Top Five for September 2017
Top Five for September 2017 By: James Hickey, CFA® Chief Investment Strategist The information and opinions in this report were prepared by James Hickey, Chief Investment Strategist for HD Vest Advisory Services (HDVAS). Information and opinions have been obtained or derived from sources considered reliable, but their accuracy or completeness cannot be guaranteed. This represents James Hickey’s opinion as of the date of this report and is for general information purposes only. HD Vest Financial Services and its affiliates do not undertake to advise you of any change in opinion or the information contained in this report. Reports and opinions prepared by other sources may be inconsistent with, and may reach different conclusions from, this report. The information is provided for educational purposes only. HD Vest Financial Services® and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. HD Vest Investment ServicesSM does not provide tax advice. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return. The information presented is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities or strategies mentioned. The investments discussed or recommended in the presentation may be unsuitable for some investors depending on their specific investment objectives and financial position. Investors should consult with their Advisor regarding their specific situation.
Executive Summary 5. Flattening Treasury spreads are concerning. 4. S&P 500 Companies debt leverage is approaching a historic peak compared to earnings. 3. Where are the losses from the three recent hurricanes? 2. Apple may have peaked. 1. The Fed has begun delevering its balance sheet.
5. Flattening Treasury spreads are concerning. a. Currently, the yield on 2-Year US Treasuries is 1.5%, and the yield on 10-Year US Treasuries is 2.3%, implying a spread of 0.8%. b. Historically, if the spread between long-term US Treasury yield and short-term US Treasury yield is zero or negative, it is a potential warning sign for a recession. c. It is concerning that the Fed has been raising the overnight rate, but long-term rates have held steady. d. The Fed is signaling that it intends to raise the overnight rate to 1.5% in December. e. Two drivers for stagnation of long-term US Treasury yields are investor demand and tepid inflation.
FLATTENING TREASURY SPREADS ARE CONCERNING US Benchmark Bond 2 Year YTM
US Benchmark Bond 10 Year YTM
Recession Periods United States
10
8
6
4
2
0 '88
Source: FactSet
'89
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
4. S&P 500 Companies2 debt leverage is approaching a historic peak compared to earnings. a. Company debt to Last Twelve Months EBITDA3 (Earnings Before Interest, Taxes, Depreciation, & Amortization) ratio is at 2.72. This is the highest in 15 years and near the historical peak of 2.74 in May 2002. As a side note, EBITDA is a good measure of the ability of a company to pay off its debt. b. Leverage has been steadily growing since 2012. c. The driver for the growth has been that debt is currently cheap due demand and Fed policies, so companies have used debt for stock buybacks and to finance capital investments. d. In the short term, this makes equity returns more attractive but adds risk if there is a recession.
DEBT LEVERAGE IS GROWING FASTER THAN EARNINGS S&P 500 Company Debt / LTM EBITDA
Monthly
S&P 500
2496.66 -5.56 -0.22% 3:05:04 PM VWAP: S&P 500 Total Debt / EBITDA LTM
High: 2.74 Low: 1.90 Chg: 21.97%
2.8
2.72
2.6
2.4
2.2
2.0
1.8 '00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
Source: FactSet Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. LTM EBITDA - Last Twelve Months(LTM) Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) is a valuation metric that shows earnings before interest, taxes, depreciation, and amortization adjustments for the past 12-month period.
2 Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. 3 LTM EBITDA - Last Twelve Months(LTM) Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) is a valuation metric that shows earnings before interest, taxes, depreciation, and amortization adjustments for the past 12-month period.
3. Where are the losses from the three recent hurricanes? a. Cumulatively, actuaries estimate there have been $400B in losses from the hurricanes, but S&P 500 companies have made only $1.5B in downward earnings revisions. b. For Harvey alone: i. There was an estimated $5B in auto losses alone for insurance companies – not counting homeowner and other policies. ii. 31% of US oil refining capacity went down, and it is still coming back online. c. It is estimated that the three hurricanes have negatively brought down GDP by roughly 1%. d. There are three explanations – and most likely all three apply. i. Initial actuarial loss estimates were too aggressive. ii. Companies have tapped their reserves to offset their losses. iii. Companies do not yet know their losses, so they have issued no guidance. e. The big takeaway is to be cautious regarding Q3 and Q4 earnings projections.
