The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (30 SEPTEMBER 2015): Buy-Low Time For EM Equities?

U.S. Home-Price Growth Remained Strong in July, Case-Shiller Says Home prices rose 4.7% in the 12 months ended in July, up from a 4.5% increase the month before

Strong YoY but the sequential trend is bad.

20-City Month-over-MonthThe index of 10 major cities gained 4.5% from a year earlier, roughly the same as in June. The 20-city index gained 5%, slightly more than in June (…)

Month-to-month price gains were tepid. Between June and July, the national index—not seasonally adjusted—rose 0.7%, while the 10-city and 20-city indexes were both up 0.6%.

After seasonal adjustment, the U.S. index was up 0.4%. The 10-city and 20-city composite were both down 0.2%, with prices declining in 11 of 20 metro areas.

Markets in the western part of the country are for the most part stronger than those in the east. Most metropolitan areas west of the Mississippi saw price gains from June to July, while most cities east of that line saw declines. After seasonal adjustment, Chicago saw prices decline 1.2% and the New York area saw prices decline 0.5%. Prices meanwhile grew 0.8% seasonally adjusted in San Diego. (…) (Chart from Doug Short)

New Mortgage Rules May Spark Delays, Frustration Effective Oct. 3, regulations aim to protect consumers, but they prompt concerns in industry

The changes, prompted by the 2010 Dodd-Frank financial law, are meant to help consumers better understand the terms of their mortgages before they sign the dotted line.

But some in the real-estate industry worry that the rest of the year could be marked by delayed closings, frustrated borrowers and confused real-estate professionals as they adjust to the new rules. (…)

“It is without question the single largest implementation challenge that the broad industry has faced since Dodd-Frank,” said Mr. Stevens. “It’s massive. It involves every real-estate agent, settlement-service provider, every consumer, mortgage originator, everyone.” (…)

That won’t help revive the mortgage market (chart from CalculatedRisk).

Weak U.S. Exports Hamper Growth U.S. exports are on track to decline this year for the first time since the financial crisis, wilting under the weight of a strong dollar and global economic strains.

Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years. (…)

Here’s How the U.S. Benefits From Good Deflation

This is a video of a David Rosenberg interview with Bloomberg brushing on my thesis…

Lower Oil Prices Boosting Oil Demand & Global Growth

Ed Yardeni:

Repeat after me: “The best cure for low commodity prices is low commodity prices.” This mantra isn’t very comforting if that’s mostly because producers are forced to slash their output of commodities to match the world’s depressed demand for commodities, which is depressed by the economic and financial repercussions of the producers’ retrenchment.

Cheer up! There is already some evidence that low oil prices are boosting global oil demand, which also strongly suggests that low oil prices are boosting global economic growth. The flood of global liquidity provided by central banks is now being supplemented with a flood of cheap oil. I am a big fan of the monthly demand and supply data compiled by Oil Market Intelligence (OMI). I track the 12-month averages to smooth out seasonality. Consider the latest data through August:

(1) World oil demand rose 2.0% y/y to a new record high last month. That’s the best growth rate since August 2011.
(2) Developed and developing oil demand are both growing faster with gains of 0.9% and 3.1%, respectively.
(3) World oil supply, however, continues to outpace demand. I use OMI data to calculate a ratio of demand to supply. It fell last month to the lowest reading since January 1999.

There are plenty of other global economic indicators suggesting that the global economy is growing, and benefitting, on balance, from the drop in commodity prices.

CHINA FACTS
Multinational China execs feel chill wind, not hot growth

(…) Reuters spoke to 13 executives in charge of China operations at international firms, and nine said they felt they were operating in an environment where the economy was growing between 3 and 5 percent.

The nine included those from the banking, consumer goods manufacturing, advertising, heavy machinery and commercial property sectors.

One executive at a shopping mall operator said he was seeing flat sales growth compared with a year earlier, while three in the education, healthcare and e-commerce industries said revenues were still growing in double-digits. (…)

Xie Zongyao, chief operating officer at Shanghai’s Super Brand Mall, one of Shanghai’s largest shopping malls, backed by Thailand’s Charoen Pokphand Group, said sales had shown a slowdown over the past two months after posting double-digit growth in the first half of the year.

“Consumers are more cautious when buying high-end brands, instead opting to buy better-value products,” he told Reuters. (…)

A China-based executive in the heavy machinery industry said orders at his firm and affiliates were down about 50 percent from a year earlier, mainly because of the sluggish real estate market, and he had his work cut out getting that message across to head office.

Hence:

The People’s Bank of China cut the minimum down payment for buyers in cities without purchase restrictions to 25 percent from 30 percent, according to a statement released on its website Wednesday. The previous requirement had been in place since 2010, when the government boosted the ratio from 20 percent to help curb property speculation.

