Topley’s Top Ten – August 14th, 2019

Author

Matt Topley
August 14, 2019

1.Bottom-Line Earnings Beat Rates Down This Season

Mon, Aug 12, 2019

The unofficial Q2 earnings reporting period comes to an end on Thursday when Wal Mart (WMT) releases its numbers.  More than 2,000 companies have reported earnings since the season began in early July, and 57.2% of them have beaten consensus analyst EPS estimates.  As shown in the chart below, this quarter’s earnings beat rate is down significantly from recent quarters where 60%+ was pretty much a guarantee.  If the current reading holds through Thursday, it will be the lowest beat rate since the Q1 2014 reporting period (April and May 2014).  Below is a look at earnings beat rates by sector this season.  Technology has the strongest beat rate at 66.1%, followed by Financials at 63.3%.  Utilities and Energy have the weakest beat rates at 33.3% and 38.8%, respectively.  Below we show this season’s earnings beat rates by sector versus the sector’s historical earnings beat rate going back to 2001.  All but two sectors have beat rates this season that are below their historical average.  The Financial and Real Estate sectors are the only two that have seen stronger-than-normal beat rates.  Start a two-week free trial to Bespoke Institutional to access our Trend Analyzer, Chart Scanner, Earnings Explorer and much more.

2.Bonds Meet the Four Criteria for Defining a Bubble

The good thing,though, is that there’s presently no catalyst to burst it. Also, trade wars andArgentina. 

Foreverblowing bubbles.

There has been atendency since the financial crisis to label any market that is rallyingor deemed overvalued to be in a “bubble.” The word has become overused anddebased. But if we treat it rigorously, the bubble concept is still vital innavigating financial markets. And the rigorous treatment reveals that bondsreally are in a bubble.

Longview EconomicsChief Market Strategist Chris Watling published a fascinating researchnote last week applying the framework introduced by Charles Kindleberger in hisbook “Manias, Panics, and Crashes.” Kindleberger was an economist at theMassachusetts Institute of Technology for many years and his book has longbeen taken as the definitive exposition on how markets veer out of control.Watling reminds us that Kindleberger needed to satisfy four conditions beforehe diagnosed a bubble:

i)  cheap money underpins and creates the bubble;

ii) debt is taken on during the bubble build-up, which helps fuel much of the speculative price increases (e.g. buying on margin);

iii) once a bubble is formed, the asset price has a notably expensive valuation; &

iv) there’s always a convincing narrative to ‘explain away’ the high price. Reflecting that, there’s a wide acceptance in certain quarters that the price is rational (and ‘this time it’s different’).

Most of us will seeinstantly that all the conditions are satisfied. Let us take them on inturn: 

Cheap money:D’Oh! There has been a lot of cheap money around, thanks mainly, but notexclusively, to the central banks. This has a lot to do with the popularity ofbonds. This condition is satisfied.Debtbuild-up:This is maybe the hardest one to substantiate, surprisingly. Are people reallybuying negative-yielding bonds on margin? According to Watling, “risk parityfunds use debt to buy bonds on margin, while CTA momentum investors will alsobe buying on margin (i.e. with implicit debt). More interestingly, though, thebiggest buyers of sovereign debt in the past decade have been the major centralbanks. Their purchases have been made with newly created money. While hotlycontested conceptually (especially by proponents of MMT), ‘bank reserves’ (i.e.newly created money) is a liability, and, in that respect, by extension a formof debt (especially the ‘excess’ reserves component).”

Further, bonds arecentral to all other asset classes as they provide the notional “risk-freerate” used for calculating valuations. Huge amounts of leverage have pusheddown yields in other asset classes and thus indirectly pushed down on bondyields.  Valuation:Yield is itself a valuation metric, so it is evident that bonds are veryexpensive. Are they really so bizarrely expensive as to justify the word “bubble?” Watlingoffers a couple of very long-term comparisons. These are government bond yieldsfrom Switzerland and Sweden dating back to 1870:

So, there is noprecedent for bonds this expensive in two of the strongest and stablestEuropean economies. Now, here is the rate on U.K. “consols,” or perpetual bondsthat can be redeemed whenever the government wants, back to 1700:

Meanwhile, the latest action inthe U.S. Treasury market has left an all-time low in the 30-year bond yieldwithin sight.

3.Small Cap Breaks 200day Moving Average.

S&P, Nasdaq, and Dow break 50days but well above 200day …Small Cap Lags.

