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    Gavekal Research

    The Bright Spot In The US Market

    Even though US home prices have risen by more than a third in the last three years, the residential construction sector has been a persistent disappointment, showing little meaningful recovery. That is finally changing. On Monday the National Association of Homebuilders’ Housing Market Index hit its highest level since 2006, while July data released yesterday showed housing starts closing in on an eight-year high at an annualized 1.2mn rate....

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    Gavekal Research

    Strong US Data Confirm Underweight

    Data released on Friday reaffirmed the robust health of the US domestic sector. Paradoxically, this only strengthened our conviction that investors should underweight US equities in favor of other markets.

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    Gavekal Research

    More Cautious Than Ever On US Stocks

    Exactly six months ago, we declared we were Turning Cautious On US Equities. At the time we noted that while US domestic demand was healthy, US stocks no longer looked cheap, the US dollar was no longer competitively valued, and the Federal Reserve was moving unambiguously towards tightening monetary policy. Half a year later, the S&P 500 has risen 4.3% and the Nasdaq Composite 9.2%. On the face of it those look like respectable returns; not...

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    Gavekal Research

    Three Risk Factors For US Growth

    In the run-up to the meeting this week of the rate-setting Federal Open Market Committee and the release on Thursday of second quarter gross domestic product data, confidence in the strength of US economic activity is deteriorating. It is not just that most market participants now expect 2Q growth to be modest relative to last year, with the consensus looking for an annualized QoQ figure of 2.7% compared with 4.6% for 2Q14 (see Not Déjà Vu Again...

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    Gavekal Research

    5C United States: Who Gains From The Widening US Trade Deficit?

    After four years of US dollar real effective exchange rate appreciation, the US trade deficit is finally showing signs of widening. Both exports and imports have slumped heavily in value terms, largely because of a combination of weak oil prices and US dollar strength. Trade volumes paint a clearer picture, with exports down -0.5% year-on-year in May, while imports rose by 3.5%. As a result, the US trade deficit has expanded from 2.5% of GDP in...

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    Gavekal Research

    What Price US Growth Stocks?

    Ever since US equities bottomed in March 2009, glamour stocks such as Google, Amazon and Netflix have been at the forefront of the rebound, leading the Nasdaq composite to an all time high this week. While we continue to prefer other markets over the US (see Turning Cautious On US Equities), recent moves in mega-cap US growth stocks have set us wondering how long the outperformance of growth stocks over value stocks can last. After all, even...

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    Gavekal Research

    5C United States: The Divergence In Inflation Rates

    Following last year’s collapse in oil prices, US inflation declined from 2.1% in May 2014 to zero in May this year. Close followers of the US economy will know, however, that this zero rate masks a sharp bifurcation in prices. The slowdown in headline inflation has been propelled entirely by goods prices, which slumped -9.6% YoY in May thanks to modest international price pressures and the strong US dollar. In contrast, services prices, which...

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    Gavekal Research

    US Payrolls Are Running Out Of Juice

    Later today we will publish our Growth & Markets Monthly, updating Gavekal’s dashboard of essential economic and risk indicators. The markets side of the equation is relatively straightforward this month: although investors have not switched into full risk-off mode, with the outlook for Greece’s eurozone membership as uncertain as ever ahead of this weekend’s referendum, there has been a clear diminution in their appetite for risk. What of...

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    Gavekal Research

    5C United States: Will Weak Manufacturing Derail Growth?

    Marching into the second half of 2015, the US economy is gradually recovering after another weak start to the year. The majority of forecasters are now expecting a rebound in the US second quarter gross domestic product growth. This makes sense as domestic demand remains strong, supported by lower oil prices, a strong job market and deleveraged household balance sheets. However, while we have seen a robust rebound in most economic data series,...

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    Gavekal Research

    Don’t Fret (Yet) About US Housing

    In the summer of 2013, a sharp rise in US bond yields driven by the taper tantrum derailed the US housing market. Will the upward spike in 10-year treasury yields from 1.7% in February to 2.4% today do the same? So far, the market is showing no signs of fear. Despite a 40bp increase in mortgage rates, monthly housing sales and prices remain highly encouraging, as do the weekly numbers for mortgage applications. Meanwhile, US homebuilder stocks...

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    Gavekal Research

    The Fed And Dollar Depreciation

    So no surprises. A slightly more dovish Federal Open Market Committee stuck to the script of future monetary policy moves being data dependent. Since the US central bank yesterday scaled back its 2015 GDP growth forecast to 1.8%-2%, the implication is that rate increases, even if they start in September, will be a gradual affair. Investors liked what they heard as this suggests that Goldilocks lives, and a “not-too-hot, not-too-cold” scenario...

