Tag: finance

Following yesterday’s strong 3Y and 10Y auction in a day of supply deluge, moments ago the Treasury sold $13 Billion in 30Y paper in the latest strong auction, which stopped at a high yield of 3.109%, stopping through the when issued 3.114% by 0.5bps. The Bid to Cover also showed a marked improvement, rising from 2.26 to 2.38, if just below the 6 month auction average.

Once again, refuting the incorrect narrative that foreigners are shying away from Treasurys (just look at the record amount held in custody at the Fed), Indirects took down 57.9%, modestly below last month’s 61.2%, and in line with the 6 month average of 63%. Meanwhile, the Direct award jumped from 8.1% to 14.8%, the highest since October 2015, leaving Dealers holding 27.3%, below last month’s 30.8%.

In summary, another strong auction perhaps boosted by today’s growing risk sentiment and flight to safety.

 

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For an election in a district that won’t exist in a few months, pundits are claiming that the outcome of Tuesday’s special election in Pennsylvania’s seventeenth district could be a harbinger of the November midterms.

As Politico explains, the traditionally blue-collar district in Southwestern Pennsylvania is “ancestrally Democratic” – the party has a six-point voter registration advantage thanks to the coal mines and steelworks that dot Allegheny County and the surrounding area. But over the past decade, it’s turned Republican. President Trump carried district by a massive 20-point margin, and Mitt Romney carried it by 12 points in 2012.

However, Republican candidate Rick Saccone, a member of the Pennsylvania House of Representatives, has been panned by pundits aligned with his own party as a weak candidate whose lackluster local fundraising efforts have been subsidized by a flood of outside money into the race – roughly $10 million. President Trump has visited the district twice – including a Saturday night rally where he unveiled his 2020 campaign slogan, “Keep America Great”.

Other members of the Trump administration, including Kellyanne Conway and Donald Trump Jr., have tried to whip up votes for Saccone.

Rick Saccone

But Democrat Connor Lamb, who has pitched himself as a centrist who personally opposes abortion and post-Parkland gun control legislation, is benefiting from his relative youth (he’s 33), his military background (he’s a former Marine) and his family’s history (Lamb’s father was the local Democratic party head during the 1970s, and one of his uncles is the City Comptroller in Pittsburgh. The national party didn’t contribute much to the race: Within the district, Lamb managed to outraise Saccone by five-to-one.

According to CNN, the National Republican Congressional Committee spent $3.5 million. The Congressional Leadership Fund, a super PAC aligned with House Speaker Paul Ryan, spent $3.3 million. The Republican National Committee chipped in $1.1 million and ran an expansive get-out-the-vote operation, while the Trump-aligned super PAC America First Action spent $1 million.

Democrats, meanwhile, spent relatively little: Patriot Majority PAC spent $450,000 and Vote Vets spent $344,000. Several other groups spent smaller amounts, largely on digital advertising. The Democratic Congressional Campaign Committee spent $260,000 on television advertising.

According to the latest polls, Lamb has a slight lead over Saccone:

…And if Democratic turnout is high, that lead could swell to six points.

Per the Hill, local Republican pundits are already losing hope…

“I have a very, very bad feeling in my gut about this one. I don’t think this is going to go well for Saccone,” said one Pennsylvania Republican strategist who asked for anonymity to give a candid impression of the race. “At some point, I saw [Saccone] as a guy in a rowboat in the middle of the Atlantic. They were rowing like hell, but they weren’t making any headway.”

Meanwhile, union leaders in the district who supported Trump in 2016 are now backing Lamb:

“The Bible tells us someday we are all going to be judged by how we treat the least of these, and the labor movement and the Democratic Party are about treating the least of these with respect and dignity and lifting them up,” said United Mine Workers of America President Cecil Roberts.

“Let me try to explain to you what kind of folks we are and what kind of Democrat Conor is. He’s a God-fearing, union-supporting, gun-owning, job-protecting, pension-defending, Social Security-believing, health-care-creating and sending-drug-dealers-to-jail Democrat!”

While Democrats will unquestionably tout a Lamb victory as a harbinger of victories to come in November, some Republican strategists have insisted that Saccone’s candidacy was flawed in ways that wouldn’t apply to the broader election map.

One Republican member of Congress told The Hill that while Saccone “has a good bio, he’s just not a good candidate.”

