Covenant Weekly Synopsis as of October 9, 2015

October 12, 2015

After the worst quarter since 2011, equities rebounded to post their best weekly performance of 2015. The S&P is now up nearly 8% from its recent lows and only about 5.5% from the all-time high set in May of this year. International developed and emerging market equities rose sharply and even beaten down commodities and high yield debt were invited to the rally party. Unsurprisingly, traditional fixed income securities declined on the week as investors pulled capital from safe haven assets. In spite of last week’s rally, it is worth noting that most regional equity indices are in negative territory for the year (with the exception of Europe and Japan) as are commodities. Additional market detail can be found here.

Bad Mood Investor sentiment has long been viewed as a contrarian indicator. Overly bullish or bearish views on the market often mark a turning point as all of the good/bad news has been priced in. The market swings (primarily the declines) over the last two months have been unnerving and impacted the short-term psyche of investors. According to Ned Davis Research, investor sentiment is at extreme lows with only 46% of surveyed investors reporting they are bullish. Historically, when the bullish investor level declines below 55% it has been a good time to go against the crowd and be a buyer.

Fight Club – The first rule of currency wars is that you don’t talk about currency wars. On Friday, the International Monetary and Financial Committee (a gathering of 25 International Monetary Fund member nations) committed to avoid “all forms of protectionism and competitive devaluations”. This announcement follows a similar proclamation by the G20 in early September, and combined the statements bring to mind a quote from Shakespeare’s Hamlet “…thou doth protest too much, methinks”. As we’ve mentioned in previous communiqués, a covert currency war has in fact been an ongoing feature of the recovery from the Financial Crisis. In an era of slow global growth central banks are scrapping for what little opportunity exists to bolster their respective economies and a cheaper currency makes exported products more attractive. The problem with this approach is that it creates a positive feedback system of competitive devaluations since currency devaluation is a zero sum game – for one currency to decline at least one other currency has to appreciate, potentially prompting action by the central bank in charge of the rising currency. I am skeptical that central bankers will honor this commitment and as a result monetary policy will continue to be the tool of choice for spurring local growth amongst competing central bankers.

Economic Wrap-Up: The September ISM Non-Manufacturing Index declined to a three-month low of 56.9, though it continues to indicate expansionary conditions (delineated as a reading above 50). Thus far this year, the non-manufacturing sectors have been the primary source of domestic growth, offsetting slower growth in the manufacturing sectors due to weak global demand and a strong USD. Weekly Initial Jobless Claims were lower than expected, while Continuing Claims remain elevated. Consumer Credit expanded at a slower pace than expected in August.

Be good,


P.S. Due to my travel schedule, there will not be a Weekly Synopsis next week.