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Daily Intelligence Briefing – January 04, 2017

Featured Topic: Labor & Education

  • Education – NY Governor Proposes Free Tuition at New York State Colleges for Eligible Students
  • Education – Trump election spurs American interest in Canadian colleges
  • Labor – U.S. Faces Doctor Shortage Despite Specialist Growth
  • Labor – AI to replace white collar workers in Japan


Meawhile —  Given the increasing global and political risks, are the options markets appropriately pricing in uncertainty?

Tail-risk as measure by out-of-the-money options is in sync with the S&P 500… i.e. perceived tail-end risk is high. 


Also, mortgage rates surge… 


Other Highlights:

  • Markets: Bonds – Biggest Economies Face $7.7 Trillion Bond Tab as Bull Run Fades; Equities – Equity bulls enter 2017 ignoring expensive valuations; FX – For Dollar Traders, the Most Important Signal Comes Roaring Back
  • Economics and Trade: U.S. – That Bubbling Sound Coming From U.S. Factories May Be Inflation; China – Cities offer a glimpse of China’s economic future; EMs – Emerging markets portfolios post lowest inflows since 2008
  • Politics and Policy: Mexico Border Wall – Trump team seeks agency records on border barriers, surveillance; N. Korea – North Korea cannot ‘tip’ missile with nuclear warhead: U.S. State Department; Russia Sanctions – U.S. Lawmakers preparing Russia sanctions bill
  • Real Estate: U.S. – US construction spending hits highest level in 10 years; U.S. – With Lots in Short Supply, U.S. Builders Revive Abandoned Projects; U.S. – Zillow: US housing value hit new high in 2016
  • Services: Movies – North American Box Office Hits Record $11.4 Billion; Credit Cards – US credit card chargeoffs lowest since at least 1991
  • Technology: Fintech – Canadian fintechs shine as investments near record; Chips – Intel Finds Moore’s Law’s Next Step at 10 Nanometers; Cloud – Survey: 80% of companies derive revenue from the cloud
  • Transportation:  EVs – Ford to charge electric cars wirelessly
  • Commodities: NatGas – US natural gas market feels the heat from mild January outlook; Oil – Opec’s long-term aim is to run down excess stocks; Oil – Oil business seen in strong position as Trump tackles tax reform; Metals – China Infrastructure Spending Won’t Prop Up Metals as Housing Slows; Wine – Texas winegrowers fear new herbicides will wipe out industry
  • Biotech: Genetics – Gene therapy is ready to become hereditary; H7N9 – China confirms human bird flu case in Guizhou province; Pharma – New drug approvals fall to six-year low in 2016; ACA – U.S. Republican senator introduces Obamacare repeal resolution
  • Endnote:  Bitcoin Surging – Gold & Bitcoin Correlation Breaking Down… Bitcoin a New “Safe Haven”?

MRP Reports:

Current Themes: 

  • Long Aerospace and Defense
  • Long Homebuilders
  • Long Gold
  • Long Value over Growth
  • Long U.S. Energy
  • Long Oil Services and Equipment
  • Long CAPEX
  • Long Steel
  • Long Emerging Markets 
  • Long Treasury Inflation Protected Securities (TIPS) & Short Long-Dates Treasuries
  • Long Coffee
  • Long Financials
  • Long Regional Banks

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. Every day, the DIBs also include links to MRP’s MARKET VIEWPOINT, THEME TRACKER and MACRO MONITOR. On many days, the DIBS will also include NEW DATA & THEME DEVELOPMENTS for active themes.

   MAJOR DATA POINTS Top   

United States: MBA Mortgage Rate, 30/DEC: 4.39% from prior 4.45%

   MARKETS Top   

Bonds – Biggest Economies Face $7.7 Trillion Bond Tab as Bull Run Fades

Governments of the world’s leading economies have about $7.7 trillion of debt maturing in 2017, with most facing higher borrowing costs as a three-decade bull market for bonds shows signs of running out of steam.  The amount of sovereign bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, Russia, India and China will climb more than 8 percent from approximately $7 trillion in 2016… Money managers including Pioneer Investment Management Ltd. and Old Mutual Global Investors Ltd. said they are either b earish or less positive on government bonds as they expect U.S.-led reflation and fiscal expansion to gradually replace monetary policy as a growth driver and push up yields further…

While signs of economic growth and rising inflation expectations have driven up yields on longer-dated bonds, they are still close to record lows. Even as investors demand a higher premium to hold these securities, that may not deter governments from issuing more long-maturity debt this year…

In developed economies, maturing debt will increase in the U.S., Italy, and Germany and fall in Japan, France and the U.K. The numbers do not take into account fresh budgetary needs. B