And regardless of who wins the seat, they will be forced to run another campaign in November. And unless the Supreme Court steps in with a legal challenge, the Pennsylvania state Supreme Court has implemented a new congressional map for the 2018 cycle that completely changes the district lines.

Connor Lamb

Saccone is already circulating petitions to run in a more conservative new district in the southern portion of the state, according to The Inquirer in Philadelphia. Lamb hasn’t said which district he’d mount his bid in.

Trump reportedly views Saccone as a weak candidate, but he traveled to the district in the hopes that his decision to slap tariffs on imported steel and aluminum would help energize the base to turn out for Saccone.

As Trump pointed out on Saturday, there were “a lot of red hats” in the crowd at Trump’s rally. “The world is watching,” Trump said Saturday. 

Another Republican loss would compound problems for Trump, who has presided over a loss in Alabama’s special election and a blowout in the Virginia governor’s race.

The vote will also be the first political test of Trump’s tax reform plan, which polls show is growing increasingly popular with voters.

The vote was triggered when anti-abortion incumbent Tim Murphy resigned following reports that he pushed a woman with whom he had an affair to get an abortion. Polls in the area close at 8 pm, local time.

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Just hours after news broke that Secretary of State Rex Tillerson was let go on Wednesday morning, the White House also fired his top deputy, Under Secretary Steve Goldstein – who earlier disputed the terms of Tillerson’s firing – amid what appears to be an unprecedented State Department purge.

According to CBS, the White House called Goldstein to tell him he is no longer needed. Goldstein was then called up to Tillerson’s office for a meeting. Tillerson spent the morning at home – after flying in from Africa early Wednesday morning – but he is now at the department. It is unclear if Tillerson will talk to the press today or not.

Goldstein had largely fallen into the role as Tillerson’s spokesperson, and was unanimously confirmed by the senate last year. He has been on the job for less than three months and is known for being loyal to Tillerson according to CBS. He did attend many meetings at the White House, and consistently said Tillerson was going to bring foreign policy decision-making back to the State Department.

“The Secretary had every intention of staying because of the critical progress made in national security,” Goldstein said in a statement before his own dismissal and after President Trump tweeted that Tillerson was being replaced as Secretary of State by Mike Pompeo, who had been serving as CIA director. “He will miss his colleagues at the Department of State and the foreign ministers he has worked with throughout the world. The Secretary did not speak to the President and is unaware of the reason, but he is grateful for the opportunity to serve, and still believes strongly that public service is a noble calling.”

Goldstein was informed of the move shortly after he released the above statement which disputed the official narrative for Tillerson’s termination, which said that the former Exxon CEO was “unaware of the reason” for his termination. Goldstein had also told reporters that Tillerson learned of his firing Tuesday morning from Trump’s tweet announcing he was nominating CIA chief Mike Pompeo to lead the State Department, while the White House claimed that John Kelly had notified Tillerson on Friday evening.

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“Bulls beware!” is the ominous big picture headline from Societe Generale’s latest Equity Strategy report.

Simply put, Roland Kaloyan explains that investors are facing “a tired bull market”

We started our 2018 equity outlook by highlighting our concern about the volatility regime given the amount of short volatility positions in the market. Looking forward, a higher volatility regime and tighter central banks should prevent US and European equity markets from extending this nine-year-old bull market much further.

Expect the US earnings momentum to fade soon now that the tax reform impact is almost fully taken into account by analysts (2018 EPS growth: +19%). Escalating protectionist measures are a growing tail risk for us.

The US midterm election in November will probably be another source of stress for equity markets, potentially pushing the S&P 500 back down to its fair value at 2500.

While many of the factors underlying stock valuations are broadly-known, SocGen notes that there are now two new elements to factor in…

1) Rediscovering what volatility means

Back in November when we rolled out our 2018 equity outlook we raised clear concerns regarding the positioning of volatility, which we identified as one of the major risks for a short-term correction facing US equities. Indeed, short positioning on VIX was extreme into the current correction. Unwinding proved particularly painful last month, with VIX rising by up to 50% intraday, a level not seen since 2015, and then only briefly, and before that 2009. This marked a turning point in the equity volatility regime for SG Equity derivatives strategists .