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    Gavekal Research

    Switch In Favor Of US Multinationals

    In recent weeks the US dollar has grown increasingly sensitive to changes in expectations for US interest rate hikes, with the currency’s DXY index fluctuating daily in response to every shift in sentiment about the precise timing of the US Federal Reserve’s first upward move. But while the exact date of the lift-off is crucial to the short term trajectory of the foreign exchange market, over the longer run the US dollar’s upside looks limited.

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    Gavekal Research

    5C United States: Treasury Yield Normalization

    The trigger for the recent jump in 10-year treasury yields from 1.9% to 2.4% was leveraged investors unwinding long positions on European government bonds. This is not surprising as a “deflating” eurozone was a key reason for last year’s decline in global bond yields. Today, the outlook has improved as the single currency area looks to be enjoying a modest recovery. Absent a Greek-inspired contagion, Europe is likely to be less of a factor...

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    Gavekal Research

    To Cheer Or Fear US Wage Growth?

    Is the US equity market merely taking a breather before the next upward leg of the bull run? Or has it reached a worrying plateau, marking US stocks out for a protracted period of underperformance? With domestic profit margins facing a squeeze between the strong US dollar on one hand, and stirrings of wage growth on the other, we are worried it is the latter. As we argued on Tuesday, the US dollar’s strength means that any rewards US firms...

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    Gavekal Research

    Will The Buyback Craze Ever End?

    Scientists tell us one of the things that sets us humans apart from other mammals is our relatively large prefrontal cortex, the part of our brain that allows us to resist the lure of instant gratification and instead sacrifice ephemeral pleasures for solid long term gains.

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    Gavekal Research

    Not Déjà Vu Again For The US

    With the mid-point of 2015 approaching it looks to be a case of “déjà vu again” for a US economy suffering early year blues. As with other “soft patch” periods, there are plausible explanations for this stodginess that don’t just involve beating up on statisticians for their seasonal adjustment techniques. The US indeed had a cold winter and the West Coast port strike disrupted trade flows. But the real question for investors is whether the US...

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    Gavekal Research

    5C United States: The Rising Supply Of 'Earned' US Dollars

    The US dollar is the world’s reserve currency, which means the US can settle its current account deficit by issuing more US dollars. As Charles says, this means any contraction in the US current account deficit means fewer US dollars flowing abroad (see The US Current Account And Vanishing Global Liquidity). Naturally the reverse is also true. Following the strengthening of the trade-weighted US dollar index over the past four years, the...

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    Gavekal Research

    5C United States: Why So Calm After The Oil Price Collapse?

    After oil prices halved, profits in the sector look to have followed suit—S&P 500 energy firms in 1Q15 saw an eye watering -55% YoY plunge in earnings. Given this backdrop, it was to be expected that gory tales would emerge from the oil fields of Texas and North Dakota of bankruptcies, mass layoffs, forced sales and shotgun marriages. To be sure the oilfield services space has seen a bit of this, but generally an eerie calm prevails.

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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

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    Gavekal Research

    5C United States: Forget Payrolls, Watch Out For Wage Growth

    Not so long ago most of what the savvy investor needed to know about the US economic cycle could be gleaned from a casual perusal of the labor market. Sadly for those seeking a simple life, those days have passed. For example, key measures of labor market slack offer mixed messages; the participation rate is stuck below the trough of the last two cycles which points to the working age population being under-utilized. Yet, a greatly reduced...

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    Gavekal Research

    Beware Of Crowds, And False Prices

    The world’s largest economy is on the cusp of a deflationary depression—at least according to yesterday’s US GDP report. Real growth was up a mere 0.2% annualized in the first quarter, while nominal growth was even lower, at just 0.1%, due to a -0.1% drop in prices. Yet the markets largely looked past this “shocking” report. There were some notable moves yesterday, but not because the market was pricing in economic disaster—far from it.

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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

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    Gavekal Research

    Drop The Dollar Hedge

    The United States represents more than half of global equity benchmarks (58% of the developed-market world MSCI and 52% of the all-country version). So the key question every global equity investor must answer is whether to be overweight or underweight the US?

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    Gavekal Research

    5C United States: Competitiveness Lost

    We must be in a global recession! At least that is the conclusion an investor might draw if looking only at US trade data. US import and export volumes both collapsed by an annualized –25% in the first two months of the year, something not seen since the 2008 recession, and 2001 before that. An assessment of trade values would result in an even worse conclusion being drawn—a deflationary depression is underway. The truth is that the situation...

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    Gavekal Research

    The US Market’s Silver Lining

    We are no bulls on the US market. Even if growth remains solid, our view is that US equities will struggle to post yet another year of outperformance given that valuations are already stretched, the Federal Reserve is no longer the easiest central bank in town, and the US dollar is no longer super-competitive (see Does It Still Make Sense to Overweight the US? and Turning Cautious On US Equities). Even worse, decent growth is not a given. While...

