Is it time to worry about credit market liquidity ?

Yes, probably according to BofAML analysts.

« Our analysis shows fewer bonds trade on a daily basis over the past year. We also find that trading volumes are declining over the past years as a percentage of the stock of corporate bonds. Liquidity is concentrated in benchmark bonds; 5y and 10y bonds exhibit better liquidity both in terms of tighter bid/offer spreads and also higher turnover. Higher spread/yield bonds exhibit better liquidity. »

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USD insensitive (so far) to Fed’s possible rate hike

According to UBS’strategists:

« Since our last FX Atlas in early July, market pricing for a December hike has risen from near zero to more than 50%, and US 10-year yields have risen nearly 30bp. Yet neither has been much help to the dollar, which remains locked in an extremely narrow range, and on a trade-weighted basis, is actually a bit weaker during this time. »

Later they write:

« We continue to see the dollar as having peaked on a trade-weighted basis versus DM currencies, the euro in particular. Fair value models indicate that the euro remains cheap, and with the growth gap between the US and Euro area shrinking, we continue to forecast a grind higher to our year-end target of 1.16. »

High quality stocks, US/EU credit, EM debt are most crowded trades

The latest survey of global fund managers by Merrill Lynch continues to reveal high levels of cash in asset allocation, neutral stance on equities (1% net overweight vs 9% a month ago), yet on the backdrop of positive sentiment towards economic and profit growth…

Interestingly, most investors explain that high cash levels in allocation (net 5.4%) reflect « bearish views on markets »…

Source: Bank of America Merrill Lynch

Source: Bank of America Merrill Lynch

Another interesting indicator in the survey is about the « most crowded trades » based on investors’ views.

From Merrill’s note:

« Most crowded trades are all « NIRP-winners »: long High Quality stocks; long US/EU Corporate bonds; long EM debt. Sept FMS shows first meaningful reduction in bond proxy exposure (staples, utilities, telcos – Exhibit 1), as well as reduction in « high growth » US market. But both REITs & tech remain big stubborn longs, and EM equity OW highest in 3.5 years. All vulnerable should Fed and especially BoJ fail to reduce bond vol in Sept. »

When you think about the increasing interest in EM debt, or the sustaining impact of QE on « low vol », « bond proxies », « high visibility/quality » stocks, you get a sense markets are probably ripe for a correction…

From ‘Expansion’ to ‘Downturn’ – Morgan Stanley

One of the latest publication on X-asset strategy comes from Morgan Stanley and the message is pretty grim:

« Our cycle indicators across DM have stalled, pointing to rising risks of a shift from ‘expansion’ to ‘downturn’. The dilemma is that this peak has characteristics of both ‘true’ and ‘false’ turns. We explore our cycle checklist. »

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European equity around fair value, won’t change by end of year – UBS

UBS’s Europe strategists stick to their Stoxx 600 340 points target by year-end and provide a useful table of the underlying fundamentals/valuation factors. The following table illustrates where market would be if you change either 2017 EPS earnings growth and 12month forward P/E ratio. Bottom line: if you are cautious right now, don’t touch European equities.

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Are Equity Risk Premiums of Any Help to Investors ? Not so sure…

Source: Goldman Sachs

Source: Goldman Sachs

From GS’s latest GOAL publication:

« Much of the reason that equities appear cheap versus bonds therefore is simply a reflection of how much bond yields have fallen. Most measures of the ERP will use some kind of long-run historical average measure of profit growth and extrapolate into the future. »

Current levels of ERP assumes that earnings growth of the past 20 years will go one forever. But that’s a hard case to make. In fact, as GS’s strategists put it:

« Here lies the great dilemma for investors: on the one hand, current bond yields imply that valuations can continue to rise for financial assets (as they have already done over recent years), but, on the other hand, to justify current risk free rates into the future, we should assume lower long-term growth (consistent with ‘secular stagnation’).This should cap the level of valuations close to current levels.This is why we argue that while the Long Good Buy for equities still holds – they should do well relative to bonds over the medium term – the market trajectory is likely to be flatter than experienced through 2009 to 2016. »

Puzzling times for investors

Excerpt from the latest GOAL publication from Goldman Sachs… I’m just picking a couple of paragraphs that give a good understanding of how difficult it is to do proper asset allocation and not be weary of losing it all when markets are distorted by central banks and the prospects for growth and inflation are dull…

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If you want to make money, you have to be a good… Sector picker

Many fund managers pried their ability to pick stocks, or, as the jargon goes « generate alpha » through stock selection (and with that the handsome fees they charge you). But the following 2 graphs show that rather than picking the right stocks, it’s better to pick the right sectors…

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Should you have gold in your portfolio ?