If the VIX is back between 15% and 20%, intraday volatility remains very high, highlighting a lot of nervousness in the market.

Back to a higher volatility regime

Will the credit market be next to fall?

The VIX and the credit market (US High yield spread) have been strongly correlated in the past. Now volatility has spiked; is credit the next to fall? Not just yet, reply our credit strategists. Since the start of year, they have been expecting more challenging conditions to appear only in the second half of the year, with the end of the EU’s Corporate Sector Purchase Programme (CSPP) and rising government yields. And now we have to add the possibility of a trade war.

After the volatility, are we likely to see some tension in the credit market? Probably not until in the second part of the year, say our credit strategists.

VIX and US high yield credit spread: six and half a dozen

2) Protectionism: bad news now taken more seriously

Until lately, it seemed like markets were only putting stock in positive announcements (tax cuts), while brushing off the bad ones (Korea, the wall). With protectionism, the mood is changing. Markets like to split President Trump’s economic programme into two parts. There is the programme that supports equities, and this includes tax reforms and deregulation. And there is the programme that seems to create stress in the financial markets, and this includes a more restrictive trade policy. Among the various trade measures that the US administration can apply, only some are dependent on presidential power.

The newspapers have never talked so much about tariffs in the US as they have in the last 18 months.

Trends in the news – the newspapers are talking more and more about tariffs in the US

The example of US steel tariffs

Article 232 is being used to raise tariffs on steel and aluminium by 25% and 10%, respectively, from all countries that are a concern for national security. We have, in coordination with SG analysts, drawn up a list of global stocks likely to benefit (SG Global Long Basket: seven names) or suffer (SG Global Short Basket: 13 names) from higher tariffs.

US steel producers will naturally benefit from this measure, Asian steel companies as well as US steel consumers (like automakers and homebuilders) would be penalised.

All of which add to the contrarian result that SocGen proclaims: “We are not buyer of US equities”…

This bull market is driven by P/E expansion, unlike the last one

Below we present a comparison between the current bull market and the previous one. Between 2004 and 2008, US earnings grew faster than sales (i.e. rising corporate margin) and equity prices (i.e. P/E contraction: from 23x to 17x).

Since 2011, corporate margins have remained roughly stable, earnings have grown by ~50%, while the equity market has doubled. This bull market has been mainly driven by P/E expansion (trailing P/E up from 17x to 24x).

What is driving the P/E ratio in a bull market?

The first intuition is earnings growth outlook. Accelerating earnings growth would rationally deserve high multiples. However, the chart below shows that earnings growth has systematically disappointed the start-of-year expectations every year since 2012.

A second driver of P/E could be risk-free rates. Indeed, an overly low risk-free rate (for example when the Fed fund rate is below the core inflation level) would push companies to make more buybacks and investors to take more risk. Between 2003 and 2008, the real Fed funds rate increased significantly, while since 2009 it has been negative. In our scenario three rate hikes this year, it would move back into positive territory and thus put pressure on US equity multiples.

It will be difficult for US equities to absorb higher bond yields

Our equity risk premium model compares the long-term expected return on equities (as measured by the internal rate of return of equities) relative to long-term bond yields. The US equity risk premium currently stands at 2.7% which is one standard deviation below the longterm average (3.9%).

We have actually seen a lower equity risk premium in the past, but only during the dotcom bubble. Hence, it would be difficult for US equities to absorb a much higher US Treasury yield. This is confirmed by the recent market swings.

In the table below, we provide a sensitivity analysis of the US equity market to the equity risk premium and long-term bond yield.

A 3% rise in the US treasury yield would theoretically push the S&P500 up to 2500pt.

US earnings momentum to run out of steam soon

In a US economy growing at 3%, any historical regression shows that earnings tend to grow at ~10% per year. According to our calculations done at the index level, the US tax reform would boost 2018 earnings by a maximum of 10%. Taking into account further tailwinds (rising oil prices and weakening USD), US EPS should grow by around 20% this year.

US 2018 earnings growth is now well above 2017 and 2019 earnings growth: this is atypical of a tax reform impact.

According to IBES, consensus analysts have revised up their 2018 US earnings estimates for all sectors since the beginning of the year. US 2018 earnings growth is now expected at 19.3%, so the impact of the tax reform has been taken into account almost fully.