    0
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    Gavekal Research

    5C US: Doing More With A Flatter Yield Curve

    Banks borrow short and lend long. Hence profits are a function of a) the steepness of the yield curve, and b) how much risk (and return) banks are willing and able to reach for at the long end of the curve—taking either duration risk or credit risk, or both. With this in mind, we consider earnings potential in the three key areas:

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    Gavekal Research

    The Fed’s New Policy: Zero Real Rates

    The Federal Reserve is convinced that the US is not turning Japanese—even though the US consumer price index was flat in February compared with a year ago, having fallen -0.1% in January. Once the effects of lower oil prices abate, the Fed expects inflation to head back toward its 2% target. Whether policymakers are right about this inflation outlook means everything for the trajectory of future policy rate hikes, for two reasons:

    2
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

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    Gavekal Research

    The US Corporate Profit Paradox

    The US equity market is richly valued and faces a buffeting headwind in the shape of the soaring dollar. Our recommendation in recent months has been to dial back exposure, but committed investors should stay concentrated in domestic plays rather than firms with a big reliance on international earnings (see Turning Cautious On US Equities). Such a portfolio orientation was borne out by generally weak 4Q14 corporate earnings. But a key part of...

    0
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    Gavekal Research

    Strong Economy, Weak Markets

    The US has been dishing out report after report showing an improving labor market. And the equity market doesn’t like it one bit.

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    Gavekal Research

    5C United States: A Crowded Trade, With Good Reason

    The dollar has had quite a run—with the DXY up 22% since July. This crowded trade is obviously vulnerable to pullbacks. But volatility aside, is there potential for the dollar to rally further in the medium term? The short answer is yes, especially against the euro. But if you want to be contrarian, we suggest going long yen. These calls are based on three factors: (i) relative monetary policy trajectories, (ii) the likely direction of fund...

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    Gavekal Research

    The Sense Of An Ending

    In yesterday’s congressional testimony, Federal Reserve chair Janet Yellen did not indicate that she is backing away from her tentative plan to hike interest rates later this year. Sorry markets. But investors may take comfort in the fact that she has made it crystal clear that rate hikes will not come as a surprise. There will be ample warning.

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    Gavekal Research

    5C United States: The Stars Have Aligned

    The 2013 “taper tantrum” sent mortgage rates up and so put the housing market recovery on hold for a few quarters. But then rates came back down, and the US housing recovery resumed—albeit modestly. We must admit that this “recovery of the recovery” has been weaker and narrower than we expected. And now, a key housing market indicator has rolled over; existing home sales in January fell –4.9% MoM, the biggest decline in more than a year....

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    Gavekal Research

    The Signal In US Market Cap

    The ratio of US stock market capitalization to US gross domestic product has long been a favorite indicator for many investors. The great Warren Buffet himself endorsed it in 2001 as “probably the best single measure of where valuations stand.” But we think we can improve on it. Recent history has shown that it is more appropriate, and more useful, to value US stocks against global GDP. Looking at this measure today we find one more reason to...

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    Gavekal Research

    The Resolute US Motors On

    January saw the oil and gas industry fire more workers than in any period since the 2008 recession. Viewed in this context the overall pace of job growth in the US is remarkably robust. The January jobs report saw non-farm payrolls grow by 257,000, far ahead of the expected 228,000 and confirming 11 straight months of job gains above 200,000. It also reinforces the point that the energy sector is a fairly small part of the US economy, and the...

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    Gavekal Research

    5C United States: An Earnings Season Divided

    Having passed the halfway stage of the 4Q14 earnings season there is a hint of disappointment in the air. On a median basis, sales and earnings grew 4.0% YoY and 6.0% respectively, down from 5% and 10% in 3Q. Unsurprisingly, the misses have mostly come from energy firms and those players which rely on overseas markets, and so suffer from a strong US dollar.

    0
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    Gavekal Research

    US Housing Gets Interesting Again

    You’d think the US housing market should be humming along nicely. Economic growth is decent even as worries of deflation in overseas markets help push long-dated bond yields to record lows, so cutting the cost of home finance. The collapse in oil prices has given households money to spend and pushed consumer confidence readings for January to a post-crisis high. Last week’s GDP report for 4Q14 showed personal consumption growing at an impressive...

    0
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    Gavekal Research

    Turning Cautious on US Equities

    Given their remarkable performance over the last four years, can US equities really continue to outperform global peers? Recent developments give cause for concern as market technicals look weak and earnings announcements for bellwether stocks have come in lackluster. Earlier this week Louis asked some basic questions about US equity market leadership (see Does It Still Make Sense To Overweight US Equities?). We share his concern not because we...

