Internet stocks, biotechs, small caps, art…what’s next?
Later Easter Drives Retail Sales in April
Overall, the eight retailers tracked by Thomson Reuters posted a 6% increase in April same-store sales. Thomson Reuters had projected the companies to record 2.8% growth versus a 4.3% increase a year earlier.
For March-April together, including Easter in both years, retailers reported 4.1% growth, up from 3.5% a year earlier.
(BloombergBriefs)
Weekly chain store sales are up 2.3% Y/Y for the 4 weeks ended May 3rd, up from +1.5% for the 4 weeks ended March 29.
Economists See Growth Rebound The U.S. economy is speeding ahead this quarter—perhaps growing faster than 4%—as the recovery gets back on track after a winter when growth slowed to a crawl, according to The Wall Street Journal’s latest survey of 48 economists.
(…) the consensus forecast is for annualized real growth in gross domestic product of 3.3%, better than the 3% pace projected in the April survey. (…) Nine in the Journal’s survey are forecasting second-quarter growth of 4% or better. (…)
A big downside risk, cited by nearly 42% of those who answered the question, is an international shock. The negative risks include further slowing in China and the continuing conflict in Russia and Ukraine. “Geopolitical concerns could lead once again to defensive behavior” among businesses, said Lou Crandall of Wrightson ICAP.
However, if sanctions against Moscow trigger a Russian recession, the forecasters don’t expect it to have a large impact on global growth. The group gave odds of 33% that a Russian downturn would have a noticeable effect on European economies and only a 16% probability that it would have an effect on the global economy.
IL MAESTRO
Draghi Says ECB May Take Action in June The European Central Bank sent an unusually strong signal that it would likely cut interest rates or take other stimulus measures at its June meeting to combat too-low inflation.
The European Central Bank sent an unusually strong signal Thursday that it would likely cut interest rates or take other stimulus measures in June to combat the too-low inflation that threatens Europe’s fitful recovery.
“The governing council is comfortable with acting next time,” European Central Bank President Mario Draghi said, referring to the bank’s scheduled meeting next month, after the ECB’s decision Thursday to hold its key interest rates unchanged at record lows.
Mr. Draghi’s declaration—which sent the euro tumbling—was notable for its bluntness and, once again, underscored the ECB president’s ability to use talk to move markets before resorting to policy measures that other central banks have taken. His boldness was reminiscent of his July 2012 pledge to do “whatever it takes” to save the euro, a vow now credited with changing the course of Europe’s debt crisis without the central bank having to tap a then-newly created bond-buying program.
The remark on Thursday was also a departure in the rhetoric of the ECB, which, throughout its 16-year history, has been loath to commit ahead of time on interest-rate changes or other policy moves. (…)
Unlike with his tough talk in 2012, though, Mr. Draghi will have to back up his words with action in June—or shred his credibility in the markets. The ECB president’s comment may also prove to have less impact on currency markets than his 2012 promise had on government bond prices, given the many factors driving the euro, including the expansionary policies of other major central banks.
Thursday’s comments by Mr. Draghi cap a steady escalation in the ECB president’s rhetoric. Earlier this year, he said the bank was willing to take “decisive action,” though that failed to spur much traction in markets. Last month, he upped the ante, saying the ECB was “unanimous” in its willingness to take steps such as asset purchases if needed to keep the inflation rate from falling too much—a remark that signaled even Germany’s conservative Bundesbank was on board.
What sets the latest statement apart is that it gives a date for action. Though a move by the ECB when it meets June 5 isn’t assured, many in the markets believe Mr. Draghi has talked as much as he can without delivering. (…)
Mr. Draghi didn’t say exactly what steps the central bank may take. But in a speech last month he suggested that if the ECB is worried about the effect of the strong euro on inflation, interest rate cuts—including a potential negative deposit rate—are a possible response. (…)
France steps up campaign to weaken euro Paris says bloc’s politicians should take up exchange rate policy
THE REACH FOR YIELD, EURO EDITION: Deflation risk.
(BloombergBriefs)
BTW, Italian IP fell 0.5% in March, after falling 0.4% in February.
THE REACH FOR YIELD, U.S. EDITION
From Moody’s:
The now very low government bond yields of several peripheral Eurozone countries effectively limit the upside for US Treasury yields. The 10-year sovereign government bond yields of Italy and Spain recently averaged 2.93%, while those of Germany and France were 1.46% and 1.91%, respectively. Nonetheless, the consensus still believes that by the end of 2014’s third quarter, the now 2.61% 10-year US Treasury yield will climb up to 3.06%. The eurozone’s current combination of exceptionally low bond yields and a possibly overvalued currency could help to stoke a major upturn in the global demand for dollar-denominated debt if US Treasury yields again approach 3%.
