoft run on and on, and it’s notable that investors took the early rally in the momentum stocks on Thursday as a chance to sell those names into the ground while Apple managed its best one-day percentage gain in about two years.

If there are places to be worried, well, revenue beats haven’t been all that special. Just 55 percent of companies surpassed revenue expectations, short of the historic average around 61 percent, though just a few extra beats would move that needle a bit. While growth of 2.9 percent in earnings for the quarter isn’t all that special (and it was much worse before Apple’s beat on results) there’s again still hope going forward.

And then of course there’s Russia. Standard & Poor’s cut its rating on the country to BBB- with a negative outlook that triggered a rate hike from the central bank and has increased pressure on Russian bonds and the ruble. Russia remains the ultimate wildcard right now. Sure, its exposure to the United States mostly amounts to raw materials and a chunk of Pepsico’s income, but hiccups certainly may be a reason to back away from speculative excess.

MORNING BID – A week overflowing with earnings

Apr 21, 2014 13:00 UTC

Markets head into a busy week of earnings with a bit of uncertainty around whether the major companies out there will help continue the momentum in the stock market that was regained last week after some weeks of lackluster trading.

As put in Reuters’ Wall Street Weekahead, there’s something for everyone this week, from the old-line tech companies like Microsoft that have been the recent beneficiary of the switch away from the high-flying names like Netflix and Facebook (which also report this week) to some big industrial names like General Motors – which has plenty of its own issues with the recall – to Dow components like AT&T and McDonald’s.

So far, earnings have been a mixed bag. There have been some good results from a few Wall Street banks, weak numbers from others, and results out of the likes of IBM and Google that fell short of expectations as well. The fact that old tech names like Microsoft and Cisco are up on the year even as the Twitters of the world are down on the year does suggest more attention to alpha generation in a way that didn’t exist in 2013.

With that in mind strategists for the most part have been trying to point more specifically to stocks that appear undervalued or at least less-loved by the analyst community. Three of those reporting this week are Microsoft, DuPont and Travelers, which Credit Suisse quantitative strategists identified as contrarian picks as analysts in general have been more enamored themselves of the momentum stocks that carried the day in 2013.

All three of those, as well as a few others, will report in a week that will see about one-third of S&P 500 names report for the quarter. But what will be interesting again to see (and here we are again in the equity market looking ahead to the future) is whether second-quarter growth figures recede or if they’ve hit a trough earlier than is usual, which may be happening. After Friday’s spate of generally strong results, second quarter year-over-year earnings growth estimates ticked up to 8.1 percent from 8.0 percent. That’s still down from 8.4 percent at the beginning of April, and much more than on January 1, but if it represents the nadir for this period, that’s a good sign for those concerned about long-term growth in stock prices and for economic demand.

A number of sectors have seen a generalized improvement in their estimates (consumer discretionary stocks are still seeing estimates cut), which points at least to optimism going forward. Dan Greenhaus of BTIG notes that a handful of notable names have seen strong year-over-year revenue growth including Baker-Hughes, United Rentals, Pepsico, and Sandisk. The latter cuts against the grain of those forecasting weak results from companies with large Chinese exposure.

Make no mistake, earnings will dominate the week. Here are a few other names coming to whet one’s appetite: Gilead Sciences, Amgen, Alexion, and Celgene, all biotech names that have been favorites at one time or another, and of course Apple, the largest U.S. company by market value. If year-over-year expectations improve by the end of the week, that’s certainly a promising sign for the current quarter we’re living in.

MORNING BID – The Cleveland Administration in the market

Apr 2, 2014 13:43 UTC

It took the market a little while to get the full measure of the day’s biggest economic news. (And no, it wasn’t the shout-fest on CNBC that seemed to have resulted in the delaying of an IPO and one of the first real reckonings among many people about the ramifications of high-frequency trading.)

But it seems to have truly settled in now: Car sales were up big in March, to a seasonally adjusted annual rate of 16.3 million units. That’s better than expected, and it’s one of the first big data points that lends credence to the idea that there was a real constraint linked to winter weather that was the worst in about 13-14 years.

With all things market related, it’s the future that matters, and that’s what allowed the S&P to push past its most recent level for its first close in the ‘Grover Cleveland administration,’ as blogger Eddy Elfenbein pointed out, pushing past Chester A. Arthur for the first time (that’s 1885 – this is a bit too ridiculous to further, so I’ll stop here).
The gainers were once again, technology, with an odd mix of leadership between a few big momentum favorites turning it back around again (Priceline, TripAdvisor), and some older tech names getting a bit of a boost like Cisco Systems, helped by it being its ex-dividend day, and Hewlett-Packard, which is just sort of old.

