Topley’s Top Ten – August 22nd, 2019

Author

Matt Topley
August 22, 2019

1.Home Depot on Earnings Call Estimated the Drop in Lumber Prices Cost Them $330m Year over Year.

WOOD-Lumber ETF -30% Off Highs.

2.Consumer Spending-Unleaded Gas Drops -23%…

Retail Gas Drop Since May.

Retailer ETF—Small Pullback After Making New Highs ..Look for new Highs.

3.New Oil Production in U.S. Will Be 8X Larger Than The Next Largest Source of Growth Canada.

U.S. To“Drown The World” In Oil

Nick Cunningham

TheU.S. could “drown the world in oil” over the next decade, which, according toGlobal Witness, would “spell disaster” for the world’s attempts to addressclimate change.

TheU.S. is set to account for 61 percent of all new oil and gas production over thenext decade. A recent report from this organization says that to avoid theworst effects of climate change, “we can’t afford to drill up any oil and gasfrom new fields anywhere in the world.” This, of course, would quickly cause aglobal deficit, as the world continues to consume around 100 million barrelsper day (bpd) of oil.

GlobalWitness notes that the industry is not slowing down in the United States,notwithstanding recent spending cuts by independent and financially-strappedoil and gas firms. If anything, the consolidationin the Permian and other shale basins, increasingly led by the oil majors,ensures that drilling will continue at a steady pace for years to come.

Itisn’t as if the rest of the world is slowing down either. The global oilindustry is set to greenlight $123 billion worth of new offshore oil projectsthis year, nearly double the $69 billion that moved forward last year,according to Rystad Energy. In fact, while shale drilling has slowed a bitover the past year amid investor skepticism and poor financial returns,offshore projects have begun to pick up pace.

But that trendmight turn out to be just a blip. The U.S. is still expected to account of thebulk of new drilling and the vast majority of new production, with much of thatcoming from shale. Already, the U.S. is the world’s largest producer of bothoil and natural gas. And the pace has accelerated in recent years. In 2018,U.S. oil and gas production increased by16 and 12 percent, respectively. According to the EIA, the U.S. surpassedRussia in terms of gas production in 2011, claiming the top spot, and itsurpassed Saudi Arabia in oil production last year.

4.Consumer Confidence High and Claims Low.

Liz Ann Sonders Schwab.

5.In the Last Decade, the U.S. Went from 40% of Investment Grade Bond Market to 50%.  The Highest Rates and Most Investment Grade Offering Driving Global Manager to More U.S. Bonds.

With negative interest ratesin Europe and Japan, European real money managers and Japanese banks are forcedto hunt yield to deliver steady returns. For regulatory reasons, they aremainly allowed to buy investment grade sovereign bonds and investment gradecorporate bonds. A decade ago the US market made up 40% of the IG universe,today it is 50%, see chart below. In other words, for global real moneymanagers, there is no other alternative than to buy significant amounts of USTreasuries and US corporate IG bonds.

With a slowdown underway inglobal growth, not only will interest rates in Europe and Japan stay negativefor longer, we are also likely to also see more downgrades from IG to HY inEurope and Asia. This will further increase the share of the US IG bond market.Add another US fiscal expansion with lower payroll taxes and the amount of USTreasuries outstanding will increase further.

In sum, negative interestrates in Europe and Japan for several years forces foreigners to buy more USIG, which pushes US Treasury yields lower, tightens US corporate IG spreads,and pushes the dollar higher. Thisvirtuous cycle for US assets continues until the day when the US enters arecession. Then corporate default rates will move up and earnings growth willslow down.

For more see also my latestclient presentation here.

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Let us know if you would liketo add a colleague to this distribution list.

Torsten Sløk, Ph.D.

