The Launch Pad: Markets move lower to close the week, A New NIRP Member? by @connectedwealth
Friday, June 10th, 2016
Berkshire Hathaway’s Buffett On Diversification
In his 2014 letter preview, Buffett states that, far from being a weak choice, indexing can often achieve investor's goals far more easily than complicated picking strategies. This is a special guest post by Robert R. Johnson, Ph.D., CFA, CAIA. He is a full professor of finance at the Heider College of Business at Creighton Read More
It is looking like an ugly close to the week so far, with markets around the world selling off. Indexes in the A-Pac lost about a percent, and those in Europe are sharply lower by about 2% across the board at this stage of the day.
Canada will be an interesting one today. Oil is trading lower alongside the rest of the commodities complex, while our labour force numbers will be out by the time you have read this. See below for more on Canadian employment. As a lead-up, loonies are lower and US$ are higher – but we expect that on a risk-off day anyways.
With the likes of Soros, Gross and Icahn ringing bearish bells, the investing world appears to be taking note for now. We would point out, however, that over the past several years two of those mentioned, at least, have been continually bearish, leading many to ask Which Tea Leaves to believe?
The German response to Draghi’s comments a couple of days ago regarding the need for fiscal stimulus is in. Austerity remains their central tenant, noting that countries should focus on reducing their debt levels. With German 10 year debt levels nearing negative territory, we wonder if their tune will change if the German government actually starts making money by issuing debt. Germany 10s are at 0.025% this morning, continuing their slow march into negative territory and dragging U.S. and Canadian yields down with them.
The market is in perfect equilibrium this week. According to the weekly survey from American Association of Individual Investors 27.83% are bullish and 27.83% are bearish. I don’t suppose that means the market is going to remain flat all day. This does have the undecideds at 44%, which is high but not as high as a couple weeks ago when they reached 53%. Some uncertainly has dissipated over the past few weeks. We are now down to a 0% probability of a rate hike in June. OPEC didn’t make any abrupt changes. The June 23 Brexit vote is the big event now as markets remain calm, the implied volatility for the pound is the highest since 2009.
Bill Gross’ tweet yesterday summarizes his view: “Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day”
FP reports yesterday that MCAP, Canada’s largest private mortgage provider is filing for an IPO. We aren’t sure what that says about the industry, but understandably with the strength of the Canadian housing market we would think that MCAP’s business, which is largely originating mortgages, selling them to investors and then servicing the mortgages, is booming.
Some news this morning on the U.S. House of Representative passing a bill to restructure some of Puerto Rico’s debt. We doubt many readers have any exposure, so we’ll leave it at that.
A healthy stock market and rising real estate prices are expected to maintain a high level of U.S. consumer confidence. The University of Michigan’s preliminary June readings are out at 10 this morning, consensus estimates are at 94 vs 94.7 previously.
According to an update from the USGS, there is way more natural gas under Colorado’s Mancos Shale formation than initially thought. The formation has the second-largest assessment of potential shale and tight gas.
The Mancos Shale in the Piceance Basin of Colorado contains an estimated mean of 66 trillion cubic feet of shale natural gas, 74 million barrels of shale oil and 45 million barrels of natural gas liquids, according to an updated assessment by the U.S. Geological Survey. This estimate is for undiscovered, technically recoverable resources.
The previous USGS assessment of the Mancos Shale in the Piceance Basin was completed in 2003 as part of a comprehensive assessment of the greater Uinta-Piceance Province, and estimated 1.6 trillion cubic feet of shale natural gas.
As if gas wasn’t abundant enough.
Here is a good read form FMD Capital on what’s been working in the markets, fund flows and sentient. Remember, fund flows follow price. Interesting that we are still seeing flows out of equities, this is more market bottoming behaviour not what you expect after three months of decent stock returns.
