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Not Doom and Gloom – But Just Cautious…

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You wouldn’t know it on the basis of the strong US market action January 26, but it wasn’t all quiet in overnight trading. Local markets in China (FXI) took another hit, with Shanghai and Shenzhen exchanges experiencing declines to the magnitude of 6%-7%+ on the session. Though some optimistically dismiss the local China markets as irrelevant, the implications on weakened Chinese banks, other Asian nations via trade, and interconnected financial institutions from Standard Charted to HSBC (HSBC) and even Citigroup (C) are material, in our view, and we’re paying close attention. Some may even say that China stocks represent less than 15% of household financial assets in the country — certainly not enough to cause a global calamity… Or is … Read more

Things Are So Bad They’re Actually Good?

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Brazil’s (EWZ) economy, nearly 60% of South America’s (ILF) gross continental output, entered into technical recession following the second consecutive quarter of GDP declines, the latest reading a fall of nearly 2%. Economic data assessing the health of Brazil’s largest South American trade partner, Argentina (ARGT), remains “flawed”, according to the International Monetary Fund, which believes the country will only grow marginally in 2015 and remain stagnant in 2016. Including contributions from Venezuela, which is dealing with near-hyperinflation, the combined gross national product of the three struggling countries accounts for approximately three-fourths of South America’s entire economy. Though less than half the size of Brazil’s, Canada’s (EWC) economy has also fallen into recession during the first half of the year, … Read more

This Just Feels Different…Mr. Brown

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We think the correction is coming. Here are 7 reasons why we plan to reduce exposure to cyclicals and add some protection to the portfolios. By Brian Nelson, CFA I hope you don’t mind my using baseball analogies. Baseball and investing are perhaps the only two endeavors where if you get more than half right, you’re at the top of the list. In any case, you don’t have to be a big baseball fan to appreciate the similarities. I used an example with Ted Williams in this piece about fat pitch investing, but there’s another analogy that is worth sharing. I’ve been to the Louisville Slugger Museum and Factory Tour a few times in the past couple years. My little … Read more

Economic Roundtable: Quant Quake, Quac-cidental Correlation

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Image Source: Anders Sandberg.  Last week, the markets may have revealed that internals aren’t all that healthy. Major equity markets experienced a “rotation” that reminded many investors of the “quant quake” from August 2007. As Valuentum’s Brian Nelson wrote in Value Trap, “just a few bad days in the market caused a rapid unwinding of many quant long-short strategies (back then). Goldman’s chief financial officer said at the time that the firm was witnessing ‘25-standard deviation moves, several days in a row.’” On the surface, markets last week seemed relatively calm, but as the episode in 2007 revealed the activity last week may just be the calm before the storm. Many are pointing to overcrowded trades in betting against certain … Read more

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?

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Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that … Read more