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It’s Coming – A Huge Bond Buying Opportunity

It’s Coming… A Huge Bond Buying Opportunity

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This article was originally published by ZeroHedge.

It's Coming... A Huge Bond Buying Opportunity Tyler Durden Tue, 10/27/2020 - 08:25
Authored by Lance Roberts via RealInvestmentAdvice.com, Here we go again. After plunging to new lows, the calls for the end of the “bond bull” market mount each time rates rise. Is this time the end of the “bond bull?” Or, is there another huge bond-buying opportunity to come?  We recently reduced our exposure to bonds, the first time in years, due to the more extreme overbought condition of Treasury bonds following the pandemic’s onset. The long-term chart of yields below shows this to be the case. There are two critical points to take away from the chart above.
  1. Interest rates are currently extremely oversold (top and bottom panels), suggesting that rates could indeed rise over the next few months. Such could coincide with another stimulus package or the passage of an “infrastructure” bill that leads to short-term inflationary concerns.
  2. When rates do rise from deeply oversold levels, there is a point where high rights collide with debt levels triggering either a credit-related event, a stock-market correction, or worse. 
There are currently two significant risks from rising interest rates, which investors should heed.

Valuation Expansion

One of the primary themes used by the “Permabulls” is that “valuations are cheap due to low interest rates.” That argument has been the clarion call of a generation of investors who have ignored fundamentals and valuations to chase market returns. Since 2019, when earnings growth began to deteriorate in earnest, investors bid up shares. As such, the primary driver of returns, as shown below, has come from “multiple expansion.” The “hope” remains that earnings growth will eventually catch up with valuations. However,  despite being 3/4ths of the way through 2020, the outlook for earnings continues to deteriorate. In just the last 15-days, the estimates for 2021 have declined by almost $7 per share despite repeated statements of a recovering economy. There are two problems with the thesis that “low rates justify high valuations.”
  1. Historically, such has not ever been the case; and,
  2. When rates rise, valuations quickly become an issue.
However, since stock prices reflect economic growth, the impact of rising rates on the economy is a far more significant issue.

The Debt Problem

People don’t buy houses or cars. They buy payments. Payments are a function of interest rates, and when interest rates rise sharply, mortgage activity falls as payments rise above expectations. In an economy where roughly 70% of Americans have little or no savings, an adjustment higher in payments significantly impacts consumption. 
  1. Rising interest rates raise the debt servicing requirements, which reduces future productive investment.
  2. As stated above, rising interest rates will immediately slow the housing market taking that small contribution to the economy. People buy payments, not houses, and rising rates mean higher payments.
  3. An increase in interest rates means higher borrowing costs. Such leads to lower profit margins for corporations reducing corporate earnings and financial markets.
  4. The negative impact on the massive derivatives and credit markets is the Fed’s worst fear. 
  5. As rates increase, so does the variable rate interest payments on credit cards. With the consumer struggling with stagnant wages and increased living costs, higher credit payments lead to a contraction in spending and rising defaults.
  6. Rising defaults on debt service will negatively impact banks, which are still not adequately capitalized and still burdened by massive levels of bad debts.
  7. Many corporate share buyback plans and dividend issuances are accomplished through cheap debt, leading to increased corporate balance sheet leverage. That will end.
  8. Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.
  9. The deficit/GDP ratio will begin to soar as borrowing costs rise. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.

Payments Matter

I could go on, but you get the idea as we discussed concerning debt-to-income ratios:
Such is also why interest rates CAN NOT rise by very much without triggering a debt-related crisis. The chart below is the interest service ratio on total consumer debt. (The graph is exceptionally optimistic as it assumes all consumer debt benchmarks to the 10-year treasury rate.)  While the media proclaims consumers are in great shape because interest service is low, it only takes small increases in rates to trigger a ‘recession’ or ‘crisis’ event.”
Am I saying rates can’t rise at all?  Absolutely not. However, there is a limit before it negatively impacts the economy, and ultimately the stock market.