WHERE ARE THE LOSSES FROM THE THREE HURRICANES? $400B In Estimated Total Losses $180
$1.5B In S&P 500 Earning Revisions 0.42 0.33
155
$100
0.26
$106
0.23
0.21
53 70
35
30
Harvey
Irma Insurance Loss
53 Maria
Insurance
Chemicals
Airlines
Software
Hardware
All Other Losses
Source: Harvey insurance losses comes from RMS. Total losses comes from Accuweather. Irma and Maria insurance losses comes from AIR Worldwide. Irma total losses comes from Accuweather. Maria total losses estimated. Market data from FactSet Earnings Insight.
Source: Harvey insurance losses comes from RMS. Total losses comes from Accuweather. Irma and Maria Insurance losses comes from AIR Worldwide. Irma total losses comes from Accuweather. Maria total losses estimated. Market Data from FactSet Earnings Insight.
2. Apple may have peaked. a. On September 4th, Apple reached a market cap of $848B. It is currently hovering around $790B, implying almost $60B in lost value. b. Realistically, it will be extremely difficult for Apple to sustain its growth. Just to grow at 10% a year would be adding $85B to market cap next year. To put that into perspective, the market cap of Delta Airlines ($34B), Southwest Airlines ($33B), and American Airlines ($23B) combine for $90B. c. iPhone 8 and iPhone X results have been disappointing. d. Ultimately, Apple still is an attractive company, but it’s no longer a growth story.
APPLE MAY HAVE PEAKED 170
165
Market Cap $848B
160
Apple Share Price
155
Market Cap $791B
150
145
140
135
130 6/30/2017
7/7/2017
7/14/2017
Source: FactSet. Data as of 9-26-17.
7/21/2017
7/28/2017
8/4/2017
8/11/2017
8/18/2017
8/25/2017
9/1/2017
9/8/2017
9/15/2017
9/22/2017
1. The Fed has begun delevering its balance sheet. a. The assets on Fed’s balance sheet currently are at $4.5T. The assets consist largely of US Treasury notes ($2.3T) and mortgage backed securities ($1.8T). b. This is up 5X from 2008, when assets on the balance sheet were at $0.9T. c. The unwinding plan should be gradual. The plan is to not reinvest proceeds from maturing Treasuries and mortgage backed securities – as compared to selling securities into the market. d. The initial plan is for $6B in Treasuries and $4B in mortgage back securities to roll off each month – for a total of $10B a month. e. This should have negligible impact.
THE FED HAS BEGUN DELEVERING ITS BALANCE SHEET (US Dollars in Trillions)
$5.0
$4.5
$4.0
$3.5
Trillions
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17
Source: The Federal Reserve
HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name. Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000. 1590573
100917
Executive Summary 5. Flattening Treasury spreads are concerning. 4. S&P 500 Companies debt leverage is approaching a historic peak compared to earnings. 3. Where are the losses from the three recent hurricanes? 2. Apple may have peaked. 1. The Fed has begun delevering its balance sheet.
5. Flattening Treasury spreads are concerning. a. Currently, the yield on 2-Year US Treasuries is 1.5%, and the yield on 10-Year US Treasuries is 2.3%, implying a spread of 0.8%. b. Historically, if the spread between long-term US Treasury yield and short-term US Treasury yield is zero or negative, it is a potential warning sign for a recession. c. It is concerning that the Fed has been raising the overnight rate, but long-term rates have held steady. d. The Fed is signaling that it intends to raise the overnight rate to 1.5% in December. e. Two drivers for stagnation of long-term US Treasury yields are investor demand and tepid inflation.
FLATTENING TREASURY SPREADS ARE CONCERNING US Benchmark Bond 2 Year YTM
US Benchmark Bond 10 Year YTM
Recession Periods United States
10
8
6
4
2
0 '88
Source: FactSet
'89
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
4. S&P 500 Companies2 debt leverage is approaching a historic peak compared to earnings. a. Company debt to Last Twelve Months EBITDA3 (Earnings Before Interest, Taxes, Depreciation, & Amortization) ratio is at 2.72. This is the highest in 15 years and near the historical peak of 2.74 in May 2002. As a side note, EBITDA is a good measure of the ability of a company to pay off its debt. b. Leverage has been steadily growing since 2012. c. The driver for the growth has been that debt is currently cheap due demand and Fed policies, so companies have used debt for stock buybacks and to finance capital investments. d. In the short term, this makes equity returns more attractive but adds risk if there is a recession.
