The RVP Weekly Hack April 28th
The RVP Weekly Hack April 28th Information overload drowns out what is relevant. Adam Newman, CEO of Real Vision Publications, draws upon the expertise of the Contributors to RVP to cut straight to the most important issues and investment opportunities. Here to keep you ahead of the market.
If You Look At Only One Chart… Time is short, so here is one chart to get you thinking in a new direction.
Medical care is dangerous to your wealth US Housing & Healthcare Expenditures (% of Disposable Income)
Source: Bloomberg
Is the US consumer, the last bastion of strength, faltering? More than 30% of household spending is for healthcare and housing. It seems that the largest consumer of goods in the world is increasingly tapped out!
Right Here, Right Now The best trading ideas of the week from RVP Contributors.
Sell Oil Say Capital Observer Capital Observer have been spot on with their oil call this year. Their proprietary models, which take into account supply and demand, have been highlighting a weak 1H17. While we could see a very short-term bounce, their thesis is that oil prices trade lower for the next 3 months at least. Oil has been muted for the last 6 months, but volatility looks set to rise. It appears we first have to go lower before fundamentals become more supportive of prices towards the end of the year. Capital Observer's report notes the oil market is a trader’s market for now as it is stuck with conflicting forces, but as those resolve in H2 the market should become more investor-friendly and start to trend upward with a more favourable term structure, probably moving in backwardation by Q1 2018.
Adam’s Portfolio Picks I have picked only the most compelling and highest conviction trade ideas of our RVP Contributors and will track them in a portfolio for you to follow.
Trade
Date
Time Horizon
Long TLT
7 th April
1-3 months
Long Eurostoxx / Short S&P
18 th April
3-6 months
Long Sensex
21 st April
2 years +
Short Oil
28 th April
3-6 months
Note: This is not investment advice. You understand that no content published, as part of the services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The Big Call Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, "Bet the ranch on it." These are the Big Calls, the investment themes that can make or break you. Think differently from the crowd and have a different time horizon, and you have an edge. RVP, with its crack team of financial minds, identifies the Big Calls and guides you through the investment opportunities when they present themselves.
Oil – between a rock and a hard place The tug-of-war is about to be resolved. Oil is one of the most important global macro factors right now. Much of the recent reflation activity can be attributed to the YoY change in oil prices, which in part gave the Fed the confidence to raise rates. However, that tailwind from YoY price changes is ending and now appears to be turning into a headwind. Mathematically speaking, the impact from oil prices should reduce inflation materially in the coming months, even considering the recent stability in oil prices. Oil looks certain to have an impact on US monetary policy. Oil has been trading in a tight range for 6 months, caught between OPEC ‘cuts’ and a record build of long speculative positions that have supported prices, versus a ramp-up of US shale and weak global demand that have pressured prices. Prices recently fell from the top of their trading range to the bottom, suggesting bears have the upper hand. That said, the follow-through so far has been timid. Oil historically has correlated very closely to the USD. This correlation broke down in the last 6 months. The USD implied price of oil would be closer to $40 than $50. The apparent calm looks set to be broken in the coming weeks and months. Being on the right side of this trade could be very profitable. From a fundamental perspective it is far easier to draw a bear case for oil. Supply is overwhelming demand. With the exception of Saudi Arabia, almost every producing nation is ramping production in a quest to gain market share. In the specific case of US shale, efficiencies and technological advancements have collapsed the cost to produce, allowing production to strengthen. Many major producers are hedged at prices above today’s levels, meaning they are insensitive to declining prices. In this environment it is far better for them to try to take market share. That backdrop sits alongside a near-record long speculative position in oil. If the price declines enough, these longs will turn into forced sellers, exacerbating the price decline. Having traded in such a narrow range, oil now looks technically vulnerable to a shake-out, and market anticipation is building. For a deep dive into the oil market and its outlook, check out Capital Observer's latest report.
Are You On This Yet? In such a fast paced world staying on top of relevant market news and developments is tough. RVP scours the globe for the most interesting stories and distils them, keeping you ahead of the crowd.
Credit-Cycle; has it turned? The four phases of the credit-cycle. Credit cycles are repetitive, and while they differ in duration and amplitude there are generic characteristics that transcend them all. Invesco highlight these 4 distinct phases below.
