Daily Note – Glory Glory Man United?



Global Equity Markets stabilise as we await the Federal Reserve Meeting

United States: Weaker than expected New Home Sales but market focus is elsewhere

United States:  Preview of FOMC meeting

Australia: NAB business conditions improve in December

Eurozone: More French people looking for work


Good Morning from a very damp Cork, Ireland’s second city, home of Roy Keane, last year’s defeated All Ireland Hurling finalists and a city blessed with lovely architecture, lots of water and locals with a great sense of humour and an ever greater sense of the place’s importance. My mother and all the extended family is from here, the Rebel County, so I have witnessed these outre delusions of grandeur on many occasions.

When I was a kid my Cork cousins constantly bragged to this visiting Dubliner about having the “longest building” in Ireland, the “tallest building” in Ireland and most comically, the “straightest road” in Ireland.

Today I am going to focus on delusions.

Last night Juan Mata, United’s most expensive signing ever at £37.1m, was unveiled. As Mata spoke, holding up his new United Number 8 shirt, he contended that United could still win the Premiership. I realize he had to say that but, seriously, have you seen them being swept aside, outfought and outthought this year? Maybe at 66/1 they deserve a punt, but that punt is only made attractive at this price. On form, United are ‘also rans’.

As they say, past performance and all that. So what do you think is more expensive, Mata at £37.1m or the S&P at 1780? What’s more delusional, Mata’s aspirations or the markets? What’s more expensive Juan Mata at  £300,000 a week or run-of-the-mill large caps at 17 times earnings?

Like Man United, the S&P’s part performance dominates perceptions of where it is now. If United’s success last year can be put down to unnatural forces – the drive of Ferguson, the form of Van Persie, the dissaray at Chelsea and teething problems putting together the City’s best starting eleven – then the one third rise in the American stock market last year can also be put down to a rise in valuation multiples, driven by share buybacks, in turn driven by QE. Rememeber, the true long term driver of stocks – earnings growth –  was an underwhelming 4% in 2013!

With bog standard, large cap giant companies trading on 17 times earnings, where is profit going to come from? Higher interest rates will increase the cost of share buybacks which have been funded by cash and once in a generation cheapness in corporate debt.

We are not bears. Regular readers know this, but if you are buying something you know is already expensive, you have to be very, very sure that you have covered all risk bases.

What happens if the US labour market tightens quicker than people expect and the new “doveish” Fed gets bullied by a bond market sell-off? What happens if Syria descends into greater conflict, dragging the regional big boys into a Shia/Sunni civil war?

(I head for one of my regular trips to the Gulf to speak at this conference  in a few weeks and will keep my ear to the ground and tell you what I hear.  I will also have the pleasure of speaking on a panel with Rana Mittar, a true Chinese expert who will shed some light on China and its hidden credit and banking landmines.)

In addition to these one-off events, what about trends? If the dollar keeps rising, as we think it will, buoyed by interest rate differentials, what happens to earnings in the one in four S&P companies that make their money outside of the US?

Bear in mind that the S&P500 last traded at 18 times earnings in the early stages of the 1999-2000 dot.com carryon. In a world where Amazon.com trades at near 600 times, is risk being underpriced?

Think about it.

Speaking of Amazon and the like, I have noticed my kids abandoning Facebook for WhatsApp in recent weeks. Now this observation is hardly front page news, but it allows me to focus on Facebook briefly, ahead of its earnings tomorrow.

Remember how Apple crashed from over $700 a share to under $400 in a matter of months? And they fell again overnight. Nothing major really happened with Apple, the company still produced great products that lots of people wanted to buy. But as the owner of an HTC smartphone, it was clear that the competitors were catching up and it found itself unloved and “flavour of the month” and its shareprice slumped.

Could the same happen to Facebook because its share price has been rocketing for close to a year?

Consider that from the second to third quarters of 2013, Facebook saw a just one million new monthly users added in its U.S. and Canada segment. Although moving from 198 million to 199 million people sounds impressive in the general, in the specific, it is very low growth – less than 1%.

Here in Europe, growth in the third quarter was just 1.4%, from 272 million to 276 million users.

One little part of me thinks that we could be close to peak Facebook and if it reveals actual user numbers declining, all bets are off. Maybe tomorrow’s figures could be the high water mark for global Facebook users.

As for Juan Mata, he togs out against Cardiff tonight. It’s a long way from there to the Champions League Final, particularly  for a man with a Champions League winners medal.

Global Equity Markets stabilise as we await the Federal Reserve Meeting

Despite valuation problems and the risk/reward concerns outlined above,  global equity markets stabilised over the last 24 hours.

Sure emerging markets continue to fall but this has been the case for some time now and is not so much a “new” virus in global markets but a reemergence of a more virulent strain of the old one.