Jason Zweig from the WSJ published a column titled « Gold is still a pet rock » and its a great read (and obviously JZ is not ‘a moron’ as he calls himself)… He reminds us that if gold is a good « insurance against chaos », its value fluctuates so much it’s a poor protection of purchasing power for short periods of time. Lire la suite

Post Brexit, European banks have lost 228bn euros of market cap

Source: Goldman Sachs

Source: Goldman Sachs

That’s a severe correction (knowing it started way before the UK referendum). But Goldman’s analyst add some interesting comments:

 » Whilst EUR funding is exhibiting no sign of strains, funding pressures are gradually building in USD (USD/EUR and USD/GBP cross-currency basis) and GBP funding indicators. This said, they remain at levels that are a fraction of previous crises (2009 and 2012) peaks. We maintain that funding shocks are unlikely, given generous central bank backstops – these were sufficient to contain the aftermath of both the Lehman and European sovereign crises. »

European banks are probably stay in such a comatose stage for some time, as long as there are no sign of steepening yield curve or a better macro environment. On top of that, due to there high beta, banks are considered a good play to short the market when everything goes wrong. So be careful if you decide to pick one.

Is the Quest for Yield Distorting US Equity Markets?

« Low global bond yields are pressuring US Treasury yields, while inflation outlooks are muted and the Fed appears on hold with rate hikes. All of these points favor high dividend yields »… Makes sense although this is massively pushing investors into the most expensive territories of equity markets !

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Always a good question: what’s priced in?

And the answer from Barclays:

« While valuations are certainly not pricing in a full-blown global recession, we are not far away from pricing a 2012-style moderate recession. If such a scenario were to fully materialise, the fundamental floor appears to us to be a STOXX 600 level of 300 (c. 10% below today’s levels). However, if a more benign economic scenario were to occur, as per our economic team’s forecasts, we expect valuations to eventually revert higher. Till further evidence of this materializes, in the near-term, we expect markets to remain volatile and follow economic and political developments. »

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Morgan Stanley Cross asset views after Brexit


Source: Morgan Stanley

Interestingly, one week after the event, systemic risk doesn’t seem to be an issue…


Source: Morgan Stanley

Views per asset classes:

  • Equities: stay defensive (global earnings have been falling, and valuation are relatively fair)
  • Currencies: USD bull market is not over…
  • Rates: lower for longer
  • Credit: best option for carry

Goldman’s strategy after Brexit

From GOAL report dated June 26:

« Brexit has driven a sharp drawdown in equities
The UK vote to ‘leave’ the EU has triggered a sharp drawdown in European and global equities. We have long argued that equities are stuck in a ‘Fat & Flat’ range given both elevated valuations and a lack of growth. The impact of Brexit on confidence and the ERP, as well as on European growth, increases the risk that we move downward in this trading range. We have highlighted risks of a correction in our recent GOAL – Global Strategy Paper No. 19 and strategies to mitigate this risk. A key concern remains the lack of diversification or availability of ‘hedges’ for equities as most safe assets, in particular bonds, remain expensive alongside equities.

Potential for further weakness & volatility in global equities We think equities will remain volatile and stay defensively positioned in our asset allocation (neutral equities over 3- and 12 -months, overweight cash over 3 months). While we think investors have been lightly positioned into the drawdown, we feel that due to policy uncertainty and lack of growth, risk appetite might remain low in the near term. However, a combination of further declines in valuations and positive growth/policy surprises are needed to stabilise equities within their ‘Fat & Flat’ range.

Lowdown on the drawdown
Comparing the current EURO STOXX 50 drawdown to history indicates that it might continue (most drawdowns have lasted more than a month), valuations might have to drop further and bonds have been less good hedges for equities. Gold and Yen performed best as ‘risk off’ hedges. »

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Great Video Interview of Piketty on Greece

Thomas Piketty : ceux qui cherchent le Grexit… par lemondefr

Unfortunatelly or fortunatelly the reporter who asks questions is completely in line with European commission’s dogmatic views. For a newspaper that claims to bring indepth analysis of economy and society, it’s a shame when one of his journalist only has cliches question to throw away.

Interesting Chart

Source: RF Research

Don’t underestimate Grexit risks warns Veronique Riches-Flores, from RF Research.