DEBT LEVERAGE IS GROWING FASTER THAN EARNINGS S&P 500 Company Debt / LTM EBITDA
Monthly
S&P 500
2496.66 -5.56 -0.22% 3:05:04 PM VWAP: S&P 500 Total Debt / EBITDA LTM
High: 2.74 Low: 1.90 Chg: 21.97%
2.8
2.72
2.6
2.4
2.2
2.0
1.8 '00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
Source: FactSet Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. LTM EBITDA - Last Twelve Months(LTM) Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) is a valuation metric that shows earnings before interest, taxes, depreciation, and amortization adjustments for the past 12-month period.
2 Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. 3 LTM EBITDA - Last Twelve Months(LTM) Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) is a valuation metric that shows earnings before interest, taxes, depreciation, and amortization adjustments for the past 12-month period.
3. Where are the losses from the three recent hurricanes? a. Cumulatively, actuaries estimate there have been $400B in losses from the hurricanes, but S&P 500 companies have made only $1.5B in downward earnings revisions. b. For Harvey alone: i. There was an estimated $5B in auto losses alone for insurance companies – not counting homeowner and other policies. ii. 31% of US oil refining capacity went down, and it is still coming back online. c. It is estimated that the three hurricanes have negatively brought down GDP by roughly 1%. d. There are three explanations – and most likely all three apply. i. Initial actuarial loss estimates were too aggressive. ii. Companies have tapped their reserves to offset their losses. iii. Companies do not yet know their losses, so they have issued no guidance. e. The big takeaway is to be cautious regarding Q3 and Q4 earnings projections.
WHERE ARE THE LOSSES FROM THE THREE HURRICANES? $400B In Estimated Total Losses $180
$1.5B In S&P 500 Earning Revisions 0.42 0.33
155
$100
0.26
$106
0.23
0.21
53 70
35
30
Harvey
Irma Insurance Loss
53 Maria
Insurance
Chemicals
Airlines
Software
Hardware
All Other Losses
Source: Harvey insurance losses comes from RMS. Total losses comes from Accuweather. Irma and Maria insurance losses comes from AIR Worldwide. Irma total losses comes from Accuweather. Maria total losses estimated. Market data from FactSet Earnings Insight.
Source: Harvey insurance losses comes from RMS. Total losses comes from Accuweather. Irma and Maria Insurance losses comes from AIR Worldwide. Irma total losses comes from Accuweather. Maria total losses estimated. Market Data from FactSet Earnings Insight.
2. Apple may have peaked. a. On September 4th, Apple reached a market cap of $848B. It is currently hovering around $790B, implying almost $60B in lost value. b. Realistically, it will be extremely difficult for Apple to sustain its growth. Just to grow at 10% a year would be adding $85B to market cap next year. To put that into perspective, the market cap of Delta Airlines ($34B), Southwest Airlines ($33B), and American Airlines ($23B) combine for $90B. c. iPhone 8 and iPhone X results have been disappointing. d. Ultimately, Apple still is an attractive company, but it’s no longer a growth story.
APPLE MAY HAVE PEAKED 170
165
Market Cap $848B
160
Apple Share Price
155
Market Cap $791B
150
145
140
135
130 6/30/2017
7/7/2017
7/14/2017
Source: FactSet. Data as of 9-26-17.
7/21/2017
7/28/2017
8/4/2017
8/11/2017
8/18/2017
8/25/2017
9/1/2017
9/8/2017
9/15/2017
9/22/2017
1. The Fed has begun delevering its balance sheet. a. The assets on Fed’s balance sheet currently are at $4.5T. The assets consist largely of US Treasury notes ($2.3T) and mortgage backed securities ($1.8T). b. This is up 5X from 2008, when assets on the balance sheet were at $0.9T. c. The unwinding plan should be gradual. The plan is to not reinvest proceeds from maturing Treasuries and mortgage backed securities – as compared to selling securities into the market. d. The initial plan is for $6B in Treasuries and $4B in mortgage back securities to roll off each month – for a total of $10B a month. e. This should have negligible impact.
THE FED HAS BEGUN DELEVERING ITS BALANCE SHEET (US Dollars in Trillions)
$5.0
$4.5
$4.0
$3.5
Trillions
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17
Source: The Federal Reserve
HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name. Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000. 1590573
100917