This US credit cycle, on paper at least, is long in the tooth. As it enters its 9th year, history tells us we are much closer to the end than the beginning. What are the signs we are watching? (1) Corporate profit margins – they are plateauing from high levels. (2) Delinquencies – they appear to have bottomed and are starting to rise. (3) Buybacks – they are prevalent and are near or exceed free cash flows. (4) M&A - deals are peaking and valuations paid are high. All the evidence above puts us late in the cycle. However, bank stocks have been on a tear, charging ahead as if anticipating the onset of a new credit cycle. What is the reality? Credit cards and auto lending are good barometers of credit health. These are the most creditsensitive segments and therefore tend to lead the credit cycle. In the US both are showing negative trends from slowing loan growth and rising delinquencies. Lisa Abramowicz picks up on the issues at Capital One’s credit card division that show that the deterioration in credit conditions is broadbased.
Auto & Credit Card Loan 90+ Day Delinquency Rates
Adding to the evidence is a sharp slowdown in commercial lending (h/t David Rosenberg for this excellent chart) right across the board. We should watch credit spreads to gauge banks’ willingness to lend. Widening credit spreads is a further warning sign.
US Commercial Bank C&I Loans (Year-on-year % change)
While it is too early to say with certainty, the evidence that this US credit cycle has turned is increasingly confirmatory. What comes after ‘late-cycle’ in the US? I refer you back to Invesco’s chart above.
China – The sleeping giant awakes? Same story, different year. There was a time in the not too distant past when China stories were all you read. Stories of an imminent collapse and 30% devaluation of the RMB. Now those stories are resigned to the back pages and barely mentioned in conversation. Does that mean that China’s problems have disappeared, or at the very least dissipated? Not at all. Financial markets tend to be myopic, and the China story just isn’t prime-time now. This lack of coverage should not be misconstrued as meaning that China is no longer crucial to the stability of the global financial system. Chinese stocks have plunged in the last week, while interest rates have exploded higher. Feel like 2014? That is exactly what Jeffrey Snider of Alhambra Investments thinks. “We have not in our experience before confronted anything like this. By all mainstream accounts and philosophy, crises or negative events are discrete, temporary things that the world must from time to time endure but having done so always move on from it. It seems like the impossible for there to be the same problem underneath year after year (after year, and then seven more times).” Is China’s financial system about to collapse? Authorities have done a remarkable job of papering over cracks, and they still have significant, albeit depleted, firepower to stave off danger. That said, we shouldn’t take our eye off the ball. Expect China stories to appear on the front pages again in the coming weeks and months.
Until next time
If You Look At Only One Chart… Time is short, so here is one chart to get you thinking in a new direction.
Medical care is dangerous to your wealth US Housing & Healthcare Expenditures (% of Disposable Income)
Source: Bloomberg
Is the US consumer, the last bastion of strength, faltering? More than 30% of household spending is for healthcare and housing. It seems that the largest consumer of goods in the world is increasingly tapped out!
Right Here, Right Now The best trading ideas of the week from RVP Contributors.
Sell Oil Say Capital Observer Capital Observer have been spot on with their oil call this year. Their proprietary models, which take into account supply and demand, have been highlighting a weak 1H17. While we could see a very short-term bounce, their thesis is that oil prices trade lower for the next 3 months at least. Oil has been muted for the last 6 months, but volatility looks set to rise. It appears we first have to go lower before fundamentals become more supportive of prices towards the end of the year. Capital Observer's report notes the oil market is a trader’s market for now as it is stuck with conflicting forces, but as those resolve in H2 the market should become more investor-friendly and start to trend upward with a more favourable term structure, probably moving in backwardation by Q1 2018.
Adam’s Portfolio Picks I have picked only the most compelling and highest conviction trade ideas of our RVP Contributors and will track them in a portfolio for you to follow.
Trade
Date
Time Horizon
Long TLT
7 th April
1-3 months
Long Eurostoxx / Short S&P
18 th April
3-6 months
Long Sensex
21 st April
2 years +
Short Oil
28 th April
3-6 months
Note: This is not investment advice. You understand that no content published, as part of the services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The Big Call Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, "Bet the ranch on it." These are the Big Calls, the investment themes that can make or break you. Think differently from the crowd and have a different time horizon, and you have an edge. RVP, with its crack team of financial minds, identifies the Big Calls and guides you through the investment opportunities when they present themselves.