Late Tuesday, the Chinese government announced stimulus measures targeted at car makers, chief among them cutting the sales tax on cars below a certain engine size to 5% from 10%, until the end of 2016. (…)

Japan Output Slide Hints at Recession

Output of goods, ranging from boilers and excavators to cars and cosmetics, fell 0.5% in August from the previous month, following a decline of 0.8% in July, according to government data released Wednesday. (…)

Output for the July-September third quarter is now projected to fall 1.1% after a 1.4% drop in the second quarter, according to the ministry.

Industrial output is seen providing a good approximation of overall economic activity, and economists now predict the nation’s economy as a whole also contracted for the second straight quarter in July-September. (…)

Sales of Japanese cars in China have been resilient so far, but exports of auto components have slumped.

Also weighing on output were weak shipments of electronic components. The release of Apple’s iPhone 6s in the autumn had been expected to buoy demand for Japanese components and production machinery, but Wednesday’s data contradicted such predictions.

“Apparently, fewer Japanese components are used in the latest models than previous ones,” a ministry  official said.

From the FT:

(…) In an interview with the Financial Times this week, Mr Abe’s economic adviser, Etsuro Honda, said additional fiscal stimulus was an “urgent task”, while an increasing number of analysts expect the Bank of Japan to expand its monetary stimulus at the end of October.

“I don’t want to say this is a really serious recession that’s changing the broad dynamics of the economy,” said Mr Adachi, pointing out that with trend growth of just 0.5 per cent Japan is always on the verge of a technical recession. But he said: “This should be a trigger for the BoJ to move.”

The Bank of Japan is reluctant to ease further because it believes its policy is working, with steady falls in the domestic unemployment rate, higher wages, and signs of an increase in domestic inflationary pressure.

But a series of demand shocks, from last year’s consumption tax rise to the slowdown in China, are undermining that progress. The BoJ’s dilemma is especially acute because its policy is supposed to work by generating public expectations of future inflation. Weak demand undermines that public belief.

Last week Janet Yellen, US Federal Reserve chair, implicitly criticised the BoJ’s policy, noting in a speech: “I am somewhat sceptical about the actual effectiveness of any monetary policy that relies primarily on the central bank’s theoretical ability to influence the public’s inflation expectations.”

The BoJ has a wide range of policy options for further easing. It could increase the rate of asset purchases from the current Y80tn ($670bn) a year; expand the range of assets it buys; or use communication tools to signal how long it will keep monetary policy loose.

There was another sign of weak domestic demand on Wednesday with retail sales up just 0.8 per cent on the previous year compared with market expectations of a 1.5 per cent rise. (…)

Eurozone Faces Renewed Deflation Threat as Consumer Prices Fall Consumer prices in the eurozone fell annually in September, increasing pressure on the ECB to act

The 0.1% drop from year-ago levels was driven largely by lower energy costs, suggesting that consumer prices could steady in the months to come amid a stabilization in oil prices.

Excluding food, energy and other volatile items, core inflation was unchanged at 0.9%.

High five Actually, core CPI was up 0.5% MoM in September after +0.3% in August which followed –0.7% in July. Core prices are up at a 0.9% annualized rate through September thanks to a –1.8% drop last January. Since February, core prices are up 3.8% annualized, although they are almost unchanged in Q3. Pretty erratic behavior.

SENTIMENT WATCH

Brokers are all over themselves adjusting to the reality. Like if they actually know…

Morgan Stanley reduced its iron ore price forecasts by as much as 23 percent as supplies from the biggest producers swamp the market and China’s slowdown hurts demand in the biggest user.

The raw material will average $58 a metric ton this year and remain at about this level through 2018, the bank said in a report e-mailed Wednesday. The outlook for 2016 was cut by 12 percent, while predictions for 2017 and 2018 were lowered by 19 percent and 23 percent, it said.

Low-cost producers including BHP Billiton Ltd. and Rio Tinto Group are expanding output to boost sales and cut costs while smaller mines shut. Iron ore sank in July to the lowest level in at least six years as surging output fed a surplus. While the global seaborne glut is seen shrinking to 65 million tons in 2016 from 79 million tons this year, it will expand to 97 million tons in 2018, Morgan Stanley estimates. (…)

Commodities are set for their worst quarter since the 2008 global financial crisis and Morgan Stanley warns that more losses may be ahead.

Returns from 22 raw materials tracked by Bloomberg have shrunk about 15 percent, the most since the last quarter of 2008, amid forecasts for the slowest economic growth since 1990 in China, the biggest user of energy, metals and grains. Oil has led the collapse as OPEC producers pump near record levels while everything from copper to wheat are also down more than 10 percent on speculation that supplies are outpacing demand.

Money has been flowing out of commodity funds while investors punish shares of oil drillers, miners and traders, including Glencore Plc, which is fighting to stanch a rout that knocked 30 percent off its shares in a single day. Markets should brace for another shock as the U.S. Federal Reserve prepares to raise interest rates, Morgan Stanley said in a report, echoing comments from Citigroup Inc. that most prices may have further to fall this year.

