The Launch Pad: Rally running out of gas, George Soros & Mario Draghi don’t help matters either… via @
George Soros – TODAY
Judging by overseas markets and early futures, this current rally is running out of gas. The S&P is pointing to a lower open after hitting 2120 yesterday, just 10 points away from its closing high of 2130 (achieved May 21st of last year). It remains to be seen whether or not it has the momentum to roll into the next gas station.
Bond markets are moving higher sending yields lower once again, this time with the world’s benchmark 10 year dropping below the 1.70% mark. In Canada, the 1.16% on the 10 year is awfully close to its all-time low yield of 1% (February of this year).
Chart of the Day: Something interesting is going on, earnings revisions have turned positive. This does matter more than you might think. The US market has been in an earnings recession for the past 6-7 quarters, depending on how you measure it. Meaning looking at the quarter compared to the previous quarter or the same quarter a year ago to adjust for seasonality. Anyhow, the important takeaway is it does appear that the earnings recession is over with growth returning in the quarters ahead. Plus, we are seeing forward earnings estimates revised upward. This has not been the norm for a few years, as the typical pattern was for optimistic forecasts to be ratcheted down as the earnings date approaches. Comparables are becoming easier, the US dollar has softened a bit, oil prices have come back up. These are all good. The chart of the day is the earnings revisions for the full reporting year of 2016 broken down by sector and also by time. The blue is the revisions from March and April, clearly negative and led by energy. The orange is May revision, positive across the board except for Utilities, Telcos and Financials.
Of course valuations matter too with the S&P 500 trading 16.9x estimated earnings for the next 12-months. That is elevated, naturally given the S&P 500 is less than 1% below its all time high set back in May of 2015. Positive earnings revisions would make this valuation come down a bit, as would the passage of time assuming earnings growth remains positive. The other factor we will mention is Energy. As earnings in this sector disappeared very quickly over the past few years it is now trading at an elevated price-to-earnings. If you backed out energy from the S&P 500, it would be trading at about 15x earnings, a much more reasonable and dare I say attractive valuation.
George Soros is back and bearish again. The currency king is coming out of “retirement” to trade some bearish views in global macro. As many are now pointing out, there hasn’t been much time over the past 5 years that George Soros has NOT been bearish. Cullen Roche warns us from “guru worship” in the markets. No criticism of George Soros, but we need to be careful about following these types of calls just because an investor has been successful in the past. Interesting that even Carl Ichan who is net long said on CNBC this morning that George Soros makes some good points.
Barry Ritholz posts a cool chart of Disruptive Events in Wealth Management. Including the launch of the mutual fund, ETF, and of course… the robo advisor.
Despite what the markets are doing, the data wasn’t all bad. Germany hit a record trade surplus in April, so high in fact that the IMF and the OECD are trying to persuade them to ramp up their infrastructure spending in an effort to reduce the surplus.
Draghi wasn’t helping matter much either. Speaking at the Brussels Economic Forum, he pressured leaders to help with Europe’s weak productivity and low growth. Stressing that monetary policy along can’t win the battle. Without dedicated fiscal stimulus, the region still risks lasting economic damage. Interesting, that Canada appears at the forefront of this policy approach.
George Soros – Oil Outages
In May of 2016, unplanned oil supply disruptions averaged 3.6 million barrels per day (b/d). This was the highest total since at least 2011. The increase in disruptions, which amounted to 0.8 million b/d, was largely attributable to problems in Canada and Nigeria. In Canada, wildfires in Fort McMurray, Alberta gave way to mass evacuations. The result was an average supply disruption of 0.8 million b/d. In Nigeria, militant attacks on energy infrastructure curtailed production. This led to an average unplanned outage of 0.8 million b/d.
Outages that are related to weather or natural disasters or technical failures generally do not last very long. On the other hand, disruptions that are related to political disputes or conflicts can go on for years. Unplanned disruptions are likely to fall from here; however, political disputes or conflicts in Libya, northern Iraq, South Sudan and Yemen may persist for some time. More from the EIA here.
