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E.g., 20-11-2017
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    Gavekal Research

    Contradictory Signals On US Corporate Credit Risk

    US high-yield spreads have widened by 39bp over the last three weeks. Nevertheless, by long term historical standards, they remain exceptionally tight, indicating that the bond market is pricing in remarkably little US corporate credit risk. That message is at odds with the tale being told by the US equity market, which is signaling that corporate credit risk is on the rise. Only one of them can be correct. There are good reasons to think it may...

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    Gavekal Research

    Equities When The Dollar Declines

    The US dollar has strengthened over the last couple of months. But the relative maturity of the US cycle, the US dollar’s overvaluation, and the prospect for changes in monetary policy stances outside the US all argue for US dollar depreciation over the medium term. Against this bearish backdrop, KX examines the characteristics of equities that tend to outperform when the US currency is depreciating.

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    Gavekal Research

    The Unconvincing Pick-Up In US GDP

    US third quarter GDP growth came in on Friday at 3% QoQ annualized, much higher than the expected 2.6% rate. The strength of the headline number sparked optimism that the US economy had successfully shrugged off any negative impact from hurricanes Harvey and Irma, and certainly did nothing to discourage equity investors, as both the S&P 500 and the Nasdaq Composite rode buoyant earnings to new highs.

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    Gavekal Research

    US Equity Exposure For The Late Cycle

    The US equity bull run continues even as the US economy issues an increasing number of late cycle indicators. For investors who want to maintain exposure to the stock market but are getting nervous that the economy may soon turn down, KX examines the characteristics that allow stocks to outperform in the late stages of the cycle.

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    Gavekal Research

    Back Away From Buyback Plays

    From a cyclical peak of US$161bn in 1Q16, US corporate share buybacks fell to US$120bn in 2Q17. But although buyback activity is down, it is not out. In the past few weeks companies including Walmart, HP and Allergan have announced new share repurchase programs. The question for investors is whether they should chase these buyback plays.

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    Gavekal Research

    Don’t Count On A Miracle

    Do animal spirits in the US live after all? As profits have picked up, firms’ capital spending has rebounded from contraction territory in 2015-16 to a perky 6.7% QoQ rise in 2Q17. A range of business surveys suggest the trend was sustained through the third quarter. Much is at stake, for if capital spending can break out of its post-2008 range, it is just possible that a productivity surge can follow, lifting underlying economic growth. KX...

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    Gavekal Research

    A Portfolio For The Monetary Cycle

    Every US recession since the 1960s has been preceded by the combination of a fall in true money supply growth relative to real GDP growth, and a fall in the unemployment rate below NAIRU. In this paper, KX constructs a model portfolio which reduces exposure to risky assets in response to these signals, and finds that it offers investors superior risk-adjusted returns.

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    Gavekal Research

    The Real Story With US Inflation

    While hardly ranking as a hawk, Janet Yellen yesterday restated her view that inflation remains a worry. The Federal Open Market Committee as a whole may have last week nudged its 2017/18 inflation forecasts lower, but Yellen continues to argue that weak pricing pressures are transitory. The corollary is that the Fed should stick with its gradual monetary tightening plan. This places her slightly at odds with policymakers like Charles Evans, who...

    2
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    Gavekal Research

    Any US Profits Rebound Lacks Legs

    US equities have rallied to new highs on a favorable liquidity tide, buoyed by hopes for coordinated global growth. But they have also been given a leg-up by an apparently improved US profits outlook, as shown in the second quarter national accounts data. There are, however, compelling reasons to think that an uptick in profit margins cannot last. As 59% of value added by US non-financial corporates went to their workers in 2Q17, these center on...

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    Gavekal Research

    Not That Canadian

    The US and Canadian economies share many similarities due to their geographical proximity, similar level of development and Anglo-Saxon traditions of common law and open political dialogue. So it is curious that each economy’s labor market dynamics are strikingly different. This observation has more than hypothetical significance as workers become hard to find at the right price in late-cycle America.