“A series of macroeconomic events have stunned commodity prices substantially lower,” Morgan Stanley analysts Tom Price, Joel Crane and Susan Bates wrote in the report dated Sept. 29. “Any price upside in 4Q is constrained by at least one more exogenous shock — start of the U.S. rate hike cycle, widely expected to occur in December.”

The bank cut its long-term forecasts for metals by as much as 12 percent. Investors should avoid thermal coal and alumina in a post-supercycle world, Morgan Stanley said, referring to a previous boom in prices that had been fueled by soaring demand from China. It still prefers base metals such as nickel, copper and zinc over bulk commodities, for which it cut estimates by up to 25 percent. (…)

Volkswagen cars with diesel engines rigged to cheat on emissions tests are being pulled from markets in Spain, Switzerland, Italy, the Netherlands and Belgium, while prosecutors in Sweden consider opening an investigation on potential corruption. About 42 percent of platinum demand comes from its use in pollution-control devices in diesel engines, according to Morgan Stanley. The metal slumped to as low as $899 an ounce on Tuesday, the weakest level since December 2008. (…)

Technicians as well:

… We have been looking for the market to retest the spike low from August at 1,867, and then medium-term support at 1,820, the October 2014 low. With several key sectors now also falling to major support levels – notably industrials ‒ and looking vulnerable, we think the risk a major top may be established has risen sharply. Below 1,867 should keep the risk lower for price and “neckline” support at 1,832/20. Below here would mark the completion of an important top, turning the core trend bearish. If achieved, we would target 1,738/30 initially – the low for 2014 itself, and the 38.2% retracement of the 2011/2015 uptrend. Although we would expect this to hold at first, a break would be favoured in due course for 1,575/74 – the 38.2% retracement of the entire 2009/2015 bull market. 

While we’ve been in a sideways market for a while, a major top, according to David Sneddon on the Credit Suisse team, would mean breaking below levels such as the October 2014 low of 1,820 in the S&P.

“We’ve obviously already had a significant fall in the stock market, triggered by the breaking down of the lows we saw earlier this year. The big question now is whether this is just a correction in a bull market,” he told us. In his mind, tumbling past 1,820 would signal that the market move could be something bigger. 

On the plus side, a move above 1,953 could help ease selling pressure, the Swiss bank said.

BofA Issues Dramatic Junk Bond Meltdown Warning: This “Train Wreck Is Accelerating”
BUY-LOW TIME FOR EM EQUITIES?

Gary sent me these great charts from CLSC:

image

image

Pretty tempting, isn’t it?

  1. I never consider P/BV without considering ROE trends.
  2. I am not a great fan of forward P/Es, especially when recession is looming.
  3. Currency, commodity and political risks?
  4. Debt!! Read below:
IMF Flashes Warning Lights for $18 Trillion in Emerging-Market Corporate Debt

Emerging markets should brace for a rise in corporate failures as debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report. (…)

Now, prospects in industrializing economies are weakening fast even as the U.S.Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.

That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.

“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” said Gaston Gelos, head of the fund’s global financial stability division.

Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” the IMF said. (…)

The Institute of International Finance on Tuesday estimated global investors have sold roughly $40 billion worth of emerging-market assets in the third quarter of the year, which would make it the worst quarter of net-capital outflows since late 2008. The IIF represents around 500 of the world’s largest banks, hedge funds and other financial firms.

Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said. (…)

In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected. (…)

Further complicating emerging market problems, the changing structure of financial markets leaves many developing economies exposed to major outflows of capital as investors scramble to exit. That can lead to fire sales and a breakdown in markets. (…)

CHARTS FOR THOUGHT

Among developed countries, only the Australian, Canadian and Japanese equity markets are selling at multiples at or below their last 10-year range. All other DC equity markets are at their highs.

image_thumb[29]

On the other hand, several emerging countries equity markets are attractively priced relative to their last 10-year range…

image_thumb[28]

…but EC EPS are falling hard. European investors are praying for higher EPS while US investors are hoping EPS hang on.

image_thumb[30]

More EMC earnings trends:image_thumb[14]

Recessions are the primary causes for equity bear markets…but recessions seldom just happen…(note that extreme valuation was present in 1987 contrary to what JPM believes).

image_thumb[27]

There is also intra-year declines:

image_thumb[26]

That said, one may think that record M&A activity is a sign that corporations are in good shape and feeling good about the future. Maybe, but that does not make better investors:

And the IPO market has become treacherous:

Even on their own shares, corporate officers and directors tend to buy high:

image_thumb[17]

image_thumb[19]

And if you think you should follow the big boys who have the truth, check this last chart. I will not bother to indicate the market’s high and low points, you can figure them out yourselves.

image_thumb[21]

Just like Joe Public:

The only positive is that neither the hedgies nor the public are currently bullish . They just don’t know.

Lastly, from the horse’s mouth Winking smile:

Triple+Crown1

Careful out there! (Charts above from JPM, Meb Faber, RBC Capital, The Economist, BAML, Bespoke Investment)