Monthly Archives: February 2016

Covenant Weekly Market Synopsis as of February 26, 2016

February 26, 2016

Equities, for the most part, built on last week’s gains, advancing 0.6% – 2% in developed and frontier markets. Meanwhile, emerging markets were slightly negative on the week dragged down by a 3.5% decline in Chinese equities. US Treasuries were flat on the week, though the 10-year yield touched an intraday low of 1.65% on Wednesday before closing the week at 1.76%. Precious metals declined, copper rose, and the US Dollar bounced +1.6%, but none of these moves were particularly large. On the other hand, WTI Crude nearly cut year-to-date losses in half, rising 10.9% to $32.97 per barrel. Today, the Bureau of Economics revised Q4 2015 GDP growth from 0.7% to 1%. The revision was unexpected, and while positive, 1% annualized growth is not worth writing home about. On a brighter note, Consumption was up 0.5% in January (the strongest reading since last May) implying that fears of an imminent recession are overstated.

Detailed asset class performance data is available here.

Shrinkage – If you have even a passing interest in the rise and fall of oil production in the U.S. since 2011, this is a must see infographic.  It provides extraordinary detail, allowing you to watch the contemporaneous movements of Total Rig Count, Oil Price and Crude Production over the last five years. Moreover, you can ‘drill’ down to see how oil production has changed in specific counties by moving the mouse pointer to different locations on the map.

Interest Rate Path – Once one of the more hawkish members of the Federal Open Market Committee (FOMC, the group that determines monetary policy in the U.S.), St. Louis Fed President James Bullard abruptly changed course last week. Bullard had argued throughout 2015 that the FOMC should raise the Federal funds target interest rate, so it is notable that he has done a 180 to turn dovish “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations”. It’s not only Bullard that has declining inflation expectations, the Conference Board’s February survey of consumers’ 12-months ahead inflation expectations registered its lowest level in eight years. Turning to the markets, according to data provided by Bloomberg, coming into today, the market was only pricing in a 10% chance that the Fed will raise rates at their March meeting, and a mere 35.7% chance that the Fed will increase rates at all in 2016. Following this morning’s data release which showed stronger than expected consumption and inflation levels (see Economic Data Summary below), the market increased the odds of a rate rise in 2016 to 53%, and the yield on the 10-year jumped from 1.72% to 1.78% (it later closed at 1.76%). The table below from Bloomberg shows the market implied probabilities of interest rate increases at each of the next FOMC meetings.


Taking Bullard’s comments and actual market positioning into account, it appears we can expect rates to rise very slowly. However, these circumstances also create a condition in which a faster than expected pace of rate increases will catch a majority of the market offside, generating large losses for certain fixed income instruments.

Economic Data Summary: The Conference Board’s measure of consumer confidence fell from 97.8 to 92.2 in February, likely reflecting the toll that financial market turmoil has had on consumers. US Existing Home Sales notched up to 5.47 mm in January, bringing the 12-month moving average to a new nine-year high. Meanwhile, US New Home Sales in January came in at 494k, slightly below consensus estimates, but still at a respectable level. Moreover, the 12-month moving average is 10% higher than the level seen last January. Although new home sales are being constrained by tight inventory as developers are simply more risk averse than prior to the Financial Crisis, the overall housing market (along with consumption) remains one of the brighter spots in the domestic economy. As noted above, Consumption levels in January were solid and December’s data was revised from flat to +0.1%. Wage and salary growth data were also strong, with Disposable personal income increasing by 0.5% (the strongest growth since May ’15). Growth in income should lend support to future Consumption levels – if not immediately then down the road.

Be well and enjoy the w/e,


Covenant Weekly Market Synopsis as of February 19, 2016

February 22, 2016

Like a dazed boxer after six punishing rounds on the receiving end of body blows and headshots, equity markets came out in the seventh week of the year and put on a show.  Gains were widespread with domestic indices rising between 3% – 4% and international stocks indices gaining 4% -5% for the week.  Meanwhile, safe haven fixed income instruments like US Treasuries ended the week virtually unchanged (they typically decline in price during risk-on periods) and with most of the buying in the worst performing stocks year-to-date, time will tell if this proves to be an oversold bounce in equity markets or a true market bottom.   Notably, equity markets are showing good follow-through today with international stocks up an additional 1%-2% and U.S. equity market futures pointing to a gains of more than 1%.  Irrespective of short-term market directionality, equities still have a ways to go to get back to breakeven on the year, as domestic indices are down about 6% and international stock indices (with the exception of Frontier Markets) are down even more.

Detailed asset class performance data is available here.

Killing the “Benjamins” – Ex-Treasury secretary Lawrence “Larry” Summers is calling for a global agreement amongst monetary authorities to stop issuing notes worth more than $50, which means the $100 bill would become a collector’s item if Summers’s plan were to be adopted.  His reason for eliminating large denomination bills is to make it more difficult for criminals and terrorists to move large sums of cash illicitly.  For example, a million dollars in €500 bills weighs only about 2 pounds, while the same amount of money in $20 U.S. bills weighs 50 pounds.  This idea may have additional appeal to central bankers in an era of negative interest rates.  Many economists speculate that the impact of negative interest rates is muted when depositors are able to stash large amounts of cash outside of banks to avoid incurring a fee (i.e. a negative interest rate) for keeping cash in a bank.   For those looking for a long-term investment idea, a pristine $10,000 bill (phased out by U.S. Treasury in 1969) is currently worth $100,000 or more to collectors.  If the U.S. Treasury removes $100 bills from circulation, the bills could be worth far more than their face value 50 years from now.

