MORNING BID – The small and the long

Apr 29, 2014 12:58 UTC

Stability is the name of the game right now in equity markets – something that can be seen in the daily moves in various speculative sectors and how investors react to outside influences like Russia and Ukraine (really, the primary factor motivating the more wild ups and downs in the stock market at this point). Signs that the tensions may be thawing – and we’ve seen this movie before – contributed to a rebound in the Nasdaq and other indexes later in the day to leave the tech-heavy index basically unchanged on the session.

But that didn’t help the biotech stocks, and the cloud names like Workday and Salesforce.com (now riding a four-day losing streak), and the sharp declines in these names is something that the folks at Bespoke Investment Group suggest is a phenomena that newer investors haven’t seen before. That is, when stocks just keep falling, and it shows that the break in momentum in these names hasn’t been arrested. “It’s rare for a market to become that information-insensitive (in either direction), so this has been a great learning opportunity for traders that haven’t seen a similar sort of move,” they wrote. It also gives lie to the idea that this was a tax-related selling issue. While those stocks have tended to pop up with the market – and this morning’s jump in futures shows that investors really do have Ukraine close at hand even if the effect is a third-order one – but any jump in the Nasdaq has been a selling opportunity for those names.

Meanwhile, the bigger tech names like Microsoft and IBM ended higher, and investors kept plowing money into utilities and telecom names like the boring AT&T (snooze) or Verizon (snore). As Bespoke puts it: “Our thesis is that
the rotation is hunting stability, and that traders are willing to bid up predictable long term cash flows, with
less emphasis on whether those cash flows are “rich” (high P/E) or “cheap” (low P/E),” they said.

Either way it helps continue a run of outperformance the large-caps have managed against the small-caps in recent history. Mike O’Rourke of JonesTrading notes that just 32 percent of speculative positions in the Russell 2000 are long right now, a sharp drop from 59 percent in early March – yet still higher than the average 25 percent from 2007-2011, suggesting if things get worse, more people could bet against the Russell. (The small-cap Russell has had a notable run, in that it’s about 350 days into a stretch of not closing below its 200-day moving average, a sign of long-term strength. Could this break be on the way? More knee-jerk selling would get us there.)

While growth isn’t entirely being discarded, the stocks with more of their price tied up in future expectations are being shed, and taking other ones with it, like Amazon, a two-time participant in momentum stock moves, which was hammered again on Monday.

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.

Crimea punishment

Mar 24, 2014 21:09 UTC

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Last Thursday, after Russia voted to annex Crimea, the US announced another round of economic sanctions against Russian officials. The new list includes twenty people and Bank Rossiya, in addition to the eleven already sanctioned earlier last week. On Thursday, Russia responded by putting out its own list of banned American politicians, including Senators John McCain and Harry Reid.

The Economist writes that sanctions by Russia against individuals in the West are likely to have little effect — McCain joked that he’ll have to cancel his spring break trip to Siberia — but that the American sanctions against Russians could hurt more. Being banned from the US financial system is a de facto ban from most of the global banking system:

Even those people who do not have any assets in America to freeze often find it difficult to obtain financial services elsewhere. They will, for example, be unable to carry out any transactions using dollars. Western banks, mindful of recent government probes of HSBC and Standard Chartered for breaking similar embargoes, will not want to go near them.

Bloomberg reports that the already fragile Russian economy is now more likely to dip into recession. The Russian stock market is down 13% and the ruble has lost 8.4% against the dollar since last November, when the protests in Ukraine started. Romanian government official Mircea Geoana told Bloomberg that “the ones who’ll pay the bill for this aggression, no matter how popular and patriotic it looks, will be the Russian people”. Moscow-based investment advisor Chris Weafer warns that the biggest impact from the Ukraine crisis “may be to radically slow the inflow of much needed investment capital” to Russia..

Even if the sanctions hurt economically, it’s unclear if they will alter Russia’s foreign policy. Economist Gary Hufbauer tells Planet Money that in the 20th century, sanctions achieved their goal only about 30% of the time, and generally only work when large economies use them against very small economies. (Iran is a recent counterexample.)

