Quantamental

While looking at price charts can be controversial for some more fundamental biased managers, plotting (not charting) fundamental trends like Earnings, GDP growth & Inflation is viewed much less cynically, even though the ability to abuse fundamental charts remains. 

In this follow up I touch on a few of the markets mentioned in the previous post, while savings 1 or 2 for a more in-depth post in the near future. 

Since Equities seem to be on my mind a lot lately, and the price action post-inauguration closely watched by many, lets take a 20,000 foot step back and look at a few fundi-charts or "Quantamental" type analysis.

S&P 500: Earnings are the fundamental driver

Below is a chart of the S&P 500 Bloomberg Estimated EPS (BEst). Note that these numbers are not GAAP and are for 1 year ahead. We can argue whether we should use this dataset for valuation purposes but for right now we are just going to focus on the trend

In the chart we also plotted the MSCI World Index in Green and the EuroStoxx 50 Index in Purple. This is a good chart to remind yourself why QE does not have a 1:1 influence on stock prices all the time. Sure it worked like a charm in the US experience, but that's also bc US companies are rock stars. In Europe QE has been large as well, but look at the corporate response. EPS have sucked. No wonder why EuroStoxx 50 price index is still below its 2007 high, and even with dividends your annualized rate of return on SX5E is a whopping 1.9% for the past 10 years.  That said recent EPS expectations for EU are growing quickly after bottoming around Brexit.

In the chart below we can see S&P 500 annual rates of change (52 weekly ROC). We can see that at almost 7% YoY, the market is forecasting some really strong earnings growth, close to the highest level we've expected in the past 5 years. Note that 2014 EPS levels correspond to what the market foretasted for 2015. What we got was much lower

Just how good are expectations in Equity land, well lets take a look at some confidence survey's 

Economic Surprises near the highest in recent history. 

CEO confidence high.

But small business owners are even more optimistic

How about consumers? University of Michigan Consumer Confidence seems strong.

But if you dig into the index, current conditions look about as good as they can get. Note you dont want to be holding equities when this thing rolls over. 

Keeping with the equity theme, on JPM, whose chart was shown in the last post and this author thinks is a good proxy for the banking sector, since Jamie Diamond according to Wall Street folklore is like William Wallace in Braveheart. While the stock has sold off post earnings (which were luke-warm according my quick take) the market has marked down Q1-17 but marked up Q2-17. Classic. 

But taking a step back and look at where we came from is helpful. Below is plot of 2017 and 2018 full year expected EPS. Seems like Wall Street is still very bullish. And assuming JPM hits $7.50 2018 earnings, the current price is still cheap at only 11x. More importantly, revisions are only going higher. 

Just a little add on, regarding Equity Vol. When you calculate equity volatility for a portfolio or an index, the correlation of its member's is an important consideration. In the chart below we can see the 3M Implied correlation of the S&P 500. This is the opposite of Risk/Risk Off times in 2011/2012. 

Moving on to CAD, which James wrote a nice piece on earlier. Just a quick chart on the 2 year yield spread, seen in yellow below. Until we see a big change in BoC posture, rate differentials will probably pull CAD lower. But the other big question is Oil

While I probably should do a more in depth post on oil, here are just a few things that caught my eye

1- US oil production is doing pretty well, especially considering the drop in oil rigs. 

And if we look at Cushing stocks, we might come up with a bearish thesis. Production bottomed, inventories high and rigs just comming off a bottom

But oil declines, and shale declines especially quick. There has also been a nice kicker in US production from DUC's, commonly called "ducks" or Drilled Uncompleted Wells, which have been adding production. So I would be cautious to assume that US production can keep current production without an increase in rigs. But the real reason I think this US view is misguided is because of this chart, from OPEC, which puts out a nice monthly summary on oil, especially useful for those of us not in the industry and used to all the jargon.

OECD stocks have declined for the 4th straight month in row. And outside of the US, $50 oil still doesnt make sense for most CapEx. Lets see 

If you are still with me, a final few price charts on Rates. 

Dec 17 Eurodollar very close to the recent lows. Perhaps 3 or even 4 rate hikes in 2017? Goldman was out earlier pushing the idea. Remember the Fed follows the market, not the other way around.

And the 5 year yield, which was stuck in a range since Bernanke's taper tantrum is holding above the line drawn at 1. 8. Perhaps the trade is a flattener not to be outright bearish.