Bird-In-Hand – Following the Financial Crisis, which saw large banks nearly crater the global financial system, there were calls to limit the size of banks.  Those cries received a lot of support, however through organic growth and acquisitions the biggest banks have only gotten bigger.  As the chart from the Wall Street Journal below shows, assets at J.P. Morgan, Bank of America, Wells Fargo and Citigroup have increased from 44% of total U.S. bank assets to 51%.  





Although banks have reduced leverage since the Financial Crisis, the trend of the largest banks getting larger is concerning as asset concentration increases the overall risk profile of the banking industry.  Absent a break-up of the Big Four banks, however this trend will likely continue because of a lack of new bank creation. 

In the period from 1990 to 2008, over 2,000 new banks were created, averaging about 100 per year (Source: Robert Adams, Federal Reserve Board).  Yet since 2008, the U.S. has only had one de novo bank charter, an Amish-backed bank in Pennsylvania called Bank of Bird-In-Hand (Source: Federal Reserve Bank of Dallas).  The lack of new bank charters can be traced directly to the sweeping financial regulatory reforms, including the “Dodd-Frank Wall Street Reform Act”, that were put in place following the Financial Crisis.  As we all know, the regulations were intended to strengthen the U.S. financial system, but as we also know regulations have unintended consequences.  Ironically, the unintended consequences in this case are diametrically opposed to the intended purpose of the regulations.

Economic Data Summary – The headline Producer Price Index (PPI) rose 0.1% in January, well ahead of expectations of -0.2%.  On a year-over-year basis, the PPI improved from -1% to -0.2%, reflecting a moderation in the decline in energy prices.  The YOY change implies inflation has picked-up a bit in the producer sector.   Additionally, in January Core CPI rose 0.3% month-over-month and 2.2% year-over-year (a slight uptick from the 2.1% reading in December).  It is worth noting that medical care prices and clothing (rebounding from an unseasonably warm December) were key factors in the increase, rising 0.5% and 0.6% month-over-month, respectively.    Industrial Production jumped 0.9% month-over-month in January, reversing the -0.7% decline in December.  While the increase represents a nice reprieve from the string of negative data points for the sector, continued growth is required to convincingly reverse the longer-term downward trend.   The Housing Sector continues to make progress as January’s Total Housing Starts (1.1 million) were in line with expectations and the longer-term trend.  Single-family starts were particularly strong, with a 3.5% YOY increase (the largest jump since 2008).

Be well,


Covenant Weekly Market Synopsis as of February 12, 2016

February 14, 2016

In spite of an impressive rally on Friday that engendered gains of 2%-3% across most equity market indices, equities were negative on the week. The usual suspects of global growth and oil prices were picked from the line-up of investor concerns and the market deemed them guilty. What was unusual about last week is that oil rose 12% on Friday and still closed the week down 5.7%. Reflecting negative market sentiment, safe haven assets like the US Treasury 10-year note touched a recent low of 1.65% before closing the week at 1.75% and precious metals were up about 5%. The US Dollar fell for the second consecutive week, a welcome respite for domestic exporters.  Updated asset class performance details can be found here.

Quicksand – Central bankers… the more they talk and the more they act, the more damage they seem to be doing to investor psyche. On January 29th the Bank of Japan (BOJ) surprised markets by adopting a negative interest rate policy (NIRP). The BOJ’s NIRP was designed to further weaken the Yen and inflate asset prices – however the Yen skyrocketed and Japanese stocks plummeted… oops. Moreover, during her Congressional testimony last week on Wednesday Fed Chairman Janet Yellen suggested that the Fed may pause its tightening if market volatility impacts international demand for US goods. The market took this to heart and sold off hard the next day. Perhaps central bankers should take a basic lesson from hikers, if you fall into a pit of quicksand, the best survival strategy is to not flail about as it only makes you sink faster.

Alchemy – As noted above, Japan recently adopted a NIRP. Though they were not the first central bank to do so as Sweden (Q2 2014), Switzerland (Q4 2014), and the European Central Bank (Q4 2014) started similar experiments previously. Negative interest rate policies, in theory, are supposed to help economies similar to cutting interest rates from higher levels: encourage business investment and consumer spending, increase the value of risky assets (including stocks), devalue the country’s currency (making exports more competitive) and create expectations of higher inflation in the future (hence encouraging people to spend money now). Ten years ago negative interest rates were merely a theory, a seeming impossible anomaly discussed by economists in the way that physicists talk about the implications that time travel could have on changing the course of history. Today NIRP is a reality and like early “scientists” who attempted to convert base metals into gold, central bankers are combining quantitative easing and NIRP – a sort of monetary alchemy – in an effort to create economic growth. Unfortunately, neither economists nor the central bankers engaged in the policies know if this strategy will prove to be productive. Furthermore, they cannot effectively forecast what the unintended effects of these policies will have on economies down the road. NIRP represents the next era of the greatest monetary policy experiment in modern times, which began with Quantitative Easing and the Financial Crisis.