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Equities – Equity bulls enter 2017 ignoring expensive valuations

Republican control of the executive and legislative branches of the Federal government will mean tax cuts, infrastructure spending and higher interest rates, in the snap market assessment of a jumble of campaign promises and nominations set to produce the richest cabinet in history… The shift sparked one of the biggest post-election rallies since at least 1952, according to the Stock Trader’s Almanac. The S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Russell 2000 of small capitalisation stocks have all hit fresh highs since November 8…

 On… an EV/ebitda basis, “the US stock market has only been this expensive during three or four months of the tech bubble”

Meanwhile, emerging markets have slumped. A strong dollar makes it harder for developing countries and companies to service hard currency debts, and has tended to be associated with weaker prices for commodity exports.  FT

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FX – For Dollar Traders, the Most Important Signal Comes Roaring Back

If you’re a dollar bull and you’re getting a little nervous about the sustainability of the greenback’s rip-roaring rally, take comfort in knowing that a fundamental gauge of the currency’s worth is on your side… The barometer is the real-yield differential. Sounds esoteric, but at the heart of it is the interest earned on dollar-denominated fixed-rate assets, compared to those issued in other currencies, after adjusting for inflation expectations. U.S. real yields have more than doubled against Japan’s since the November preside ntial election…

“Yield differentials are always a huge driver of FX,” said Brad Bechtel, a currency strategist at Jefferies Group LLC in New York. “U.S. real yields are elevated and likely to continue rising — this will continue to underpin dollar strength and is worth keeping an eye on.” B

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   ECONOMICS AND TRADE Top   

U.S. – That Bubbling Sound Coming From U.S. Factories May Be Inflation

Champagne wasn’t the only thing bubbling at the start of 2017 for U.S. manufacturers: So was inflation, a potential warning sign in an otherwise broadly positive report on American factories.  The Institute for Supply Management said Tuesday that its index of manufacturing increased for a fourth straight month, reaching a two-year high of 54.7 as new orders surged by the most since the summer of 2009 on stronger overseas and domestic demand. Percolating sales were evident in the group’s gauge of prices paid for raw materials, which advanced to 65.5, the highest level since June 2011…

Even with the increase in the ISM price index, it’s far below levels from times associated with rapid inflation. The gauge averaged a 73.7 reading in 1980, when the consumer-price index averaged a 13.6 percent rise… The ISM price index reached a post-recession high of 85.5 in 2011, coinciding with a post-recession high in crude oil and faster gains in the Fed’s preferred index…

Price pressures are slowly starting to build globally. In China, the world’s second-largest economy behind the U.S., an official manufacturing purchasing managers index remains near a post-2012 high. Economists are taking note of signs that the U.S. economy could find itself at risk of overheating, requiring more ambitious interest-rate increases this year from the Fed. B

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China – Cities offer a glimpse of China’s economic future

When China’s stock market and currency both plunged last January, many global investors assumed the end was near. After years of debt-fuelled stimulus used to fund investment in housing, infrastructure and excess manufacturing capacity, many believed the bubble was finally bursting.  It didn’t. China’s economy is expected to have met the government’s target of at least 6.5 per cent growth of gross domestic product for 2016. The stock market has stabilised and is up 19 per cent since its low point in late January 2016. Rising commodity prices have pulled factory-gate prices back into positive territory after more than four years of deflation. The currency has continued its decline, but in an orderly manner…

Yet few think that China’s fundamental economic challenges have been addressed. The relatively strong growth performance came at the cost of adding further leverage to the economy and falling back on smokestack industries to drive growth…

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements…

The dangerous nexus between shadow lenders and large, systemically important commercial banks… Trusts raise funds for their loans by selling high-yielding wealth management products to investors. For the riskiest trust products, banks typically serve only as sales agents but bear no legal responsibility for product payouts.   Yet investors often ignore these technicalities, assuming that state-owned banks and by implication, the government stand behind the products they distribute. Adding to the perception that defaults are impossible is a history of bailouts of WMPs by banks, even where no legal responsibility exists…

“They just look at the yield,” he says, “and they don’t pay attention to the risk. And sometimes the bank’s salespeople do not explain the risks properly.” FT

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EMs – Emerging markets portfolios post lowest inflows since 2008

Emerging market portfolios recorded their lowest total inflows since 2008 as investors responded to global shocks last year by buying fewer developing country assets… Nonresident investors cut inflows to emerging market assets to $28 billion in 2016, with debt portfolios recording substantial outflows… In December, portfolio outflows totaled $3.4 billion, predominately in debt, to give 2016 the weakest inflows for emerging markets since the global financial crisis. The $28 billion of inflows for the year was also 90 percent below the average from 2010 to 2014 R
 

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