And that kind of puts us at a crossroads. Michael O’Rourke of JonesTrading suggests we could see a breakout after a month of churning in this market, though it’s possible the day’s gains came from some beginning-of-month flows into equities as investors allocate funds in that direction. ETF flows per Credit Suisse show lots of money headed in the direction of large-cap stocks – $6.4 billion out of the $7.5 billion on the week – with the biggest outflows out of healthcare ETFs, not exactly a surprise given the selling in biotech last week.

Now then, on the high-frequency trading (HFT) issue. Felix Salmon points out that the fervor over Michael Lewis’s book comes at a time when HFT action has diminished somewhat and the money being made isn’t what it was a few years ago.  But critical mass takes a while on these things, and a Lewis book seems to have turned out to be a catalyst for discussions of both the fairness question and how it relates to the underlying technology: Is this skimming or the way these firms provide liquidity (though one would argue who has asked them to act as an intermediary in some of these cases).

It seems to have thrown a monkey in the wrench of Virtu Financial’s IPO as well, at least for the time being. The times have changed – when smaller shops were doing the bulk of this activity and hitting other banks in their prop trading operations, it seemed like it was in a weird area and the nebulous definitions of what HFT did in the market didn’t move anyone to act, despite books from the likes of WSJ’s Scott Patterson or others. Things seem to be moving another direction now — and the old defense, that the HFT world provides liquidity and is totally benign (or worse, the knee-jerk “free markets gotta be free” assertion), isn’t enough. Institutions may be the ones most affected, and the concerns people have are there even if, as Salmon notes, the idea that Greenlight’s David Einhorn qualifies as the “little guy” doesn’t quite pass muster.

MORNING BID – Crushing It

Mar 26, 2014 12:48 UTC

Is King Digital Entertainment the next Zynga or not? The markets may not find out with today’s first day of trading in the London-based company, but it will provide a bit more context for those eager to build some kind of “time wasting” index or something like that. The King IPO has other gamemaker companies waiting in the wings at a time when there’s been a high volume of IPOs this year coming from unprofitable companies – according to Renaissance Capital, the IPO research firm, 66 percent of this year’s 53 IPOs were unprofitable names, though Kathleen Smith, principal at the firm, points out that if you clear out the biotech names, just 37 percent are those that do not yet have earnings. (Whether this is a good argument or not is another matter — witness the trading lately in the biotechnology shares overall, which have been pummeled in the last few weeks.)

The obvious reference point for King is Zynga, which has lost about half of its value since the company’s IPO in 2011 that valued it at about $8.9 billion. And things did well for them as long as people were interested in Farmville, until they weren’t. Right now, Candy Crush is the current darling, drawing in more revenues on Apple’s App store than any other in 2013, and, well, it just happens to garner three-quarters of its revenue from this game (well, 78 percent, actually). These kinds of fads tend to fade, though, putting pressure on the company to keep filling the void with some kind of new version or new product, not an easy task.

The company’s registration statement helpfully points out that this game, plus Pet Rescue Saga and Farm Heroes Saga together account for 95 percent of total gross bookings — but really, that’s not exactly a three-legged stool here, as we can see well enough. And that leaves you a model of finding a way to make the most profitable activity ever that you can use to while away the hours, for infinity forever (or at least 20 years or something like that). Because time-wasting just really isn’t much of a business model. Yes, film and television qualify as leisure, but production companies don’t bank it all on one program, and besides, this ain’t Game of Thrones we’re talking about here. A better comparable would probably be the bowling stock bubble of 1961 when Brunswick and AMF shares went kinda nuts on the idea that Americans would be bowling for two hours a week, every week. Yes, really. BOWLING.

The summary offering puts it well enough by reiterating its biggest problem – lots of competition. “We face significant competition, there are low barriers to entry in the digital gaming industry, and competition is intense,” they wrote in their F-1 registration. (They’re so worried about competition they said it twice in one sentence.) They also point out that people might, well, find something else to do with their time (like go bowling). So investors have a right to be wary – while Renaissance’s US IPO Index has done well for itself over the last three years, gaining 52 percent, it is down 4.7 percent over the last month, trailing the S&P 500 pretty badly.


