Trends in Outperformance Across the MSCI World

Generally speaking, about 50% of member companies are outperforming the MSCI World Index over any given time period.  When we take a closer look at each region, however, we notice some interesting trends.

 

In MSCI North America, the percent of companies outperforming the index has risen very slightly from 53% to 61%:

The trend in MSCI Europe constituents is less positive as the percent outperforming has dropped to just 38% from 57%:

Meanwhile, companies in MSCI Pacific are increasingly outperforming as the percentage has risen from only 28% to nearly 50% (down slightly from a recent high of 60%):

Stocks the Only Economically Sensitive Asset Trading Higher Today

Stocks are once again departing from most other asset classes today as the S&P 500 and Russell 2000 rip higher while treasury yields and most hard commodities are down on the day, though higher than in early morning futures trading.















Crude oil is higher, but not notably so, and the same goes for the USD/JPY cross.

What A ZIRP World Looks Like

Out of the United States, China, Australia, Germany, Canada, EMU, and Japan, only China has seen their bond yields, both government and corporate, move higher over the past five years. Outside of China , government bond yields have been moving in tandem recently. Canada, Australia, and the US 10-year yield have moved in lockstep, as have Japan, Germany and the EU, and the two groups have diverged since the middle of 2013. The latter group has fallen quite a bit and the former has risen slightly. In the countries where corporate yields are lower, corporate bond yields are all at least 25% lower and in the case of Canada, Germany, EMU and Japan yields are at least 50% lower.

Median Stock Valuations are Still Near a Record High

Measuring the valuation level of the median stock in an index can help mitigate the market-cap-weighted bias associated with many index level valuation statistics. This is important because index level valuations that are heavily influenced by a handful of large companies can give a misleading representation of prevailing valuations for most stocks.

In the below charts we show the median valuation for stocks in the MSCI World Index (red line, right axis) and compare it to the Index price (blue line, left axis). Of note is that the median stock is trading at valuation levels only seen at the previous stock market highs of 2007 and 2000.

How Much Tighter Can Junk Spreads Get?

The chase for yield has driven the the spread between junk bonds and AAA bonds to a 20-year low level of just 79 points.



This has happened at the same time as the AAA-10-year spread has widened. The Junk-10-year spread remains historically tight.



Somewhat surprisingly with spreads so tight, the high-yield market isn't a screaming sell at the moment. However, when one looks at real junk bond yields, it does look to be extremely overvauled

The ECB And Kicking The Dog

Today the ECB moved to once again ease monetary policy, and as a part of its package, it imposed negative rates on excess reserves.

I remember, years ago, sitting at the feet of Art Laffer at his home in Rancho Santa Fe listening to him offer his simple version of why incentives matter.  He said, "If you kick a dog, you know where it will not be--within kicking range.  If you feed a dog, you know exactly where it will be--at your side."  By moving to impose negative deposit rates, the ECB is instituting a tax on banks holding excess reserves.  This is the equivalent of the ECB kicking the dog.  Where those reserves end up is subject to debate (though we have some ideas below), but it is probably fair to suspect they will move out of kicking range.

So, where then do European banks part their excess reserves to avoid being kicked?  If the last few years is any guide, some may end up in the US banking system via European banks intra-company transfers in order to earn the 25bps the Fed is paying..  Think of a European bank operating in the US having two basic divisions--one is its European operations and the other is its US operations.  Each division maintains its own balance sheet, and each division can increase or decrease its net debit or credit position relative to the other.  In the chart below, we illustrate this idea.  Presently foreign banks (think of BNP in Paris) have a $597 billion net credit position vis-a-vis their US operations.  In simpler terms, Foreign banks have deposited almost $600 billion with their US affiliates.  With total liabilities of $2.535 trillion, this means that foreign banks have a net credit position with their US operations amounting to 23.56% of their total liabilities.  This stands in stark contrast to 2008, when foreign banks had a net debit position against their US operations amounting to over 40% of total liabilities.



Now, here is where this gets interesting.  For the last five years, there has been a pretty strong correlation between the size of the net debit/credit position of foreign banks vs. their US operations and bond yields.  In a nutshell, when foreign banks increase the amount they have deposited in their US operations, US Treasury rates fall.  In the chart below, I have plotted the Net Due to Foreign Related Institutions (the technical term for these inter-bank debits/credits) alongside 10 year US Treasury bonds.



If past is prelude, this may portend another mysterious reason why US Treasury yields are falling--the ECB is kicking the dog.

Intraday Volatility has Completely Disappeared for the S&P500

One way to measure price volatility is to look at the intraday range an asset trades within (the intraday high minus the intraday low) and then compare that range to the asset's price level. In this way we normalize the daily range for the prevailing price of the asset so comparisons through time are consistent.

That is exactly what we do in the charts below for the S&P500. What we want to highlight is that the intraday trading range of the S&P500 has, outside of the Christmas to New Years period each year, only been lower on two occasions over the last ten years; once in November of 2013 and once in November of 2006 (1st chart). Extending the observation period back twenty years only yields two more instances of lower intraday volatility; one instance in each 1994 and 1995 (2nd chart).

The Euro: Where To From Here?