Emerging market are now down 21% from their May 2011 peak. Interestingly, this bear market has been primarily a foreign exchange phenomenon accounting for 15% of the losses. Local equity returns have been only down 6% in the same period.

This is all to do with economics and the impact of large current account deficits dragging down local currencies.

As the US Federal Reserve continues to “taper” asset purchases and at some point next year raise rates, we see no reason at this point to become more positive on emerging markets. But at some point the falls in the currencies will stop and it will be time to move back,

The focus now returns to the economic data and the Federal Reserve meeting later in the week. With the USD and US fixed income yields moving higher, we continue to believe the growth path for developed economies is solid.

United States: Weaker than expected New Home Sales but market focus elsewhere

Table 1 28 Jan

The level of new home sales in the US came in at a lower-than-expected 414k in December (vs. consensus 455k). December sales fell by 7.0% (vs. consensus -1.9%), while sales growth was revised down in both October and November. With weaker numbers in November and December, new home sales have mostly retraced their large 14.9% jump in October.

New home sales are a timely indicator of sales activity, based on contract signings rather than closings. However, the series is noisy and will likely  be subject to significant revisions in subsequent months.

Ahead of the meeting of the Federal Reserve tomorrow (see below), we have a raft of key economic data out of the US later this afternoon, including Durable Goods and Consumer Confidence.

United States:  Preview of FOMC meeting

We anticipate a further $10bn reduction in the monthly rate of asset purchases to be announced tomorrow at Ben Bernanke’s last meeting as Chairman of the US Federal Reserve. Like December this should be split equally between Treasuries and MBS―and no changes to the forward guidance is expected. Although the 6.5% unemployment threshold mentioned in the statement is fast approaching, the Committee has probably already enhanced the forward guidance as much as it is willing to in the near term. Bernanke will leave that difficult decision to incoming head Janet Yellen. Despite the more international leanings of Yellen and Fischer, I don’t see them reversing Fed policy on the taper to ease Cristina Kirchner’s difficulties in Buenos Aires.

There is a less than 10% chance that the Fed decide not to “taper” at all, with a 20% chance that they just do $5b rather than the expected $10b. The likelihood of a change to forward guidance – telling the market that it is looking at a new employment threshold – is  somewhat higher because it allows them to buy a bit of time.

But it’s steady as she goes from the Fed from here.

Australia: NAB business conditions improve in December

Table 2 28 Jan

Down under, the National Australia Bank business conditions for December came in at 4 (prior was -3). This is a significant improvement in confidence and the biggest month-on-month jump since March 2011. Business peope are now more confident than they have been since early 2012.

The NAB noted the following:

In an effort to downplay the figures, it questioned the inflationary consequences of the reports because  capacity utilisation is still low.

  • It said that most industries reported improved conditions, especially transport, wholesale and the services industries, but manufacturing and construction were notable exceptions
  • Unusually, employment conditions remain soft, at negative four points compared with negative eight points in November

This is the first set of strong data out of Australia (outside of the CPI number last week). With AUD$ failing to make further significant downside ,currently $87.90, we  think Australian is finely balanced. If I were a central banker down there, there are  few reasons to change policy right now.

China: PBOC Injects further liquidity into the market as year end approaches

Immediate concerns around China have subsided after  the bailout of the resolution trust which was in danger of defaulting on the 31st of January.

But the PBOC is taking nothing for granted and kept up the liquidity measures, injecting 150 bn Yuan via 14-day reverse repos today. The 7-day repo opened at 4.86% (Monday’s close of 4.96% and an average of 4.9623%).

Eurozone: December French jobseekers up (10.2k vs 1.1k exp)

The “Moped Lothario”, whose dismissal of his First Lady revealed him to be a creature with vertebrae, has a serious problem on his lecherous hands.

French unemployment is rising relentlessly. Total jobseekers rose 3.303m vs 3.296m exp. Prior 3.293m. This is a new record high level of joblessness for the French economy as pressure mounts on Hollande.  I am heading to Paris for an event on Friday, the note will be written with Gallic flair from the 6th Arrondissment, focusing on the travails of France and what it means for investors.

Portfolio: Some modest USD strength as bond yields move higher

Our portfolio has recovered somewhat from last week’s losses as US bond yields and the USD has risen. Ahead of next week’s US employment report, tomorrow’s Federal Reserve meeting is the major catalyst. We continue to have our order in to pick up more of our 5 Year note position at 1.49%.

Portfolio 28 Jan

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The statements, opinions and analyses presented in the articles, newsletters, and other materials appearing on this website are provided as general information and for educational purposes. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this website is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. David McWilliams shall not be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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