Anne-Marie Slaughter says it’s not sanctions that won’t work, but American sanctions. She suggests the EU should be the ones leading the push against Russia. First, because Russia’s largest trading partners, after China, are EU countries. Also, “the EU does not remind Russians daily of their post-Soviet losses and humiliation on the global stage in the same way that the US does”. Then again, EU sanctions have their problems, too. The US is not dependent on Russian energy the way Europe is. — Shane Ferro

On to today’s links:

Bubbly
Germany’s concrete gold rush - Joe Weisenthal

Data Points
36% of web traffic is fake  – and it’s worth $18 billion - WSJ

Ugh
Over 30 and washed up: Silicon Valley’s brutal ageism - Noam Schieber

Housing
Tax subsidies don’t increase homeownership – they make Americans buy bigger homes - WSJ

Billionaire Whimsy
David Einhorn knows the identity of pseudonymous blogger, isn’t telling - BI
Trish Regan, Einhorn apologist - Felix

Easing Ain’t Easy
The Fed keeps missing its inflation target - WSJ
Why we think inflation is high when it’s actually really low - Guardian

Study Says
Academics are too interested in publishing newsworthy studies, according to the authors of a newsworthy - Motherload
The unemployed are happier once they retire, because they feel less inadequate - The Economic Journal

Fiscally Speaking
77% of deficit reductions since 2008 have come from spending cuts - Jared Bernstein

Bitcoin
Another Bitcoin exchange freezes withdrawals - Gigaom

Right On
A startup that’s a “business… not a religious experience, a revolution, or a disruption” - Valleywag

Quotable
“Racism bad. Eat kale.” - NY Mag

Investigations
Wage theft in Silicon Valley: dozens of companies conspired to keep down workers’ pay - Mark Ames

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Crimea never pays

Mar 3, 2014 23:20 UTC

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“The markets are punishing Russia much more swiftly than the diplomats”, writes Jason Karaian of Russia’s invasion of Crimea, which began Friday. Today, MICEX, Russia’s main stock index, fell 11.3%. Russia’s central bank reportedly sold $10 billion of reserves and raised its overnight rate to 7% (from 5.5%) to support the ruble. The currency nevertheless fell 2.5% against the dollar today, to a record low of 36.5 rubles/dollar.

Gary Greenberg, head of emerging markets at Hermes Fund Managers, told Reuters’ Sujata Rao that “the market’s assessment is that the Russian government is willing to sacrifice both the country’s economy and its international standing in order to bolster its pretensions for a Eurasian union”.

Sober Look argues that a war probably won’t be too bad for Russia’s economy: a weak ruble and high oil prices (which are likely coming for Europe) will reduce imports and increase the value of exports. The result? “The nation’s current account will improve. Putin’s economic advisers will not be losing any sleep over the current geopolitical tensions”.

Timothy Ash at Standard Bank disagrees. “It is complete tosh,” he writes, “to think that all this aggressive action by Moscow in Crimea, and jingoism at home, and the prospect of international isolation, will have no effect on the Russian economy”. Ash points to capital flight, weakening asset prices, and sanctions from the West as potential problems for the Russian economy.

Capital Economics’ Julian Jessop says that Europe and the West face two major economic issues: a disruption in the Russian oil supply to the EU and the cost of a potential Ukrainian bailout, which he predicts would cost hundreds of billions of dollars long-term. Russia is a major oil supplier to Germany and the Netherlands, and supplies much of Western Europe’s natural gas. Thus, Jessop says, both Russia and the West would be hurt economically by sanctions, making them unlikely to happen. — Shane Ferro

On to today’s links:

New Normal
Why big companies are hoarding cash – Mohamed El-Erian
“Higher education is becoming a caste system” – Suzanne Mettler

Bitcoin
What did — and did not — happen during the collapse of the biggest bitcoin exchange – Emin Gün Sirer
“Inequality’s impairment of economic growth may dwarf its more apparent social costs” – Daniel Altman
What it’ll take to build a truly stable electronic currency – Robert Shiller

Russia
Ukraine and the west: a guide to international law – Brussels Blog
A primer on recent Ukrainian history – Timothy Snyder

The Oracle
A quick-and-dirty guide to Warren Buffett’s annual shareholder letter – Dan McCrum
Does Berkshire have trouble finding use for its own capital? – Cullen Roche

