- US Initial Jobless Claims declined to 391k last week vs 405k expected and 410k previously
- US Capital Goods Orders Nondef Ex Air declined -6.9% in Jan vs -1.0% expected and 1.4% previously, although again the weather probably had an impact.
- Chicago Fed national Activity Index declined to -0.16 in Jan vs 0.09 expected and 0.03 previously.
- EU Economic Confidence improved to 107.8 in Feb vs 106.8 expected and 106.5 previously
- There will be no recap tomorrow.
- Many well respected participants have opined on the cheapness of large caps vs small caps. Certainly, on a trailing earnings yield basis, the differential is near multi-decade highs:
There are many reasons for this – but the primary reason, IMO, is the availability of money, where availability is defined as yield + availability. With the growth in the US shadow banking system, this is hard to measure, but the yield curve provides a rough sort of approximation. As you can see below, the 2s10s treasury curve has done a good job historically of leading the Russell / S&P ratio:
But something interesting happened over the last cycle. The differential never really corrected after the curve flattening and the subsequent recession. A potential explanation for that is that financing for PE funds never really went away, given that generally money is committed with very long lockup periods. If this is correct, then assumptions that the valuation differential between small and large cap stocks will correct over the next couple years look unlikely to pan out. In fact, given the relationship above and given where we are in the cycle, we may see it widen even further.
- Wheat has been under pressure over the past few days, and there have been some media discussions of a top across the agriculture complex. I just wanted to note a few things:
1) The fundamentals for Wheat were never as good as it was for corn or soybeans. Unlike the latter two, global wheat stockpiles are actually quite high.
2) As wheat is harvested earlier in the US, wheat has historically lead on the way down. The price action in 2008 is an example:
3) HOWEVER, given the price ratios, we can expect substitution to be taking place very quickly. (This has already been reported) As a result, substantial increases in the price of corn or soybeans are likely to require a worsening of the supply situation across the entire agriculture complex. In fact, unless this does occur, and if history is a guide, an overall top for the entire complex is likely coming, if it hasn’t occurred already.