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E.g., 16-11-2019
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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...

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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:

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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...

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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

    In The ECB We Trust (Well, For Now)

    Ever since the European Central Bank announced its €60bn-a-month QE program in January the market has craved answers to some elementary questions. Specifically:

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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.

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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...

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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

    Australia, The Next Shoe To Drop

    Central bankers are ditching managerial gradualism in their monetary policy communication and are getting serious. Switzerland, Denmark, India and now Canada have all made surprise interest rate moves in recent days—okay, the European Central Bank continues to drip-feed its every thought to friendly journalists, but the sheer scale of the adjustment taking place in relative global prices means that policymakers must respond swiftly to events....

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    Gavekal Research

    Positioning Prior To The ECB Decision

    With the European Central Bank set to make its big announcement on quantitative easing tomorrow, the market is already pricing in a game changer. This makes portfolio positioning today a difficult task. Lofty expectations have increased the odds of disappointment, and yet investors can be excused for not wanting to position themselves for a fight with the ECB—after all, it could actually decide to fire up its printing presses in earnest. We have...

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    Gavekal Research

    Who Will Profit From Eurozone QE?

    Finally, the European Central Bank is expected to launch its first program of full-blown quantitative easing, buying sovereign bonds outright with freshly-printed euros. The announcement could come as soon as this Thursday’s policy meeting. But there are big questions still unanswered over how exactly to conduct QE in a currency union made up of supposedly independent countries and autonomous governments.

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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.

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