The Bulls Are Running Worldwide

The bulls are running 
The chase by Frances Horodelski:

The bulls are running
The chase by Frances Horodelski:

“Whatever you paid to watch this game, it wasn't enough.” – Cathal Kelly (In case you didn’t know, Jays won the ALDS and move on to the ALCS).

Who’s winning today? Stocks are, as enthusiasm for central banks takes another step into the spotlight. The Euro is down as investors anticipate ECB action (or at least continued action) as disinflationary/deflationary pressures continue to cause heartburn. Two dovish comments over the past couple of days (from Brainard and Tarullo) for holding an “easing” rather than “tightening” bias have added to the enthusiasm as well as a San Francisco Fed academic paper that argues that the Fed is actually running a “tight” policy and some concluding that the implications of that is more QE might be needed. And for stocks, if you look at the relationship between the Fed’s balance sheet and the stock market, the fit is quite tight with the balance sheet and stocks rising hand-in-hand. The balance sheet peaked in January of 2015 and is down about 0.7% from that level although still huge at $4.49 trillion

If you just want to hang our hat on the Fed, good on you. But the bearish view (thank you Zacks) points these items of concern: Chinese weak inflation, U.S. retail sales, Wal-Mart’s dismal outlook, Atlanta Fed’s GDPNow estimating just 0.9% for Q3 growth and the Beige Book that highlighted weakness in the factory sector and decelerating growth in more regions than in the past. And others call this whole rally a head-fake! We’ll talk to bulls and bears today to balance the discussion.

The bulls point to earnings (outside of Wal-Mart) which aren’t bad, the technical picture, the sentiment, the cash, the M&A, the easiness, the lack of alternatives, dividend yields above the 10-year, the benefit of lower energy prices, the price/earnings multiple below the 15 year average and the list goes on.
As for Wal-Mart, the company is being squeezed by online and by new entrants such as Aldi and Lidl that are Germany global supermarket chains with better prices and fresher products that are entering the U.S. market and elsewhere. There is also the demographic angle. There are millennials than boomers with the former preferring an experience and shopping somewhere other than their parents’ WalMart. The average target on the street is now in the high $50s. A company with almost half a trillion in revenue doesn’t turn easily – time and the right strategy will be needed.

News-wise, there is an acquisition by Linamar, Goldman Sachs earnings, Alamos buying Carlisle Goldfields for stock, we’re awaiting Canadian housing data for September, and inflation and jobless claims from the U.S, Brookfield seems to be having some difficulty with its Australian ports acquisition, and Concordia provides another update on its AMCo acquisition and financing. I see an upgrade on Canadian Tire from Credit Suisse to hold from sell ($116 target), Mead Johnson also upgraded at BMO to buy with a new $89 target. Goldman Sachs missed the bottom line estimate ($2.64 versus $3 estimate) and AB Inbev is doing a $55 billion debt deal to pay for SABMiller. China’s lending and money supply numbers came in higher than expected.
Worldwide markets are up (Chinese markets also on a roll). The bulls are running.

It's a trader's day with U.S. jobs on tap

It's a trader's day with U.S. jobs on tap
The chase by Frances Horodelski:

Just so you know, the first Friday of every month is “World Smile Day” – so do so!

A trader’s day. First, at 8:30 am ET we get the U.S. jobs numbers with expectations around 200,000 jobs and an unemployment rate of 5.1%. We’ll also be hearing from Stanley Fischer, Vice-Chair of the Fed will be speaking at 1:30 pm ET. His topic is “Macroprudential Regulation and Supervision” and he is giving the speech at the “Macroprudential Monetary Policy” conference. If you don’t know what macroprudential means here’s the definition: “The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or "systemic risk").” Traders will be not be focusing on that term but on any further indication that a rate rise is imminent.

The bullish items are lining up – it seems so easy. Market internals are oversold (although maybe not deeply so), the pessimism continues to rise whether it is the AAII survey or the Investors Intelligence one (the latter is showing bullish sentiment at 24.7% - the lowest since October 2008 – and historically it doesn’t get much lower than this), ratio of new highs to new lows is in oversold territory, we’re in one of the more seasonally bullish times of the year (although October can be a little rocky for sure). RBC did some historical work looking at the quarterly performance of the S&P 500 and of treasury bonds following a quarter of significant outperformance of the latter vs the former. In the 18 instances in 45 years when there has been such a wide outperformance (950 basis points), equities outperformed 67% of the time with an average outperformance of 7.7%. When stocks did underperform over that historical time frame, the period was “characterized by a sharp slowing in payroll growth” – an event not likely right at the moment.

The news this morning, beyond the jobs, will focus on the Canadian banks following yesterday’s capital raise of $300 million by National Bank on the restructuring announcement and potential risk to its $165 million investment in Maple Bank, a German asset that is under investigation. National Bank owns just under 15% of the bank. The company’s CET1 ratio (common equity tier 1) will be 9.8% at the end of fiscal 2015, including the restructuring charges and the capital raise although a write-down of its Maple assets could reduce CET1 by 13 basis points. For comparisons and based on a Scotiabank report, the CET1 ratios for the other banks, pro-forma various activities, are BMO (9.7%), BNS (10.3%), CIBC (10.78%), Royal Bank (9.41%), TD (9.96%).

Interesting items crossing my desk include a report from Scotiabank outlining its Q3 strategy, asset allocation and model portfolio. In the latter, Scotia has increased its exposure in select groups including banks moving to overweight with BMO replacing TD, increasing rails, mining (adding TRQ), energy (adding MEG). Staples, discretionary and cash move lower and according to strategist Vincent Delisle “we plan to revisit our gold exposure after Fed lift-off. Following these moves, our stance in Energy remains underweight and we are now market weight base metals.” Meanwhile, CIBC is adjusting its outlook in the metals space and is upgrading Teck Resources on the basis of relative valuation – ranking of names in the same are First Quantum, Teck, Cameco and Capstone.

Equity markets are firm as is the Canadian dollar, bonds are small to the downside, oil is up, gold down (couldn’t make that lift through the resistance line at $1,150), Japanese stocks are back in positive territory for the year. Weathermen are watching Hurricane Joaquin as it gathers power but the current thinking is it will miss the U.S. TPP trade talks continue. And the day begins (and a weekend ahead).

Smile.