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    Gavekal Research

    5C United States: What If The Fed Really Did Hike This Year?

    Since making its first rate cut in September 2007, the Federal Reserve has delivered seven years of the most intense monetary easing that modern economies have experienced. Now, the world must grapple with the exit strategy. To be sure, that moment of reckoning could be delayed by factors that include lower oil prices, a higher dollar and renewed risk of a Grexit. But, unlike a certain central bank from a country noted for its chocolate and...

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    Gavekal Research

    5C United States: The Economic Ripple Of Cheaper Oil

    Some worry that while US consumers are today benefitting from lower fuel costs, this will be trumped by mass layoffs as the shale energy boom goes bust. We don’t buy it. The shale boom is certainly going to bust, but the size of the US energy sector should not be over-estimated and nor should the positive effects that tend to follow oil price declines be underestimated.

    0
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    Gavekal Research

    Oil And US Contagion Risks

    Oil prices are 50% lower than last summer and it is not clear that the rout is over. Such a dramatic price adjustment in what is arguably the most essential commodity to modern life will inevitably shape the economic and investment landscape in 2015. In the case of the world’s largest oil consumer, our view has been that lower oil prices reinforce the case for a sustained US recovery. Our proviso to this fairly cheery prognosis is that the...

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    Gavekal Research

    The Sources Of US Purchasing Power

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    Gavekal Research

    New York Seminar December 2014 - Charles, Francois, Tom & Will

    We held our winter seminar in New York on December 5 with Charles, Francois, Tom and Will offering their views of the global economic pulse and recent market developments.

    0
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    Gavekal Research

    5C United States: US Capex Will Grow Despite Energy Sector Cuts

    The relentless decline of oil prices promises to be a key variable impacting economic activity in 2015. The positive implication for consumers is clear. The implication for capital spending growth is less obvious. Our view is that the outlook for overall US capital spending is bright, despite the likely collapse of oil-related capex. In fact, it may be brighter because of the collapse in oil prices.

    0
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    Gavekal Research

    5C US: United States: Capital Spending Is Picking Up

    Corporate America has been extraordinarily profitable through the post-2009 recovery, with the latest earnings season once again surprising on the upside. Yet, economy watchers have been frustrated that companies have not used this profitability to fund a capital spending spree. Instead, they have opted to buy back shares and pursue mergers and acquisitions. Our view—considering the economic circumstances—is that this was rational behavior. But...

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    Gavekal Research

    Global Central Banks Are Driving Appetite For US Cyclicals

    The rebound in US equities since their mid-October trough has been impressive. After giving up almost all its year to date gains in just four weeks, the S&P 500 snapped back even more quickly, ending October at a new record high. Since then, it has extended its advance to notch up a YTD gain of 12%. Yet, until just a few days ago, the relative performance of sectors within the index indicated a degree of caution on the part of investors....

    0
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    Gavekal Research

    5C US: To The Consumer Go The Spoils Of Shale

    The US shale energy revolution will continue to confer economic benefits, but a reordering of the main winners and losers is unfolding. With the WTI benchmark at $77/barrel and seemingly headed lower, the US shale oil drilling industry is set for a significant slowdown. That is bad news for the energy companies, equipment suppliers and those states with heavy exposure to the sector—all of which have had a great few years (see Is The Shale Boom...

    0
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    Gavekal Research

    The Most Reliable Source Of Demand

    The strong third quarter growth in US gross domestic product announced yesterday—a 3.5% annualized rate—not only suggested that the American economy is on a sustainable upward trajectory; it also confirmed that the Federal Reserve’s decision to end quantitative easing is appropriate. Although the faster-than-expected headline growth figure was partly driven by government spending, the two key engines of the economy—business capital spending and...

    1
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    Gavekal Research

    Walking Without The QE Crutch

    After three rounds, six years and some US$3.7trn in asset purchases, the US Federal Reserve yesterday finally called time on its program of quantitative easing, and shifted its language on the US labor market from ultra-dovish to something slightly closer to neutral. Investors took the news in their stride, largely untroubled by the Fed’s confirmation that it is to take away what many had long regarded as an essential crutch for asset prices....

    3
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    Gavekal Research

    Is The Shale Boom Turning To Bust?

    America’s shale bonanza has been one of the great success stories of the last ten years. Since the mid-2000s, the US energy industry has transformed itself, as rising international energy prices and advances in horizontal drilling made it feasible to exploit vast hydrocarbon resources locked away in the shale beds which underlie much of the country east of the Rockies. As companies drilled new wells by the thousand, domestic production soared,...

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