4.A Blip of Increased Inflation CPI

The Daily Shot WSJ

Let’sbegin with the July CPI report, which was stronger than the market hadexpected. The chart below shows the headline and the core CPI.

Andhere are the 3-month changes in the core CPI.

• The 25% tariffs on some $200billion of imports from China (increased earlier this year) are making theirway to the consumer. For example, the CPI on furniture and bedding hit thehighest level in years.

5.Subprime Lending Post 2008 Crisis Shifted to Auto Loans.

Subprime Auto Loans Blow Up, Delinquencies at 2009 Level, Biggest 12-Month Surge Since 2010

by Wolf Richter • Aug 13,2019 • 20 Comments • Email to a friend

But these are the good times. Automakers are not amused.

The auto industry depends on subprime-rated customers that make upover 21% of total loan originations. Without these customers, the wheels wouldcome off the industry. And tightening up lending standards to reduce riskswould cause serious damage to the undercarriage. Subprime lending is veryprofitable – until the loans blow up – because interest rates can be high. Butthose subprime auto loans are blowing up at rates not seen since the worst daysof the Financial Crisis – and these are the good times!

Serious auto-loan delinquencies – 90 days or more past due – inthe second quarter, 2019, jumped 47 basis points year-over-year to 4.64% of alloutstanding auto loans and leases, according to New York Fed data released today. This isabout the same delinquency rate as in Q3 2009, just months after GM and Chryslerhad filed for bankruptcy. The 47-basis-point jump in the delinquency rate wasthe largest year-over-year jump since Q1 2010:

But this time there is no economic crisis. The unemployment rateand unemployment claims are hovering near multi-decade lows, and employers aregriping about how hard it is to hire qualified workers without having to raisewages. So, unlike during the Financial Crisis, this surge in the delinquencyrate has not been caused by millions of people having lost their jobs. It’s notthe economy that did it. It’s the industry.

What the lenders are sitting on.

Total outstanding balances of auto loans and leases in Q2 jumpedby 4.8%, or by $59 billion, from a year ago to $1.3 trillion, according to theNew York Fed’s data (which is slightly higher and more inclusive than theamount reported by the Federal Reserve Board of Governors in its consumer credit data). Over the past decade,since Q2 2009, total auto loans and leases outstanding have surged by 76%:

Of those $1.3 trillion in auto loans, 4.64%, or a record of $60.2billion, are 90+ days delinquent, which gives the chart below quite an amazingtrajectory. But this is not an employment crisis, when millions of people losetheir jobs and cannot make the payments on their auto loans. What will thischart look like when the economy turns, and unemployment surges again, andpeople cannot make their car payments? No one has an appetite for makingprojections here.

6. HomeEx-Fed boss Greenspan says ‘there is no barrier’ to Treasury yields falling below zero

‘Thereis no barrier for U.S. Treasury yields going below zero. Zero has no meaning,beside being a certain level.’AlanGreenspan

Thereis some $15 trillion in government debt that now yields less than zero, andformer Federal Reserve Chairman Alan Greenspan believes there’s no reason whyU.S. government bond yields couldn’t join much of the developed world in thesubzero world.

Greenspan, during aphone interview with Bloomberg News on Tuesday, said “zero” has no realmeaning for the U.S. bond market and that a slide below that psychologicallevel, already traversed by many others countries, wouldn’t be inconceivable forU.S. paper.

The93-year-old economist’s comments come as more Wall Street participantscontemplate the very real possibility of negative Treasury rates.

Deutsche BankSecurities’ Chief Economist Torsten Sløk on Tuesday noted that some 42% ofnegative-yielding debt is from Japan, known as JGBsTMBMKJP-10Y, +5.69% :

All maturities ofGerman government debt are yielding negative, headlined by near-record lows for10-year German benchmark bondsTMBMKDE-10Y, +7.05% ,known as bunds, which yield minus 0.605% (see chart attached):

7.Blockchain Venture Update.

Blockchain InvestmentSoars In H1 2019: A Look At Trends

Investors Continue To View Blockchain AHigh Return Investment

In the first half of 2019, total capitalinvestment into blockchain companies has been the opposite of what we saw inthe previous year, which saw a dramatic rise in the amount of capital investment. The previous year saw arecord-breaking $15.2 billion investment in TGEs (token generation events) and$5.1 billion in conventional equity funding. In contrast, approx. $2 billion inTGE capital were raised in the first half of this year. The upward trend islosing steam in the first half of 2019, after four years of positive growth.