If Greece were to exit Eurozone, which would be unprecedented and is not anticipated by current European treaties (as far as I know), the consequences would be dire for financial markets.

Even more so since financial markets are globally overvalued, as illustrated in the above chart…

The Bruce Greenwald Method

h/t Value Investing World and thank you to Michael Mauboussin for initially sharing this…

A thorough review of Greenwald’s course on value investing with lots of very valuable content. For those who haven’t read his classic book Value Investing From Graham to Buffet and Beyond.

The PDF is here to download.

Greece: Time to Worry a Little or to Rejoy ?

Well, the markets are heading into panic mode, again. Brace yourself ! Lots of opportunities will probably arise, but wait a little, that dust settles down before chasing quality stocks at discounted prices, because right now, the market is still expensive and most quality stocks trade at a premium…

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BIS Annual Report Is Out With A Warning Message

Some valuable piece of information and insight on global financial markets, with a somewhat alarming message: « Don’t let the unthinkable become the new normal« .

« The global expansion remains unbalanced, debt levels and financial risks are still too high, productivity growth is too low, and the room for manoeuvre in macroeconomic policy has continued to narrow », warns the BIS, with a global message: current governance and ruling of financial markets around the world is a big mess and there is little progress in aknowledging and fixing that…

Full report is here.

It’s sad/funny that this kind of analysis comes at a time when the IMF is sending ultimatums to Greece which replies with democratic call to its people, something IMF’s leaders are probably not accustomed to.

Guy Spier’s Education of a Value Investor – A Review

Reknowned investor Guy Spier (Aquamarine Capital) published his autobiobraphy late 2014, a book entitled The Education of a Value Investor (Palgrave MacMillan). As Spier explains himself, the book recounts his journey from Wall Street where he started as a junior investment banker to becoming a Buffett’s groupie (like many value investors, including myself) and a famous value investor, with an outstanding track record (here it is as of end 2012). Lire la suite

Grexit: important facts in images…

Courtesy of Exane BNP Paribas’economist team, the Grexit case in a nutshell, actually 2 charts that might help clarify some points. According the Exane, Grexit now has a 40% chance to materialize.

About the timeline for the coming summer…

Source: Exane BNP Paribas

Source: Exane BNP Paribas

And here are the scenarios in the event of Grexit:

Source: Exane BNP Paribas

Source: Exane BNP Paribas

Obviously, investors should think about ways to protect their portfolios, but they shoudl also raise cash and be prepared to seize investment opportunities.

What to worry about – JPMorgan View

« The uncertainties that made us cut our risk OWs to small have not gone away and merit hedging. The biggest one comes from an early end to the cycle caused by the lack of productivity growth. Inflation will be the warning sign and should be hedged. »

Another good read from Jan Loeys and team at JPMorgan…  Lire la suite

The recipe to become a successful value investor

Back in 2003, reading The Intelligent Investor blew my mind. I had been a financial reporter for a couple of years, in a publication that was supposed to give valuable investing ideas to individuals. From 2001 to 2002 we just witnessed the market crash, and failed to help investors protect their capital. All the way down to capital destruction, bad investment advices, all to be ashamed of when I think about it in retrospect (I sincerely apologize for that by the way).

After having read Graham’s book, I actually wondered why no one had ever asked me to read the book BEFORE I joined the newsroom… The paper is still in business, but I’m not sure their readership has greatly expanded since 2003… Lire la suite

The irrefutable defense of passive investing by one famous active fund manager

Most of you probably know that Buffett has often made the case for passive investing, which might be surprising regarding his own track record as the smartest active manager on earth.

But he is not alone…

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Berkshire Hathaway 2015 Meeting Photos & Videos

Some footage from the « Woodstock of Capitalism ». Sorry for the poor quality of images, but you should be able to recognize some folks here and there.

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A Correction in the Making ? From Goldman Sachs

Derivatives specialists at Goldman have put up an interesting piece of research. Unfortunatelly, it only covers the US equity market.

From GS:

Over the past 9 months, the cost of SPX 55% OTM 5 year equity puts has more than doubled while the cost of 10 year puts is up 50%+. Long-dated options markets appear increasingly concerned about the potential for a decline in the S&P 500. Equity valuation and CDS spreads have been highly correlated with put prices over the past several years, but long-dated put prices have diverged. We see reason for concern as put prices were up a similar amount in 2007 ahead of the financial crisis, diverging from credit and equity at that time as well.

Source: Goldman Sachs

Source: Goldman Sachs