10 marzo 2017

llevamos 8 años de mercado alcista...

¿Cuántos años más va a durar?
Anniversaries are usually joyous events. This week marked the eighth anniversary of the bull market. On March 3, 2009, President Barack Obama told us to buy stocks: “What you’re now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” On March 6, 2009, the S&P 500 fell to an intra-day low of 666, and never looked back. You might recall (because I’ve reminded you a few times since then) that soon after, I declared that this devilish number was THE low. March 9, 2009 marked the closing low of 676.53. Let’s review some of the accomplishments of the charging bull: 
1-Performance, earnings, and valuation. The S&P 500 is up 249% since March 9, 2009 through yesterday’s close. The forward earnings of the S&P 500 is up 103%. The forward P/E is up 75% (from 10.2 to 17.9). 
2-Blue Angels. Putting all these trends together in our Blue Angels charts shows that the market is certainly flying high. Valuations suggest that stock prices are too high. However, forward earnings for the S&P 500 continues to climb in record-high territory. Furthermore, valuation isn’t too high if President Donald Trump delivers the goodies that he promised, including tax cuts, deregulation, and infrastructure spending. The market clearly liked Trump’s speech before Congress last week, along with his kinder and gentler tone. It was his first truly presidential-sounding performance since he first landed on the political stage. 
3-Fundamentals. Last week’s rally was impressive, and certainly provided a vote of confidence in the President’s economic agenda. That vote was also merited by last Wednesday’s M-PMI, which jumped to 57.7 during February, up from 56.0 during January and 52.0 during October, before the presidential election. Yesterday’s ADP report showing a gain of nearly 300,000 in February payrolls is yet another number suggesting that Trump’s victory unleashed the economy’s animal spirits. 
4-Sentiment. The Bull-Bear Ratio compiled by Investors Intelligence rose to 3.82 last week. That’s the highest since April 2015. Of course, if we all start celebrating the stock market melt-up, the contrarian killjoys will say that such events are usually followed by a meltdown. They’ll observe that the hard work is still ahead, i.e., getting the bullish part of the Trump agenda passed by Congress while blocking the bearish parts that have to do with protectionism. 
For now, I continue to dance with the bulls. On a note of caution, let’s recall the infamous last words of former Citi CEO Charles (“Chuck”) Prince. In July 2007, Prince told the FT that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market. “As long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said. On November 4, 2007, he retired from both his chairman and chief executive positions due to unexpectedly poor Q3 results, mainly attributed to CDO- and MBS-related losses.
Y en Alemania también celebran que llevan 8 años de carrera al alza… (aunque no ha conseguido superar su alto de 2015)
¿Son demasiados? No lo sé, pero otras veces las correcciones son muy cortas…
PD1: La rentabilidad de las acciones (yield) es más baja que los rendimientos de los bonos…
Ay de los bonos, ay!!!
¿Es muy malo?

Negative real yields = Equity sell signal?

A reader asked me my opinion about this tweet by Nautilus Research. According to this study, equities have performed poorly once the inflation-adjusted 10-year Treasury yield turns negative. With real yields barely positive today, Nautilus went on to ask rhetorically if the Fed is behind the inflation fighting curve.
Since the publication of that study, The January YoY CPI came in at 2.5%, which was surprisingly high. The higher than expected inflation rate pushed the 10-year real yield into negative territory. So is this a sell signal for equities?
Well, it depends. The interpretation of investment models often depends a great deal on their inputs. In this case, the questions is how does we adjust for inflation? Do we use the headline Consumer Price Index (CPI), core CPI, which is CPI excluding volatile food and energy prices, or some other measure?
As I go on to show, how we adjust for inflation dramatically alters the investment conclusion for a variety of asset classes, like equities, gold, and the USD.
As is the case in the application any quantitative model, the devil is in the details.

Real yields and equity returns

Consider the evidence. As the FRED chart below shows, history shows real yields indeed either lead or are coincidental with equity returns. If we adjust for 10-year Treasury with headline CPI, the outlook is equity bearish. On the other hand, adjusting with core CPI leads to a bullish conclusion.
Which inflation measure should we use?

Real yields and the USD

There is a more direct empirical relationship between real yields and the level of the US Dollar. As real yields rise, it puts upward pressure on the USD. So which inflation rate should we use?

Real yields and gold

Historically, the price of gold has been inversely correlated with the USD. Since gold is thought of as an inflation hedge, it is therefore no surprise that low real yields are gold bullish and high real yields are bearish (note the inverse scale for the gold price, right axis).
Our intermediate term outlook for these asset classes therefore crucially depend on the correct interpretation of the inflation adjustment factor. Do we use headline CPI, or the less volatile core CPI?

A “hot” CPI print

The CPI print last week came in ahead of expectations. YoY CPI was 2.5% (vs. 2.4% expected), and core CPI was 2.3% (vs. 2.1% expected). As I showed in my previous post (see Watch what they do, not just what they say), most of the strength in CPI was attributable to rising Owners’ Equivalent Rent (OER), which comprises of 25% of the weight of CPI and 31% of core CPI, according to the latest BLS figures. (Note that the chart subtracts 2% from each CPI metric so that we can easily see whether each is above or below the Fed’s 2% inflation target.)
Much of the recent boost to headline CPI compared to core CPI is attributable to surging gasoline prices. As the chart below shows, YoY gasoline prices are due to peak and headline inflation should start to moderate in the months ahead.
After dissecting the components of CPI, my conclusion is that inflation remains tame after stripping out the more volatile components and OER, which can be ignored for the purposes of this analysis. I have also highlighted past analysis from George Pearkes that core PCE, which is the Fed’s preferred inflation metric, has been slowing.
In conclusion, investors shouldn’t panic about negative real yields based on an erroneous interpretation of inflation. Unless conditions change dramatically, the intermediate term outlook for the USD and equities is bullish. Conversely, gold bulls will face headwinds from positive real yields.
PD2: Me voy del 31/3 al 2/4 a hacer mi curso de retiro anual en un pueblo de Madrid. Es en silencio, sin que el ruido de la gente nos distraiga. No se habla, ni en la comida que se lee algún libro espiritual. Es un momento de desconexión, de mirarme por dentro, de intentar corregirme, de hablar mucho con Dios… Son unos días de mucha paz y de reposición de fuerzas, de ver a dónde voy, y de ponerme buenos propósitos. Es el momento oportuno para hacer una muy buena confesión ¿Te quieres venir?