Fund flows have been an interesting story and confirmation of the bearish sentiment patterns in stocks. Investors have been exiting stock-focused ETFs and mutual funds at a big clip as the market gets closer and closer to its prior highs. Check out this table of the last five weeks of combined fund flows from ICI. The numbers say it all – investors are exiting stocks and buying bonds at a pretty consistent clip.
Diversion: Euro 2016 kicks off today, here are the predictions from Sports Illustrated. Looks like quite a few of their experts are banking on France’s home field advantage.
The new Aston Martin DB11 is one good looking car. I’ll take one in cobalt blue please.
The world’s biggest bond fund, run by PIMCO, is adding Treasuries as they continue to rally. Tesla said yesterday that they will be creating a cheaper more affordable Model S in the next product cycle. They also announced a software upgrade that can extend the battery range of the vehicle from 208 miles to nearly 250 miles. The upgrade can be done remotely for the mere cost of $9,000. Valeant has agreed pay $54mm to settle a suit that drug reps from Salix Pharmaceuticals a subsidiary of the company was giving doctors kickbacks to sell their products. Statoil has ended their offshore drilling campaign of the shores of Newfoundland.
Oil prices have breached below $50 this morning as stocks and bond yields head lower. Gold is attracting new investment as the carry trade favors the yellow metal for the first time in history. That being you earn a larger relative yield storing gold than you do with a JGB for example that pays you a negative yield. Copper prices have taken a turn for the worse with prices heading lower as supply floods the market. Inventories rose nearly 40% this week, the biggest weekly gain in over a decade. Prices are down 11% since the start of May.
FIXED INCOME AND ECONOMICS
A positive Friday surprise has graced our desks this morning with the announcement that +13.8K new jobs were created in May. This easily trumped the +1.8K estimate from analysts, nicely reversed the -2.1K decline from April, and helps temper the concerns (at least temporarily) that our domestic labor market is in the wringer. StatsCan is reporting that a whopping +60.5K full-time workers were added last month that marks the highest monthly gain in the category since May 2013. Conversely, part-time hires were down -46.8K that is the lowest since last November. Diving into the details paints a pretty rosy picture with goods-producing work up +19.0K led by big gains in construction (+18.6K) and manufacturing (+12.2K). The latter is a welcome print in light of the sector losing -48.3K workers in the previous two combined months. On the service side, we saw upticks in the education (+14.2K), public admin (+19.4K) and business support (+16.6K) categories. Government work was up +30.2K while private sector hiring fell by -5.4K. The pool of Canadians looking for work slipped slightly to 65.7% from 65.8% prior but this was more than offset by the overall unemployment rate falling two-tenths of a percentage point to 6.9% — the lowest level of joblessness since last May.
We expected the impact of the Alberta wildfires to adversely affect the hiring patterns of the region and that unfortunately did come to fruition. More than -24K Albertan workers were shed in May that built on the -20.8K decline in April. This pushed joblessness up in the province to 7.8% after being just 7.1% in March. Bank of Canada Governor Stephen Poloz has said the fires are a short-term setback that may cause output to shrink in the second quarter before a rebound as crude starts flowing again, so we hope a similar pick up of hiring in the province also follows suit. Other regions of the country produced mixed results with Ontario and Quebec both adding +21.6K workers while BC (-8.4K) and Nova Scotia (-3.6K) both reported declines. While unemployment in the maritime provinces were mostly lower, most of this was attributed to sharp declines in participation with Newfoundland (-0.2%), PEI (-0.3%), and Nova Scotia (-0.5%) all reporting fewer workers in the job pool. This could be an area of concerns going forward if the trend of those outright looking for work continues. Overall, it’s a decent report from Ottawa with positivity in Ontario and Quebec helping to pick up the slack of other provinces. Reaction to the release sees the CAD building on gains and trading stronger by more than a penny against the greenback.
CHART OF THE DAY
QUOTE OF THE DAY
But I keep cruising
– Taylor Swift (Shake it off)