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Dalio’s Bridgewater Warns Of “Lost Decade” For Stocks

Dalio’s Bridgewater Warns Of "Lost Decade" For Stocks

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Dalio's Bridgewater Warns Of "Lost Decade" For Stocks Tyler Durden Thu, 06/18/2020 - 15:10

At the end of January, when the news media was reporting of the first cases of an odd pneumonia-like diseases spreading in Wuhan, Ray Dalio appeared on CNBC during the annual billionaire pilgrimage to Davos, where he made a comment that would soon come back to haunt him: "You can't jump into cash. Cash is trash."

Little did Dalio know that just one month later the global economy would grind to a halt, the US stock market would suffer the biggest drop since the financial crisis, the Fed would announce the biggest ever bailout of corporate America and Congress would unleash a fiscal stimulus program the likes of which have never before been seen.

Fast forward five months, when in a recent letter to Bridgewater investors, Dalio warns that a reversal of the strong growth seen over the years in U.S. corporate profit margins could lead to a “lost decade” for equity investors.

So... cash is king?

In the June 16 letter seen by Bloomberg, Bridgewater analysts write that the margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings. They are referring to the following dramatic divergence between S&P income margins - which are at all time high s- and the true, unvarnished corporate profits, which as shown in the Goldman chart below have tumbled to decade lows even before the Coronavirus pandemic hit.

"Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked,” Bridgewater said adding that "now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization."

The deglobalization trend has only accelerated in recent weeks as the pandemic-induced collapse in demand has already resulted in a huge fall in profit margins in the short term, the analysts added.

Bridgewater cited Intel and Taiwan Semi as two examples of companies that have announced their intentions to build production facilities in the U.S., despite the higher costs.

"Even if overall profits recover, some companies will die or their shares will devalue along the way. Left with lower levels of profits and cash shortfalls, companies are likely to come out on the other side of the coronavirus more indebted," the report warned, appropriately just as the percentage of zombie corporations in the US - those that can't even fund their their interest expense - is an all time high, and kept alive only thanks to the Fed's direct purchases of corporate bonds.

Is Bridgewater right? Considering that less than half a year ago, its billionaire founder was urging the broader population to be in a well-diversified portfolio just before global stocks suffered their biggest crash in decades, one can certainly be cynical, especially in a time when retail daytraders on Robinhood can retire in just a few trading days if they pick the rick momentum stock du jour. On the other hand, if Dalio is right, he is effectively saying that the Fed will no longer be able to propel stocks ever higher, which coming at a time when Powell confirmed last week that it is his intention to blow an even bigger asset bubble in hopes of creating jobs, means that the Fed will lose control.

Of course, so far the Fed (and retail investors) are winning: as we reported last week, the hedge fund giant suffered a 15% drop in assets under management during March and April, as its assets fell to $138 billion at the end of April from $163 billion at the end of February.

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Government

China Shortens Travel Quarantine In COVID Zero Shift

China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one…

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China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.

Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31). 

"This relaxation sends the signal that the economy comes first ... It is a sign of importance of the economy at this point," Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg

At the peak of the COVID outbreak, many residents in China's largest city, Shanghai, were quarantined in their homes for two months, while international travelers were under "hard quarantines" for three weeks. The strict curbs appear to have suppressed the outbreak, but the tradeoff came at the cost of faltering economic growth. 

The announcement of the shorter quarantine period suggests a potentially more optimistic outlook for the Chinese economy. Bullish price action lifted CSI 300 Index by 1%, led by tourism-related stocks (LVMH shares rose as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%). 

"The reduction of travel restrictions will be positive for the luxury sector, and may boost consumer sentiment and confidence following months of lockdowns in China's biggest cities," Barclays analysts Carole Madjo wrote in a note. 

CSI 300 is up 19% from April's low, nearing bull market territory. 

Jane Foley, a strategist at Rabobank in London, commented that "this news suggests that perhaps the authorities will not be as stringent with Covid controls as has been expected." 

"The news also coincides with reports that the PBOC is pledging to keep monetary policy supportive," Foley pointed out, referring to Governor Yi Gang's latest comment. 

She said, "this suggests a potentially more optimistic outlook for the Chinese economy, which is good news generally for commodity exporters such as Australia and all of China's trading partners." 

Even though the move is the right step in the right direction, Joerg Wuttke, head of the European Chamber of Commerce in China, said, "the country cannot open its borders completely due to relatively low vaccination rates ... This, in conjunction with a slow introduction of mRNA vaccines, means that China may have to maintain a restricted immigration policy beyond the summer of 2023." 

Alvin Tan, head of Asia currency strategy in Singapore for RBC Markets, also said shortening quarantine time for inbound visitors shouldn't be a gamechanger, and "there's nothing to say that it won't be raised tomorrow." 