What may prove to be a disappointing peak spring sales season for housing also favors lower-than-anticipated Treasury bond yields. Though May 2’s MBA index of mortgage applications for the purchase of a home soared higher by nearly 9% from the prior week, not only was the index down by -16% from a year earlier, it was also off by -6% from early May 2012. In part, the notable drops by homebuyer mortgage applications compared to one and two years back are the offshoot of a climb by the 10-year Treasury yield’s moving four-week average from May 3, 2013’s 1.74% and May 4, 2012’s 1.99% to the 2.68% of May 2, 2014. (…)
Even a Benign Default Outlook Warns That High-Yield Spreads Are Too Thin
Chairman Yellen further recognized that “some reach-for-yield behavior may be evident… in the lower-rated corporate debt markets, where issuance of … leveraged loans and high-yield bonds has continued to expand briskly, spreads have continued to narrow, and underwriting standards have loosened further.”
Yellen is correct in view of how spreads seem thin given recent outlooks for high-yield defaults. Though the default outlook is benign and should remain so until resource utilization rates eases and profits peak, spreads still seem unsustainably thin given expectations of a slight rise by the default rate from March 2014’s 1.7% to 2.5%, on average, by the six-months-ended March 2014.
Also warning of more defaults was May 7’s 2.15% average expected default frequency (EDF) for 580 US non-investment grade companies. May 7’s high yield EDF was the highest since the 2.26% of December 13, 2013. According to the 2.15% average high yield EDF and its 10 bp rise of the last three months, the high yield bond spread ought to be centered on 400 bp, which is wider than its recent 349 bp. (Figure 4.)
A risk-laden “reach for yield” can be justified only if the investor can tolerate the above-average risk associated with the potentially calamitous combination of exceptionally thin spreads atop extraordinarily low yields. And, while there is no denying today’s above-average credit and duration risks, if profits grow, if real economic activity continues to fall short of previous upturns, and if hordes of retiring baby boomers gobble up bonds the same way they bought equities in the 1980s and 1990s, such risks may remain dormant.
Meanwhile,
Global Inflation Picked Up In March
The Organization for Economic Cooperation and Development Friday said the annual rate of inflation in its 34 members rose to 1.6% from 1.4% in February, while in the Group of 20 leading industrial and developing nations it rose to 2.5% from 2.3%. The G-20 accounts for 90% of global economic activity.
Despite the rise in March, the rate of inflation across developed countries remains uncomfortably low for central bankers, since many regard annual price rises of 2% as consistent with healthy economic growth. The pickup in the inflation rate was driven by higher energy prices, but the core rate of inflation—excluding energy and food—also rose, to 1.7% from 1.6%.
According to the OECD, five of its members experienced a decline in prices over the 12 months to March, all of those being in Europe.
In addition to pickups in the U.S., Canada and Japan, there were also significant rises in inflation in large developing economies that have in recent years driven global economic growth, and been the leading source of inflationary pressures. The annual rate of inflation rose to 2.4% from 2.0% in China, and to 6.2% from 5.7% in Brazil.
Salmon price heads for luxury territory Fish set to lose mass market status, say industry executives
(…) Salmon prices leapt above NKr50 ($8.50) a kilogramme to a record high last year on the back of strong demand in countries such as the US and emerging markets such as Brazil. And many of the fish producers and investors gathered in Brussels this week for the annual Seafood Expo are hoping for another good year.
Sushi’s growing popularity, and increasing awareness of salmon as a good source of omega-3 fatty acids, is behind the rise in demand. (…)
There could be further support on the supply side. Salmon farming faces structural challenges that are limiting supply growth, says Georg Liasjø, analyst at ABG Sundal Collier, an investment bank based in Oslo. (…)
Higher prices for fish feed – a result of more farming and limited sources of anchovies because of climate change – and other raw materials are also pushing up the cost of production. (…)
Easing China inflation seen opening door for more support steps
China’s consumer price index (CPI) rose 1.8 per cent in April from a year earlier, the smallest rise in 18 months, while the producer price index (PPI) dropped 2.0 per cent in its 26th straight fall, the National Bureau of Statistics said on Friday.
The CPI fell 0.3 per cent from March, a second straight monthly fall. Seasonal factors pushed prices lower, but a run of negative readings could raise broader concerns of deflation. (…)
Yu Qiumei, a senior statistician at the National Bureau of Statistics, attributed the April CPI reading to drops in vegetable and pork prices, which fell 7.9 per cent and 7.2 per cent from a year ago respectively. “China inflation will keep a mild upward trend in the future and the April reading might be the trough for the first six months of this year,” Yu said in a statement.