Alpha
“It’s almost biblical. There is a time to reap and there’s a time to sow”, says guy who just earned $546 million – Will Alden
Carl Icahn begins a letter to eBay shareholders with an epigram from himself – Shareholders’ Square Table
“Why would anyone want to trade foreign exchange?” – FT

Felix
Why Puerto Rico is the anti-Argentina – Reuters

Hope/Change/Etc.
Obamacare effects help push up income, spending – WSJ

Equals
The economy and the gender-norm challenge – Cardiff Garcia

Apple
“Apple’s annual acquisition spending pace has been neck and neck with Google” – Apple Insider

Wonks
Abenomics: what could go wrong – Fistful of Euros

Degrees of Angry
“If housing prices fall, ‘they’ll not get just a little angry, they’ll get tremendously angry’” – NYT

Ugh
1 in 3 nursing homes patients are harmed by some form of mistreatment – ProPublica

Housing
The UK’s housing crisis: “when the present is intolerable and reform appears impossible, something has to give” – Guardian

Politicking
Why Comcast’s chief lobbyist isn’t technically a “lobbyist” – Philly Inquirer

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MORNING BID – Detangling Ukraine

Mar 3, 2014 13:59 UTC

Geopolitical situations are difficult ones to interpret from a markets perspective. For the time being, markets are responding to the escalation of hostilities in Ukraine – where Russia has bloodlessly taken control of the Crimea region and is threatening more action in the eastern part of the country – with a bit of negativity. The action is notable in U.S. equity futures, down more than one percent, and some buying in the safe haven that is U.S. Treasuries, along with bond markets around the globe.

Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, said it well enough in describing the market views so far, that “the fallout for the equity markets may be minor over the medium-term. The short-term is more of a gamble. It should serve as a reminder that you don’t put grocery money for the next month in risky assets.”

This isn’t a surprise, of course, nor is it a surprise that the G7 nations are looking at ways to sanction Russia or to boot it out of the G8, easier in theory than in actual practice. The pass-through effects on the world are hard to determine. Ukraine is a big grain producer and disruption to those supplies would result in an inflationary environment there. Also, some of the exported oil out of Russia passes through Ukraine, so it’s not hard to imagine scenarios where the world economy is affected by some kind of escalation that goes beyond what people expect at this particular moment.

Citigroup strategist Tobias Levkovich, in a morning note, said as much: Companies with big international exposure are likely to keep underperforming but “this is far different than worrying that the near 70 percent of sales and earnings in North America would be threatened by events in the Crimea, which is rather unlikely.”

That still seems far-fetched, and the overnight trading in VIX futures does not betray a particularly lofty level of anxiety, with the March VIX contract jumping to about 16.5 from the Friday close of 15.10; with the spot VIX at 14, the level of worry remains subdued for the time being, though it will rise in morning trading today.

The most stark example of the effect on the markets is in the currency world, where the Ukrainian hryvnia has lost more than 20 percent so far this year, as well as the Russian ruble, which has also dropped substantially, though not as much as its Ukrainian cohort. The overnight action is not encouraging here either, as Moscow stocks are off sharply – 11 percent! – and the ruble has dropped another 2 percent.

MORNING BID – Janet Yellen’s rain (snow) check

Feb 27, 2014 14:16 UTC

This is the thing about delaying the new Fed chair’s follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that’s potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That’s mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There’s also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the “Fed put” option has become in the discussion of Fed activities, so we’ve really lowered expectations here.

Meanwhile, Boston Fed head Eric Rosengren said the Fed is looking very closely at activities in emerging markets, which is sort of obvious in a sense but contradicts, if only modestly, Yellen’s thoughts two weeks ago. And really, the Fed’s ability to influence economic activities overseas in some of the world’s developing markets or troubled spots is even weaker than what it can exert over U.S. demand. So maybe it’s just one to grow on.
Either way, Yellen would probably want to comment on the situation, if, again, a smart senator would think to … well, never mind.

Overnight, the situation in the Ukraine has worsened, with armed gunmen taking control of regional government headquarters in Crimea, vowing to be ruled from Russia. The Ukrainian hryvnia continues to sink while the Russian ruble plumbs new five-year lows, surpassing the previous day’s losses, and a bit of risk-off action can be seen in the zloty and a bit of better buying in Treasuries, where the 10-year yield was lately at 2.66 percent. Fund flow figures will be key to watch here to see if overseas flows increase to the U.S. or at least to the developed areas of Western Europe and Japan.