Bond Prices Very Overbought

In June of 2013, when the cries of the “death of the bond bull market” were rampant, I made repeated calls that then was an ideal time to be a “buyer” of bonds.
“However, the recent spike in interest rates has certainly caught everyone’s attention and begs the question is whether the 30-year bond bull market has indeed seen its inevitable end.  I do not think this is the case and, from a portfolio management perspective, I believe this is a prime opportunity to increase fixed income holdings in portfolios.”
As shown in the chart below, that was the correct call and, despite repeated wrong calls by the mainstream analysts, bonds remained in an ongoing bullish trend. Since interest rates are the inverse of bond prices, we can look at a long-term chart of rates to determine when bonds are overbought or oversold. In 2019, rates began to slide slower as the realization that economic growth was weakening weighed on outlooks. As the yield curve began to invert, the Federal Reserve stepped in with expanded “repo” operations to shore up financial institutions. Rates kept going lower. In March of 2020, the economy was shut down due to the pandemic causing rates to plunge to record lows.

Huge Bond Buying Opportunity Coming

The plunge in rates and massive Fed liquidity caused stocks to surge to new highs despite an underlying recessionary economy. Currently, the plunge in interest rates pushed bonds to an extreme “overbought” condition.  Such suggests the most likely target for rates in the near term could be as high as 2.0%. While an increase of 1.2% from current levels doesn’t sound like much, that increase would push bonds back to “oversold.”  That move will provide the best opportunity to increase bond exposure in portfolios. We can confirm the same using a very long-term chart (50-years) of 10-year interest rates overlaid with a 10-year moving average. As you can see, that moving average has provided formidable resistance and denoted every peak in rates going back to 1988. Currently, with interest rates at the bottom of their long-term trend, the risk is that rates could indeed rise in the months ahead. What could cause such an increase in rates?
  1. A massive debt-funded stimulus package that sends increased amounts of funds directly to households.
  2. More debt-funded infrastructure programs.
  3. If the government further increases deficit spending programs that fail to produce economic benefits such as universal basic incomes. 
  4. An increase of economic activity as the economy reopens, and a post-recessionary recovery occurs.
  5. If there is a point where the Federal Reserve is unable or unwilling to monetize the entirety of the debt issuance
  6. A lack of demand by foreign buyers of U.S. debt over concerns on economic strength and financial stability due to debt-to-GDP ratios.
These lead to concerns over temporary inflationary spikes, which could drive interest rates back to the top of the long-term downtrend.

Where To Invest While We Wait For Bonds

While bond prices currently remain overbought, such a condition will likely not last very long. As shown below, markets and volatility have an inverse relationship with rates, hence the non-correlation for portfolios. The long-term log-chart of interest rates and the stock market tells the tale. This analysis also suggests that the correction that started in March is likely not over as of yet in the longer term. If rates rise back toward the long-term downtrend, bond prices will come under pressure as the stock market corrects. For investors, we can turn to our colleague Jeffrey Marcus of TPA AnalyticsHe recently analyzed the best places to invest during rising interest rates for our RIAPro Subscribers.
The 4 best performing sectors are:
  • Technology
  • Consumer Discretionary
  • Industrials
  • Materials
The 4 worst performing sectors are:
  • Utilities
  • Telecomm
  • REIT’s
  • Staples
The 2 best performing broad categories are:
  • Small-Cap Growth
  • Small-Cap
The 2 worst performing sectors are:
  • Large-Cap Value
  • Large-Cap
Commodities: Crude and Copper are positive over half the time. Crude is the best performing commodity, historically. Gold is the worst-performing commodity; it is only positive 14% of the time. 2 more focus items:
  • TECH beat the S&P500 100% of the time
  • Utilities underperformed the S&P500 100% of the time”

