Hot prices, cold earnings

"We may well at present be seeing the first stirrings of an increase in the inflation rate- something that we would like to happen."

So spake Stanley Fischer yesterday.  It wasn't exactly an admission that he has his finger on the trigger, but as Fed commentary goes it beat the hell out of moaning about forward breakevens.  Small wonder that the Fischer has noticed a potential percolation in inflation- not only have core measures ticked up recently, but as discussed even commodities are finally showing signs of life.   To be sure, crude oil is still down on the year (though only modestly so), but iron ore has continued its ascent and has now nearly doubled in price over the last couple of months.


In trying to explain this price action it's hard not to point the finger at some combination of short covering and speculative silliness out of China.  In some ways, recently it seems that the worse your fundamentals are, the better your price performance has been.  That is a classic, if not the classic, symptom of short covering, which is naturally the reason for scepticism in some quarters, especially as prices ascend into the relative stratosphere.

Of course, it would be dangerous to forget that in some instances price precedes fundamentals; it was seven years ago that the SPX put in its bottom and started to rally, before Fed Treasury purchases or even Bernanke's (in)famous green shoots.  Then again, sometimes a painful bear market rally is just a bear market rally, and not indicative of a future fundamental improvement at all.   The trick, as readers are no doubt aware, is to be able to distinguish between the two- or to play on such modest time frames that the difference is irrelevant.

It's probably fair to say that if this is just a short-covering rally, it's probably getting long in the tooth.  Copper has reacted just as you'd want following last week's break of the inverted head-and-shoulders neckline, but is already some 2/3 of the way to the target of 2.33 or so.




Given where we are in the developed market equity cycle, however, it difficult to get enthused about buying for anything other than a punt...and even there, we've just had a nice rally already, so how much upside is left.   Macro Man noted a week or two ago that he was agnostic about the next 3-5% in US equities; a big reason is that one of his favourite indicators, rolling 12m forward earnings expectations, is showing no signs of life on a structural basis.  Indeed, in many markets, it's moving the wrong way altogether.


That earnings expectations for the SPX have been largely unchanged for the last two years offers a pretty good explanation for why the price has, as well.  If these indices had been beaten up to the extent of commodities/EM over the last year or two, or everything in 2008-09, it would be a lot easier to countenance a value-based purchase even without an earnings tailwind.  

Perhaps that's why EM and some of the commodity producers have done so well recently.   After all, Macro Man got bulled up on GDX largely because of nice base-forming pattern, though admittedly he waited until gold had started rallying before actually pulling the trigger.  Still, he had the luxury of waiting, which isn't the case for all professional money managers.  Perhaps what we're seeing is actually a rational asset rotation; after all, if you're forced to buy something with lousy earnings prospects, you might as well buy the thing that's already adjusted in price!

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Hotairmail
admin
March 8, 2016 at 9:22 AM ×

According to the WSJ, the trailing p/e on the Russell has ballooned to 687 in the recent rally amidst falling earnings. That never looks good.

(do we believe it?)

http://www.wsj.com/mdc/public/page/2_3021-peyield.html

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Anonymous
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March 8, 2016 at 12:11 PM ×

CB was just in the market. Dax up +100 in a couple of minutes.

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Anonymous
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March 8, 2016 at 12:48 PM ×

Nah, pretty sure that was the illuminati, ramping just before they immanetise the eschaton.

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Anonymous
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March 8, 2016 at 12:50 PM ×

Nah - that was my fault, I forgot to lockup the CB pen and Yellen & Greenie got out and were fighting over my keyboard.

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Anonymous
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March 8, 2016 at 1:06 PM ×

Folks, we're in a bear market. Common signs of a bear market:
1. stocks go up every day
2. when stocks temporarily drop they reverse on massive momentum gaining 50-100bps in mins
3. commodities goes up every day

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Anonymous
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March 8, 2016 at 1:12 PM ×

No, you're right, we're clearly in a bull market.

1) SPX down on the year
2) Europe and Japan down on the year
3) China down on the year
4) Oil down on the year
5) Earnings falling

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Booger
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March 8, 2016 at 1:31 PM ×

Looks like a good price to take a seat and depending on your persuasion, gamble on Draghi delivering "the asset" (QE expansion). After the disappointment last time, I would be surprised if he didn't over-deliver.

The extent of the commodity based short covering surprised me: everything from iron ore squeeze, to petrobas to even Seadrill up over 100% on a day. I guess trash can really bounce when compacted!

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jbtfd
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March 8, 2016 at 2:16 PM ×

anon 1:12 - I just hope for your p&l's sake you haven't been short equities and commodities for the past few weeks.

Saying all that, I'd love a pullback in spx so I can buy more before we get higher prices.

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TraderJim
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March 8, 2016 at 2:37 PM ×

And then we get this today...

"Goldman Sachs says commodity rally is unlikely to last

The most influential bank in commodity markets believes the recent rally is unlikely to last and prices will reverse unless there is a sustained improvement in demand led by China, the world’s biggest consumer of raw materials

In a series of reports published on Tuesday, Goldman Sachs said the 20-month commodity rout had further to run and prices needed to remain lower for longer to rebalance markets that are still groaning under the weight of plentiful supplies.

The Walls Street bank reserved its most bearish comments, however, for industrial metals, advising investors in another report to take positions betting against aluminium and copper prices, which it forecasts as falling 18-20 per cent during the next year"


They have a point on oil as inventories are still growing. Prices must drop at some point to clear.