Additional evidence that this is the consequence of US tax reforms is the differential between EPS adjustments and EBITDA adjustments: for each US sector, 2018 EPS has been revised higher than 2018 EBITDA.

Meanwhile, for both 2019 and 2020, the consensus has S&P 500 earnings growth at 10%. US earnings growth should thus run out of steam soon.

Midterm elections: another potential source of volatility

On 6 November, midterm elections will take place in the US. Control of both chambers of Congress is up for grabs: the Senate might be a tough hurdle for the Democrats, but they have a chance of gaining control of the House. According to Gallup polling, since 1946, when presidents have an approval rating of above 50%, their party loses an average of 14 seats in the House midterm elections, compared with an average loss of 36 seats when they are below 50% (the Democrats need 24 new seats to take control of the House). President Trump’s approval rating is currently at 39%.

If either house of Congress flips, the US would be likely to encounter more political gridlocks. The Republican legislative agenda would be under pressure if not dead and no one could then exclude further investigations into the Trump administration. This could be new source of volatility for US equities, with both valuations and expectations at decade highs.

While US large caps would probably be protected by a weaker USD in such a scenario, the Russell 2000 (small & mid caps, more domestic, weaker balance sheet) would be more at risk.

*  *  *
So, apart from fading earnings momentum, higher volatility, midterm election uncertainty, credit risk anxiety, and rising rates… everything’s Goldilocks for stocks, right?

 

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The Kudlow bounce is dead (again). Early gains in stocks have evaporated in the last hour as it appears inflation hype is fading fast (and breakevens are plunging)…

 

And as Breakevens plunge, so stocks have all slumped into the red (led by Financials) – apart from Trannies…

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Submitted by James Miller of The Political Insider

This morning we learned that President Trump finally pulled the trigger on his decision to fire Rex Tillerson as Secretary of State, and replace him with current CIA Director Mike Pompeo.

That left an opening at the head of America’s top intelligence agency. President Trump has indicated that Gina Haspel, the current Deputy Director of the CIA, will get the nomination to lead the agency.

Who is Gina Haspel? Here are five fast facts you need to know about her.

1. Haspel, if confirmed by a majority vote in the Senate, would be the very first female head of the CIA. This is a great achievement, and one that liberals will give no credit to Trump for.
2. Haspel has been a career CIA employee and once ran an agency prison in Thailand, where waterboarding was used an an extreme interrogation measure. President Trump has supported waterboarding in the past.
3. Being appointed director of the CIA would be a huge promotion for Haspel, but she has held multiple leadership roles within the U.S. intelligence community in the past. Her past roles include being “deputy director of the National Clandestine Service and deputy director of the National Clandestine Service for Foreign Intelligence and Covert Action.”
4. Haspel was investigated for her role in heading a prison where waterboarding took place, and obeyed an order to destroy video evidence of the interrogation. The Justice Department ultimately filed no charges in the case.
5. Haspel has received numerous rewards and accolades for her work, including the George H. W. Bush Award for excellence in counterterrorism and the Presidential Rank Award, which is the highest award in the federal civil service.

President Trump congratulated Haspel and Pompeo on their promotions this morning:

Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!

— Donald J. Trump (@realDonaldTrump) March 13, 2018

 

Edward Snowden had some comments of his own earlier this morning. First, he tweeted that “the new CIA director was a key part of the torture program and its illegal cover-up. Her name was on the Top Secret order demanding the destruction of tapes to prevent them being seen by Congress. Incredible. “

The new CIA director was a key part of the torture program and its illegal cover-up. Her name was on the Top Secret order demanding the destruction of tapes to prevent them being seen by Congress. Incredible. https://t.co/HjVHCPCbpo https://t.co/VamIGa1A8w

— Edward Snowden (@Snowden) March 13, 2018

He then noted that “The new CIA Director Haspel, who “tortured some folks,” probably can’t travel to the EU to meet other spy chiefs without facing arrest due to an @ECCHRBerlin complaint to Germany’s federal prosecutor.”

