Mutual Daily Mutterings
Quote of the day…
Ronald Reagan on politics – “Politics is supposed to be the second-oldest profession. I have come to realize that it bears a very close resemblance to the first…”
The satirical week…
Overview – “remember that volatility thing I mentioned yesterday…?”
- I mentioned yesterday that volatility would likely stay elevated for the near term and that wild swings in stocks – especially US stocks – would become more common. I just didn’t peg it to happen ‘so’ quickly. US markets have now had their fourth day of losses in five. Again, tech stocks battered as the narrative points to stretched valuations – energy stocks taken behind the wood shed for a decent thrashing also. European stocks in the red, but outperforming their more excitable US counterparts.
- Reasons for caution over the past week are aplenty, and I’ve flagged most of these repeatedly. However, putting one’s pasty-white lockdown sausage finger on the ‘one’ to set the tone today remains a fool’s errand. Overnight, the market tea-leaves and chicken giblets were pointing to mounting signs the pandemic continues to upend the global economy. US labour data last night showed cracks appearing in nascent labour-market strength, while Europe continues to re-emerge as a virus hot spot. And then there is the all but forgotten fresh fiscal relief bill from Congress…no progress.
- The ECB held its meeting last night, which met market expectation on the policy front – all settings unchanged. And, as flagged amidst a range of media reports, the ECB lifted its growth and inflation forecasts. With the COVID pandemic seeming to flare up again in the past week, one might question any improving growth scenario. In France alone cases have risen to 9,000 a day – I know that because I’ve been watching the Tour de France. Add to this we have Brexit back in the headlines, and not necessarily in a positive way…another confrontation looming with the ECB handing down some ultimatums.
- Talking heads… “everybody loves a party … but, inevitably, after a big party there’s a hangover,”…“right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up!”
- More talking heads…“we likely have not seen the full correction play out yet,”… “It’s difficult to point to a specific catalyst, but currency volatility rose today on concerns about a hard Brexit and we’ve seen some worse news about the virus in Europe.”
- Elsewhere, modest moves in Treasuries with a marginal bull flattening (↓1 bps) – again, nothing worth writing home about. Credit primary markets remain buoyant despite stocks getting a case of the wobbles, while in secondary some widening in high yield, while investment grade remains relatively stable. Oil under the pump (pardon the pun), while gold was flat.
Credit – “offshore primary alive and well, secondary holding firm…”
- US IG primary markets active again with another $23.6bn issued across fourteen borrowers, with a decent weighting to BBB/BBB- rated issuers (9 out of 14). New issue concessions popped into positive territory, +9 bps given the weighting toward the lower end of investment grade. Nevertheless, books were solid at 3.8x and spread compression was around recent averages, ↓30 bps. A bit of a pull-pack in EU IG from yesterday, just €5.2bn printed with book cover of just under 5.0x and spread compression of ↓31 bps.
- On the local front, I’ll ‘borrow’ some trader’s comments. Tonally, “light volumes with no discernible trend in the flows”…”trading conditions to remain light and choppy as we head into September year end”…”better buying in major bank T2, but quiet in major bank senior and offshore financials”. The recent street inventory overhang in tier 2 seems to have largely cleared, which should allow spreads to re-engage with their tightening bias – assuming no systemic shock.
- APRA released updated details on the state of ADI mortgage deferrals yesterday. As at the end of July, deferred mortgages (residential and business) totals $240bn, representing 9% of total mortgages ($2.7 trillion). Deferred housing mortgages was $167bn (9% of total), and small business was $55bn (17% of total). Loans that exited or expired outweighed new or extended loans for the first time in July, with exited or expired loans increasing from $33bn in June to $40bn. Banks most exposed proportionately to deferred small business mortgages are CBA with 25%, followed by BOQ . Things will get interesting here in coming months as JobKeeper tapers and eventually disappears – assuming no extension.
- Prevailing theme: no change – range trading near term. Cyclically (>6 months), spreads could drift moderately wider on systemic risks (i.e. US election), although strong techncials should provide a good buffer to spreads. Broadly constructive.
Stocks – “dip buyers lacking stamina…”
- ‘Stretched valuations’, what does that mean, especially as it relates to tech stocks? The simplest way is forward PE’s, which have been running hot across the market. The S&P 500 is at 25.5x (vs 16.0x – 18.0x historical averages). The NASDAQ is running at 31.3x (vs 19.0x – 21.0x historical averages). While many tech stocks have risen, at the peak of the rally, the FAANGS accounted for ↑25% of the rally. Facebook fell ↓0% last night, and is sporting a forward PE of 30x. Amazon, down 2.9% overnight and has a forward PE of 67x, Apple is down ↓3.3% with a forward PE of 38x…you get the drift, they’re all very punchy valuations.
- As a sign of further irrational investor behaviour, on August 11 Tesla, which is sporting a forward PE of 131x, announced a 5 for 1 stock split. Through to August 31 the stock rallied ↑5%! While it has pulled back over the past five-days, it is still up ↑35% post stock split. So, there are more stocks across which to spread earnings….it should not be rallying this much. Nevertheless, Tesla is up over ↑400% since the March lows. Here’s something I only found out yesterday, Tesla makes more money selling its carbon credits to traditional automakers than it does making cars. Cray-cray!
- The ASX didn’t really buy the hype of the US rally over Wednesday evening, closing yesterday with its nose marginally above water. Futures today are pointing to a ↓1.4% drop.
- Prevailing theme: elevated tactical volatility has become a key theme, outlasting dip-buyers yesterday. It’s a trader’s environment given volatility, while for strategic investing markets are populated with potential landmines. By most traditional measures stocks are still expensive compared to fundamentals. Further mini-corrections likely over the next couple of months. Delays in US fiscal stimulus and the upcoming US election represent key headwinds.
Bonds & Data – “range bound for now, mild risk biased to rising yields…”
- US new jobless claims came in at 884K, flat in the prior week, and above the 850K that consensus was calling for. Continuing claims also disappointed, rising to 13.4 million from 13.3 million.
- Prevailing theme: no change…with rates (yields) at or near historical lows, and negative rates are apparently off the table, rates are generally “asymmetrically skewed higher” over the year ahead. While global monetary policy will remain accommodative, and extraordinarily so, supply and expectations of macro improvement (admittedly off lows) suggest rising rates. How far? The front of the curve will remain anchored around 0.25%, while the ten-year part of the curve is forecast to push toward 1.0% near term (opened at 0.94% this morning).
This day in history…
- Thursday September 10: 1942: Enid Blyton publishes the first of her Famous Five children’s books “Five on a Treasure Island” with over 100 million copies of series sold worldwide. Despite this legacy, some of her posthumously released titles received less critical acclaim including “Five Go Gluten Free”, “Five Give Up The Booze”, “Five Escape Brexit Island” and “Five Get Beach Body Ready”. There are higher hope for the most recent release, “Five Go Absolutely Nowhere”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907
Mutual Limited Daily Update