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    Gavekal Research

    Bank Deregulation Is Not The Answer

    Janet Yellen nailed her regulatory colors to the mast on Friday. In her speech on financial stability at Jackson Hole, the Federal Reserve chair made plain her opposition to any wholesale roll-back of financial regulations introduced in the aftermath of the 2008 crisis. She didn’t mention by name the Financial Choice Act, the attempt currently before Congress to scrap key provisions of the post-crisis Dodd-Frank regulations. But she did address...

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    Gavekal Research

    Can The US Property Engine Fire Up?

    Two years ago banks started to make it harder for US construction firms to borrow and soon after activity began to fizzle. While blame has been pinned on skilled worker shortages and rising costs of both land and materials, KX and Will think financing was the key issue. The good news is that banks seem to be again loosening their purse strings.

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    Gavekal Research

    The Misleading Signal In US Auto Sales

    Trying to tease economic trends out of recent US data releases is a frustrating business. Take yesterday’s figures. Although the ISM manufacturing PMI ticked down a shade in July to come in a fraction below expectations, at 56.3 the number remained firmly in expansionary territory. On the other hand, two classic cyclical indicators of US economic health—construction spending and automobile sales—both came in weak.

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    Gavekal Research

    US Bear Flattening Ahead

    The miniscule change of wording in yesterday’s Federal Reserve statement appears to confirm that the Fed will go ahead and begin to shrink its balance sheet from September. June’s statement said balance sheet normalization would begin “this year”, implying the process would start by December at the latest. Yesterday’s statement altered that to “relatively soon”—and relatively sooner than December suggests September, as the only other meeting...

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    Gavekal Research

    The Eurozone Is Now So Far Behind The US, It’s In Front

    Among the many tricky tasks facing investors is to determine the relative positions of the US and eurozone economies in their respective business cycles. Over the preceding two cycles—the ones that peaked in 2000/01 and 2005/06—the two economies moved broadly in phase, with the eurozone lagging the US by around one year. Estimates from the International Monetary Fund and OECD suggest that that relative position is largely unchanged, with the...

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    Gavekal Research

    Liquidity: More Bad News Than Good

    Gavekal has long maintained that bull markets rest on three pillars: liquidity, valuations, and growth. Now with the Fed set to tighten further in an environment of weak bank credit growth, KX and Will warn that the liquidity pillar which has done so much to support the current bull market in US equities is looking increasingly shaky. That is especially ominous, given that valuations are no longer cheap and catch-up growth is played out for this...

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    Gavekal Research

    Watch US-Eurozone Rate Differentials

    Interest rate differentials between the US and eurozone are wide by historical standards. This is no surprise. The US has enjoyed uninterrupted growth (at least in year-on-year terms) since 2010, and today the Federal Reserve stands as the most hawkish big central bank in town. In contrast, the eurozone slumped back into recession in 2012, and the European Central Bank remains in full-blown easing mode. As a result, interest rate differentials...

    2
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    Gavekal Research

    The State Of US Inflation

    In her testimony to Congress yesterday, Federal Reserve chair Janet Yellen attributed the weakness of US inflation to temporary factors. As a result, the Fed remains focused on tightening policy. However, given that US inflation has consistently undershot the Fed’s target, any further decline will raise concerns that the US business cycle is rolling over.

    0
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    Gavekal Research

    The Payrolls Paradox: Tight Labor But Weak Wage Growth

    As usual the market focused closely on the headline number in last Friday’s employment report, which saw non-farm payrolls come in at a stronger than expected 220,000 in June. As usual, we caution against reading too much into any one month’s figures, for the reasons Anatole has explained so elegantly (see Beyond The March Payrolls Soft Patch). Instead we prefer to take a step back and to attempt to answer the two big questions currently hanging...

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    Gavekal Research

    What Could Turn Around The US Business Cycle? Hint: Not Much

    As often happens, US data is sending mixed messages. Yesterday’s ADP report showed weak job growth in June, despite the latest ISM service sector PMI being decidedly perky. Investing according to the latest high-frequency growth data is a good way to get whiplash. Instead, let’s take a step back and review the US economy’s overall positioning.

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