Tyler Durden Tue, 06/28/2022 - 07:38

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Economics

Energy Stocks Are Down, But Remain Top Sector Performer

High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s…

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High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s close (June 27), based on a set of ETFs. But with global growth slowing, and recession risk rising, analysts are debating if it’s time to cut and run.

The broad-based correction in stocks has weighed on energy shares lately. Energy Sector SPDR (XLE) has fallen sharply after reaching a record high on June 8. Despite the slide, XLE remains the best-performing sector by a wide margin year to date via a near-36% gain in 2022.

By contrast, the overall US stock market is still in the red via SPDR S&P 500 (SPY), which is down nearly 18% year to date. The worst-performing US sector: Consumer Discretionary Sector SPDR (XLY), which is in the hole by almost 29% this year.

The case for, and against, seeing energy’s recent weakness as a buying opportunity can be filtered through two competing narratives. The bullish view is that the Ukraine war continues to disrupt energy exports from Russia, a major source of oil and gas. As a result, pinched supply will continue to exert upward pressure on prices in a world that struggles to quickly find replacements for lost energy sources. The question is whether growing headwinds from inflation, rising interest rates and other factors will take a toll on global economic growth to the point the energy demand tumbles, driving prices down.

The market seems to be entertaining both possibilities at the moment and is still processing the odds that one or the other scenario prevails, or not. Meanwhile, energy bulls predict that the pullback in oil and gas prices is only a temporary run of weakness in an ongoing bull market for energy.

Goldman Sachs, in particular, remains bullish on energy and advises that the potential for more prices gains in crude oil and other products “is tremendously high right now,” according to Jeffrey Currie, the bank’s global head of commodities research. “The bottom line is the situation across the energy space is incredibly bullish right now. The pullback in prices we would view as a buying opportunity,” he says. “At the core of our bullish view of energy is the underinvestment thesis. And that applies more today than it did two weeks, three weeks ago, because we’ve just seen exodus of money from the space… investment continues to run from the space at a time it should be coming to the space.”

Meanwhile, a bit of historical perspective on momentum for all the sector ETFs listed above reminds that the trend direction remains bearish overall. But contrarians take note: the downside bias is close to the lowest levels since the pandemic first took a hefty bite out of market action back in March 2020 (see chart below). This may or may not be a long-term buying opportunity, but the odds for a bounce, however, temporary, look relatively strong at the moment.


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Commodities

Gold as an investment; a long-term perspective

To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio…

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To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio from inflation, the price of gold declined from its all-time high reached in 2020.

At the same time, inflation in the US and other advanced economies kept rising. Nowadays, inflation in the UK is expected to reach double-digit territory at the end of this year and runs at more than four decades high in the US.

Moreover, the news that a huge gold deposit was discovered in Uganda made many wonder what the point of investing in gold is if it isn’t so scarce. The new deposit has some 320,000 tonnes of extractable pure gold.

But time is on gold’s side. As an uncorrelated asset with the main financial markets, gold has its place in an investment portfolio.

Because of that, an analysis of the price of gold from a long-term perspective is useful as it helps filter the noise. After the bullish breakout in the early 2000s, the price of gold is in a bullish run, unlikely to end despite the recent underperformance.

Only bullish patterns followed the early 2000s bullish breakout

In the early 2000s, gold traded below $400/ounce. A bullish breakout led to several bullish patterns – including the current one, which may end up being bullish after all.

First, it was a pennant – a continuation pattern that was responsible for sending the gold price to $1000/ounce for the first time ever. What followed was an ascending triangle.

After the market had cleared the horizontal resistance given by the $1,000 level, it did not stop all the way to $1,900 in 2012. The move was reversed in the years to follow, but an inverse head and shoulders pattern propelled the price to a new all-time high in 2020, as uncertainty during the COVID-19 pandemic reigned on financial markets.

From that moment on, gold is in a consolidation area. Because it hesitated at horizontal resistance, one may argue that the price of gold forms an ascending triangle. The last time it did so, the market traveled more than $900, so bears might want to watch the current pattern closely.

Gold price’s resilience against the dollar has been impressive

Perhaps the best way to interpret the market is through the eyes of the US dollar. The gold price has been resilient against a rising US dollar, and the chart below shows it accurately.

From June 2020, the gold price did not move much, while the US dollar declined initially, only to recover the lost ground. Hence, gold’s price resilience in an environment of a rising US dollar adds strength to the yellow metal because a strong dollar limits the effects of inflation by offsetting the price of imports.

To sum up, gold is consolidating. A move to a new all-time high should trigger more strength, and a higher dollar might accompany it.

The post Gold as an investment; a long-term perspective appeared first on Invezz.

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