Chief Economist

Managing Director

Deutsche Bank Securities

6.Here’s four reasons why investors might snap up negative-yielding bonds

 1U.S. investors havestruggled to get their heads around negative yielding debt

By

SUNNYOH

JOYWILTERMUTH

U.S. investors have looked with incredulity atthe near $17 trillion of negative-yieldingbonds across the world amid global economic concerns andeasier monetary policy by central banks.

Textbook financetheory, itself, has struggled to explain why investors might want to tie theirmoney in debt that if held through the entirety of its existence would giveback less money than what had been invested, said Kathryn Kaminski, portfoliomanager at AlphaSimplex.

Nonetheless analystssay there are reasons for investors and traders to buy subzero-yielding bonds.Here arejust a few of them:

Bagholders

Investors who scoop upnegative-yielding bonds are betting on the value of the securities to keeprising, in effect, wagering that there are other “bagholders.”

With the EuropeanCentral Bank widely expected to restart their asset purchasing program, Europeanbond-buyers could be relying on the central bank to hoover up their portfoliosof negative-yielding securities.

Although investorsbuying bonds with subzero interest rates are, in effect, paying for theprivilege to hold on to an investment, that cost can be more than offset if thesecurity’s price rises.

In July, an auction for€4 billion euros of 10-year German government bondsTMUBMUSD10Y, +2.03% soldat a negative yield of 0.26%, but at a premium price of 102.6 cents to theeuro. The benchmark bund is now trading at a price of a 106.9 cents to theeuro, meaning that investors who scooped up debt at last month’s auction wouldhave reaped a gain of around 4% from the price increase alone.

“Everyone is buyingthis stuff like crazy, because there is too much money in the system fromquantitative easing and too much money going to government bonds,” said JimBianco, founder of Bianco Research, in an interview with MarketWatch.

On the other hand,market participants say it is unclear if buying fixed-income securities inexpectation of further price gains remains a sustainable trend.

Safe assets

Market participants saythere are a few bolt-holes that are capable of weathering the deterioration ofthe U.S. economy and geopolitical tensions. When risk assets sell off, theissue of negative yields on government bonds may be overshadowed by theirproven ability to rally during times of market distress.

“This realization thatit is important to have high-quality income in fixed income portfolios hascreated a mini-panic in the market,” said Thanos Bardas, co-head of globalinvestment grade at Neuberger Berman, underscoring that as of last week, allmaturities of German bunds have been trading at negative yields.

Cross-currency hedging

Negative yields don’tmean negative income for some.

Unlike European andJapanese investors, U.S. investors are often paid to hedge against fluctuationsof foreign currencies because U.S. interest rates are much higher than in otherdeveloped markets like Europe and Japan.

It is why American fund managers can still earnmoney from holding a negative-yielding European government bond. Currencyhedging can provide an additional 3% annualized return for U.S. investorsbuying euro-denominated debt, according to Jens Vanbrabant, seniorportfolio manager at Wells Fargo Asset Management.

Roll down

Another way investorscan benefit from subzero interest rates is to take advantage of the yieldcurve’s slope, which still can be steep even for negative-yielding bond marketsin Germany and Japan.

The yield curverepresents the gap between shorter-term yields and longer-term yields, with asteep curve indicating a large difference.

For example, a tradermight buy a negative-yielding 3-year bond and sell it after a year. Since debtprices move in the opposite direction of yields, the value of the 3-year bondshould be higher than, say, a 2-year bond, all else being equal.

So long as the interestrates for shorter-term bonds are more negative than their longer-datedcounterparts, the price for the long-term bond should generally rise as itmoves closer to maturity, said Michael Chang, a rates strategist at SociétéGénérale.

He cautioned thatmaking money from “rolling down the yield curve” is only a short-term strategy,and that traders must sell the bond well before maturity, because the securitywill trade only at par when it expires.

Pimco says globaldebt investors often have employed this tactic to make money from Japan’smeager returning government bond market.

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7.Net Outflows From Hedge Funds $55B in 2019….50% More Than All of 2018.

