New High For The S&P 500, Emerging Leaders, Gotta Catch ’em All
New High For The S&P 500 – Today
A record close for the S&P 500 is all the talk, especially since it comes shortly after a major geopolitical event like the June 24 Brexit vote. Markets are looking for more though, with overseas indexes mostly higher overnight and futures pointing towards the same. Despite the potentially destabilizing news out of The Hague regarding Chinese control of the South China sea, equities continue upwards.
Here’s what Charlie Munger had to say at the Daily Journal meeting
Charlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More
Bond yields are moving higher as well, with 10 year Treasuries adding another 4 basis point to the 7 added yesterday. The US yield curve has also revered, as the 10 years are moving more than the 2 years, and the 75 basis points between the two has widened to 81. This is still the flattest since November 2007.
This reversal, while it may be temporary, comes just as the New York Times is writing about the alarm bells that the bond market is signaling.
What’s most impressive about the record close yesterday is that it came just nine days after it closed at a 50 day low on June 27th. That post-Brexit low was below its 200,100 and 50 day averages. In just 9 days it’s blown through these now flat lining averages to reach a new high, a quick and impressive move. The index as a whole is seeing broad strength throughout. 74% of the index is trading above its 50 day moving average, and 69% is trading above its 200 day moving average. Good to see that across multiple time frames, we’re seeing rising trends.
While yields are moving higher we’re starting to see the Utilities and Telecom sectors beginning to lag. Leadership is now emerging from the more cyclical sectors. Since the beginning of the year, the market has been led by the defensive Telecom (+21.2%) and Utilities (+21.2%), perhaps we’re seeing changing of the guard.
“Certain banks look cheap for a reason”. In this article written for the CFA Institute blog, David Schawel discusses the profitability of banks and insurance companies in low interest rate environments. Given the current environment of not only low, but in many cases negative rates, this article is a must-read.
With everyone walking into walls now playing Pokemon Go, there are a few voices out there warning that the game is digging deep into your data – perhaps checking your privacy settings is in order? Read here from New Scientist and more here from BuzzFeed
Smarter Than HFT?
Legendary quant-based hedge fund Renaissance Technologies has applied for a patent that could change the game for High Frequency Trading (HFT). According to Bloomberg, “the invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks – precisely calibrated to vibrations of irradiated cesium atoms – to sync orders to within a few billions of a second.” Sounds scary. Even so, the concept is not as complex as it seems.
HFT firms have been criticized for exploiting order flow. As an example, an HFT firm might see a buy order for 100 shares at $1.00 each. Using locational and technological advantages, the firm could execute the same order and then sell to the original buyer at $1.01, generating a small profit. Renaissance’s new technology would help to prevent that from happening. The basic idea is that the invention would “send an order to a central server, which breaks it up into multiple smaller orders.” Those orders, which would be synchronized using atomic clocks, would then be sent to “venues that offer the best prices and most liquidity.” If you can’t beat them then outsmart them. More from Bloomberg here.
Diversion: It’s in the media, but for those of you who still just don’t get it, Vox explains just what is Pokemon Go.
Mercedes is leading the way in luxury car sales, over passing BMW for the first time in over a decade. BMW sales grew at a 6% clip in the first half the year compared with 12% for Benz. Bombardier is set to embark upon a new chapter as the C Series takes off from Switzerland to Paris this week. The beleaguered plane maker is hoping they can gain sales traction with another European carrier after their win with Delta, earlier this year. Thompson Reuters is selling their intellectual property unit to Onex and Baring Private Equity for $3.55bb. They will use the proceeds to pay down debt and buyback stock.
Oil is rallying this morning up over 2% as the dollar is weakening and supply disruptions in Nigeria have intensified. The biggest pipeline in Nigeria that can carry as much as 180,000 barrels a day has been shut down after a leak was fund. U.S. stockpiles fell 3.25mm barrels last week. Gold prices are off almost $10 this morning as markets reached record highs yesterday on positive job data and overseas by the reelection of Japanese Prime Minister Shinzo Abe. Nickel has rallied to an eight month high this week as there are supply concerns from Philippine producers and more stimulus from international governments.
Fixed Income And Economics
The U.S. Treasury Department will raise $20 billion in a 10 year re-opening today that will be interesting for us fixed income observers. Last month’s auction drew a high yield of just 1.70% which represented a multi-year low with buyers coming in at a time when benchmarks were melting up. Fast forward 30 days later and we see the 10 year yield this morning at just 1.47% which barring any major market announcements, would challenge the all-time record low draw of 1.459% set at the July 11, 2012 auction (timing is everything of course and if this sale took place last week we’d be popping the bubbly at a new record). Expect demand for the issue to strong still despite the curve’s richness with indirect bidders likely to surpass the 74% level and the bid-to-cover to remain above 2.50 times. The U.S. government is of course enjoying these low costs of funding as they seek to re-finance and service the current $19.3 trillion in debt outstanding.
Fed speak is back in the headlines with Kansas City Federal Reserve President Esther George remarking yesterday that U.S. interest rates are too low and signaled she could be ready to restart her push for rate hikes within the Fed’s rate-setting committee. As a reminder, George is the most hawkish member of the FOMC and despite voting to keep rates unchanged last month, has dissented the previous two times in favor of a tightening move. “Keeping rates too low can create risks,” George told a management conference in Lake Ozark, Missouri. She said her decision not to dissent at the June 15 meeting owed to an unsettling sharp slowdown in hiring during May and worries around Britain’s vote on its EU membership. But she also said subsequent jobs data showing a rebound in hiring in June was “welcome news,” and that Britain’s vote now appeared to be more a long-term rather than a short-term concern. Given that markets have rebounded to all-time highs since, expect her to resume her call for a hike on July 27.
Earnings season kicked off with Alcoa Inc. releasing after the close yesterday with better than expected results. Pre-market sees the equity set to open higher while Alcoa’s debt trades stronger at time of writing. The widely owned $1.25 billion Alcoa 5.125% 2024 senior unsecured notes are up nearly a point to $105.25 for its highest level in a year. That equates to a yield of 4.34% and a yield spread of just +290.0 basis points over benchmarks. Note that Alcoa carries a split credit rating with S&P deeming them investment grade while Fitch considers them junk. Five year CDS spreads for their paper is narrower as well this morning.
Chart Of The Day
Quote Of The Day
Early to rise, early to bed, makes a man healthy, but socially dead. – Yakko from Animaniacs