Diversion: For lovers of two wheels, here is the onboard view of the fasted lap ever at the Isle of Man TT Is. It’s a long circuit but Michael Dunlop really rips it averaging 137mph and hitting top speeds over 206mph.
George Soros – COMPANY NEWS
Bloomberg released a report that Larry Page one of the founders of Google, has started a company Zee.Aero that is working on developing flying cars. The project has been a bit of a secret denying any affiliation with Alphabet since its launch in 2010. UBS is cutting head count in their wealth management division and is shifting the focus away from recruiting advisors from competitors. They are focusing more on paying those that are there than those that aren’t. Performance Sports Group has reduced their full year guidance based on higher than expected bad debts, the bankruptcy of Sports Authority. They also named Harlan Kent as the CEO formerly from Yankee Candle. Elon Mush, the CEO of Tesla said yesterday that Samsung may be a provider of batteries for the company in the future.
WTI futures have retreated from yesterday’s recent high. Oil closed yesterday at the highest level in eleven months. The reversal today aligns with an uptick in the U.S. dollar. Movement in Brent prices has followed suit. Concerns surrounding genetically modified corn seeds in the U.S. has Brazilian poultry farmers reducing corn feed imports from the States. This comes as stockpiles in the U.S. are at all-time highs and chicken producers in Brazil have cut production by 10% this year because of corn shortfalls. Zinc has reached an eleven month high and now technically is looking to be overbought with the RSI rising above 70.
George Soros – FIXED INCOME AND ECONOMICS
Treasuries are building on their rally this morning with the 10 year nominal yield down to just 1.67% at time of writing — the lowest since late February. A strong auction yesterday helped fuel the buying with the sale of $20 billion in fresh government paper that drew 73.6% in indirect bidders. That marked the largest ever for this group (which included major central banks) and above the recent average of 63%. Direct bidders, which include domestic money managers, bought 7.2% which was below the average of 12%. The bid-to-cover came in at 2.70X and stronger than the 2.62X average from the prior ten auctions. This was the second of three planned sales of new Treasury notes this week, following in the $24 billion three year bond auction on Tuesday and preceding the $12 billion re-opening of 30 year paper today. Results of the latter will be interesting to say the least with current nominal yields hovering in the 2.47% area — significantly lower than the high draw of 2.615% last month. Falling investment manager demand suggests potential weakness and we could see larger than usual tail risk at today’s auction.
Overseas central bank action is in the spotlight in the overnight session beginning with the USD/NZD cross falling by more than 1% after the Reserve Bank of New Zealand left interest rates on hold amid worryingly high growth in house prices. The RBNZ however, left the door open to further easing from their current 2.25% cash rate if inflation failed to pick up. It has already cut the official lending rate five times in less than a year but like their Australian counterparts, are also concerned about further stoking already-overheated parts of the country’s property market. Later in the session South Korea’s central bank, the Bank of Korea, stunned financial markets by cutting interest rates to a record-low level of 1.25%. It’s the first time the BoK has eased policy since June 2015 and comes in response to growing pressure to ease policy and spur growth. Exports are slumping in the nation, domestic demand remains weak and consumer spending has yet to make a solid pickup. Only 4 of 23 economists polled by Thomson Reuters were expecting a policy easing at this meeting. Lastly, the central bank of Brazil held interest rates steady for the seventh straight time, resisting pressure to slash borrowing costs amid a recession as inflation remains near double digits. In a unanimous vote, the central bank’s monetary policy committee decided at its last meeting led by governor Alexandre Tombini to keep its benchmark Selic rate at 14.25%, the highest in nearly a decade.
CHART OF THE DAY
George Soros – QUOTE OF THE DAY
Aye, fight and you may die. Run, and you’ll live… at least a while. And dying in your beds, many years from now, would you be willin’ to trade ALL the days, from this day to that, for one chance, just one chance, to come back here and tell our enemies that they may take our lives, but they’ll never take… OUR FREEDOM!
– William Wallace (Braveheart – 1995)