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Jobs report today delivers a nasty shock to the markets

posted on June 3, 2016 at 2:48 pm
umemployed blue-collar worker

The U.S. economy added only a net 38,000 jobs in May, according to the jobs report from the Bureau of Labor Statistics this morning. Economists surveyed by Bloomberg had projected job gains of 90,000 to 215,000 with the median forecast at 160,000.

The details below the shockingly bad headline number made ugly reading. The government statisticians revised the April job gains, already weak at 136,000, down to 123,000. The unemployment rate sank to 4.7% from 5%, but only because more Americans left the workforce. Even noting the one-time effect of the Verizon strike in May–which took 35,000 workers out of the job count–the longer term trend is decidedly soft: The economy has averaged a gain of 116,000 jobs a month for the last 12 months. That’s down from an average of 229,000 in the same period last year.

No wonder that the markets have decided that today’s jobs report takes a June interest rate increase from the Federal Reserve almost completely off the table. Odds of a June move, based on prices in the Fed funds futures market, fell back to just 4% from 22% yesterday. (The odds of a June increase were at 4% before the release of the Fed minutes for April and a series of speeches from Fed officials designed to stress the Fed’s intention to raise interest rates sooner rather than later.) Odds for a July interest rate increase fell to 31% from 55% yesterday.

Other economic news this morning supported the market’s negative conclusions about the jobs market and U.S. economic growth. The service sector index from the Institute for Supply Management fell in May to 52.9 from 55.7 in April. Anything above 50 signals expansion in the sector but the trend is in the wrong direction. The employment sub-index for the services sector fell for the first time since February.

Some of the restraint in the market’s reaction comes, I think, because investors are figuring out which way to jump. Oil was down as of 1:30–with West Texas Intermediate falling 1.63% to $48.37 and Brent dropping 1.42% to $49.33%–on the theory, I’d speculate, that slower U.S. growth, if confirmed, would mean lower U.S. demand. Yet other commodities moved up on the theory that a delay in any interest rate increase from the Fed would mean a weaker dollar–and commodities priced in dollars go up in nominal terms when the dollar falls. Following on that theory the dollar fell strongly against the euro–to 1.1341–and the yen and dropped 1.3% against the 10 currencies in the Bloomberg Dollar Spot Index.

On the same weak dollar is good theory emerging market assets climbed with the iShares MSCI Emerging Markets ETF (EEM) rising 1.35%–although I think you can make a strong case too for slower U.S. economic growth being bad for the global economy and for growth in commodity prices and developing economies in particular.

Gold climbed 2.39% to $1239.93 an ounce as of 1:30 as some investors sought a safe haven from volatility, but the VIX volatility index (VIX), which measures volatility for the S&P 500 by looking at what prices traders are willing to pay to hedge against volatility has barely moved from recent very low levels. The Vix was up just 0.81% as of 1:30 today.

With so much uncertainty in the market’s reaction to the news it’s hard today to figure out whether to go long or short and in what. Especially because there’s a very good chance that the market’s reaction on Monday, after a weekend of cogitation, will be very different than what it has been today.

On my paid site: Is volatility about to spike in China and could it take global volatility up with it?

posted on June 1, 2016 at 7:40 pm
chinese currency

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy I call tactical stock picking.

Over the long weekend, though, I focused on explaining one big market puzzle: If there’s so much uncertainty in global financial markets–the timing of any interest rate increase from the Federal Reserve, worries/hopes over U.S. economic growth, gyrations in the price of crude and other commodities, a continued slow down in the Chinese economy–should I go on?–why do U.S. stocks trade near their all-time high with extremely low volatility. The CBOE S&P 500 volatility index, the VIX, hit an intraday low of 13.04 on Friday before closing at 13.94. That’s the lowest level for what is often called the fear index since it hit 12.50 on April 20.

With all the uncertainty I’ve summarized above, why is no one hedging the S&P 500?

The answer that I laid out in a post on JubakAM.com on Tuesday involves China where the volatility in the Shanghai index has hit its lowest level since 2014. I think that’s a result of the People’s Bank acting to support the market and at the same time discourage speculation in Chinese stocks.

The rest of the post argues that this has led to speculation in commodities by Chinese traders that has led to a rise in commodity prices that has been misinterpreted by global markets. The end of that suppressed volatility in Shanghai would be a return of volatility to global markets.

That’s what I’m working on at my subscription JubakAM.com site. (I’m still at work on what’s turned out to be a very complicated post on the robotics sector that should go up on JubakAM.com in the next day or two.) I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

The risk-on/risk-off market is back again

posted on May 20, 2016 at 6:37 pm
banking_brazil

Step aside global central banks.It’s time for the pattern called risk-on/risk off to set the direction of global financial markets again.