In the wake of today's ECB announcement of rate cuts as well as additional measures to boost bank lending and head off disinflation/ deflation trends in many of its member countries, the euro has (unsurprisingly) moved lower versus the dollar:



How far might it decline?  If the Eurozone-U.S. short-term interest rate differential is any indication, it could fall quite a bit from current levels:

Just posted in Financial Advisor Magazine:

Crashes, Cash and the Art of Long-term Investing

By Steve Vannelli

If you could choose what happens in the stock market tomorrow, would you prefer it to double or drop by two-thirds? For long-term investors, the choice may not be as obvious as it seems. 

During a cyclical bull market like the one we have been in for the last five and half years, with stock markets making glorious all-time highs and valuations marching steadily higher, it’s easy to forget one of the most basic rules of investing: compounding of dividends trumps price appreciation over the long-term. This may seem counter-intuitive at first blush. Who wouldn’t prefer a doubling of the S&P 500 versus a two-thirds decline? In fact, for long-term investors and under certain conditions, a crash would produce a larger annual return over a 30-year horizon. In the charts and discussion below, we explain how that works. 

Read more at FA-mag.com … 

The Bear Population Around the MSCI World

Just seven (or 1.5%) of the 450 or so companies in MSCI Europe have underperformed dramatically enough this year that they can be classified as being in a bear market:

MSCI Europe


This compares to 17 (3.6%) of the 463 companies in the Asia-Pacific Region and only 18 of the more than 700 MSCI North American companies (or ~2.5% of the total number of constituents):

Asia-Pacific


North America

Gold And Lumber Glidepaths In Taper Scenario

Not all commodities are driven by the same factors.  Weather patterns exert a heavily influence when it comes to crop prices (corn, soy, etc.) and in turn meat prices (beef, pork, etc.).  Global demand for durable goods, infrastructure building, etc. drive metals like copper or iron ore.

When it comes to gold and lumber the driver of prices recently has been monetary policy, specifically quantitative easing (QE).  More QE stimulates building, which in turn boosts lumber prices.  Less QE has the opposite effect.  Gold is surely more complicated given its role as an alternative store of value and medium of exchange, but monetary policy is likely the most important variable here too.

What's interesting is how QE has had the exact opposite effect on lumber and gold.  In the charts below, we plot the three month change in Fed total assets alongside each commodity.  The three month rate of change in total Fed assets peaked at $332 billion on 12/13/13 and currently sits at roughly $166 billion, a drop of almost half from peak to present.  In the first chart, we invert the right scale to show how gold should RISE as the taper unfolds.  In the second chart, the right scale is upright to show how lumber should FALL as the taper unfolds.

Chinese Stocks Are Flirting with a Downside Breakout

Major Chinese stock indices have been in a bear market for six years now and currently find themselves testing the lower bound of what may or may not prove to be a base. We'll be watching carefully to see if the lows set in 2012 and 2013 hold. Below we show five years of history for the Shanghai Composite, CSI 100 and CSI 300.

The Market Is Due For A String Of Down Days

A random walk theorist would suggest that over a long enough period of time, the number of days the market ended higher should equal the number of days the market ended lower. Said differently, the percent of "up days" should equal the percent of "down days". In our work, we have discovered that the average daily percent change of a stock (or index) has a higher correlation to future returns than the percent of days the stock ends higher. However, the percent of up days is a mean reverting series so when extreme levels are reached it (as they are now) pays to take note. Since 1980, over a moving four month period, out of 100 days the market has ended higher nearly 54 of the days on average. As the chart below indicates, the percent of up days tends to stay within 1-standard deviation of the mean (ranging from about 47-60). The four month cumulative percent of up days is currently sitting at just below 64%. Given the mean reversion tendencies of this series, it is fairly safe to say that investors are most likely entering a phases where the number of down days will out number the number of up days.

European (Youth) Unemployment

The headline number for European unemployment came in slightly better (lower) than expected today.  However, young people under the age of 25 still struggle to find jobs.  And while the situation is (slowly) improving in some of the hardest hit countries like Greece and Spain, youth unemployment in Italy continues to rise, reaching over 43% in April.



Compared to a year ago, the rate of unemployment in Italians under the age of 25 is nearly 4% higher.  In contrast, youth unemployment rates have fallen by about the same in other peripherals like Ireland, Greece, and Portugal.

Americans Just Don't Drive Like They Used To

During our massive monthly data review on commodities, inflation, trade and leading indicators, one of the consistently eye-opening data points, even though we have seen the chart many times, is the leveling off of aggregate amount of miles driven on all roads and streets (annualized) in the United States. The US is well below highs made in 2007 (latest data is only through March, unfortunately). If we deflate this series to account for population growth, the findings are even more eye-popping. Outside of one blip in February 2011, what you find is that the US hasn't had a positive year-over-year growth in miles driven adjusted for population growth since September 2005! To put that in context, the US spent the majority of the 1980s and 1990s consistently growing on a year-over-year basis adjusted for population. If you are interested in learning more about this phenomenon going on we found this report interesting.

Advanced Countries' Export Volume Dipped Into Negative Territory In March

On a year-over-year basis, according to the CPB World Trade Monitor, exports among Advanced Economies slipped into slightly negative territory in March. On an aggregate basis, export levels still have not surpassed highs made in 2008. This is contrast to exports from Emerging Economies where they have far surpassed 2008 levels. However, exports from Emerging Economies have been a recent funk as well. March was the fifth straight month that registered a month-over-month decline.





Import volume among Advanced Economies has basically been flat for the past three and half years and are well below levels seen in 2008. Emerging Economies imports have steadily increased over the past 5 years but have declined for the past two months.