We have now done the math and compiled the Q2 earnings for the S&P 500 and we can indeed confirm that (at least in the second quarter) the buyback part is not only over but has ended with a thud, with the total notional amount of buybacks completed in Q2 plunging by 27% in Q2 to "only" $117 billion - the lowest since Q1 of 2013!
"We had a relatively dry period during the Medieval Warm Period, 900-1400AD. There were several prolonged periods of drought that lasted decades to over a century during that time. That period was followed by a cooler, wetter period (the Little Ice Age) that continued until the 19 century. However, the tree-ring records suggest that the 20 century was unusually wet, meaning we had fewer droughts on average than the previous 1000 years.... the past decade in California and the West has been pretty dry, and the concern is that these climate conditions could continue for several more decades. We've seen these broader cycles of wet-dry in the past."
Native Americans appear to have been in a constant state of warfare, with many tribes becoming extinct well before the arrival of Columbus. Not only did these tribes have to compete for food but also genes, where problems associated with inbreeding likely led to the common practice of raiding one another for women and slaves. The arrival of the Europeans did not make things any better, and not before long they were also fighting among each other.
"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards
Climate change continues to drive energy policy, despite the fact that there is no way to reconcile eradicating energy poverty in much of the world with reducing carbon dioxide emissions. This is one of the many conundrums of the climate change debate - a debate that has been taken over by social media and propaganda, while scientists struggle to get back into the game and engage the public.
- EU to weigh extensive sanctions on Russia (FT)
- U.S. lifts flight ban to Israel (Reuters)
- Russia says will cooperate with MH17 probe led by Netherlands (Reuters)
- Norway faces ‘concrete and credible’ terrorist threat (FT)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- But... but... PMI: Unilever Sales Growth Misses Estimates on Asian Slowdown (BBG)
- World’s Biggest Wealth Fund Reviews $8 Billion Russian Stake (BBG)
- Qualcomm latest US tech company to reverse in China (FT)
- Hamptons Home Sales Rise as Buyers Find More Inventory (BBG)
Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
Like Bush Saying “You’re Either With Us or Against Us”
... the most effective alpha-generating investment strategies are parasites. An alpha-generating strategy of the type I’m describing uses the market itself as its habitat. It’s not an investment strategy based on the fundamentals of this company or that company – the equivalent of a geographic habitat – but on the behaviors of market participants who are living their investment lives in that fundamentally-derived habitat. A parasitic strategy isn’t the only way to generate alpha – you can also be better suited for a particular investment environment (think warm-blooded animal versus cold-blooded animal as you go into an Ice Age) and generate alpha that way – but I believe that the investment strategies with the largest and most consistent “edge” are, in a very real sense, parasites.
We would be the first to espouse the view that, in speculative markets, the 'sentimentals' can long trump the fundamentals, but there is a counterpoint to such a projection, not that many wish to countenance it. The dispiriting truth is that some of the steam has already gone out of the US and were this to continue to be the case, given that esteemed institution’s pathological aversion to short-term difficulty, the Fed's "taper" might yet prove an all too short-lived gesture in the direction of a belated restoration of monetary sanity. As the following 3 charts suggest, equity 'sentimental' valuations are at extremes and fundamentals are deteriorating rapidly, making for an uncomfortable rock- and hard-place-straddle for a Fed that faces 4 reasons it has to Taper (sentiment, deficits, technicals, and international resentment).
If You Don't Buy Global Warming, Great ... Use This Info to Talk to Your Friends Who Do
The bloodbath in the bond markets has led some 'greatly rotating' commentators to see this as the end of the long bull market (and the beginning of a lost decade for Treasuries); in fact, as SocGen's Albert Edwards notes, the financial wreckage left in the wake of Bernanke's taper talk has generated a lot of interesting commentary. But, he asks (and answers eloquently in this far-reaching anatomy of all-the-world's-views-on-what-the-Fed-is-doing) what if (as we have noted) tapering has nothing to do with the US economy having reached a sustainable take-off velocity? From Janjuah to Rosenberg, and from Wolf to Faber, Edwards explains how his Ice-Age thesis (lower lows and lower highs for nominal economic quantities in each cycle... with each recovery bringing a partial reversal to the process and each recessionary phase taking us to shocking new lows, both in bond yields and in equity multiples) is very much still in play (despite the risks that are evident) since governments will take the path of least resistance, which is to print their way out of this looming fiscal catastrophe. Marc Faber is right. QE99 here we come.
"The late Margaret Thatcher had a strong view about consensus. She called it: “The process of abandoning all beliefs, principles, values, and policies in search of something in which no one believes, but to which no one objects.” The same applies to most market forecasts. With some rare exceptions (like our commodity analysts? recent prescient call for a slump in the gold price), analysts don?t like to stand out from the crowd. It is dangerous and career-challenging. In that vein, we repeat our key forecasts of the S&P Composite to bottom around 450, accompanied by sub-1% US 10y yields and gold above $10,000."
If You Don't Believe In Global Warming, Please Forward This to Your Friends Who Do