In my book on volatility, Juggling with Knives, I’ve included an entire chapter on correlations between assets and markets. In an Age of Volatility I argue, correlations among asset classes can change over night and the trend  that once drove markets–stocks rise with a stronger dollar, for example–can breakdown so quickly that it throws an entire investment strategy into chaos. (Buy Juggling with Knives at Amazon http://www.amazon.com/Juggling-Knives-Investing-Coming-Volatility/dp/1610394801?ie=UTF8&qid=1463761996&ref_=tmm_hrd_title_0&sr=1-1. )

Well, that’s where we are today now that markets have decided that programs of quantitative easing from central banks–the Federal Reserve, the Bank of Japan, and the European Central Bank–aren’t enough to drive economies or financial markets.

The new pattern is an old pattern, one known as risk-on/risk off.

Yes, the glorious (sarcasm alert) days when money sloshed from one asset class to another as investors decided that the markets felt risk and that this asset felt more or less risky than that asset are back.

The evidence in correlations between asset classes over the last 120 days, compiled by Bloomberg, is rather compelling.

For example, the correlation between an index of 20 emerging-market currencies and global stocks has climbed back to 0.6 to approach its level on April 8. That was the strongest correlation since December 2013. In other words emerging market currencies are moving in lockstep with global stocks. The correlation between commodities climbed to an almost six-year high of 0.7 this month. In late 2014, neither asset had a significant correlation with emerging-market currencies.

Or to take another example, the correlation between the dollar-yen exchange rate and stocks reached 0.7 in February. That was the strongest correlation since Bloomberg began collecting this data in 1987. Since then the correlation has fallen to 0.5. So, yes, while the yen still tends to weaken when equities rally, the move is a bit less strong than earlier in the year.

Why the shift back to a risk-on/risk-off market? Worries over the Brexit referendum next month on United Kingdom membership in the European Union, the chaos that is the U.S. election, a potential June or July interet rate increase from the Fed, the big sell-off in stocks earlier in 2016.

Why is this important? Because the shift in correlations should result in a rethink of some old strategies and consideration of some new possibilities. For example, the new correlations suggest taking a look at going long the Mexican peso, one of the worst performing currencies in 2016, with an increase in commodity (especially oil) prices.

 

Update Freeport and mining sector

posted on January 12, 2016 at 7:29 pm
iron_ore

Update: January 11. News that Arch Coal (ACI) had filed for Chapter 11 bankruptcy under the weight of $4.5 billion in debt didn’t come as a surprise yesterday. Granted the shares fell 31% in the session before trading was halted for news but the stock had already dropped to 83 cents at yesterday’s close.

And it certainly wasn’t surprising that the news from Arch Coal took down shares of other coal companies. Peabody Energy (BTU) plunged 20%, for example. The problem of severely lower demand for coal–plus longer-term pressure to move away from coal in electricity generation in order to combat global warming–has hit all coal companies so it’s not surprising that a bankruptcy filing from Arch Coal would ripple through the sector.

What is surprising–to me anyhow–is now far those ripple extended yesterday given how much damage has already been done to many companies operating in what can most broadly be defined as the “mining sector.” Mining equipment big dog Joy Global (JOY) fell 6.27% for the day even though it was already down 79% for the last 12-months. Copper miner Freeport McMoRan Copper & Gold (FCX),which had already suspended its dividend last month and where shares are down 80% over the last 12 months, fell 20%.

I think that it’s safe to say that we’re seeing another ratcheting down of expected revenue and earnings for this wider universe. JoyGlobal didn’t fall so far yesterday, for instance, because it does so much business with Arch Coal that a bankruptcy filing by that company would have a huge effect of sales and earnings at the mining equipment maker. The drop reflects a belief that Arch won’t be the last bankruptcy filing and that indeed the mining sector is about to enter a period of even greater financial stress which sees a significant number of producers following Arch to bankruptcy court or something worse.

So what do you, as an investor, do about that possibility. It’s be no means a certainty but I do think it’s likely. The analysis I laid out for the rising financial stress on oil producers in 2016 as bank lending gets tighter and as hedges expire applies to other commodity sectors too. (On my subscription site JubakAm.com see my post http://jubakam.com/2015/12/sector-monday-why-the-saudis-will-win-and-then-lose-the-oil-wars-in-2016/.) Unless China’s economic growth rates turn around quickly, which I think is unlikely, then 2016 is going to be ugly indeed.

But at the same time I’ve also noted that some of the best companies and stocks are now trading at prices that are so low that they constitute, for all intents and purposes, extremely long-dated options. Given how much uncertainty there is about when a recovery in demand might occur–and even more uncertainty about when financial markets might start to anticipate a recovery. (And, of course, there’s the problem/opportunity of potential anticipated recoveries that turn out to be false dawns.)

Way back in 2015 when Brazilian iron ore miner Vale (VALE) was flirting with a drop below $4 a share on its ADRs, I suggested that long term investors consider adding a position of this member of my long-term 50 Stocks portfolio somewhere around $3.70 to $3.20. Well, today the American Depositary Receipts fell another 2.3% to $2.54 per ADR. Vale is now down 68.7% for the last 12 months and 22.8% for 2016 alone. I think that $2.54 for the world’s low cost producer of iron ore is a good price–even with all the turmoil in Brazil and all the extra capacity coming on line from Vale and its peers over the next few years. Is it the best price we’re conceivably going to get in this commodity recession/depression? Doesn’t look like it and I’d be tempted to wait longer for an even better price. However, $2.54 is a reasonable option price for Vale.

