Wednesday, May 7, 2014

Weakness in Small Caps

In 35 years of history, this is only the third time that the NYSE Composite Index was sitting at a 52-week high one day, and the next day the Russell 2000 had fallen below both its 50-day and 200-day moving averages. The two precedents occurred on 3/12/99 and 11/1/07, which is disturbing as it preceded the last two bear markets. It's tenuous (!) to place a lot of weight on a sample size of two, though this is another warning that the divergences we've been seeing lately have not had positive outcomes the majority of the time.

Tuesday, May 6, 2014

Research Brief from 361 Capital

Below are some excerpts from Blaine Rollins, CFA excellent research briefing...

Something else you don't see every day... Stocks and Bonds both moving toward highs...


Russia is still a thorn in the world which benefits Bond prices, but remove the Ukraine and there remains a disconnect...
With U.S. stocks near record highs and Treasury bond yields near multi-month lows, the disconnect between equity and debt investors has rarely been as stark. Over the coming months, the economy is likely to show one of the groups has bet wrong. The S&P 500 sits less than one percent below an all-time high. After a wintry first quarter, stock investors are betting that economic growth is picking up, as evidenced by stronger spending figures and business demand. That's boosted the cyclical stocks which react to rising demand, particularly energy shares... Bond investors are reacting to a different story. Yields on the 10-year note hit a five-month low on Friday and the 30-year note's yield fell to its lowest since June after the April jobs report, which showed strong growth in payrolls but no growth in earnings and a decline in the labor force. That data points to the conclusion that overall economic demand will remain tepid and that inflation won't materialize as the Federal Reserve continues to pull back on monetary stimulus, analysts said.
(Reuters)


Transportation stocks moving back to highs favor the strengthening economy...


ISI Group's Weekly Economic Surveys also told you that the data points would be moving higher...
ISI's company surveys and bank loans both correctly suggested the recent run of strong monthly U.S. data, e.g., employment and consumer spending. They now suggest another run of strong data. Improvements in the U.S. and Europe are driving a global reacceleration (e.g., global IP), and lifting earnings for S&P companies (over the past three weeks, 1Q estimates have surged from -1% to +5%, and further increases are likely). Around the world, money is pouring into everything --- deals, real estate, equities, corporate bonds, Spanish bonds, and U.S. bonds. Cumulatively, Fed and BoJ balance sheets have surged +$495b ytd.
(ISI Group)


(WSJ)

But some excellent discussion on the state of the Financing and M&A markets from the Carlyle Group conference call last week...
...“given recent geopolitical and macroeconomic events we are surprised at how well credit markets have been in 2014. The world continues to be awash in liquidity and investors are chasing yield seemingly regardless of risk. Leverage levels in the United States are increasing and rose by almost a full third over the past year while spreads between IG and HY are ~250 basis points below the 20 year average. Thus, the market is not assigning a significant premium to riskier assets. We continually ask whether the fundamentals in the global credit markets are healthy and sustainable. Frankly, we don't think so. What does this mean for global investments? On the positive side we are locking in low interest rates for new investments and continuing to refinance existing debt. At the same time historically low interest rates and a high appetite for risk are pushing up leverage levels and contributing to rising asset prices. This is good news if you are a seller, but bad news if you are a buyer. Given these dynamics good deal judgment is paramount”.


While Treasury Prices move to highs, Junk Bond prices have stopped gaining. This should be a bit worrisome for RISK investors. The ramp in supply from the above mentioned M&A does not help.

And still worrisome to RISK investors is the under performance in Small Cap versus Large Cap equities...

But working in RISK investors favor is the continued buying in the Emerging Markets. In Brazil the Real currency is helping. And as Barron's noted over the weekend, political changes in India are helping those Equities...

(@stockcharts.com)
(Barron's)

But for Portfolio Managers, 2014 has been BRUTAL...
Calendar year 2014 is now 1/3 behind us and for many equity portfolio managers the calendar is turning into an annus horribilis to use the phrase immortalized by Queen Elizabeth II. Nearly 90% of large-cap growth mutual funds, 90% of value funds, and 2/3 of core funds are trailing their style return benchmarks YTD (1%, 4%, and 2%, respectively).
Stock-picking has been extraordinarily challenging this year. The typical hedge fund had a YTD return slightly below zero as of April 30. Dispersion of S&P 500 stock returns for the last three months ranks at the 1st percentile compared with the past 30 years. Within Consumer Discretionary, where hedge funds have nearly 25% of their net exposure, the return dispersion also ranks in the 1st percentile. Simply put, 2/3 of consumer stocks usually have a three-month return within a 29 percentage point span. However, the range is currently just 16 percentage points which makes both long and short security selection extremely difficult compared with prior periods.
(Goldman Sachs)

For the week, there was a bounce in RISK as Technology outperformed and Utilities underperformed...

More broadly, International Equities were also snapped up across Emerging and Developed markets...