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    Gavekal Research

    Embrace The Asian Deflation

    The specter of deflation continues to threaten big chunks of the global economy and the alarm has even spread to China after the GDP deflator was revealed to have slipped into negative territory in 1Q14. Our starting point is that deflation does not have to be some grizzly beast that must end with soup kitchens, for as Charles has forcefully argued, periods of falling prices have in the past been associated with rapid capital formation and...

    0
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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...

    3
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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...

    0
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    Gavekal Research

    A Turning Point For Eurozone Bank Lending

    Is it too early to celebrate the green shoots of a eurozone recovery? Most recent data has been positive with retail sales expanding at the fastest rate since the early 2000s, PMIs signaling a broadening of growth to the struggling periphery and unemployment in most economies continuing to decline. Green shoots can easily wither in response to shocks or bad policy choices, but there is one good reason to think this recovery may have legs: bank...

    4
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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...

    0
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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

    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.

    0
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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....

    0
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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...

    1
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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: 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...

    5
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    Gavekal Research

    Our Holiday Reading List

    For the third year we are publishing a year-end books round-up. The topics covered by the 17 books in our compendium include hardy Gavekal perennials such as economics, politics and the effect of technological transformation on modern life. In addition Charles considers ancient Rome’s decline due to its apparent embrace of socialism over liberalism. Louis kicks us off with a look at the roots of our most basic human urges.

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    Gavekal Research

    The Sources Of US Purchasing Power

    5
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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...

    0
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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

    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

    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,...

    15
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    Gavekal Research

    Buying The Dip? Choose Asia

    Markets remain jittery, but the last week has at least seen a break in the downward momentum. Hence it may be worth taking stock of relative performance by the big regions. Looking across the MSCI benchmarks, the All Country World index is down –4.7% since its peak in early September, while the US, Eurozone, Emerging Markets (ex-Asia) and Emerging Asia declined respectively by –3.9%, -5.2%, -8.4% and –5.4%.

    0
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    Gavekal Research

    Five Corners (October 15): The Equity Rout

    Overview: François Chauchat asks whether a US recovery is enough to drive global equity markets or has the world changed.

    0
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    Gavekal Research

    5C US: Domestic Plays Beat Multinationals

    The current sell-off has left few places to hide, but some areas have done worse than others. Small caps have underperformed large caps; cyclicals have fallen versus defensives; and foreign markets have done worse than the US (especially in US dollar terms). While our clients have surely given a lot of thought to these trends, today we suggest dividing the US equity market another way: between ‘domestics’ and ‘multinationals’.

    2
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    Gavekal Research

    5C US: Beware The Small Cap Energy Effect - Will Denyer & Tan Kai Xian

    The US hydrocarbon industry continues to suffer weak natural gas prices and must wait until 2016 before new LNG export terminals allow more gas to be shipped overseas. Hence, active production rigs in areas such as Texas and North Dakota are increasingly being used to extract oil. The expansion of US crude production has seen output reach 8.6mn barrels per day, back to levels seen in the 1980s; and the rig count continues to rise. But if this is...

    0
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    Gavekal Research

    Cutting Through The Noise: A New Inflation Indicator

    The outlook for US inflation and monetary policy was already cloudy, even before the Federal Reserve further muddied the waters yesterday with its conflicting signals. To help clients pierce through the haze, Will and KX have developed a new composite diffusion index to provide a reliable leading indicator of US consumer inflation, which they are publishing for the first time in today’s Chartbook. Based on five components from both the money and...

    2
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    Gavekal Research

    5C US: Cutting The Slack

    Federal Reserve chair Janet Yellen opened her speech in Jackson Hole with the fairly obvious assertion that the labor market has made major improvements but has yet to recover fully. We agree. Our preferred cyclical labor market indicator, the employment-to-population ratio for core working ages 25-54, has risen to 76.6% from the trough of 74.8% in late 2010, but it is still way below its pre-crisis peak of 80.7%.

