Wednesday, June 8, 2016

Today's Links

1--Goldman sees storm ahead for equities

according to Goldman the "growth" phase is behind us, we are now in the "optimism" phase, and it is only a matter of time before "despair" sets in. To wit:
A typical equity cycle often ends in ‘Despair’ with a drawdown… 

Large equity drawdowns often mark the end of an equity cycle and tend to coincide with a recession or financial market/geopolitical shock or a combination, which tend to result in a sharp equity correction driven by a decline in both earnings and valuations (the ‘Despair’- phase).....
, however, with margins at peak levels prospects for a material acceleration of earnings growth appear limited from here. ...

if secular stagnation is increasingly priced by the market, equities might suffer as growth expectations built into valuations would have to fall – if the market reduces its long-term growth expectations the equity risk premium could be much lower, closer to levels from 2007 . Similarly, if bond yields normalise faster than market expectations, this should also weigh on valuations. Changes in the growth/rates mix (how much do rates increase relative to growth?) will be key for equity performance from here. As a result equities appear vulnerable to both ‘growth shocks’ (e.g. secular stagnation repricing, US recession or another China slowdown/RMB devaluation) and ‘rate shocks’ (e.g. Fed rate hike cycle too steep or other central bank disappointments). In addition there could be financial market and geopolitical shocks that further tighten financial conditions, e.g. Brexit, US presidential elections etc...

here is Goldman's best answer for strategies on how to manage the equity drawdown risk.
  1. As the search for yield has boosted valuations across assets, we believe cash becomes valuable as diversifier in a portfolio and offers option value in drawdowns.

2--"He has never been charged with a crime ":

CIA agents subjected him to 83 rounds of waterboarding, sleep deprivation, nudity, confinement in a coffin-sized box — techniques that, the so-called 2014 Senate Torture Report said, did not turn up more intelligence than Soufan and his FBI colleagues got through about two months of traditional interrogations.
“I do not recall a case during the war on terror years that contained more elements of deceit and exaggerations aimed to promote the ill-conceived torture program like the case of Abu Zubaydah,” Soufan also told the Miami Herald, by email

3--World’s Safest Market Beset by Most Volatility Since 2008

The $1.5 trillion market for U.S. Treasury bills, known as an oasis of stability for investors worldwide, is experiencing the most volatility since the financial crisis.
Daily swings in the government’s shortest-maturity obligations are widening as debate over the Federal Reserve’s path collides with rising demand for the securities before the implementation of regulations intended to make money-market funds safer....

(Money Markets NOT safe--No guarantee you'll get your money back)
The new regulations mandate that institutional prime funds report prices that fluctuate, rather than sticking to $1 per share. The measures also allow fund companies to use steps such as redemption fees to prevent runs in times of panic...

Amid all the changes, which have already led many money-market companies to alter their offerings, institutional investors may pull about $400 billion from prime funds, JPMorgan Chase & Co. predicted in the first quarter.

4--These Are The Bonds The ECB Is Now Buying; A policy that openly rewards shareholders over working people

Today is a historic day for the corporate bond market: with the launch of the ECB's CSPP, Mario Draghi is now directly buying European investment grade non-financial bonds. This means that no longer will European corporate bonds trade based on their fundamentals, but purely on expectations of frontrunning future ECB purchases. And to make the frontrunners' lives easier, according to Bloomberg among the ECB's purchases today were €3 million Engie bonds, Telecom Italia notes due in 2023 and 10-year Telefonica securities; the ECB also bought securities issued by Anheuser-Busch InBev NV, the world’s largest brewer; Telefonica SA, Spain’s former telecommunications monopoly; Siemens AG, Europe’s biggest engineering company; Assicurazioni Generali SpA, Italy’s top insurer; French automaker Renault SA and utilities Engie SA and RWE AG.
average yields for euro notes were down to 0.98% on Tuesday, the lowest in more than a year, according to Bank of America Merrill Lynch index data. The ECB’s intervention in the government bond market over the past year has pushed yields down to records, as pricing no longer reflects any fundamentals.

We expect their yields to tumble to even lower record lows in the coming days...

The perception is that if they can’t buy at least 5 billion euros of bonds a month, the program will be seen as unsuccessful.” Of course, if buying IG bonds fails, there is always ETFs, REITs, and finally single name stocks before Draghi has to unleash the helicopter money...

While it is unclear how allowing European corporations to unleash a historic stock buyback spreed will do antyhing for the economy - after all this has been tried in the US for years without any positive impact - the ECB's action is already having an impact on European bond supply. Anticipating a surge in demand, companies sold more than €50 billion of bonds in the single currency in May, the second-busiest month on record, according to data compiled by Bloomberg. Already some are worried that the ECB's purchases, having been frontrun for the past three months, may not be enough: while buying of more than 5 billion euros of company bonds a month may boost the market, investors may be disappointed if the ECB bought less than 3 billion euros, CreditSights analysts wrote in a June 5 report. Commerzbank AG and Morgan Stanley don’t expect the monthly purchases to surpass 5 billion euros.

5--Draghi Fires Starting Gun on Corporate Bond Purchases in Europe

It has already moved markets and prices significantly.

The European Central Bank entered new territory in its efforts to stimulate the euro region’s flagging economy, plunging into the corporate bond market on Wednesday and buying the debt of some of the continent’s biggest companies.