MORNING BID – Contagion abounds, and the Super Bowl

Jan 31, 2014 13:57 UTC

On Thursday, this column suggested that a bunch of stock markets selling off in tandem did not satisfy the definition of contagion. Central banks dumping U.S. assets, weak auctions of government debt in seemingly less related countries, and big sell offs in less affected currencies? That’s getting closer to the mark.

Foreign central banks cut their holdings of U.S. debt stored at the Federal Reserve by the most in seven months in the past week, in a bid to defend weak currencies. “It makes sense,” said Scott Carmack, fixed income portfolio manager at Leader Capital, which has $1 billion under management. “It will probably continue as emerging markets try to prop up their currencies.”

So, overall foreign holdings of securities like Treasuries, mortgage-backed securities and agency debt at the Fed fell by $20.77 billion to $3.325 trillion in the week ended Wednesday, the biggest drop since June. The overall draw-down has come to about $55 billion since the Fed first said it would cut back its monthly bond buying. Debt and equity funds, meantime, continue to shift away from the emerging markets, with EPFR reporting a pullback of about $10 billion from such funds; debt funds have shed $4.6 billion so far in 2014, about one-third of 2013′s total drawdown of $14.3 billion (and that’s for a full year).

While in some ways, the most attractive solution for some of these countries to try to stem capital flight is through higher interest rates (making their debt more attractive to investors who need a bigger return over inflation, which is too hot in places like Brazil and Turkey), higher rates aren’t going to entirely solve the problem. And so you get the spectacle of Hungary cutting its 1-year Treasury bill auction and yields rising by about two-thirds of a percentage point just to garner enough interest for what they did manage to sell.

Hungary’s less in danger than some other countries. It’s got a big current account surplus rather than a deficit, but that hasn’t stopped investors from pulling back there either, driving the forint to a two-year low against the dollar.

The ongoing weakness in currencies – which many analysts say has not yet run its course – is going to pinch economic growth in tandem with higher rates. This can sometimes launch a vicious cycle that has consumers in those countries saving money rather than spending it – again, because of inflation. Combine that with a slowing in capital flows, and a weak export environment thanks to the China slowdown, and it gets a lot uglier, as Reuters’ Sujata Rao pointed out in an overnight story.

She quotes Steve O’Hanlon, a fund manager at ACPI Investments, who summarizes it well by saying: “Markets are pricing a pretty dire situation in emerging markets (but) is EM cheaper given potential future output? I wouldn’t say so but it’s getting there. When currencies stop selling off, if (governments) produce real reforms, I will be investing in those markets. If you don’t see any reforms, the rate hikes will just destroy growth, discourage investors and make the situation far worse.”

On the U.S. side of things, the stock market might see a bit of relief, however briefly. The outperformance by bonds against stocks this month might spur some reallocation trades, helping the market on its last day of the month. So it’s got that going for it, which is nice. Of course, futures are getting hit hard this morning, so maybe this is false hope.

SUPER BOWL SHUFFLE
From a more grounded (well, ridiculous) perspective, it’s the Super Bowl this weekend in the U.S.

Strategists have long made sport of the vaunted “Super Bowl Indicator,” which, for a long time, stipulated that when teams in the National Football Conference (the 49ers, Giants, Cowboys, to name a few) were victorious, the stock market was in line for a good year, but when teams in the American Football Conference (Dolphins, Raiders) won the big game, the equity market was set for a bad year.

That was modified a few years ago to include old NFL teams that had migrated to the AFC – the Steelers and the Baltimore Colts (this column does not recognize teams that move in the middle of the night.) So that puts us in a unique position this year.

First off, the AFC team is the Broncos, so a win by them should put the market on track for weakness for the rest of 2014. This is, of course, undermined by the fact that when the Broncos do win (and they won in early 1998 and early 1999), the market does pretty darned well. Furthermore, their opponent, the Seattle Seahawks, spent most of their existence in the NFC before moving to the AFC a few years back. If the Steelers and Colts can be grandfathered into the good side of the ledger, it stands to reason that the Seahawks ought to be included on the bad side of the ledger, no?

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