    0
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    Gavekal Research

    Hello US Capital Spending?

    The US has managed a steady but sub-par economic recovery with the crucial missing ingredient being a sustained pick-up in capital spending. There is some evidence this may be changing since yesterday’s second revision for 2Q14 GDP pointed to the main two engines of investment spending starting to fire simultaneously. It may be too early to declare the start of a new capital spending cycle, but for pretty much the first time since the post-2009...

    0
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    Gavekal Research

    The Shifting Sands Under US Homes

    The US housing market seems to be coming off the boil with the latest national price measures pointing to significantly reduced gains. The worry is that professional investors are pulling back from the market as the share of home purchases made with cash fell to 37.9% in 2Q14 from a high of 42% the previous quarter (see report). Private equity firms such as Blackstone Group, the largest private landlord in the US, have bought an estimated 200,...

    2
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    Gavekal Research

    The US Consumer Lives, Really

    Even as US real wage growth has picked up over the last 18 months, consumption spending has been slow to respond. The relatively weak state of the US consumer, once the irresistible force pulling along the global economy, has emboldened those advocating a ‘secular stagnation’ thesis. But is this really a fair analysis? The answer has a particular relevance as central bankers gather for the Federal Reserve’s annual Jackson Hole shindig and...

    0
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    Gavekal Research

    US 2Q Earnings Favor Industrials

    As the second quarter US earnings season winds up, the dominant picture is of stronger sales and faster earnings growth. That’s handy. In the early stages of this five year bull market, it was central bank liquidity that pushed equity prices higher. Then over the last two years, multiple expansion took over. Now, with valuations back in line with fair value, top and bottom line growth are emerging as the market’s main driving force (see The...

    3
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    Gavekal Research

    The US Growth Engine Sparks Into Life

    Second quarter US GDP growth came in encouragingly strong at 4% quarter-on-quarter annualized, much better than the expected 3%. At the same time the 1Q number was revised up to -2.1%. That’s up from -2.9%, but it’s still a contraction; so a strong 2Q reading was crucial to show the previous GDP number was just a blip and not the start of a slide into recession. But looking past the headlines, was this really a strong report?

    0
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    Gavekal Research

    Emerging Asia's Leverage Problem

    Aggregate debt levels in Asia (ex-China) are back to levels seen just prior to the 1997-98 Asian Financial Crisis. This does not pose a near term macro-economic risk since most Asian economies have large foreign currency reserves and run flexible currency regimes. Indeed, this was the mercantilist lesson most Asian economies learnt from the late '90s crisis. Still, Joyce and KX show in this chart book that the likes of China, South Korea...

    0
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    Gavekal Research

    US Construction: Once More Into The Breach

    Having been a key driver of the US economic recovery, the residential property sector has had a tough year. Ructions in the bond market last summer forced up mortgage rates and gave a shock to both buyers and builders of property. And just as markets calmed down, severe winter weather meant that construction workers were more likely to break their tools than break ground on fresh projects. The onset of warmer weather has inevitably produced a...

    2
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    Gavekal Research

    5C US: Profits: Past The Peak Or Just A Blip?

    US statisticians recently provided a far more shocking view of the first quarter than the benign picture we got from the S&P500 earnings season, reinforcing concerns that the exceptional US profit story is peaking and that margins are finally going to mean revert.

    0
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    Gavekal Research

    Unpicking The US Capital Spending Puzzle

    US statisticians told us yesterday that GDP, business investment, and corporate sales all dropped in 1Q14. Such weakness can be blamed on freak winter weather, but looking back to last fall, growth trends were not exactly stellar. The nagging issue for US economy watchers in recent times has been the sustained weakness in business investment. In the immediate aftermath of the 2008-09 slump capital spending (ex-housing) snapped back, raising...

    6
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    Gavekal Research

    Five Corners (28 May 2014)

    In the latest bi-weekly review of global economics and investment:

    0
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    Gavekal Research

    5C US: Hello Stagflation?