But only because, as I read the company’s balance sheet, it is extremely unlikely (never say never in Brazil these days) to go the way of Arch Coal. Vale at $2.54 is an option worth buying because the company is almost certain to be around come the turn in commodities.

I’d say the same thing about Freeport McMoRan and about BHP Billiton (BHP) among the stocks in the long-term 50 Stocks portfolio. Other commodities companies I am not so sure of and after today’s market reaction to the Arch Coal news I think it’s worth going through every commodity stock you still own to calculate the odds of the company being around so you can cash in those cheap options.

I’m doing that right now on the 50 Stocks portfolio and I’ll have recommendations over the next few days on which “long-term commodity options” in that portfolio aren’t worth the risk of holding through 2016.

Arch Coal bankruptcy sinks entire mining sector; copper miner Freeport falls 20%

posted on January 11, 2016 at 9:27 pm
iron_ore

News that Arch Coal (ACI) had filed for Chapter 11 bankruptcy under the weight of $4.5 billion in debt didn’t come as a surprise today. Granted the shares fell 31% in the session before trading was halted for news but the stock had already dropped to 83 cents at yesterday’s close.

And it certainly wasn’t surprising that the news from Arch Coal took down shares of other coal companies. Peabody Energy (BTU) plunged 20%, for example. The problem of severely lower demand for coal–plus longer-term pressure to move away from coal in electricity generation in order to combat global warming–has hit all coal companies so it’s not surprising that a bankruptcy filing from Arch Coal would ripple through the sector.

What is surprising–to me anyhow–is now far those ripple extended today given how much damage has already been done to many companies operating in what can most broadly be defined as the “mining sector.” Mining equipment big dog Joy Global (JOY) fell 6.27% today even though it was already down 79% for the last 12-months. Copper miner Freeport McMoRan Copper & Gold (FCX),which had already suspended its dividend last month and where shares are down 80% over the last 12 months, fell 20% today.

I think that it’s safe to say that we’re seeing another ratcheting down of expected revenue and earnings for this wider universe. JoyGlobal didn’t fall so far today, for instance, because it does so much business with Arch Coal that a bankruptcy filing by that company would have a huge effect of sales and earnings at the mining equipment maker. The drop reflects a belief that Arch won’t be the last bankruptcy filing and that indeed the mining sector is about to enter a period of even greater financial stress which sees a significant number of producers following Arch to bankruptcy court or something worse.

So what do you, as an investor, do about that possibility. It’s be no means a certainty but I do think it’s likely. The analysis I laid out for the rising financial stress on oil producers in 2016 as bank lending gets tighter and as hedges expire applies to other commodity sectors too. (See my post in my subscription site JubakAM.com http://jubakam.com/2015/12/sector-monday-why-the-saudis-will-win-and-then-lose-the-oil-wars-in-2016/.) Unless China’s economic growth rates turn around quickly, which I think is unlikely, then 2016 is going to be ugly indeed.

But at the same time I’ve also noted that some of the best companies and stocks are now trading at prices that are so low that they constitute, for all intents and purposes, extremely long-dated options. Given how much uncertainty there is about when a recovery in demand might occur–and even more uncertainty about when financial markets might start to anticipate a recovery. (And, of course, there’s the problem/opportunity of potential anticipated recoveries that turn out to be false dawns.)

Way back in 2015 when Brazilian iron ore miner Vale (VALE) was flirting with a drop below $4 a share on its ADRs, I suggested that long term investors consider adding a position of this member of my long-term 50 Stocks portfolio somewhere around $3.70 to $3.20. Well, today the American Depositary Receipts fell another 2.3% to $2.54 per ADR. Vale is now down 68.7% for the last 12 months and 22.8% for 2016 alone. I think that $2.54 for the world’s low cost producer of iron ore is a good price–even with all the turmoil in Brazil and all the extra capacity coming on line from Vale and its peers over the next few years. Is it the best price we’re conceivably going to get in this commodity recession/depression? Doesn’t look like it and I’d be tempted to wait longer for an even better price. However, $2.54 is a reasonable option price for Vale.

But only because, as I read the company’s balance sheet, it is extremely unlikely (never say never in Brazil these days) to go the way of Arch Coal. Vale at $2.54 is an option worth buying because the company is almost certain to be around come the turn in commodities.

I’d say the same thing about Freeport McMoRan and about BHP Billiton (BHP) among the stocks in the long-term 50 Stocks portfolio–although I think both are worth waiting on here for a lower price. Other commodities companies I am not so sure of and after today’s market reaction to the Arch Coal news I think it’s worth going through every commodity stock you still own to calculate the odds of the company being around so you can cash in those cheap options.

I’m doing that right now on the 50 Stocks portfolio and I’ll have recommendations tomorrow on which “long-term commodity options” in that portfolio aren’t worth the risk of holding through 2016.



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