Source: www.nytimes.com2016/02.13

Economic Summary – Retail sales data for January were solid across the board, with the control group (excluding autos, gasoline and building materials) rebounding by 0.6% month-over-month (m/m). It’s worth noting too, that December’s headline Retail Sales decline of 0.1% m/m was revised upward to a 0.2% m/m gain. The labor market also continues to exhibit strength as new jobless claims came in below consensus estimates and the number of Job Openings remains elevated based on data released last week. While there has been increasing chatter about a U.S. recession, those fears appear inflated, at least for now.

Be well,


Covenant Weekly Market Synopsis as of February 5, 2016

February 8, 2016

And the beat goes on….last week equity markets slid further into negative territory for the year, though remain above their recent mid-January lows. On Friday, LinkedIn missed its Q4 earnings estimates and was summarily punished by investors. The stock plunged 43% on the day, highlighting the razor’s edge of investing in companies that are priced for perfection, but fall short. Value stocks outperformed growth stocks by 1.5% for a change, yet both declined more than 2% last week. Yields on safe haven U.S. Treasuries fell slightly and high yield spreads widened a bit further. Gold rose nearly 5%, but oil continued its violent path closing down nearly 8% on the week and is down 16% YTD. The VIX jumped 16% as equity markets fell, while the HFRX hedge fund index was off by only 50bps.

Updated asset class performance details can be found here.

Political “Markets”– A company named PredictIt allows subscribers to place real money wagers on a host of political and financial events including election outcomes. Founded by a not-for-profit university named Victoria University, Wllington of New-Zealand, PredictIt calls itself an educational purpose project to help experts better understand the wisdom of the crowd. The platform allows “investors” to make and trade predictions on future events by buying shares in the binary outcome, either “yes” or “no”. Each outcome has a probability between 1 and 99 percent, which are converted into US cents. For example, a snapshot of the current wagering on the Republican presidential nomination is included below. Note that following a strong showing in the Iowa caucuses Marco Rubio’s presidential nomination “stock” skyrocketed while The Donald’s stock plummeted.



However, after the Republican debate this weekend, Trump regained the lead in the presidential candidate race (according to PredictIt) with his stock now trading at $0.42 vs. Rubio at $0.35. In the New Hampshire Democratic primary, Predictit shows Sanders stock is currently valued at more than 15x that of Clinton, although Clinton’s presidential nomination stock is trading at $0.71 vs. Sanders of about $0.30.

While the platform operator may be a not-for-profit organization, PredictIt takes 10% of winning trades. Whatever the motives, PreditIt offers an interesting and different predictive framework to traditional political polling.

Womanpower – It’s no secret that the financial services industry remains a male-dominated space. At a recent conference there were probably 20 males for every female in attendance, and if marketers were excluded the ratio dropped to something like 40:1. Men roamed the conference chatted, snacked, rushed to meetings, or looked at their iPhones mostly unaware that industry vanguard Marjorie Hogan was in their midst. After a successful career at Bear Stearns (including trading through the demise of that bank) Marjorie founded Altum, a hedge fund focused on the complex world of trading structured credit instruments. Altum is one of the few hedge funds with an employee base consisting almost exclusively of women, a refreshing outlier both in terms of its demographics and in the number of performance-based industry awards they have received. I’ve joked with Marjorie that Altum is the female version of The Lilttle Rascals “He-Man Women Haters Club”. It is great to see Altum bucking the industry trend and I am optimistic that women will continue to make inroads in the industry to comprise a larger portion of the population (and not just on the marketing side). Anecdotally, of the five people hired by Covenant in the last 6 months, four were women including positions in investment research, graphic design and compliance. Women now make-up more than 50% of Covenant’s employee base, which is more consistent with general population demographics and hopefully a sign of changes coming to our industry.

Economic Summary – The Jan US ISM Manufacturing index rose slightly to 48.2 (from 48 in Dec), but remains below 50 indicating the sector is in contraction. The Jan US ISM Non-Manufacturing Index also slipped from 55.8 to 53.5. Although it remains above 50, the trend is negative (it was at 59.6 in July ’15). The services sector is one of the healthiest sectors in the economy and the recent deceleration could be an indication that weakness in the manufacturing sector is spilling over into the rest of the economy. The January employment report was reasonably solid, in spite of falling short of consensus expectations: 151k new jobs were added (vs. 190k consensus) and even though the Participation Rate ticked up to 62.7%, there were enough new jobs created to reduce the U3 Unemployment Rate to 4.9% (from 5%). The broader U6 Unemployment Rate (which includes discouraged workers) held steady at 9.9%. Overall the unemployment rate was neither so strong nor so weak as to give investors any clear indication on the direction of Fed monetary policy. Uncertainty is never good for markets, which likely contributed to equity sell-off on Friday.

Be well,