    Inflation’s back. In April US CPI rose to 2% YoY with both goods and services making a meaningful contribution. Manufacturers are starting to report higher output prices according to business surveys by the Philadelphia Fed and the NFIB, a small business representative body. After a weak GDP growth in 1Q14, mutterings of “stagflation” can be heard in the bear camp. But is this really what the data suggests?

    1
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    Gavekal Research

    Fat Margins, Thin Growth Prospects

    With more than 450 of the S&P 500’s constituents having reported first quarter earnings, investors were sufficiently happy with the outcome of the results season to bid the index up to a new record close of 1,897 on Monday. In aggregate, the story told by first quarter earnings was more of the same—extraordinary margins, but lackluster growth. As a result, the pessimists expecting a collapse in growth or a mean reversion in margins have been...

    0
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    Gavekal Research

    5C US: A Rotation Into Value, Not Defensives

    Since mid March, we have seen a drastic rotation into value stocks. Clearly, investors are starting to rethink the kind of multiples they are willing to buy into.

    0
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    Gavekal Research

    Five Corners (30 April 2014)

    In the latest bi-weekly review of global economics and investment, Arthur Kroeber considers the implications of Asian deflation. Will Denyer & Tan Kai Xian consider the strong rental market for US homes and wonder what this means for the broader housing sector. Nick Andrews looks up close at reduced liquidity in the eurozone’s financial system. Chen Long looks at a favorable convergence between national GDP numbers and the growth claims made...

    0
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    Gavekal Research

    5C United States: Fed Targets + Weak Global Inflation = Rising Rents

    The US housing market has had a rough time recently—first mortgage rates rose then an extreme winter hit. So don’t expect residential construction to be a positive contributor to first quarter GDP growth (out Thursday). But how will the housing market fare going forward? Our bet is that it won’t be too bad.

    0
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    Gavekal Research

    The End Of The Automobile? Not So Fast

    US auto sales have had a strong run and are nearly back on their pre-crisis trend. This is hardly surprising since Americans have long shown a willingness to scrimp on life’s essentials rather than give up their vehicles—through the 1930s depression they kept on driving even while relying on soup kitchens for nutrition. But how much juice is left in this purring engine of US consumption?

    3
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    Gavekal Research

    5C US: A Little Late For Early Cyclicals

    US consumer discretionary stocks are considered “early cyclicals” because they tend to outperform in the first two or three years of the cycle. This time around, the firms that make everything from iPhones to automobiles have outperformed for nearly five years! Are we really still in the early part of this cycle? Or are we starting to see signs of fatigue in an overextended rally? The sector is down –2.4% year to date, finally underperforming...

    0
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    Gavekal Research

    An Elitist Housing Recovery

    Yesterday’s data spit showed that US existing home sales edged up slightly in December, good news after several months of declining momentum. But it remains to be seen if the US housing recovery can get back on track, and this is worrying for two reasons. The first, obvious one, is that the rebound in house prices since 2011 has been a key support for an otherwise struggling US economy. The second worry is that consumer confidence has been...

    4
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    Gavekal Research

    5C US: The Yield Spread Matters For Profit Margins

    With US corporate profit margins at extreme highs, investors are on high alert for the dreaded “mean reversion.” One concern has been that after years of benefitting from extremely low interest rates, margins are going to fall as rates normalize. We don’t buy it.

    0
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    Gavekal Research

    On Profits: There Will Be No Revolution

    7
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    Gavekal Research

    Student Loans: Bubble, What Bubble? - Will Denyer & Tan Kai Xian

    Last Friday, the US enacted legislation that will peg the interest charges on student loans to 10-year treasury yields. The move headed off an automatic surge in loan rates and should ensure reasonably priced student finance for years to come. But even as Washington celebrated an outbreak of bipartisanship there were concerns that these latest reforms could wrongly incentivize young Americans to pursue higher education.

    19
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