Not The End Of The Bond Bull

In the short term, we have cut our bond exposure and have begun to shift our allocations to protect portfolios for a rise in interest rates. However, as rates rise within their technical downtrend, the media will be replete with headlines about the death of the 40-year “bond bull market.”  It won’t be. 
  • The stock market will defy higher rates initially until rates start to undermine the valuation story.
  • A weaker economy will undermine the valuation story as higher interest rates impede consumption.
  • The bullishly biased media will find themselves lost as to why stocks crashed and earnings fell.
While in the very short-term, the current overbought condition suggests we could see more downside pressure in bonds over the next few months. Such would not be surprising. However, as we approach that point where the market begins to realize the impact of higher rates on economic growth and corporate profitability, bonds will again emerge as a haven for investors against market declines. In an economy that is $75 Trillion in debt, requires $5.50 of debt per $1 of growth, and running a $3 Trillion deficit, rates can’t rise much. Which is also why the Federal Reserve is now forever trapped at zero.

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Economics

DryEyeRhythm: A reliable, valid, and non-invasive app to assess dry eye disease

Dry eye disease (DED) is a condition characterized by an array of different symptoms, including dryness, ocular discomfort, fatigue, and visual disturbances….

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Dry eye disease (DED) is a condition characterized by an array of different symptoms, including dryness, ocular discomfort, fatigue, and visual disturbances. This condition has become increasingly common in recent years owing to an aging society, increased screen time, and a highly stressful social environment. There are about 1 billion people, worldwide, who have DED. Undiagnosed and untreated DED can lead to a variety of symptoms, including ocular fatigue, sensitivity to light, lower vision quality, and a lower quality of life. Given the widespread prevalence of the condition, this can further lead to reduced work productivity and economic loss.

Credit: Juntendo University

Dry eye disease (DED) is a condition characterized by an array of different symptoms, including dryness, ocular discomfort, fatigue, and visual disturbances. This condition has become increasingly common in recent years owing to an aging society, increased screen time, and a highly stressful social environment. There are about 1 billion people, worldwide, who have DED. Undiagnosed and untreated DED can lead to a variety of symptoms, including ocular fatigue, sensitivity to light, lower vision quality, and a lower quality of life. Given the widespread prevalence of the condition, this can further lead to reduced work productivity and economic loss.

 

Despite the obvious disadvantages of DED, a large portion of the population remains undiagnosed, which ultimately leads to increased disease severity. DED is currently diagnosed through a series of questionnaires and ocular examinations (which can be invasive). But this method of diagnosis is not ideal. DED examinations do not always correspond with  patients’ subjective DED symptoms. Furthermore, non-invasive and non-contact dry eye examinations are required in the COVID-19 pandemic. These flaws point to a need for a simple, reliable, and accessible screening method for DED to improve diagnosis and prognosis of the disease.

 

To answer this need, a research group, led by Professor Akira Murakami and Associate Professor Takenori Inomata of the Juntendo University Graduate School of Medicine, developed a smartphone application called DryEyeRhythm. “DryEyeRhythm leverages the cameras in smartphones to measure users’ blink characteristics and determine maximum blink interval (MBI)—a substitute for tear film breakup time, an important diagnostic criterion of DED,” explains Associate Prof. Inomata. “The app also administers Ocular Surface Disease Index (OSDI) questionnaires, which are also a crucial component of DED diagnosis.

 

To validate the usefulness of the app, the research team conducted a prospective, cross-sectional, observational, single-center study, the results of which have been published in

The Ocular Surface (available online on 25 April 2022 and published in volume 25 in July 2022).

 

For their study, the team recruited 82 patients, aged 20 years or older, who visited the ophthalmology outpatient clinic at the Juntendo University Hospital between July 2020 and May 2021. The participants completed the Japanese version of the OSDI questionnaire (J-OSDI) and underwent examinations for MBI, both via the app and via other analysis techniques.