The ECB is adding investment-grade corporate notes to its 80 billion-euro monthly purchase program, which already includes covered bonds, asset-backed securities and sovereign debt, as part of efforts to encourage growth. The central bank has bought more than 800 billion euros of government bonds since March 2015.

...Investors have previously been disappointed by other parts of the ECB’s bond-buying program. Securitized debt surged to the highest in more than seven years when the central bank announced plans to start buying asset-backed securities in 2014. They soon declined when purchases failed to meet expectations. Since the central bank started buying the notes in November 2014, it has accumulated just 19 billion euros of them.
“So much depends on the sizes of the purchases, which the ECB has been vague about on purpose,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “They might still be figuring out their approach.” (Market wants to know, "How much will you do for me this tome?")

6--US unemployed have quit looking for jobs at a 'frightening' level: Survey

Nearly half of unemployed Americans have quit looking for work, and the numbers are even worse for the long-term jobless, according to a poll released Wednesday that paints a grim picture of the labor market.
Some 59 percent of those who have been out of work for two years or more say they have stopped looking, the Harris Poll of unemployed Americans showed. Overall, 43 percent of the jobless said they have given up, according to the poll released in conjunction with Express Employment Professionals, a job placement service.

"This is a tale of two economies," Express CEO Bob Funk said in a statement. "It's frightening to see this many people who could work say they have given up."...

Other highlights of the poll:
  • 83 percent say economic benefits are skewed to the rich
  • 66 percent say they don't apply for minimum-wage jobs because the pay is too low
  • The unemployed are spending just 11.7 hours a week looking for work.
  • More than half — 51 percent — say they haven't had a job interview since 2014.

The results come just a few days after a government report showed that the unemployment rate fell to 4.7 percent in May, but the drop came primarily because of a sharp decline in the labor force participation rate. The number of people of all ages whom the government considers "not in the labor force" swelled by 664,000 to a record 94.7 million Americans, according to Labor Department data

7--Rock-Bottom Bond Yields in Europe Hit All-Time Lows--Yields on the 10-year government debt of Germany and the U.K. continue to slump

Yields on the 10-year government debt of Germany and the U.K. fell to all-time lows, a stark demonstration of the modern era of scant inflation, weak growth and outsize monetary policy.
Government-bond yields have been slumping for a year across the developed world. Tuesday’s decline came after tepid U.S. jobs data on Friday spurred concerns that the global economy would remain weaker for longer.
The yield on 10-year German bunds closed at 0.049% on Tuesday and continued to fall on Wednesday, hitting 0.036% in early European trade, according to data from Tradeweb. The 10-year U.K. gilt yield slipped to 1.263% at Tuesday’s close and traded down to 1.256% early Wednesday. Both yields are lower than previous troughs in the first half of last year. A different measure of the U.K. yield from data provider FactSet stood at 1.267% Tuesday. Yields fall as prices rise..

Some analysts also say that tepid labor-market data for the U.S. in May has driven investors to believe economic growth across the developed world will be weaker than previously believed, leading central banks to keep interest rates lower for longer. This in turn depresses sovereign-bond yields.
“The poor May jobs number led to a rally in bonds with yields falling across most markets. Bonds have continued to rally today,” said Mihir Kapadia, chief executive at Sun Global Investments.
As so much of the world’s debt falls into negative territory, investors have been pushed into markets that still are offering positive returns, in particular U.S. Treasurys. That extra demand has been a key factor in keeping U.S. yields low, analysts say. Even in the U.S., though, some traders in the options market have signaled concern that short-term U.S. yields could fall below zero. (Just keep that capital flowing into USTs! What a twisted system)

8--They'll stop at nothing: This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings

9--Weak Productivity, Rising Wages Putting Pressure on U.S. Companies

U.S. companies are facing a toxic combination of dismal productivity growth, accelerating wages and sluggish demand, raising the risk they will slow hiring, cut spending further and weaken an already-fragile economy.
Labor productivity, or the amount of goods and services employees produce per hour worked, fell at a 0.6% annual rate in the first quarter, the Labor Department said Tuesday. The drop, while less steep than initially estimated, extended a troubling slowdown that has hindered the economy’s ability to lift Americans’ living standards.

Stronger productivity boosts corporate profits, giving firms more money to pay their workers. Productivity grew an average 2.2% since World War II but has expanded just 0.5% over the last five years. Only in the five years through late 1982 has it grown as slowly.
Meanwhile, workers’ hours and compensation are accelerating, suggesting the labor market is at near or a level of employment deemed to be healthy without stoking too much inflation.

“The prospect of average yields below 1% is very scary,” Juan Esteban Valencia, a credit strategist at Societe Generale in Paris told Bloomberg. “Investors are being pushed outside their comfort zone to sectors like high-yield debt, where they may not have expertise...

When wage compensation outruns productivity, the result is an acceleration in labor costs per unit of output. In the first quarter, those costs rose 4.5% at a yearly rate and 3% from a year earlier. If companies can’t boost productivity, they must either absorb the costs in their profit margins or raise prices.
Corporate profits are being squeezed as a result, and the worry is that companies will slow hiring and further slash spending.
A different worry for the Fed is that firms will react to higher labor costs by raising prices, pushing inflation above the central bank’s 2% target

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