Interesting: The new CIA Director Haspel, who “tortured some folks,” probably can’t travel to the EU to meet other spy chiefs without facing arrest due to an @ECCHRBerlin complaint to Germany’s federal prosecutor. Details: https://t.co/7q4euQKtm7

— Edward Snowden (@Snowden) March 13, 2018

He also asked a rhetorical question: “Are these really the values the US should be promoting? The CIA might as well start issuing uniforms decorated with skulls and lightning bolts.” He said this in response to a NYT report according to which “As a clandestine officer at the Central Intelligence Agency in 2002, Gina Haspel oversaw the torture of two terrorism suspects and later took part in an order to destroy videotapes documenting their brutal interrogations”

Are these really the values the US should be promoting? The CIA might as well start issuing uniforms decorated with skulls and lightning bolts. https://t.co/ZIeHWP57l3

— Edward Snowden (@Snowden) March 13, 2018

* * *

Separately, Julian Assange, who has plenty of reason to be nervous following his public spat with Mike Pompeo, tweeted the following: “As head of CIA, the US press (aka “the Mighty Wurlitzer”) fawned over Mike Pompeo. Congratulations, he’s now your new Secretary of State.”

As head of CIA, the US press (aka “the Mighty Wurlitzer”) fawned over Mike Pompeo. Congratulations, he’s now your new Secretary of State.https://t.co/PFfnbmBg4v

— Julian Assange ⌛ (@JulianAssange) March 13, 2018

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It’s becoming increasingly perilous for Russians living in the UK.

Just days after a chemical toxin was used in an attempted murder on former Russian double agent Sergey Skripal, an attack which has since been blamed on Moscow, this morning a close associate of the late oligarch Boris Berezovsky has been found dead in Britain.

Nikolai Glushkov, a former deputy director of Aeroflot, died at the age of 69, Russia’s Business FM radio station said, according to the Telegraph. The lawyer, Andrei Borovkov, did not mention a cause of death.

Glushkov left Russia after a Moscow court sentenced him to a two-year suspended sentence for fraud in 2006. In March last year, he was handed a second eight-year sentence in absentia and a one million Russian Ruble fine for allegedly defrauding Aeroflot of $122 million during his tenure as finance director there in the late 1990s.

Glushkov denied all the charges against him. In 2016, he told Russian media that Aeroflot was attempting to sue him in a civil case in the High Court in London.

* * *

Glushkov was reportedly associated with Berezovsky, who was once one of the most powerful businessmen in Russia and was instrumental in Vladimir Putin’s rise to power in 1999. He later fell out with the Russian president and fled to London in 2000, where he became one of Mr Putin’s most outspoken critics.

The “Godfather” of the Kremlin, as Paul Klebnikov branded him in a book which eventually claimed his life,  Boris Berezovsky was the  personification of oligarchy in its most ugly form. He played the role of grey cardinal near president Yeltsyn in the 1990s, securing super profits for his business empire and trying to manipulate political process in Russia. He even reportedly “approved” the candidacy of Vladimir Putin as Yeltsyn’s successor back in 1999, being sure that he and his people would be able to curb and control the neophyte politician.

However, as Oriental Review notes, the cold shower came soon. Three weeks after the first Putin’s inauguration, the Berezovsky-controlled media launched a powerful campaign to oppose president’s plans to reform the federal system of Russia, depriving Berezovsky and other tycoons of the tools to manupulate regional authorities. Those were the first maneuvers in a political war which lasted for more than 12 years. Berezovsky was firmly and  consistently pressed out of all institutional positions in Russia, a number of legal cases for power abuse, financial fraud and other crimes were opened against him. At the end of 2000 he left Russia for good, settled in London and started his vigorous, costly, but generally futile efforts to oust Putin and recover influence on Kremlin.

By September 2012, when Vladimir Putin was elected for his third term and Berezovsky lost the case against his business rival Roman Abramovich in London’s high court, he surrended. He wrote two repentful private letters to president Putin asking for forgiveness and permission to return to Russia without being put under custody. He certainly did not receive any formal reply from the Russian president, but perhaps by March 2013 he received some kind of other positive signals from Moscow.

According to witnesses, he was full of life and optimism and plans for the future the very day March 23, 2013 when he was found dead in a bathroom of his Ascot’s house, shortly after a European “bail in” of Cypriot banks drained billions in Russian deposits kept with the country’s then insolvent banks.