 

The study revealed that the J-OSDI collected with DryEyeRhythm showed good internal consistency. Moreover, the app-based questionnaire and MBI yielded significantly higher discriminant validity. The app also showed good positive and negative predictive values, with 91.3% and 69.1%, respectively. The area under the Receiver operating characteristic (ROC) curve—a measure of clinical sensitivity and specificity—for the concurrent use of the app-based J-OSDI and MBI was also high, with a value of 0.910. These results demonstrate that the app is a reliable, valid, and moreover non-invasive, instrument for assessing DED.

 

Non-contact and non-invasive DED diagnostic assistance, like the kind provided by DryEyeRhythm, could help facilitate the early diagnosis and treatment of patients, as well as, DED treatment through telemedicine and online medical care,” says Associate Prof. Inomata. The research team plans to further validate its results by conducting a multi-institutional collaborative study in the future. They are also planning to obtain medical device approval and insurance reimbursement for the smartphone application.

 

The development of DryEyeRhythm is crucial step forward toward the management of DED and improving vision and quality of life among the population.


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Economics

Global IPO market continues to plummet as Q3 draws to a close

Global IPO market continues to plummet as Q3 draws to a close
PR Newswire
LONDON, Sept. 28, 2022

Global IPO volumes fell 44%, with proceeds down by 57% nine-month YOYUS market is set to record its lowest IPO proceeds since 2003Highest volume of IPO…

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Global IPO market continues to plummet as Q3 draws to a close

PR Newswire

  • Global IPO volumes fell 44%, with proceeds down by 57% nine-month YOY
  • US market is set to record its lowest IPO proceeds since 2003
  • Highest volume of IPOs is in technology and energy sector now leading on proceeds

LONDON, Sept. 28, 2022 /PRNewswire/ -- Year-to-date (YTD) 2022, there have been a total of 992 IPOs raising US$146b, a 44% and 57% decrease year-over-year (YOY), respectively. This follows the trend for the year in which IPO companies and investors were faced with mounting macroeconomic challenges, market uncertainties, increasing volatility and falling global equity prices. Volatility (CBOE VIX average) increased from 19.7 in 2021 to 25.6 in YTD 2022.

YTD, the technology sector continued to lead by number of IPOs, although the average deal size came down from US$261m to US$123m YOY. While the energy sector overtook by proceeds with the largest increase of 176%, driven largely by three of the global top five deals in YTD 2022, the consumer products sector witnessed the biggest drop in average deal size (69%).

Q3 2022 saw the lowest SPAC IPO proceeds since Q3 2016, along with de-SPACs struggling to find the right targets. The SPAC market was continually challenged this quarter with only 17 deals, raising US$0.9b. A record number of existing SPACs are actively seeking targets, with the majority facing potential expiration in the next year. These and other findings were published today by EY.

Overall regional performance: taking a wait-and-see approach

Major economies and financial markets in the Americas and EMEIA remain under pressure as quantitative tightening kicks into a higher gear.

Americas exchanges saw the sharpest decline, recording only 116 deals raising US$7.5b YTD, a decrease of 94% in proceeds and 72% in volume YOY. In direct contrast to a record-breaking year in 2021, YTD Americas IPO activity sank to its lowest level in 20 years.

YOY, EMEIA IPO activity fell by 50% and 52% by number and proceeds, respectively. Europe dropped 76% in proceeds, but the Middle East continued to be a rare bright spot with a 209% increase in proceeds, despite a 51% decrease in the number of deals.

As the region has been less impacted by inflation and geopolitical issues, Asia-Pacific exchanges have performed relatively better, housing five of the top 10 global IPOs in YTD. YTD it has also contributed 61% and 69% of the global share of IPOs and proceeds, respectively. However, it still registered YOY declines of 25% by deal number and 22% by deal size.

Paul Go, EY Global IPO Leader, says:

"With uncertainties being the IPO market's biggest challenge, companies and investors continue to wait for a more stable and positive stock market sentiment before any sustained appetite for IPO activity re-emerges."

Q4 2022 outlook: icebreakers will pave the way

Soaring inflation and rising interest rates are adversely affecting the global equity market. Geopolitical tensions and the COVID-19 pandemic led to more market uncertainty and volatility. All these factors are bringing headwinds for risk assets as we near the end of 2022.