Chinese Car Makers Struggle
Sales of Chinese-brand passenger vehicles in the first four months of the year fell 0.1% compared with the year-earlier period to 2.48 million vehicles, according to data released Friday from the China Association of Automobile Manufacturers, a government-backed industry group. By comparison, China’s overall passenger market climbed 10% to 6.48 million vehicles over the same period.
Over the same period, foreign brands have posted sizable gains. Volkswagen AG’s two joint ventures in China sold 1.1 million cars in the first four months of this year, up 20% from a year earlier, according to the auto association.General Motors Co. has seen sales rise 11% to 1.2 million vehicles.
Results look somewhat better in April, when sales of Chinese-brand passenger vehicles rose 4.5% to 596,900, according to the auto association. But April sales for all brands rose 12% to about 1.61 million vehicles, a pickup from the 8% year-over-year rise in March and exceeding analysts’ expectation of growth for the month of up to 10%.
The market share of Chinese domestic brands in the country’s passenger-vehicle market fell to 37.1% last month from 39.6% in the year-earlier period, the eighth consecutive month of decline, CAAM added.
China’s homegrown car makers have been struggling as foreign companies are now producing cheaper cars, entering into what used to be the Chinese players’ realm. Rising affluence also has prompted brand-conscious consumers to pick foreign brands, which they see as having a significant edge over local brands in terms of quality and engineering. (…)
As a group, sales of Chinese-brand sedans totaled 941,600 in the period from January to April, down 17% from a year earlier, the industry association said. Their market share fell to 22.7% from 28.5% over the same period. (…)
India Car Sales Fall in April
Sales in the first month of the fiscal year declined 10% from the year earlier, to 135,433 cars, according to the Society of Indian Automobile Manufacturers. The decline was the steepest since a 12% drop in May last year. Ten of 14 car makers in India reported lower sales in April, despite recent price cuts. (…)
In February, the Indian government cut taxes applied to vehicles when they leave factory gates in hopes of reviving demand. The taxes were lowered for cars, sport-utility vehicles, motorcycles, trucks and buses. Auto makers dropped their prices to pass on the tax reductions to customers.
Mr. Sen said cuts in excise taxes and vehicle prices resulted in an increase in customer visits to car showrooms. However, people are still holding back on purchases. (…)
EARNINGS WATCH
453 companies (93.2% of the S&P 500’s market cap) have reported. EPS are up 5.9% Y/Y. Earnings have surprised by 5.3%, the highest surprise level since Q3’11 (Earnings had been revised down 4.3% prior to March 31) (RBC Capital Markets).
CORRECTING EXCESSES?
The S&P 500 Index remains pretty resilient, thanks in good part on a pretty good earnings season and generally more positive economic news and well-behaving interest rates. However, investors are becoming more choosy (rational?) as to where they want to be at risk:
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Internet stocks
(…) The Internet group ran and ran and ran all the way to its highs this February, gaining more than 80% from where it started 2013. Over the same time period, the S&P 500 gained as well, but not nearly as much.
Once March rolled around, though, the fun for the Internet group ended. We’ve seen pure carnage in this group over the last two months, as names like Amazon.com (AMZN), Netflix (NFLX), Pandora (P), Groupon (GRPN), etc. have plummeted. Through today, the Internet group is now up just 43.4% since the start of 2013, erasing nearly half of its 80%+ gain at its highs.
As it stands now, the Internet group is still outperforming the S&P 500 by roughly 12 percentage points since the start of 2013, but another week like this one where the momentum names tank and the broad market holds up, and the tortoise could catch up to the hare. (Bespoke Investment)
The Russell 2000 had another ugly day and despite the best efforts at a ramp is now down 10% from its highs in “correction” territory and trading near 6-month lows…
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Biotechs: the Biotechs didn;t like the truh about their risk…
BofA Warns, Big Trouble In Small Caps If This Line Is Crossed
US equity price action warns of trouble, BofAML’s Macneil Curry warns. Since the start of this year, Tuesdays have consistently resulted in positive returns for US equities; but this week’s failure to follow through with that pattern, coupled with the Russell 2000’s first close below the 200-day moving-average since November 2012, warns of trouble ahead.
Indeed, the Russell is dangerously close to completing a 4 month “Head-and-Shoulders Top”. A close below 1099 is needed to complete the pattern, exposing significant downside to 1057 (5-year trendline), ahead of 988/975 (Head-and-Shoulders obj.).