The official investigation concluded that it was “an act of suicide” failing to provide any supportive evidence. Most likely he was about to leave Britain for good with his fiancé Katerina Sabirova (she had paid e-tickets way to Israel for March 25, 2013), so the MI6 spymasters supervising “project Berezovsky”, closely monitoring him and being aware of his intentions, could not afford  let him go out of their reach.

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Authored by Mike Shedlock via MishTalk,

Let’s investigate belief in Goldilocks vs belief in Bears.

John Rubino at DollarCollapse says A Bull Market For The History Books — Bear Market To Follow Shortly.

Why the current expansion/bull market has so long is open to debate. What’s undeniable, though, is the vast amount of malinvestment that has accumulated. The biggest example might be corporations borrowing hundreds of billions of dollars to buy back their stock at record high prices. See Record Buybacks at Worst Possible Time. If those equities subsequently fall by half in a future bear market, today’s buybacks will end up as an object lesson in corporate hubris.

Goldilocks Jobs Report

Liz Ann Sonders says All Right Now: Goldilocks Jobs Report Eases Inflation Fears.

Key Points

• A very strong jobs growth with benign wage pressures unleashed a strong day for the stock market.

• Other than wage growth deceleration, the details of the report were quite healthy.

• Tax reform can take some of the credit for stronger goods employment relative to services employment.

In the wake of the release of January’s jobs report—which saw a jump in average hourly earnings—I had our fearless cartoonist Charlos Gary create the visual below, with the headline “Goldilocks may be leaving the building.” Notice that the little bond bear has been awakened (as Schwab’s Kathy Jones has been detailing); but the equity bears are still tucked in their beds—albeit with the non-recession bear keeping a cautious eye on the situation.

Courtesy of last week’s February jobs report though, it looks like Goldilocks may have taken a step back into the building. For those not familiar with the analogy, an economy that’s operating “not too hot, but not too cold” is often referred to as a Goldilocks environment. We have been in such an environment as it relates to economic growth and wages/inflation for much of the current economic expansion.

Perfect Payrolls?

Jeffrey Snider writing for Alhambra Investments write about the Return of The Perfect Payrolls.

Over the past two days, Chinese exports exploded, US payrolls bested 300k, and China’s CPI recorded the hottest inflation in 5 years. Globally synchronized growth?

It might be tempting to view this recent positive report cluster in that way, but, again, we’ve seen these before.

The other big problem with the current BLS figures for February 2018 is that +311k sounds impressive but it shouldn’t. It does only because the labor market is just that weak. What I mean by that is any reasonable standard for meaningful growth is so far above what we have become accustomed to. It’s not that the labor data is misleading on its face, it’s that the interpretations of them haven’t been re-calibrated properly for the last decade.

 

Using the averages for the late nineties, the Establishment Survey if it represented solid growth would gain almost 4 million payrolls in 2018. That would be an average of 320k per month. The latest estimate for 311k is actually below average. That means everyone is celebrating as some kind of blowout what would otherwise fall as a weak month under more reasonable analysis. That’s how bad the labor market has been for so many years.

And it’s an outlier, but it’s not the first. The BLS data shows that in June and July 2016, for example, payrolls gained +285k and then +325k, respectively. Taken in isolation, those two “blowout” months seemed to suggest economic acceleration in keeping with the “reflation” sentiment that was then just forming. We know, for that labor market anyway, those two perfect reports were quickly forgotten, mere statistical noise that represented instead more of the same – the good months, even two in a row, are the exception.

 

Average weekly earnings, which are even more noisy month-to-month, rose just 3.2% year-over-year in February after being nearly flat, +0.8%, in January.

Despite the unemployment rate sticking at 4.1% for the fifth straight month, there isn’t the slightest hint that earnings let alone wages are accelerating; nor is there any indication they are about to.

Is it the beginning of the labor market finally stabilizing after three years of slowing? Or is it Harvey and Irma?

Given the inherent lags economy to employment, it is possible that what’s indicated in February is the trailed effects of the artificial hurricane boost.

This is where the noise works against us (like the middle of 2016). There is, right now, simply no way to tell.

Global Synchronization

There’s much more in Snider’s article that bears a closer look.

It’s interesting that he kicked off with a question about global synchronization.

Jim Bianco at Bianco Research just wrote about that. I covered it in Synchronized Global Growth is Ending: Shocks Come Next.

Where is Goldilocks?

Is Goldilocks in the room or out of the room?