Hedge funds have already bled 50% more money this year than in allof 2018, as the industry struggles to win back investors fed up with highfees and poor performance – Investors yanked $8.4 billion in July, bringing netoutflows this year to $55.9 billion. That’s up from $37.2 billion for all of last year. 

The pain for hedge funds isn’tspread evenly, with 37% of funds posting net inflows this year. So-calledevent-driven funds have fared the best, with inflows of $10.3 billion throughJuly.  Long/short equity funds are having the hardest time, with netoutflows this year of $25.5 billion

FROM DAVE LUTZ AT JONES TRADING  

8.Netflix -20%+ from Highs….Biggest Original Content Movie “The Irishman” Launching This Fall.

Netflix Struggles to Come to Terms With Theater Chains Over ‘TheIrishman’ Release

By Brandon Katz • 08/21/19 10:23am

WillNetflix release The Irishman in theaters? Netflix

WillNetflix release Martin Scorsese’s mob drama The Irishman in theaters? The director certainly hopes so. Scorsese waswell-aware that a wide theatrical release was a long shot when he took the picture to Netflix in 2017 after Paramountpassed over budget concerns. But the streamer has reportedly been eyeing its biggest traditional releaseyet for The Irishman. Last year, Roma received an exclusive three-week theatrical runbefore being made available to subscribers online. Yet neither Netflix nor themajor theater chains appear close to a mutually beneficial compromise for The Irishman.

Thestreaming service is in talks with AMC Theaters and Cineplex, two of thelargest exhibitors in North America, according to The New York Times. Though the negotiationsare separate, both exhibitors have reportedly dug their heels in over the sameimpasse.

“A crucial sticking point has been the major chains’ insistencethat the films they book must play in their theaters for close to three monthswhile not being made for available for streaming at the same time, which doesnot sit well with Netflix,” according to the report. “Talks broke down in July,only to pick up again two weeks ago, the people said.”

Netflixis committed to serving its 151 million worldwide subscribers above all else,especially after a rough quarterly earnings report last month led to widespread concern throughout Wall Street. As of now, thecompany is unwilling to agree to AMC and Cineplex’s terms and are not currentlynegotiating with fellow exhibitors Regal or Cinemark. Conversely, the majortheater chains are unwilling to entertain a smaller theatrical window as theybelieve it will undercut the existing agreements they hold with traditional studios such as Disney, Warner Bros.,Universal, Paramount and Sony. With neither side budging at this time, therelease of The Irishman, which will premiereSeptember 27 at the New York Film Festival, is currently unclear.

Onemotivating factor for Netflix is the opportunity to compete for Academy Awardsas The Irishman is expected to be a contender thisyear. To qualify for the Oscars, a film must have a one-week run in acommercial theater in Los Angeles County, per the outlet. Yet as voters showedwith Roma, the presumptive favorite for Best Picture, thereis a reluctance from the old guard to anoint a streamingproduct with the top prize unless it plays by the traditional rules. To improveits chances, Netflix knows The Irishman mustbe screened in theaters one way or another.

Netflix Struggles to Come to Terms With Theater Chains Over ‘The Irishman’ Release

https://observer.com/2019/08/netflix-struggles-to-come-to-terms-with-theater-chains-over-the-irishman-release/

9.Share of Children Living in Relative Poverty.

The concept of relative poverty, on the otherhand, is defined with respect to an income level that may change over time andacross countries. Most often, relative poverty in a country is measured withrespect to the median income in the same country (i.e. the income of the personin the middle of the income distribution). Because it is defined in relative terms, it is a measure ofeconomic inequality.

The visualization belowshows relative childhood poverty. That is, the share of children living inrelative poverty. The OECD defines childhood poverty as the share ofchildren living in a household with a post-tax-and-transfer income ofless than 50% of the national annual median income (i.e. half of the disposableincome of the person in the middle of the distribution).

10.Are You An Inclusive Leader?

Six Must Have Qualities forInclusive Leadership