CAP RECAP
Bespoke Investment helps us understand the significance of all this “localised carnage”:
The decline in small cap stocks relative to their larger brethren has been pretty dramatic recently, and it’s a topic we’ve posted on before. But what does it mean for the market as a whole? We think some context is necessary before evaluating how harmful the big losses in smaller cap stocks and internet firms is for market psychology as a whole.
Below is a table showing the market cap for several major indices. The Russell 1000 index tracks large cap stocks similar to the S&P 500, while the Russell 2000 index is focused on smaller firms. The Nasdaq Composite is also weighted to smaller firms, while the Nasdaq Internet Index is diverse in terms of the size of companies but weighted heavily towards the type of firm that has gotten smoked in the recent pain trading for momentum stocks.
As shown below, the 1,000 stocks in the Russell 1,000 make up about $20 trillion in market cap, while the 2,000 stocks in the Russell 2,000 make up just $2 trillion in market cap. From their peaks, the Russell 1,000 has lost $265 billion in market cap, while the Russell 2,000 has lost $155 billion in market cap. While these drops in market cap are pretty similar, in percentage terms, they’re very different. The Russell 1,000’s drop in market cap is just 1.3%, while the Russell 2,000’s drop in market cap is 7.4%.
The bubble chart below shows the same information in a different presentation. The horizontal axis shows the decline in terms of dollars since the peak of each index, while the vertical axis measures percentage declines. Bubble size is the market cap of each index at their peak. Despite being the worst and third-worst performers in percentage terms, the Internets and Russell 2000 are off by the least in dollar terms. Meanwhile large cap indices that are only down modestly from recent highs are bigger losers.
Our point here is that huge percentage declines aren’t always a threat to the market as a whole. Another important factor is the total size of the decline. Putting that in context helps explain why outsized percentage declines in go-go momentum stocks or speculative internet plays haven’t spilled over to similarly painful percentage drops in large cap stocks…the large caps are just too big relative to small caps for the pain trade to be the most dominant factor in their performance.
Wait, wait, Chris Kimble wants you to know this: Third Time a Charm?
Only twice in 35-years has the NYSE Index been at all-time highs, when the Russell 2000 broke below its 200MA line. Those two times were in 1999 & 2007. The chart below reflects where the S&P 500 was when this took place. Now it’s taking place for the third time in three decades. Will the “third time be a charm” this time around?
Finally,
Art Bubble Also Cracking As 21 Of 71 Works Fail To Sell At Latest Sotheby’s Auction
With the Biotech bubble busted and social media stocks slaughtered, it seems disappointment is spreading for the world’s wealthy living off the fat of the Fed. As NY Times reports, on Wednesday, many in the art world converged upon Sotheby’s for the sales of Impressionist and modern art… but nearly a third of the art went unsold. The mediocre results followed an unexciting night at Christie’s on Tuesday and suggest that yet another central-bank-fueled excess-money-has-to-spill-out-of-our-silk-lined-pockets-somewhere trickle-down bubble is bursting. With Chinese property prices tumbling and PBOC cracking down on Macau money-laundering, it is perhaps no surprise that what demand Sotheby’s saw was Asia buyers.
Have a good week-end!! 
White House reviews crude export ban
John Podesta, who is one of President Barack Obama’s most senior advisers, said the administration was “taking an active look” at the strains caused by the US shale oil boom. Any change would have implications for oil traders, refiners and consumers worldwide. (…)
The light, low-sulphur quality of shale oil is ill-suited to much of the refining infrastructure lining the Gulf of Mexico, which was designed to process the heavier varieties from countries such as Saudi Arabia and Mexico. Commercial crude oil stocks on the Gulf coast are more than 200m barrels, a record high, leading some to warn of a looming glut.
Asked on Thursday about the administration’s thinking on crude oil exports, Mr Podesta said: “We’re taking an active look at what the production looks like, particularly in Eagle Ford, in Texas, and whether the current refinery capacity in the US can absorb the capacity increase to refine the product that’s being produced.”
“We’re taking a look at that and deciding whether there’s the potential for effectively and economically utilising that resource through a variety of different mechanisms,” he told a conference in New York. (…)
U.S. Ready to Join Tax Alliance The U.S. is ready to join five other countries, including China and Japan, in fighting efforts by multinational corporations to avoid paying taxes.
(…) According to some estimates, the world’s governments lose US$3 trillion in tax revenue a year to such efforts. (…)
Niv Tadmore, an adviser on corporate taxation with Australian legal firm Clayton Utz, said political pressure for international tax reform would result in agreements for sophisticated information sharing between countries, putting much more pressure on multinationals.
“We almost have a perfect alignment of the planets in terms of global political consensus and a strong commitment,” Mr. Tadmore said. (…)