The research still reports a positive,upward trend in terms of venture capital (VC) injected into blockchaincompanies. Conventional equity rounds have accumulated $1.2 billion in thefirst 6 months of 2019, as compared to $1.3 billion for all of 2017.

How Did Blockchain Companies Fare In DealActivity?

Throughout the research, 2018 continued toremain the benchmark for blockchain companies. The height setduring the blockchain boom is hard to replicate as the effects of the dramaticfall in value still affect the industry.

In terms of deals, the grand total ofinvestment rounds in the blockchain industry in the first half of 2019 was 268.

For comparison, blockchain companiesattracted 910 deals in 2018 and 478 deals in 2017. At the same pace, 2019 mightjust oust 2017 in terms of blockchain deal activity.

Surprisingly enough, if you add privateequity into the equation, the total number of conventional funding roundsalmost equal the growth numbers in 2018.

A breakdown of all the blockchaininvestment funds also reveals that TGEs were more successful in raising moneythan Venture Capital rounds – with the former amassing 26% more on average.

https://www.valuewalk.com/2019/08/active-blockchain-companies-analysis-h1-2019/

Author: Jacob WolinskyJacob Wolinsky isthe founder of ValueWalk.com, a popular value investing and hedge fund focusedinvestment website. Prior to ValueWalk, Jacob was VP of Business Development atSumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-capfocused private equity firm, followed by a stint at a smid cap focused researchshop. Jacob lives with his wife and three kids in Passaic NJ. – Email:jacob(at)valuewalk.com – Twitter username: JacobWolinsky – Full Disclosure: Ido not purchase any equities to avoid even the appearance of a conflict ofinterest and because at times I may receive grey areas of insider information.I have a few existing holdings from years ago, but I have sold off most of theequities and now only purchase mutual funds and some ETFs. I also own 2.5 gramsof Gold

8.8 of the Top 10 Best-Performing ETFs are China Funds.

In fact, eightof the top 10 best-performing EM ETFs are China funds. That includes the Global X MSCI China Consumer StaplesETF (CHIS), up 37.7%; the CSOP FTSE China A50 ETF (AFTY), up 32.9%; and the KraneShares CICC China Leaders 100 IndexETF (KFYP), up 29.8% (see Figure 2).

The fact thatChina ETFs are outperforming to such a strong degree in the face of suchnegative news flow is pretty impressive.

Analysts pointto relatively cheap valuations following last year’s drop in China stocks andpotential government buying as factors that could be propping up China ETFs in2019.

9.Weekly mortgage refinances spike 37% in one week as rates fall further

PUBLISHED AN HOUR AGOUPDATED 18 MIN AGO

KEY POINTS

  • -Mortgage application volume jumped 21.7% last week comparedwith the previous week, according to the Mortgage Bankers Association. Volumezoomed 81% from a year ago.

  • -The average contract interest rate for 30-year fixed-ratemortgages with conforming loan balances decreased to its lowest level sinceNovember 2016, 3.93%, from 4.01%

  • -That drove a stunning 37% jump in refinance volume for theweek, the highest level since July 2016. Refinance applications were nearlythree times higher than a ago.

A real estate agent and a potential home buyer in Coral Gables,Fla.

Another sharp drop inmortgage rates sent even more homeowners to their lenders, hoping to save moneyon their monthly payments.

Mortgage applicationvolume jumped 21.7% last week compared with the previous week, according to theMortgage Bankers Association’s seasonally adjusted index. Volume zoomed 81%from a year ago.

The surge was a directresponse to another drop in mortgage rates. The average contract interest ratefor 30-year fixed-rate mortgages with conforming loan balances ($484,350 orless) decreased to its lowest level since November 2016, 3.93%, from 4.01%,with points decreasing to 0.35 from 0.37 (including the origination fee) forloans with a 20% down payment. That rate was 88 basis points higher a year ago.

That drove a stunning 37%jump in refinance volume for the week, the highest level since July 2016.Refinance applications were nearly 196% higher than a year ago.

“The 2019 refinance wavecontinued, as homeowners last week responded to extraordinarily low mortgagerates. Fears of an escalating trade war, combined with economic andgeopolitical concerns, once again pulled U.S. Treasury rates lower,” said JoelKan, MBA’s associate vice president of economic and industry forecasting.