But appreciate ECB shock and awe has another run to go


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Macro Man
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March 8, 2016 at 2:45 PM ×

Well, if the performance of their top trades is anything to go by, it's a one-way ticket to the moon for commods, I guess...

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washedup
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March 8, 2016 at 3:23 PM ×

ditto MM - plus, even going back further in history, their record at nailing inflection points in the commodity super-cycle is not stellar either. Who can forget the calls by Currie and co., for crude to 'head to $200 and stay there' back in summer of 2008 - they were only proven wrong by $100 in short order.
And this is the crew thats the gold standard for calls on commodities, by the way….

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abee crombie
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March 8, 2016 at 3:32 PM ×

Vale & Fortescue tie up probably the reason for massive iron ore spike. In fairness it is a pretty big move and should stabilize prices at the 40-50 level, but 60 is just too high, IMO but that doesnt mean it cant go a bit higher in the near term.

What we have seen though is a lot of new equity issuance from oil co's that was readily embraced and HY inflows. So there is NEW money coming into commodities even though I do agree with Currie's analysis that the cleanse isnt done. But if money flows it, its self fulfilling ( at least for now)

* Week ended March 2 marked the highest weekly HY fund inflows on record of $4.967b, surpassing $4.2b in Oct. 2011
New issues are trading well

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Anonymous
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March 8, 2016 at 4:05 PM ×

Fundamentals and the market parted ways back in 2013...

http://imgur.com/czxBeXV

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Anonymous
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March 8, 2016 at 4:15 PM ×

Adam Richmond, of Morgan Stanley:

The voracious appetite for corporate bonds is now highly concentrated in the Investment Grade space. Only $21B of HY corporates have been sold so far this year, and the last 6 months of 2015 tallied a paltry $92B

Gross leverage at Investment Grade companies is back at decade’s highs

EBITDA growth excluding energy was a modest 4% in Q4 of 2015. Including energy it was negative. It will get harder for companies to pile on more debt if their EBITDA growth does not accelerate

Cash to Debt is also declining, although it remains above pre and post crisis levels. But the behemoth cash hoarders – Apple (AAPL), Oracle (ORCL), Microsoft (MSFT), etc – do tend to skew the averages, and without those companies, the Cash to Debt ratio would look quite different

Interest coverage is still very healthy at 10.8x, but it too is dropping

This from Morgan Stanley...

Buybacks for Q4 of last year were down 10% Y/Y and flat for 2015 as a whole.

And this from Morningstar...

Commercial Mortgage Back Securities of pre-crisis vintage. This is the worst CMBS paper out there. According to Morningstar, some $155B of CMBS coming due this year and the next will be paid off at 50 to 60 cents on the dollar.

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Anonymous
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March 8, 2016 at 5:11 PM ×

Once again buyers step up and bid up equities. Folks there's a pattern here: if the day ends in "y" and it's the US session, expect equities to rally ;)

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Macro Man
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March 8, 2016 at 5:56 PM ×

That's an awfully odd comment when stocks are down on the day and the year. But I don't want to feed the trolls, particularly ones so pisspoor at basic math. Please consider those types of comments superfluous to further discussions, oh dipbuyers of the world.

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MrBeach
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March 8, 2016 at 7:21 PM ×

So someone help me out - what are the realistic options in front of Draghi this week? I can't seem to find a good summary. What would shock and awe entail? What assets would be targeted?

As an aside, Target2 continue seemingly unabated in Euroland. As long as the economies of Northern Europe are more productive, these balances will continue to accrue. This seems like a long term problem....

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MrBeach
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March 8, 2016 at 7:24 PM ×

In my previous comment, I left out an important word: As an aside, Target2 imbalances continue seemingly...

EuroCrisisMonitor has good data on Target2.

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Polemic
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March 8, 2016 at 9:16 PM ×

Anon 4.35 - at least jbtfd had the decency to only crow once things had zoomed.
In your case, I think you've got your screen upside down.

LB- there we go my old son.. metals cracked first. watching copper as ever. Oil really hung in much longer than I was expecting all morning. But finally . creeeeak the whole lot did the roll over Beethoven.

Now it's much harder to call but bias should be more down at least for next few days. momo models have driven much of this and the thing with algos is they don't fill in sentiment surveys. Though of course everyone tries to guess how they feel thru futures positioning surveys.

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Anonymous
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March 8, 2016 at 9:43 PM ×

jbtfd said...

anon 1:12 - I just hope for your p&l's sake you haven't been short equities and commodities for the past few weeks.

Saying all that, I'd love a pullback in spx so I can buy more before we get higher prices.

Well, isn't that stupid? Why do you need a pullback? Is your buying model dependent on stocks taking a step back before they go two steps forward? Why not just buy 24/7? You'd make more money that way!

Or you could be 12 years old, and as someone has already mentioned, a twat.

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jbtfd
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March 8, 2016 at 11:04 PM × This comment has been removed by a blog administrator.
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Anonymous
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March 9, 2016 at 8:30 AM ×

@Anon 9:43PM Frankly I think the biggest twat here is you. Goodbye troll.

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platter
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March 12, 2016 at 2:48 AM ×

Any reccos on basic reading on patterns - head/shoulder or the base as mentioned above for GDX

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