After I originally commented I seem to have clicked the -Notify me when new comments are added- checkbox and from now on every time a comment is added I receive 4 emails with the same comment. Is there a way you are able to remove me from that service? Many thanks!

MORNING BID – Seeing the Oracle

Mar 18, 2014 13:05 UTC

The markets are still a few weeks away from the earnings season (didn’t the last one just end?) but there’s an early – or late, if you will – precursor to all of that with Oracle’s results due out after the closing bell on Tuesday.

Whether it’s a harbinger of what to expect for technology companies remains to be seen. But as a company with substantial revenue coming from the Asia-Pacific, it’s going to be closely watched to see what kind of toll slowing growth in China has taken on demand for technology goods for companies operating in the region in general.

The trends, of late, haven’t been all that fantastic. Year-over-year, new software licenses and cloud software subscriptions revenue fell to $410 billion in its most recent quarter, down 17 percent from a year earlier, and revenue from the sales of hardware systems products wasn’t much better, dropping 10 percent from a year ago.

From a year-over-year perspective, software licenses/cloud subscriptions revenue has weakened for four straight quarters. Hardware systems revenues had already been struggling, but overall, for the six months ended in November, the software/cloud segment was at least helping Oracle boost overall revenues, if only by two percent compared with the previous June-November period.

That’s good, but the lack of pronounced growth has resulted in lower margins, another sign to watch headed into the release. On the other hand, the management team sounded rather optimistic at the last, most recent conference call. It expects to keep boosting those subscription revenues, even though the overall growth rate in most parts of the world has been lackluster. If it works, though, that will boost margins for Oracle, which saw its after-tax margin slip in its most recent quarter from a year previous.


Oracle’s cloud business will take more than enough time to grow given the competitors have strong offerings. and Workday have specific cloud offerings, which will make it tough for oracle to compete with.

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MORNING BID – Losses continue, and other concerns

Mar 14, 2014 12:27 UTC

The ructions in China have had an interesting effect on commodities prices – good for gold, crappy for copper. And more developments in this area should be expected as the market deals with growing weakness and the threat of a deflating credit bubble coming from the massive lending to various sectors in the world’s second-largest economy. Copper has been rather weak of late, but the broader CRB commodities index is actually much higher on the year. This is the biggest divergence since the eurozone debt crisis in 2011, points out Ashraf Laidi, the chief global strategist at City Index in London.

Again, the recent selling has had to do with the Chinese companies using the metal (and iron ore, too) as collateral for cheap dollar financing. So we’ve hit a weird storm here – weak yuan that makes those loans more expensive, and copper falling too, and again, that also messes with those loans. Put that together and you have a few markets moving in directions that are not beneficial to a major counterparty in several of them, for one, and resulting in the kind of activity that tends to turn into a vicious cycle.

More copper weakness, more yuan weakness, wash, rinse, repeat. Add a slowing macro economy and it’s a recipe for some more problems down the line. It’s also not good for other risk assets, even U.S. stocks, and part of the reason bonds rallied on Thursday. The growing problems there may be a reason why the Fed’s custody holdings data on Thursday afternoon showed foreign central banks dumped more Treasuries this past week than at any time – $104 billion, almost triple the previous record – as banks prepare for liquidity problems.

And it’s why things look like they’re going to be a bit ugly on Friday following more losses in Russia (down 5 percent) and in Asian markets. That’s not all, though. More defaults on trust products in China are expected. These started earlier in the year, where these big trusts that were sold to investors guaranteeing big returns backed by loans to coal producers didn’t repay investors on time. “The number of defaults are likely to accelerate in coming weeks as more Trust funds are expected to mature starting in April,” wrote Robbert van Batenburg, strategist at Newedge. He points out how intertwined these companies are in differing industries, with the common link being that they’ve all promised big returns for investors that now seem like they’re not going to come to fruition. Sound familiar? “If these problems in China escalate, a flight in gold and Treasuries is likely to ensue,” van Batenburg wrote. Well, that’s what we’re seeing again on Friday; the safe havens get the benefit while other markets suffer.

A bit of the reverse is happening in gold, which is predictably benefiting from the safe-haven allure of the yellow metal at a time when tensions are also rising between Russia and Ukraine and as a possible response from the West looms if Russia annexes the Crimean region of Ukraine (even if they want to go).