Archive for Chart Of The Day

Reminder: Tapering is not Tightening

A strange thing has happened ever since the “tapering” began last December – interest rates have fallen, stocks have risen and inflation expectations have actually increased.  This is almost exactly the opposite of what many people might have expected.  After all, if “tapering is tightening” and QE is “money printing” then something doesn’t add up here because stocks should have fallen and inflation expectations should have declined.  But when we look at the operational realities of QE it becomes clear that “tapering” really isn’t “tightening” in any meaningful sense.

As you can see in the chart below, the Fed really hasn’t started tightening in any meaningful sense.  In fact, their balance sheet is still expanding quite rapidly.  So, as I explained early last year, if we want to call QE “money printing” then tapering is really just “less money printing”.  Of course, that’s not how I view QE at all (see my QE primer here), but if you want to remain consistent with the mainstream view of things then that’s one way to view the tapering.



Perhaps more importantly, the stock market doesn’t even perform poorly during the early phases of a tightening.  And the logic behind that is rather simple – the Fed reacts to an improving economy and if the Fed isn’t even reducing their balance sheet then we’re not even at the point in the economic cycle where the Fed thinks tightening is necessary.  And that means the economy is probably still too weak to warrant a real tightening.  And that, in a counterintuitive sort of way, is actually a good thing.

Chart o’ the day: Dividends and Buybacks Jump to new All-time High

We’ve officially round tripped it now.  Not only is the VIX at pre-crisis lows, but corporations are now issuing dividends and buying back shares like the crisis never happened (via Fact Set):

“Dividends per share (“DPS”) for the S&P 500 grew 12.5% in the trailing-twelve month (“TTM”) period ending in April. This also marks the thirteenth consecutive quarter in which DPS has grown at double-digit rates. Long-term, significant dividend growth—coupled with growth in share repurchases (which grew over 50%)—has helped quarterly shareholder distributions to reach record levels since at least 2005. In total, $249.1 billion was distributed to shareholders in Q1, which modestly surpasses the $242.1 billion distributed in Q3 2007.”



Chart O’ the Day: Round Trippin’ it

Not much to say here.  Just a chart of the volatility index.  Right back to where we were before the crisis occurred and fast approaching the all-time lows (via Bloomberg):


U.S. Home Prices Still Rising Double Digits

Home prices continued to accelerate at a double digit pace in April according to CoreLogic.  The latest reading came in at 10.5% year over year which is the fifteenth consecutive double digit reading.  Since 1977 the CoreLogic housing price index has averaged a 5.7% annual change so the current rate of change is substantially higher than the historical norm.

While the annual rate of change looks strong it has decelerated in recent months from almost 12%.  Still, the housing market in the USA remains robust.  And that’s probably not surprising since Americans have become disillusioned by just about every other asset class as seen in this recent survey on various asset classes.



SocGen: Beware the Global Macro Slowdown

Just passing along this data point from the Cross Asset Research team.  They cite the CitiGroup Economic Surprise Index for several regions to reinforce their case for a global macro slowdown:

  • The macro environment has slowed down in most regions except for the US, which is now enjoying a strong economic rebound.
  • In China, economic data continue to surprise on the downside. Yet, even in a scenario of a severe downturn, the country can still emerge strongly from the crisis in the long term, if its leaders remain on the path of reform. 
  • Emerging markets continue to slowdown as reflected by the contraction in manufacturing activity in major EM countries.


When Was the Last Time Treasury Yields Were This Low?

By Sober Look

We’ve had an unprecedented compression in US (and global) government bond yields in a short period of time. Here is one surprising fact: Treasury yields are now at the level they were during the US government shutdown. The level of uncertainty has diminished dramatically since then and the employment picture continues to improve (see Twitter post). Yet here we are again. This time however it’s the global chase for yield and expectations of ECB’s monetary easing driving rates to new lows.

US 10y bond yield

Why and How the ECB Might Implement QE

Important chart here from Michael McDonough at Bloomberg.   It shows the spread between Italian sovereign bond yields and corporate bond yields.  As you can see, as the government yield has fallen quite dramatically the corporate yield hasn’t followed.



This is not at all what the ECB would like to be seeing.   This is one of the main reasons why the ECB is increasingly likely to implement QE.  It’s also a key reason why QE in Europe might look very different than it does in the USA.  In my opinion, the ECB is likely to focus on private securities markets in addition to the sovereign bonds.  They really would love to see the yield reduction spill over into the private sector so they (hopefully) get some investment boost.

And of course, this means more chase for yield in the coming years as this is just one more set of instruments that are likely to get jammed lower….

Chart of the Day: Bond Bears vs Stock Bears

I liked this post by Surly Trader which highlights an importance difference about stocks and bonds that often goes overlooked – that is, a bear market in bonds is a very different animal than a bear market in stocks.  Given that there seems to be such widespread fear over bonds and rising interest rates, I think this is an important point (via ST):

From the return side, let’s look at the bad days.  If you look at the rolling total returns of the Investment Grade Corporate Bond Index since 1976, the bad 6 and 12 month total returns were shy of -20% in the early 80′s:


The funny thing about bonds is that their returns are “self-fixing”.  The bonds move back to  Par ($100 per face) price at maturity over time.  In addition, the investor continues to re-invest his/her coupons at higher interest rates thereby dampening the changes in price of the underlying bond holdings.