Oil – between a rock and a hard place The tug-of-war is about to be resolved. Oil is one of the most important global macro factors right now. Much of the recent reflation activity can be attributed to the YoY change in oil prices, which in part gave the Fed the confidence to raise rates. However, that tailwind from YoY price changes is ending and now appears to be turning into a headwind. Mathematically speaking, the impact from oil prices should reduce inflation materially in the coming months, even considering the recent stability in oil prices. Oil looks certain to have an impact on US monetary policy. Oil has been trading in a tight range for 6 months, caught between OPEC ‘cuts’ and a record build of long speculative positions that have supported prices, versus a ramp-up of US shale and weak global demand that have pressured prices. Prices recently fell from the top of their trading range to the bottom, suggesting bears have the upper hand. That said, the follow-through so far has been timid. Oil historically has correlated very closely to the USD. This correlation broke down in the last 6 months. The USD implied price of oil would be closer to $40 than $50. The apparent calm looks set to be broken in the coming weeks and months. Being on the right side of this trade could be very profitable. From a fundamental perspective it is far easier to draw a bear case for oil. Supply is overwhelming demand. With the exception of Saudi Arabia, almost every producing nation is ramping production in a quest to gain market share. In the specific case of US shale, efficiencies and technological advancements have collapsed the cost to produce, allowing production to strengthen. Many major producers are hedged at prices above today’s levels, meaning they are insensitive to declining prices. In this environment it is far better for them to try to take market share. That backdrop sits alongside a near-record long speculative position in oil. If the price declines enough, these longs will turn into forced sellers, exacerbating the price decline. Having traded in such a narrow range, oil now looks technically vulnerable to a shake-out, and market anticipation is building. For a deep dive into the oil market and its outlook, check out Capital Observer's latest report.
Are You On This Yet? In such a fast paced world staying on top of relevant market news and developments is tough. RVP scours the globe for the most interesting stories and distils them, keeping you ahead of the crowd.
Credit-Cycle; has it turned? The four phases of the credit-cycle. Credit cycles are repetitive, and while they differ in duration and amplitude there are generic characteristics that transcend them all. Invesco highlight these 4 distinct phases below.
This US credit cycle, on paper at least, is long in the tooth. As it enters its 9th year, history tells us we are much closer to the end than the beginning. What are the signs we are watching? (1) Corporate profit margins – they are plateauing from high levels. (2) Delinquencies – they appear to have bottomed and are starting to rise. (3) Buybacks – they are prevalent and are near or exceed free cash flows. (4) M&A - deals are peaking and valuations paid are high. All the evidence above puts us late in the cycle. However, bank stocks have been on a tear, charging ahead as if anticipating the onset of a new credit cycle. What is the reality? Credit cards and auto lending are good barometers of credit health. These are the most creditsensitive segments and therefore tend to lead the credit cycle. In the US both are showing negative trends from slowing loan growth and rising delinquencies. Lisa Abramowicz picks up on the issues at Capital One’s credit card division that show that the deterioration in credit conditions is broadbased.
Auto & Credit Card Loan 90+ Day Delinquency Rates
Adding to the evidence is a sharp slowdown in commercial lending (h/t David Rosenberg for this excellent chart) right across the board. We should watch credit spreads to gauge banks’ willingness to lend. Widening credit spreads is a further warning sign.
US Commercial Bank C&I Loans (Year-on-year % change)
While it is too early to say with certainty, the evidence that this US credit cycle has turned is increasingly confirmatory. What comes after ‘late-cycle’ in the US? I refer you back to Invesco’s chart above.
China – The sleeping giant awakes? Same story, different year. There was a time in the not too distant past when China stories were all you read. Stories of an imminent collapse and 30% devaluation of the RMB. Now those stories are resigned to the back pages and barely mentioned in conversation. Does that mean that China’s problems have disappeared, or at the very least dissipated? Not at all. Financial markets tend to be myopic, and the China story just isn’t prime-time now. This lack of coverage should not be misconstrued as meaning that China is no longer crucial to the stability of the global financial system. Chinese stocks have plunged in the last week, while interest rates have exploded higher. Feel like 2014? That is exactly what Jeffrey Snider of Alhambra Investments thinks. “We have not in our experience before confronted anything like this. By all mainstream accounts and philosophy, crises or negative events are discrete, temporary things that the world must from time to time endure but having done so always move on from it. It seems like the impossible for there to be the same problem underneath year after year (after year, and then seven more times).” Is China’s financial system about to collapse? Authorities have done a remarkable job of papering over cracks, and they still have significant, albeit depleted, firepower to stave off danger. That said, we shouldn’t take our eye off the ball. Expect China stories to appear on the front pages again in the coming weeks and months.
Until next time
