Edge and Odds

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)

Edge and Odds

Invest with smart knowledge and objective odds

USA, USA, USA!

World ex-U.S. equity markets are in correction mode or in outright bear markets. Can the USA save the world?

Let’s drill world equity markets down:

  • The MSCI World Index is down 5.4% from its January 26 high, sitting on its still rising 200 dma line, just about to be crossed by its declining 100 dma line:
MSCI WORLD INDEX

acwi

  • Taking U.S. equities out, the ACWX is down 10.8%, in correction mode, with a declining 200 dma neatly crossed over by its falling 100 dma:
MSCI WORLD EX-USA

acwx

  • The MSCI EAFE Index (Developed markets ex-USA and Canada) is down 9.8%, with similarly falling dmas:
MSCI EAFE INDEX

efa

  • The MSCI Europe is down 10.4%, in correction mode, with similarly falling dmas:
MSCI EUROPE

ieur

  • The MSCI Japan Index is down 10.2%, in correction mode, with a flattening 200 dma just crossed downward by its 100 dma:
MSCI JAPAN

ewj

MSCI EMERGING MARKETS

eem

  • The MSCI China Index is down 20.2%, the Panda Bear, with both dmas only recently turning down:
MSCI CHINA

mchi

Meanwhile in North America:

  • The MSCI Canada Index is down 4.3% with a flat 200 dma and a recovering 100 dma trying to catch up:
MSCI CANADA

msci canada

  • But Canada’s official S&P/TSX Composite Index is unchanged YtD with smartly rising dmas, in spite of no tax reform and NAFTA uncertainties. Canada’s strong banks (Financials = 33.5% of the Index), higher oil prices (Energy = 20%) and some strong global Industrial and IT companies have carried the Index this year.
TSX COMPOSITE INDEX

tsx

MSCI USA

eusa

  • While the S&P 500 Index is down only 0.7% with similarly rising dmas:
S&P 500 INDEX

spy

  • The S&P 500 Equal Weight Index is down 1.7% but displays strong dma trends as well:
S&P 500 EQUAL WEIGHT INDEX

rsp

  • The very broad Wilshire 5000 Index is down 0.3% and also displays smartly rising dmas:
WILSHIRE 5000

w5000

Foreign investors are looking at the U.S. equity markets with both envy and bewilderment given its political show. So far, booming earnings and a strengthening economy are winning over anything else that might be viewed negatively. Add the rising USD and the attraction of U.S. equities could become irresistible given the bearish trends outside North America.

This could potentially provide another boost to U.S. equities and propel valuations into the “Extreme Risk” area.

image

That would further boost the dollar, adding to the headwinds faced by foreign borrowers, on top of the increasing trade issues already reducing the supply of dollars in the world, also contributing to the strength in the greenback.

This seems to be an untenable position for the U.S.: weak foreign demand for U.S. goods and services (weak economies and local currencies) coupled with rising U.S. imports (strong economy and currency) will aggravate the trade balance going into the mid-terms with the risk of another 1987 Baker tantrum (TRUMPISM: Déjà-vu!).

Speaking of mid-term elections, Charles Schwab’s Liz Ann Sonders had this comment and chart in her recent piece:

(…) midterm election years have been rough for stocks, with the average decline or “drawdown” being 17% in the S&P 500 since 1950, with much of the weakness clustered in the summer months. However, going from each of those midterm drawdowns’ troughs, the subsequent one-year performance was a strong 32%. History certainly doesn’t guarantee the future, but it does give us some reason for a bit of caution over the next couple of months. (LIZ ANN SONDERS)

Max drawdown vs 1-yr performance

FYI, the January-February 2018 drawdown was 11.8%. Was that it? Fingers crossed 

Two charts on the seasonality of U.S. equity markets:

  • This one graphically illustrates the August-October trends since 1992:

image

  • Callum Thomas (topdown charts) has 55-year stats on monthly returns:

image

So, was that it last February?

THE DAILY EDGE (7 August 2018)

Conference Board’s Employment Trends Increased in July July’s results mark the second consecutive month of increases

The index grew to 109.89 in July from 108.72 in June. The July reading was 5.4% higher than it was a year earlier. (…)

July’s results were driven by positive contributions from all eight components, according to the report. The largest contributions came from the ratio of involuntarily part-time to all part-time workers, initial claims for unemployment insurance, number of employees hired by the temporary-help industry and industrial production.

JAPAN WAGES SPIKE

The latest acceleration in Japan’s wage growth was a bit of a shocker. The increases in pay are now higher than in most other developed economies (including the US). Is the Phillips curve finally working? Are Japan’s extremely tight labor markets finally translating into faster wage growth? Will this trend boost Japan’s inflation? (The Daily Shot)

The trend in U.S. wages is much smoother and softer, even though employment costs are slowly rising:

image

Only the job switchers are enjoying much higher wages, although there has been no acceleration there as well.

image

THE U.S. SAVINGS RATE REVISION

What were the drivers of the Commerce Department’s massive adjustment to the savings rate? A substantial part of it appears to be underreported asset income, which would suggest that the upward correction in savings is skewed toward wealthier Americans. (The Daily Shot)

Source: Goldman Sachs

Don’t Worry About the End of QE, Worry About Rates The Federal Reserve is putting quantitative easing into reverse, but investors should focus instead on interest rates.

(…) So could the turnaround in QE change prices? The Fed aims to cut its holdings of bonds by $40 billion a month, rising to $50 billion by the end of the year. If that makes bond yields rise, investors who had abandoned Treasurys might be tempted back, reducing demand for riskier assets and so their prices. At the end of the chain are emerging markets, the riskiest assets that saw the biggest inflows during the bull market, and it is reasonable to expect them to suffer most from such a rise in yields.

That’s the theory. In reality, Treasury yields are tightly linked to expectations about the economy, inflation and future interest rates–not anyone’s buying and selling. Over each of the three QE periods 10-year Treasury yields rose, the opposite of what would be expected, because investors grew more confident about growth, and after each ended yields fell back. If the Fed was responsible, the general sense that it is doing something, and the signal that sends, seems to be more important than what it actually does. (…)

Well, James Mackintosh may write all he wants about the term premium but the reality is that the Fed’s gargantuesque appetite for bonds during QEs boosted excess reserves and brought real yields way lower than normal.

image

image

JP Morgan Asset Management displays central banks QE/QT programs into 2019:

image
EARNINGS WATCH

We now have 413 reports in and the beat rate has finally declined below 80% to 79% but the surprise factor has gained to +5.2%. Amazingly, 8 of the 11 S&P 500 sectors are showing surprise factors at +5.1% or above (average: +6.6%). Materials (+1.5%), Real Estate (+0.2%) and Energy (-8.9% to +123.6%!) are holding the average down.

Q2 EPS now seen +24.0% from +20.7% on July 1. Revenues: +9.4% (!) vs +8.1% on July 1.

Q3 estimates are +22.6% vs +23.4% on July 1.

Full year 2018: +23.2% from +22.4% on July 1. Full year 2019: +10.1% vs +9.7%.

High five However, corporate pre-announcements are getting worse with 2 more negatives and no positive yesterday.

Ninja Surprised smile Steaming mad Facebook Asks Banks for Customer Data Facebook has asked large U.S. banks to share detailed financial information about customers, including card transactions and checking-account balances, as it seeks to boost user engagement.