As a comparison we can look at S&P 500 price returns over the same time period.  Total returns are not available back to 1976, but they would be very close to the rolling price returns:


He notes:

“Stocks fix themselves as well, but the drawdowns are more frequent and returns are obviously more volatile”

That’s the key point.  Stocks and bonds are very different types of instruments which serve very different roles in a portfolio.  Comparing them or thinking about “bear markets” or “bubbles” is often done in such a manner that implies an unjust level of fear with regards to how those environments might apply to these very different instruments.  Don’t let a bond bear scare you into thinking that a bear market in bonds is anything remotely similar to a bear market in stocks….

Chart of the Day: Is the Expansion “Long in the Tooth”?

This was a useful chart from the WSJ over the weekend.  It puts the current economic expansion in perspective:



We’re in month 58 of the current expansion, which is right in-line with the post-war average.  I’ve said that the current expansion is a little long in the tooth, but that it’s important to keep that in the right expansion.  While we’re probably closer to the next recession than we are to the beginning of the recovery, it’s also important to remember that the business cycle seems to be getting longer and longer.  As I noted earlier this year:

“it’s also interesting to note that the expansion phase of the business cycle appears to be getting longer.  You’ll notice that 3 of those 6 long recoveries occurred since 1982.  Are these anomalies or are they signs of a changing economic landscape?  I think they’re probably signs of a changing economic landscape and that means that a lot of the data that exists before the post-war era probably doesn’t apply.”

So yes, we’re long in the tooth.  But that doesn’t mean we can’t get longer in the tooth.

Chart of the Day: Showing up Late to the Party

Here’s some nice perspective on the market cycle from Lance Roberts:

An interesting article this morning via Investment News caught my attention:

“After watching the stock market climb from peak to peak last year, investors are finally starting to warm up to equities.

More than 85% of investors are feeling optimistic about the investment landscape, and 74% think stocks have the greatest potential of any major asset class, according to a survey of 500 affluent investors released Monday by Legg Mason Global Asset Management. The survey was conducted in December and January.

The survey also shows that investors still hold relatively conservative portfolios, but are increasingly willing to increase exposure to international assets.”

This is not a surprising survey by any measure. In fact, it is typical of what you would expect from a group of individuals whose investment decisions are primarily driven emotional behavior rather than a disciplined investment process.

“At the time this survey was conducted, investors had experienced in the U.S. a pretty positive stock market,” said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management.“Markets are typically forward looking, while investors are typically backward looking.”

Investors are indeed backward looking as shown below. The Investment Company Institute (ICI) began tracking flows into equity funds in 2007 which I have overlaid with the investor psychology cycle. In this manner, you can witness investor behavior in “real time.”


Chart of the Day: New DM-EM Equity Convergence

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic, created on Bloomberg, depicts the MSCI equity index for the developed countries (orange line) and the emerging markets (white line).

dm em

The charts begins at the start of last year. In the first several months of 2013, DM outperformed EM. The big EM sell-off coincided with first hint from the FOMC about tapering. EM recovered and tracked the DM until October. A new phase of divergence, with DM outperforming again lasted into early March.

Since mid-March the performance is a study in contrasts. MSCI emerging market equity index is up about 8.4%. During the same time the developed markets index is up a little less than 1%.

In the foreign exchange market over this period, the dollar-bloc is the strongest. The Australian dollar is easily the best performer rising 3.3% against the dollar, followed by the Canadian dollar (1.7%) and the New Zealand dollar (1.5%). Sterling is a distant fourth, up 0.4%, and all this was recorded today. The other major currencies have lost ground against the dollar this period.

Among the emerging market currencies, the Brazilian real (5.8%), Colombian peso (5.5%) and Turkish lira (5.5%) have led the advance. Chilean peso (3.5%) and the Russian rouble (3.0%) round out the top five. As with the majors, the high yielding/high beta currencies has generally outperformed.


Chart of the Day: Estimating Wage Growth

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic was tweeted by the Financial Times’ Cardiff Garcia, which he got from Goldman Sachs. It tries to assess the outlook for wage growth based on different measures of unemployment, including short-term unemployment rate.


The problem is that wages do not seem to be tied to the measures of the unemployment rates. This is to say that wage growth is been considerably weaker than the improving labor market would suggest.

Wages are understood to be an economic function of supply and demand. Yet the relationship appears to have broken down. One response is that it is simply a question of time, Back in 1998-19900, wages grew faster than expected based different unemployment measures. This was a short run anomaly. An alternative hypothesis begins with the observation that since 2001, wage growth has typically under performed what the levels of unemployment would suggest. Could this be the implicit threat posed by China? It joined the WTO in late 2001. This hypothesis suggests that politics, as in power, is may be a better explanatory variable for how the social product is divided between profits and wages.

Given that the forward guidance of the Federal Reserve is evolving and, most recently, it dropped the reference to a 6.5% unemployment rate, and the comments by Yellen, investors will be watching earnings very closely. Recall that in February, the weather prevented many from going to work, but their salaries were not impacted. This helped generate a statistical quirk of a larger than expected increase in hourly earnings. They rose 0.4% for a 2.2% year-over-year rate, which is the upper end of the range for the past three years.