Recap 2014-10-20


Oil prices have fallen by an amount similar to levels typically seen during recessions. As such, the stimulatory factors are comparable. The chart below shows the log S&P 12m price return (blue, LHS) vs the 24m log change of WTI prices, leading by 1 year. (red, RHS, and extrapolated past Oct 2015) As the chart shows, if oil prices hold here, the historical precedents are quite bullish for equities – the last time we saw an oil price fall of this magnitude without a recession was the mid 90’s, and before that, the mid 80’s. Obviously, all are not equal, and far more goes into equity returns than oil prices, but I thought the relationship was interesting.

Separately, lots of folks have claimed that the recent market volatility has been due to the decline in dealer balance sheets and risk appetite. I.e., there is a smaller ‘shock absorber.’ Which is probably true. But there are two sides here, and the other side may be that there is too much short term hedge fund money in the market. Certainly, aggregate returns over the past few years support that hypothesis. As a result, the size of the short term flows may well have increased as well. If true, this suggests that we should expect these types of positioning driven moves to recur in the future, barring a decline in hedge fund AUM.

Finally, more signs of loosening regulatory standards for mortgages, via WSJ:

Federal Housing Finance Agency Director Mel Watt said the agency, along with mortgage-finance giants Fannie Mae and Freddie Mac, reached a deal on what kinds of mistakes could trigger penalties for lenders years after a loan is issued… After the financial crisis, Fannie and Freddie required lenders to buy back billions of dollars in loans that the companies said didn’t meet the standards. As a result, lenders have said they have been wary to grant mortgages to riskier borrowers. The FHFA has tried a few times to mollify lenders’ concerns. The latest agreement clarifies what kinds of mistakes could trigger a repurchase demand many years after the loan is granted. Mr. Watt also said the new framework would include a “significance test” for mortgage buyback demands that would require Fannie and Freddie to determine that a loan would have been ineligible for purchase originally had the loan’s information been accurately reported. In his speech, Mr. Watt also said Fannie and Freddie were close to beginning new programs to guarantee loans with down payments of as little as 3%, something the companies largely have stopped doing. He said the loans would be available for loans with “compensating factors” and that details on the program would be released in coming weeks. “We have started to move mortgage finance back to a responsible state of normalcy—one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness” of Fannie and Freddie, Mr. Watt said.


  • German PPI declined to -1.0% YoY as exp vs -0.8% prev
  • Abe hinted he may delay the next consumption tax hike, telling the FT such a move would be meaningless if it inflicted too much damage on the economy – FT
  • The Nikkei reported that the GPIF will raise its allocation in domestic stocks to around 25%. Currently the investment in equities myst be in a range of 12% (+/- 6%). The weighting at the end of June stood at 17%, near the upper limit. Equities finished +4% in Japan on the news.
  • ~45% of companies responding to a Reuters poll think the BOJ should prevent the yen from weakening below 110 – Reuters
  • GS: We are just past the half-way point of regional bank earnings (10 of 18 reported) and results have disappointed – only 3 banks have beat (BBT, HBAN, FRC) as loan growth has lagged (+64bps QoQ vs. consensus of +1.2%), the credit/expense leverage stories are in the late innings, margins are down 8bps and concerns around the timing of rate rises have pushed rates lower, weighing on margin outlooks. That said, shares are down 3% since earnings (-0.6% for S&P) vs. just 1% 2015 estimate revisions. While near-term trends won’t see much pick-up, shares (11.3x 2015) appear to be pricing in an overly negative outcome.
  • US crude production still going very strong. Experts think Brent would have to hit ~$60 before production starts to get dialed back (and even then the output cuts probably won’t be very large). “Slowing American production is like slowing a freight train moving at high speed.” NYT
  • Most of the dozens of people who had direct or indirect contact in Dallas with Thomas Eric Duncan have been declared no longer at risk of contracting the virus. The Carnival Cruise passenger tested negative. "Nigeria is now free of Ebola," WHO representative Rui Gama Vaz told a news conference in the capital Abuja. "This is a spectacular success story."
  • Germany and France are in “secret” negotiations over a deal that would see Berlin sign off Paris’s new budget even though it violated EU fiscal rules. In exchange for a detailed deficit reduction and structural reform roadmap, Germany is apparently willing to accept the new French budget. Reuters/Der Spiegel
  • Banks begin charging customers for their euro-denominated deposits; in response to the ECB’s neg. deposit rate, some of the world’s biggest banks are charging customers for euro-denominated deposits – WSJ
  • ECB bank stress tests; investors are worried that the shipping loan portfolios of some of Germany’s biggest banks (inc. HSH Nordbank, NordLB, and Commerzbank) could see large write-downs under the ECB’s stress test, prompting some to incur capital problems. HSH Nordbank, the world’s largest shipping lenders, is seen by bankers in Germany as one of the most likely firms to “fail” the ECB tests – FT


  • Mon: RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales