RISK MANAGEMENT: AVOID EUROPE
Equity markets are at valuation levels skewed towards higher risk vs potential reward. Beta management must be on at this time. Beware of poor economic and market momentum. Beware of Europe.
- The EU economy is slow and slowing (charts from Pictet). German manufacturing output has slumped lately. German retail sales are very weak.
- The EU is most vulnerable to a Russian recession and/or worsening in geopolitics.
- EU companies earnings are not as strong and resilient as US companies earnings (Table below from Ineichen Research and Management AG)
- EU equity valuation offer no compensation for these poorer fundamentals:
- The ECB’s QE program is more words than substance, so far. In fact, the ECB’s balance sheet has shrunk 14% in the last 12 months.
CHINA NOT BOUNCING BACK JUST YET
China’s excavator sales in June were 6.3 th units and the Y/Y growth was -24%, better than the previous month. 1H sales decreased by 11% on a Y/Y basis, well
below the single-digit growth expectations at the beginning of the year. (CEBM Research)
MEANWHILE, IN THE USA
ISI’s truckers survey, which has the highest correlation with GDP, increased to a very strong 63.7, up +11.0 points y/y, a nine-year high.
TRANSPORTATION COSTS RISING
The Harpex Index is a shipping index calculated and published by ship brokers Harper Petersen & Co. It tracks the weekly shipping rate changes for eight classes of container
ships. Importantly, the HARPEX measures the changes in fleet demand for the transport of finished goods, and is considered a good current activity indicator. It thus gives a broader picture of commercial goods versus a narrow glimpse of only raw input commodities.
But container exports have been falling steadily for 28 months:
Ocean container exports fell 1.2 percent in June ‐ the fourth month‐to‐month drop this year. Containerized exports have performed poorly throughout all of 2014 and have declined 8.4 percent year to date. The global economy is still struggling to recover and all but one of our top ten trading partners had a decline in container
imports from the United States. Compared to the same month in 2013, container exports were down 8.9 percent. Container exports in each of the last 28 months have been down on a year‐over‐year basis. They hit a high in March 2011 and are currently 44 percent below that high.
The import container index dropped 3.7 percent from May, following the slight 0.8 percent decline in April. Orders for imports by U.S. companies were weak in the first half of the year, which decreased the quantity of containers shipped to the United States. Imports from China fell for the third month in a row, but China’s new
export orders rose in June, signaling a rise in U.S. imports in the coming months. China excluded, there was a 2.0 percent rise in imports from other Southeast Asian countries. Despite the June drop, container imports are 4.7 percent higher than last June. Year‐to‐date, however, container imports are down 5.7 percent, due mainly to the large drop in February. (Cass)
Top US banks see loan losses tumble Lending strengthened and credit quality improved
Big US banks reported the lowest loan losses in eight years in the second quarter, reflecting tighter lending standards since the financial crisis. (…)
Six of the biggest commercial and consumer lenders in the US – Wells Fargo; Bank of America; JPMorgan Chase; Citigroup; US Bancorp; and PNC Financial Services – collectively reported credit losses equal to 0.6 per cent of total loans, down from a credit crisis high of 3.3 per cent, according to Keefe, Bruyette & Woods, an investment bank.
Lower-than-expected loan losses and the sale of non-performing assets have enabled the big banks to release reserves, helping to flatter earnings. (…)
On a year-over-year basis, the improvement in net charge-offs at the six big US commercial banks was across the board, including residential mortgages, home equity, credit cards and commercial real estate, according to data compiled by SNL Financial and Credit Suisse.
In commercial real estate lending, the banks recorded a negative loss rate, meaning they actually saw higher recoveries on delinquent debt than losses in the quarter.
In broad-based lending to companies, the losses have already shrunk significantly and the second quarter saw a flattening of net charge-off rates at lows of 0.1 per cent. (…)
Both in the US and globally, the high yield bond issuance of April-June 2014 proceeded at a record pace for a second-quarter. High yield bond offerings from US-domiciled companies totaled $88.5 billion in Q2-2014, which rose by 4.0% from Q2-2013’s old second-quarter high of $85.1 billion. Better yet, worldwide offerings of high yield bonds soared higher by 52.5% annually in Q2-2014 to a new second-quarter record of $214.0 billion that was also unrivalled in terms of a moving three-month sum.
Second quarter 2014’s record three-month sum for the worldwide issuance of high yield bonds was mostly the consequence of a blistering pace of high yield bond offerings from West European companies. Not only did Q2-2014’s $101.8 billion of high yield issuance from Western Europe handily surpass the $85.1 billion from US entities, but West European supply also skyrocketed by 211.9% year-over-year, where the latter included year-to-year advances by high yield bond offerings of 235.7% for European financial companies, to $45.8 billion, and of 194.8% for European nonfinancial companies, to $56.0 billion.
In a stark break from the past, the $162 billion of newly issued high yield bonds from Western Europe eclipsed the accompanying $155 billion from US-based companies. By contrast, 2013’s $153 billion of high yield bond issuance from Western Europe approximated 44% of the US’s $348 billion of such offerings, where that share falls to a much smaller 27% for the 10-years-ended 2013.
Small Caps Run Into Big Doubts The swoon in shares of small companies’ shares deepened Monday, underscoring investor concern about valuations.
THE INTERNET OF THINGS
This is big and will get much, much bigger. Here’s an interesting infographic from Valuewalk.