The “Abe Spreads” (excerpt)

I visited with a few of our hedge fund accounts around Greenwich, CT last week. The consensus among the macro strategy funds is that the Nikkei has more upside because the yen has more downside. They have been long the Nikkei and short the yen since late last year when they concluded that Japan’s new prime minister Shinzo Abe was intent on jolting the economy with a huge increase in fiscal spending and a massive round of QE. The hedge funds remain in the trade. Some have also been shorting the DAX, figuring that the plunge in the yen relative to the euro is bound to depress Germany’s exports and economy while boosting Japan’s exports, especially of autos.

These developments could explain some of the recent performance of the US stock market. The DAX peaked at a new cyclical high on March 14. It is down 7.4% since then. Global investors may be switching out of European stocks and into American ones, especially blue-chip defensive names that are viewed as safe havens. When the new governor of the BoJ announced on Thursday, April 4 that he intends to double the balance sheet of Japan’s central bank, bond yields plunged around the world. That might have attracted more money into American stocks, especially those with a dividend yield.

Today's Morning Briefing: Flash Consensus. (1) Macro hedge funds still playing “Abe spreads.” (2) Long Nikkei and short DAX. (3) Flash mob, flash crash, and flash consensus. (4) Getting the shakes about shaky global economy. (5) Pause more likely than correction or melt up. (6) Analysts raising revenue estimates, while companies lowering guidance. (7) Technicians see lots of bearish signs. (8) Health Care may be the cheapest defensive play left. (9) Have central bankers lost their groove? (10) No recovery in sight for Europe. (11) “42” (+ + +). (More for subscribers.)

Old Normal (excerpt)

For stock investors, following the New Normal paradigm obviously has been a bad investment strategy given that the stock market is up 129% since March 9, 2009. There’s no denying that the latest recovery in real GDP has been subpar. Real GDP has increased only 1.8% on average over the past two years. However, this average growth rate rises to 2.9% excluding total government spending. That’s closer to the old normal. Needless to say, the profits recovery has been abnormally good relative to GDP.

Today's Morning Briefing: The New Abnormal. (1) Some hits and some misses for the New Normal. (2) Eight centuries of data can’t be wrong. (3) Scholars challenge Reinhart/Rogoff findings. (4) Seeking and finding the old normal in private-sector GDP and in profits. (5) Yellen favors “lower for longer.” (6) Fed seeks to promote “prudent risk-taking.” (7) For gold bugs, deflation is the new abnormal. (8) Dudley isn’t worried about inflation. (9) CPI inflation rates remain subdued in the G7. (More for subscribers.)

Technology (excerpt)

The IT sector has significantly underperformed the S&P 500 so far this year. I haven’t been keen on the sector mostly because of the commoditization of both hardware and software. The proliferation of digital devices has depressed PC sales. The Cloud may be doing the same by allowing users of the devices to do more of their computing up there rather than down here on their PCs. The Cloud may also allow more users to rent rather than to own the software they use.

Nevertheless, as I recently observed, the IT sector is the cheapest it has been since 1995. IT companies tend to generate good cash flow. If they pay more of it as dividends, then they might sport higher valuation multiples as do dividend yielding stocks in other sectors. So we recommend a market weight in the sector.

The data released in the Fed’s March industrial production release for the information processing industry are uninspiring. Output of computer and peripheral equipment is down 49.2% since the record high during May 2008, and is down at levels not seen since the end of 2004. Communication equipment output has been flat for the past year, and in a flat range since 2000. On the other hand, semiconductor output is at a record high. Capacity utilization is depressed at 65.3% for computer manufacturing. It is 71.1% for semiconductors and 79.0% for communication equipment.

Today's Morning Briefing: Not Too Swift. (1) Three-speed global economy. (2) IMF gives a haircut to 2013 world growth. (3) IMF still upbeat about 2014. (4) US more likely to impress than depress. (5) Construction and energy output leading the way. (6) Europe fiddles while Draghi pleads. (7) European SMEs are stressed. (8) Don’t hold your breath for euro zone banking union. (9) Weak yen should boost Japan’s exports, though maybe not to China. (10) Regulators shining a light on China’s shadow banking system. (11) Focus on market-weighted Information Technology. (More for subscribers.)

Gold & Stocks (excerpt)

Friday’s selloff in commodity prices was triggered by a disappointing retail sales report for the US. Monday’s plunge was triggered by weaker-than-expected GDP news out of China for the first quarter. In a phone conversation, one of our accounts concluded, “The market is discounting that there is no growth anywhere in the world.” I’m not so sure about that, but I do respect the relationship between the stock market and commodity prices.

Indeed, the CRB raw industrials spot price index is one of the three components of our Fundamental Stock Market Indicator (FSMI), which has been highly correlated with the S&P 500 since 2000. The recent rally in the S&P 500 to new record highs hasn’t been confirmed by our FSMI, which backed off from its cyclical high during the last week of March and first week of April.

The price of gold tends to follow the underlying trend in the more volatile CRB raw industrials index. So gold’s two-day free-fall of $203 per ounce to $1,360 is unsettling if investors see it as a harbinger of a widespread plunge in commodity prices resulting from a much weaker global economy. I don’t see it that way. Nevertheless, gold’s precipitous descent only one week after the Bank of Japan announced a massive QE program suggests that investors are losing their confidence in the power of central banks to stimulate economic growth. As a result, gold bugs may no longer be convinced that inflation will heat up, notwithstanding the monetary excesses of the central banks.

Today's Morning Briefing: Global Growth Scare. (1) No gold medal for the metal. (2) MEI sectors leading on the way down. (3) Emerging and submerging economies. (4) Has the global economy stopped growing? Of course not! (5) Is gold a leading indicator for anything? (6) Giving up on inflation. (7) China is still growing faster than any other economy. (8) Global oil demand growth increasing, not decreasing. (9) So why are oil prices falling? (10) Earnings still in record territory. (11) Focus on underweighted S&P 500 Energy sector. (More for subscribers.)

Gold (Excerpt)

That was a very bad break for gold on Friday. The nearby futures contract price plunged $63 to $1,501 an ounce, down 20.5% since its record high of $1,889 on August 22, 2011, and the lowest level since July 4, 2011. Other precious metals prices also dropped sharply that day. That’s a bit surprising given that a week ago, the BoJ announced plans to double its balance sheet over the next two years, which should have been bullish for precious metals. Obviously, when they failed to rally on this news, the path of least resistance was downwards. Similarly, the price of gold fell in February despite a bullish Valentine’s Day press release from the World Gold Council.

In the 2/21 Morning Briefing, I wrote: “Over the past few years, I’ve been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends, or earnings. I also observed that the price of gold had already increased sevenfold since January 20, 2001. … It has been a crowded trade, as evidenced by the high levels of net long positions held by both large speculators and small traders, according to the Commodity Futures Trading Commission. With so many bulls around, the lack of upside price momentum since late 2011 must have convinced some of them, especially the big hedge funds, to lighten up.” They lightened up some more on Friday.

Today's Morning Briefing: Back to the Future. (1) The 1990s and now. (2) US looks fairest of them all. (3) What about Japan and China? (4) Heavy metals. (5) Bullish news depresses gold. (6) Upside for US in commodities’ downside. (7) When supply exceeds demand. (8) Fracking adds up. (9) Trend still up for retail sales. (10) S&P 500 Retailers should continue to outperform as forward earnings rises to record high. (11) “The Place Beyond the Pines” (+ +). (More for subscribers.)