Recap 2014-10-21

Commentary:

I wrote last Thursday that that we were likely to see a strong rally off the lows. The price action is reflective of aggregate positioning: cash overweights in most portfolios remain quite high. The recoveries following the previous corrections this year have had similar characteristics to this one – a strong move with minimal retracements until the prior highs are reached. IMO, this isn’t a fluke – it is representative of many underinvested market participants who do not appreciate why the macro backdrop can only result in higher equity valuations.

I found the ECB leak on corporate bond purchases to be very funny. The ECB is in effect saying that, to ease policy, they are willing to take the credit risk of small, barely investment grade companies but not that of Spain or Italy. It’s like they’re using their left foot to scratch their right ear, because their left arm is holding their right arm down. As such actions go, they are likely to kick themselves in the head in the process, and their ear will still be itchy. Comically sad, or sadly comical?

Separately, here’s an interesting chart from Barclays: the percentage of multi-family starts of the total are now at the highest level since the mid 80’s. Demographically, we are seeing some of the effects of the Baby Boomer ‘echo;’ note the similar rise in the early 60’s, as the first Baby Boomers began leaving high school. If history is any guide, we should see continued strong growth in rental properties, and eventually (somewhat) higher inflation as demographics driven aggregate demand rises.

Looks like private equity agreements will be renegotiated after this:

http://www.nytimes.com/2014/10/19/business/retirement/behind-private-equitys-curtain.html?_r=0

In August, Carlyle settled a lawsuit contending that it and other large buyout firms had colluded to suppress the share prices of companies they were acquiring. The lawsuit ensnared some big names in private equity — Bain Capital, Kohlberg Kravis Roberts and TPG, as well as Carlyle — but one by one the firms settled, without admitting wrongdoing. Carlyle agreed to pay $115 million in the settlement. But the firm didn’t shoulder those costs. Nor did Carlyle executives or shareholders. Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states.

Finally – this is pretty cool:

http://www.theverge.com/2014/10/21/7026889/magic-leap-google-leads-542-million-investment-in-augmented-reality-startup

Notable:

  • FT: The European Central Bank has not yet put the issue of buying corporate bonds on the agenda for its December policy meeting, according to two people familiar with the matter. While corporate bond purchases are an option that policy makers have discussed in recent months, one of the people familiar with the matter said preparations for buying the debt have not intensified in recent weeks. However, the person said corporate bond purchases are being considered, along with other ideas, as a possible means to extend the ECB’s program of private sector asset purchases – which at the moment are confined to asset-backed securities and covered bonds – should inflation and growth in the eurozone continue to disappoint. Earlier Reuters reported that the ECB might buy corporate bonds as soon as this year.
  • US Existing home Sales rose 2.5% vs 1.0% exp and -1.8% prev
  • RBA Minutes:
  1. Faced with volatility in the labour force survey results, members based their assessment of the labour market on a range of indicators. These suggested that conditions in the labour market remained subdued but had stabilised somewhat this year. While forward-looking indicators pointed to modest employment growth in the months ahead, there was a degree of spare capacity in the labour market and it would probably be some time before the unemployment rate declined consistently.
  2. Despite the easing in financial conditions associated with the depreciation of the Australian dollar, the exchange rate remained high by historical standards – particularly given recent declines in key commodity prices – and was offering less assistance than would normally be expected in achieving balanced growth in the economy.
  3. Members considered that the most prudent course was likely to be a period of stability in interest rates.

China data:

  1. Q3 GDP 7.3% vs 7.2% exp (still a 5 1/2 year low).
  2. IP +8.0% vs 7.5% exp. (this suggests the collapse in IP growth in August to 6.9% was temporary)
  3. Retail sales 11.6% y/y vs 11.7% exp (ex NY, lowest since 2004)
  4. Fixed Asset investment 16.1% y/y vs 16.3% exp, lowest since 2001
  5. the state-backed China Association of Automobile Manufacturers (CAAM) sees total passenger/commercial vehicle sales coming in at 23M for ’14, up 4.6% Y/Y (the prior target was 23.83M, or +8.3%). Bloomberg

The market is talking about the corporate buyback blackout 5 weeks prior to reporting earnings. “Most companies cannot buy stock in open market purchases in the five weeks prior to reporting earnings, and the start of that period coincided with the S&P 500 peak on Sept. 18.” Goldman sees corporate’s responsible for ~3% of the daily volume recently.

Paul Tudor Jones says US stocks will outperform the rest of the world into year-end. Jones thinks the USD rally may have ended and warned about a bubble in credit markets.

Upcoming:

  • Tue: 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
  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence
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