This page has been archived and commenting is disabled.

Jakobsen: "Stash Your Cash & Use It Later"

Tyler Durden's picture




 

Submitted by Saxobank's Steen Jakobsen via Tradingfloor.com,

  • Profit both drives and explains stocks
  • Rising cost of capital will filter through to profits in autumn
  • Ignore rises in capital costs at your peril
  • Best advice? Stash your cash and use it later
 
S&P
There's less to smile about when rising capital costs damage profits. Photo: iStock
 
 

Studying economics, to be honest, is of little practical benefit, but one thing I did learn which continues to help me is this: Capital should always be allocated to the “marginal cost of capital”.

What’s interesting in this context is that the stock market in its most simple form is really an input–output black box: In goes the “cost of capital” – out comes “profit”. I don’t think anyone will disagree that long- and medium term it’s the profit which both explains and drives stocks best.

The most profitable companies get the best stock returns, Philip Van Doorn explained recently in a MarketWatch column. (See his list of the most profitable S&P 1500 companies here.)

Van Doorn's conclusion reads:

MarketWatch
 

This brings me to the “dilemma” of today’s market: The marginal cost of capital is significantly higher. My own Marginal Cost of Capital chart (50% US, 25% Germany & Japan 10-year yields) is up from -3.0 Z-score to +1.0 since the low in late January – a significant move by any standard.

The average cost of capital has risen 55 bps and 65 bps earlier this month!
marginal cost of capital
Of course there is a delay in time from rising rates to profit – the “black box” takes 6-9 months to process the changes in input prices (cost of capital) but it increasingly clear that should the stock market continues up, and the consensus is more positive than any time before, it will entirely be driven by increase in multiples.

The credit cycle peaked in March/April last year and now the cost of capital has been rising since January (six months) which means by September/October the full impact will be felt on profit. There are also some good reasons to expect buy-back programmes to lose some steam as the continued aggressive buy-backs are mostly funded not from free cash flow created, but new net lending meaning we are getting “worse” quality earnings on top of rising input costs.

I note that several people love to comment that I am always “negative” on stocks, that may be the case when journalists quote me, but in terms of money managed I am neutral – not long, not short – I have not done a stock index deal in more than six months and I maintain my equity exposure at the required 25% mainly through mining and commodities now.

Here is my “official” view on S&P500 from Feb 2015 – far from “bearish” I guess…..
spx

 

Source: Bloomberg, Saxo Bank. 

The credit cycle also peaked a while back:
HYG yoy

 

The real peak was in April 2013, with a new “lower” peak in April 2014. The above chart shows US high yield (HYG) vs. YoY return in the S&P500. The correlation seems reasonable…..

But let’s look at more charts and the marginal cost of capital:
Leveraged

 

Leveraged loans – high risk credit lending – is also coming off.. again, the peak was April 2014ish….

In more liquid assets – the 10-year and 30-year generic US yield and the 30-year average mortgage rates look like this:US 10,30 yr mortgages

 

You can ignore these rises in capital cost at your peril but I would warn that this is NOT going away – we can discuss Fed next move in 3D, 50 colors and with conviction but the cost of capital is rising already even before Fed is starting its “normalisation”. The Fed is now priced to go most likely in December, but I remain with September as December becomes political with primaries and US elections. The data should be “good enough” – not great but the trend will be rising (from a very low point).

The strategy for most assets remains one of wait-and-see to me: I keep recommending the few people who want advice to bring back their stock portfolios to a January 2013 level – keep the profit in the “piggybank” to be used later. There are too many unknowns to proceed full steam ahead – the tax of “volatility” in now again increasing:
volatility index

 

The “catalyst” for change is the first Fed move – It will be a full blown “margin call” – if you add my models plus the Fed consensus together with the “prediction” made in February, things are suddenly interesting.... What is clear is that the market “expected return remains zero over 3, 5 and 7 year and how you tackle that downbeat scenario really is an exercise in capital preservation.

PS: Greece: to be honest, I don’t see Greece going away – everyone is losing now, the whole debate is being defined by emotions not long-term solutions. The Greeks will fail again, only because they have no interest in changing their ways. They are in an economic and political Catch-22.

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 06/25/2015 - 12:16 | 6233891 KnuckleDragger-X
KnuckleDragger-X's picture

Hmmmm.... What a nice, smelly, pile of shit........

Thu, 06/25/2015 - 12:19 | 6233903 silverserfer
silverserfer's picture

Yellen must love this article. Yesssssss. Control the scope of discussion within the ponzi system and continue to rule them all. 

Article for the sheep written by the sheep sponsored by the wolf. 

Thu, 06/25/2015 - 12:21 | 6233908 1stepcloser
1stepcloser's picture

Where can I get one of those Go get fucked gift cards to stash my cash...

Thu, 06/25/2015 - 12:24 | 6233915 Soul Glow
Soul Glow's picture

Stash cash?  Why?  It burns up in the long run due to inflation!

You want a long term investment?

BUY SILVER

Thu, 06/25/2015 - 12:34 | 6233962 KnuckleDragger-X
KnuckleDragger-X's picture

Buy many things, just make sure it actually has a real value.......

Thu, 06/25/2015 - 14:31 | 6234501 Four chan
Four chan's picture

this concept makes a big assumption, that there will be a "later". 

Thu, 06/25/2015 - 16:25 | 6234921 meterman
meterman's picture

SOUL GLOW

Great advise Dimwit - I bought silver - now I have half the wealth I started with. Go back to your cave you PM Huckster shill.

Thu, 06/25/2015 - 12:44 | 6234002 nakki
nakki's picture

Does this guy own part of, or pay ZH to be on this site. Eventually we'll all be right, the "market" will correct and all pundits who have called it will be the enlighten ones. You and me not so much, because we dont work for a bank.

Thu, 06/25/2015 - 12:48 | 6234028 eddiebe
eddiebe's picture

I've learned one thing in these last few years of having my money invested. In these markets, being as totally manipulated and fixed as they are: Unless you are part of the gang that either does the fixing or has access to the information from the fixers, you will loose money, if you have not lost already. 

Thu, 06/25/2015 - 16:27 | 6234933 meterman
meterman's picture

RIGHT - RIGHT - RIGHT

Thu, 06/25/2015 - 13:44 | 6234305 rockmanlinux
rockmanlinux's picture

I can see the short term cash investment if we see massive deflation.  I won't bet the farm on that stance like this artcile seems to suggest.  In fact, I won't be stashing much except for when everyone runs to cash to keep afloat, then I run to gold and well...real food cuz its gonna be bad, really really bad, like never seen before bad!

Thu, 06/25/2015 - 13:54 | 6234351 withglee
withglee's picture

Studying economics, to be honest, is of little practical benefit, but one thing I did learn which continues to help me is this: Capital should always be allocated to the “marginal cost of capital”.

Terrific. Now educate me. What in the hell does capital should always be allocated to the "marginal cost of capital" mean?

Thu, 06/25/2015 - 16:31 | 6234946 Jacksons Ghost
Jacksons Ghost's picture

Jakobsen? Since when are the Jews giving the Goyims the heads up?

Do NOT follow this link or you will be banned from the site!