Mortgage rates havefallen 15 basis points in just the last two weeks and are down 80 basis pointsthis year, prompting borrowers to take advantage and lower their monthlypayments. For most, refinancing only makes financial sense if the rate can belowered at least 75 basis points. Interest rates were lower in 2012 and part of2013, and refinance volume was much stronger then. The majority of those whonow would benefit from a refinance are more recent homebuyers.

Lower mortgage rates didnot help juice the home purchase market quite as much. Mortgage applications tobuy a home rose 2% for the week and were 12% higher than a year ago. Buyerstoday are still facing a very pricey market, and while the drop in rates helpsaffordability some, it’s not quite enough in some markets. Prices are alsorising most at the lower end of the market, where demand is strongest.

Mortgage rates haveplateaued so far this week, despite continued turbulence in internationalmarkets.

Here’swhy hiring managers say they often value emotional intelligence more highlythan IQ.

According tothe World Economic Forum’s Future ofJobs Report, emotional intelligence will be one of the top 10 jobskills in 2020.

The awarenessthat emotional intelligence is an important job skill, in some cases evensurpassing technical ability, has been growing in recent years. In a 2011 Career Builder Survey ofmore than 2,600 hiring managers and human resource professionals, 71% statedthey valued emotional intelligence in an employee over IQ; 75% said they weremore likely to promote a highly emotionally intelligent worker; and 59% claimedthey’d pass up a candidate with a high IQ but low emotional intelligence.

The question,then, is why companies are putting such a high premium on emotionalintelligence. Here are seven of the top reasons why highly emotionallyintelligent candidates are so valuable.

Dealing withworkplace pressures and functioning well under stress demands an ability tomanage our emotions. People with higher levels of emotional intelligence aremore aware of their internal thermometer and therefore better able to manage their stress levels.They tend to have better-developed coping mechanisms and healthy supportsystems that keep working effectively even in tough situations. The increasingrate of change in the workplace is likely to increase work-related stress andboost the value of those who can manage it.

People with highly developed emotional intelligence are lessdefensive and more open to feedback, especially when it involves areas ofimprovement.

As teamworkbecomes increasingly important in the workplace, people who are able tounderstand and get along with others will become ever more sought after. Highlyemotionally intelligent people have well-developed people skills that let thembuild relationships with a diverse range of people across many cultures and backgrounds.That’s an asset in an increasingly globalized workplace.

Everyonewants to be heard and understood. The ability to listen well and respond toothers is crucial for developing strong working relationships. Many of us,though, aren’t as good as we could be atreally listening to what others are saying. Because of their ability tounderstand others, highly emotionally intelligent people are in a betterposition to put their own emotions and desires aside and take others intoaccount. Their ability to pick up on people’s emotions, through tone of voiceand body language, come in handy in team settings.

Open, timely,and honest feedback is essential to job performance–especially at a timewhen annual performance reviews are indecline. People with highly developed emotional intelligence areless defensive and more open to feedback, especially when it involves areas ofimprovement. Their high level of self-regard lets them look positively at areaswhere they can do better, rather than taking feedback personally.

Highly emotionally intelligent people are in a better position toput their own emotions and desires aside and take others’ into account.

Collaborationdoesn’t just present logistical issues–it also comes down to responding to teammates’feelings. People with high emotional intelligence are able to use theirsensitivity to where others are coming from to build trust and cohesiveness.This allows teams to focus on the task at hand rather than become embroiled ininternal bickering and politics. Their sensitivity to the needs of others actsas a lubricant that helps team members work together.

Highlyemotionally intelligent people don’t get easily flustered when things don’t goaccording to plan. And their knack for getting along with others makes it morelikely that others will take note and try to emulate them. That’s why highemotional intelligence is a key to influencing people in an organizationregardless of official title. An ability to rise above daily irritations earnspeople with high emotional intelligence the respect from those above them aswell as from their colleagues.

Because oftheir ability to see things clearly from another’s point of view, highlyemotionally intelligent people are able to make better judgements about howtheir decisions will impact others. Not only does this result in betterdecision making overall, but it also helps manage damage control when certaindecisions lead to negative consequences. Being able to judge the outcomes oftheir choices lets highly emotionally intelligent people behave moreproactively.

People whoshow an enhanced ability to adapt to change, manage their emotions, and workwell with a diverse range of people are already valuable in most workplaces.But with the rates of change and pressures in the workplace rising, they’llbecome even more sought after than ever.

ABOUT THEAUTHOR

Harvey Deutschendorf is an emotional intelligence expert, authorand speaker. To take the EI Quiz go to theotherkindofsmart.com

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