Developed Countries
The above chart shows the three most important indicators of the housing market in our view. Residential investment as a share of potential GDP, the 12-month moving average of single family housing starts and the 12-month moving average of new home sales. At…
Our 12-month Fed Funds discounter tracks the market’s expectation for changes in the Fed funds rate during the next 12 months. The discounter plunged sharply in early 2016 from a peak of 75 bps to a trough of 4 bps, signaling the peak in credit spreads. At…
All three indicators are highly sensitive to global demand, and they signaled the peak in credit spreads in early 2016. Most importantly, they are updated daily and can therefore be tracked in real time. The first indicator is the CRB Raw Industrials…
The average spread of the Bloomberg Barclays High-Yield index is now above 400 bps and the investment grade spread is at its widest level in two years. Just like when credit markets sold off in 2014/15, the catalyst for wider spreads is a combination of…
Underweight The drubbing in oil markets this month has not spared stocks in the S&P oil & gas refining & marketing index, which has given up all of its 2018 gains. Our downgrade to underweight on July 16 has been spot on and already returning 15.5% compared with the broad market. Crack spreads have nose-dived and should weigh heavily on earnings (second panel). Despite the collapse, the sell-side community has remained stubbornly optimistic, a position that looks untenable in the context of both a contracting crack spread and still-rising domestic gasoline inventories (inventories shown inverted, third panel). Such an imbalance can either be resolved via an inventory or earnings drawdown; we anticipate the latter. While the sector has seen a valuation correction, we would be hesitant to call the index affordable. Rather, in the context of analyst expectations that will have to return to earth, even an average valuation multiple seems too optimistic (bottom panel). Bottom Line: More pain lies ahead for refiners; we reiterate our underweight recommendation. The ticker symbols for the stocks in this index are: BLBG: S5OILR - PSX, VLO, MPC and HFC.
Slowing global growth and inflation as well as a strong trade-weighted dollar could very well put a bid under the price of Treasury bonds over the next few months, especially as speculators are still large sellers of the whole U.S. government bond universe. …
Viewed through the framework of our U.S. Investment Strategy team’s equity downgrade checklist, the supply-driven plunge in oil prices is not a cause for alarm. It does not mandate an increase in the estimated probability of a recession, the way that a demand…
The lack of a discernible 2015-16 consumption boost after oil cratered upended the notion that the U.S. economy is as negatively correlated with oil prices as it has been cracked up to be, and the equity reaction also bucked the conventional wisdom (see…
October and November were terrible months for global markets, but oil prices stand out as the primary underperformer among the major assets. If a global recession really were afoot, EM and Chinese equities would not likely be outperforming global equities.…
Overweight (High-conviction) Air freight & logistics stocks have been bouncing along the bottom for the better part of the past year and have formed a base that should serve as a launch board higher in the coming months. Energy costs comprise a large chunk of freight services input costs and the recent drubbing in oil markets will boost margins especially on the eve of the busiest season for courier delivery services (top panel). On that front, there are high odds that this holiday sales season will be another record setting one, especially given that corporations have paid out bonuses and shared part of the lowering in corporate taxes and also wage inflation is underpinning discretionary incomes. Keep in mind that the accelerating domestic manufacturing shipments-to-inventories ratio confirms that demand for hauling services is upbeat. The implication is that rising demand for freight services will buoy industry profits and lift stock prices out of their recent funk (middle panel). While the U.S./China trade tussle and the greenback are clear risks to our sanguine S&P air freight & logistics transportation subindex and have been intense headwinds for the sector, they are already reflected in depressed valuations (bottom panel). Bottom Line: We reiterate our high-conviction overweight status in the S&P air freight & logistics index; please see last week’s Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5AIRF - FDX, UPS, EXPD and CHRW.