Curiously, that’s not even the right question. Even if Goldilocks is is in the room with the inflation and recession bears slumbering, are stock valuations so stretched that it does not matter where she is?

That’s my belief. I suspect we are right about here:​

Stocks are tremendously overvalued.

In Sucker Traps and the Arithmetic of Risk I noted that John Hussman expects equities to decline as much as 67% from here.

That may be a bit high, but it’s a well-researched target. Even flat returns for the next seven years would crucify pension plans.

Goldilocks? No one will be talking about a Goldilocks environment no matter what inflation or jobs do once stock valuations start returning to normal.

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Two weeks after Dick’s Sporting Goods infuriated First Amendment supporters when the sporting goods retailer announced it would end sales of assault rifles, its stock is plunging and conservatives will hardly shed a tear.

In early trading, shares of Dick’s tumbled as much as 7.3% to just above $30.19, its biggest intraday decline since mid-November, slashing in half the 13% gain YTD.

What is odd is that the drop in DKS stock has nothing to do with the halt in assault rifle sales, and everything to do with the general lackluster state of the US consumer, and specifically its second consecutive – and bigger than expected – sales decline.

Adjusted EPS were $1.22 in Q4, missing estimates of $1.24, but it was the big miss (and drop) in sales which hit $2.66 billion – well short of the $2.74 billion consensus – that have sent the stock into a tailspin. Meanwhile, the closely watched same-store sales fell 2%, more than the expected drop of 1.2%.  This was the second consecutive quarterly decline, prompting many shareholders to bail on the stock.

While the sales impact of Dick’s decision to limit gun sales has yet to be felt – some conservative groups have already vowed to boycott the retalier in response – what is surprising is how quickly its business has foundered: as Bloomberg notes, “the future had appeared bright after Sports Authority collapsed in 2016, leaving Dick’s as the last national chain of its kind. But price cutting by competitors and tepid demand for items like basketball shoes have hammered the stock and put pressure on profit margins.”

The company is also facing a threat from Nike, the largest sports brand in the world, which has been pushing more of its customers to its own stores and websites.

And, of course, the ubiquitous Amazon which is promoting its own private-label athletic gear.

Hoping to project confidence, CEO Edward Stack said “stronger product innovation from select key partners and the continued expansion of our private brands” will result in less pressure on profit margins this year. The company also plans to open 19 Dick’s stores this year, with eight of those coming in the current quarter.

However, even with the expansion, profit this year will be $2.80 to $3 a share, as same-store sales will range from flat to a low-single-digit decline.

But the biggest question, of course, is how much will DKS’ sales suffer as a result of its hard-line stance on guns, which will certainly have an impact on demand after alienating a substantial portion of its customers. The effect on its business from this decision remains to be seen, so tune in in 3 months when the company announced earnings for the quarter ended April.

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Via GoldBroker.com,

The leadership of the Hungarian National Bank (MNB) has decided to bring back home Hungary’s gold reserves.

Up to now, 100,000 ounces (3 tons) of the precious metal were stored in London, which is in total worth some 33 billion forint ($130 million) at current gold prices.

The decision seems to be in line with international trends as storage of gold reserves out of the country is now considered risky by more and more central banks. Austrian, German, and Dutch central banks are among those who have recently decided to repatriate their gold reserves. According to MNB, this may also further strengthen market confidence towards Hungary.

MNB has been holding gold reserves since its foundation in 1924. Towards the end of World War II, it had been transported to Austria on the famous Gold Train, captured by the Americans, then repatriated in full in 1946.

The highest amount Hungary has ever had was around 65-70 tons at the beginning of the 70s. At the end of the 1980s, however, a decision was made to decrease gold reserves to the lowest possible level and rather to invest in sovereign debts, which as a consequence of the collapse of the Bretton Woods system are considered safer, more liquid and potentially of higher yields. At the beginning of 2010 this tendency changed again and central banks started to accumulate gold as a potential response to the financial crisis.

The Largest gold reserves in the world belong to the US and Germany, while in comparison to other Central-European countries Hungary has one of the tiniest amounts of the precious metal; for instance, Romania and Poland both have 103 tons, and Serbia has 13 tons. Since 1992, Hungary’s activity has remained steady, as the MNB hasn’t bought or sold any of its gold reserves.

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