David Fuller and Eoin Treacy's Comment of the Day
Category - General

    After The Long Rally: S&P 500 Outlook

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    The trajectory of the S&P 500 has been extremely closely tied to that of earnings during the course of this recovery and remains so. Following the ECB’s move to negative rates in mid-2014 and the subsequent dollar and oil shocks, earnings growth First slowed then turned negative and equities became range bound for a year and a half. In the context of the trend channel, the range bound S&P 500 moved from the top to the bottom of the trend channel, falling briefly below during the Q1 2016 growth scare and the trough in earnings. Following the Q1 2016 bottom in earnings, equity prices began to rise, briefly breaking their 1½ year range to reach a new peak in mid-2016; then paused as is typical in the run up to close Presidential elections before rebounding strongly after.

    The trajectory of the S&P 500 year to date has continued to closely track that of earnings. Indeed the market rallied in the first half of the year only during earnings seasons which saw well above average beats and paused between reporting seasons. Trailing earnings were up 10% through Q3, held back in the quarter by the impact of the unusually severe hurricane season, while our estimate is for 12% growth through Q4.

    The S&P 500 trailing multiple meanwhile fluctuated in a relatively narrow range of 3.5% until September before moving up by a modest 2%. The rise in the multiple in late September though is consistent with the market simply looking through the impact of the hurricanes on earnings, ex which they would have grown for a third quarter in the solid double digits.


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    On Target November 2017

    Thanks to Martin Spring for this edition of his letter. Here is a section Japan:

    “The MSCI Japan Index now trades on 15.1x 12-month forward earnings, or an 18 per cent discount to the MSCI USA Index’s 18.4x,” Wood reports. “It is also a major structural positive that earnings growth is increasingly coming from domestic-focused [rather than export-focused] corporates.” That means shares generally are less dependent on favourable moves in the yen-dollar exchange rate. 

    The worsening labour shortage should lead sooner or later to accelerating wages, boosting consumption. 
    “This dynamic has already been evident for some time in the case of temporary workers. But to the longstanding frustration of both the Abe government and the Bank of Japan, wage rises for permanent employees have remained minimal, primarily because the trade unions have been more concerned about keeping their employees “permanent”, since such permanent full-time staff, on average, still earn 1.8 [times] the hourly wage for part-time workers.”  

    Companies have been keeping a tight grip on pay increases – one reason why listed firms are enjoying record profits and sitting on record amounts of cash, even allowing for the effect of increasing share buybacks. 

    There is a long-term trend for Japanese companies to be more generous with their dividend payouts to shareholders. Back in 2004 the payout ratio (dividends as a proportion of earnings) for the Topix index was only 17 per cent. Now it’s up to 30 per cent.


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    Gold makes some recovery on fresh demand, global events

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Globally, gold prices rose for a third day, helped by a weaker dollar and falling US bond yields ahead of inflation data later that could influence how quickly the Federal Reserve will raise interest rates.

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    Free Money: The Surprising Effects of a Basic Income Supplied by Government

    This article from Wired.com may be of interest to subscribers. Here is a section:

    Hughes is no basic income purist. He believes, for instance, that for this economic moonshot to be politically palatable, it would have to be tied to work. “Not just because it seems more intuitive for people,” he says, “but because work is a key source of purpose in our lives.” But the changing nature of work, particularly among top tech employers, is still a critical problem for the American workforce. One illuminating New York Times article illustrated how the men and women who scrub toilets and do other low-skilled work for companies like Apple are hired from contracting companies which set the terms of their employment. Those workers are cut off from the benefits and upward mobility that the company’s engineers and marketers enjoy. Because the workers are contractors, the big tech companies feel no pressure to raise their wages, and aren’t responsible for offering health-care coverage. In 2015, Facebook’s bus drivers voted to unionize in order to secure themselves the kind of worker protections that the social networking giant refused to provide.

    Looked at in this light, the tech-led efforts to push a basic income can appear hypocritical. In a new economy that mints billionaires overnight, giving millions of dollars away for experimentation is the easy part. It’s taxpayers, after all, not individual tech companies, who would have to pay for a basic income should one ever come to pass.


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    Breakfast with Dave November 13th 2017

    Thanks to a subscriber for this report by David Rosenberg for Gluskin Sheff. Here is a section:

    Indeed. And what we’re referring to is the High Yield bond market which tends to lead equities. Junk bond spreads have widened out to a two-month high of 380 basis points. That is over a 40 basis point widening in barely more than two weeks (and the selling have been taking place on rising volume too…to nearly a two-year high in junk bond ETFs. 

    As the weekend WSJ aptly pointed out, the bubble hit its peak a couple of months ago when “money losing” Tesla offered up an eight year $1.8 billion with a puny 5.3% yield – which was so oversubscribed in an income starved world that the issue was boosted by $300 million. We are talking about a B3 rated company here. And now in a classic signpost of late cycle behavior, these bonds are trading at 94 cents on the dollar (from par in August). 

    For the first time in years, planned bond sales are being pulled. And we also are seeing some big redemptions - $2.5billion have withdrawn in the past month. 


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    Nickel Plunges in Metals Selloff as Mood Turns Sour in Shanghai

    This note by Mark Burton for Bloomberg may be of interest to subscribers. Here it is in full:

    Nickel slumped by the most in almost two months as a late-night selloff in Chinese metals spilled over to the London Metal Exchange.

    Prices dropped as much as 5.9 percent to $11,755 a metric ton, the biggest drop since September. A slump that big has happened only a handful of times in the past five years.

    Nickel bore the brunt of selling in metals, with volumes traded electronically surpassing aluminum, usually the LME’s most liquid contract. The slump came after data showing weaker Chinese industrial production and fixed-asset investment.


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    Ubisoft's Microtransaction Revenue Just Beat Digital Sales for the First Time

    This article from Extreme Tech may be of interest to subscribers. Here is a section: 

    Microtransactions have been hotly debated since they began debuting in mobile games almost ten years ago. While they’d been used sporadically in various games for years, the rise of mobile games and their extremely low-to-free pricing made them a functional necessity for developers working in Android or iOS. The AAA PC gaming industry quickly took notice of this, and began offering games with microtransaction options. There’s been a great deal of pushback from the community at various points (Dead Space 3 got hosed for it, as did Bethesda and its horse armor), but microtransactions are clearly here to say. Ubisoft just reported that it took in more money in microtransaction sales than it did in game sales for the first time ever.

    Over the past few years, Ubisoft has seen a notable shift in its earnings for various titles, SeekingAlpha reports. Game sales were buoyed this year by South Park: The Fractured But Whole and Assassin’s Creed: Origins, but microtransactions shot up even further, growing 1.83x in 12 months compared to 1.57x for game sales. Ubisoft also got a boost from the Switch, but even with Nintendo’s new platform, microtransactions brought home the bacon.


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