In the Americas, IPO pipelines are waiting for the market to reopen next year, and in EMEIA, tough market conditions continue to squeeze IPO windows. For APAC, while public filings for IPOs have not picked up, activity remains strong in the background as companies evaluate their options for 2023.

Go says: "Many companies' IPO plans were put on ice in early 2022, in anticipation of more favorable market conditions. Providing market uncertainties and volatility subside, the launch of long-awaited blockbuster IPOs together with improved after-market returns may reverse the sentiment and attract more companies to follow."

Overall, IPO candidates looking to go public will need to be well prepared when re-engaging the market as they will face much lower valuations compared with the highs of 2021.

Notes to editors

About EY

EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets.  

Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate.  

Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today. 

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com. 

This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients. 

About EY Private

As Advisors to the ambitious™, EY Private professionals possess the experience and passion to support private businesses and their owners in unlocking the full potential of their ambitions. EY Private teams offer distinct insights born from the long EY history of working with business owners and entrepreneurs. These teams support the full spectrum of private enterprises including private capital managers and investors and the portfolio businesses they fund, business owners, family businesses, family offices and entrepreneurs. Visit ey.com/private

About EY Initial Public Offering Services

Going public is a transformative milestone in an organization's journey. As the industry-leading advisor in initial public offering (IPO) services, EY teams advise ambitious organizations around the world and helps equip them for IPO success. EY teams serve as trusted business advisors guiding companies from start to completion, strategically positioning businesses to achieve their goals over short windows of opportunity and preparing companies for their next chapter in the public eye. ey.com/ipo

About the data

The data presented here is available on ey.com/ipo/trends. Year to date 2022 (i.e., January-September) is based on completed IPOs from 1 January 2022 to 21 September and expected IPOs by the end of September 2022. Data as of close of business 21 September UK time. All data contained in this document is sourced from Dealogic, CB Insights, Crunchbase, SPAC Insider and EY analysis unless otherwise noted.  SPAC IPOs are excluded in all data included in this report, except where indicated. 

CONTACT: Lauren Mosery
EY Global Media Relations
+1 732 977 2063
lauren.mosery@ey.com

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SOURCE EY

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Economics

Why WWE could be a good stock to buy/hold in October

World Wrestling Entertainment Inc. (NYSE:WWE) remains in defensive mode as the stock market crumbles. A year-to-date return of 37.40% makes the stock one…

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World Wrestling Entertainment Inc. (NYSE:WWE) remains in defensive mode as the stock market crumbles. A year-to-date return of 37.40% makes the stock one to hold for value preservation. This article finds WWE a good stock to trade when keenness and proper risk management are exercised.

WWE, as it is popularly known, is an integrated media and entertainment entity. It’s known for wrestling promotion, but related fields of film and American football widen its scope. 

Just like other entertainment companies, WWE was grounded by the Covid-19 disruption. As recovery began, the stock has never looked back. It has acted as a true momentum stock while maintaining an uptrend since the beginning of the year. There are clear fundamentals too.

In its second quarter, the company’s net revenue rose 24% to $328.2 million or £309.6 million. The revenue was above $322.4 million or £304.15 estimates. The earnings per share increased from $0.42 to $0.59. The company projects “strong revenue growth” in the third quarter. The raised guidance reflects rising content monetization, local media rights fees, and international ticket sales increases. 

WWE touches the bottom of the ascending channel

Source – TradingView

On the daily chart, momentum is weak on WWE as it corrected to $67. However, we can see that WWE is still maintaining the upside channel. 

Should you buy WWE

WWE has maintained momentum and recovers each time it hits the bottom of the ascending channel. The stock is a buy at the current level, preferably after recovering above the 50-day MA. Short-term traders can exit at the top of the ascending channel.

The post Why WWE could be a good stock to buy/hold in October appeared first on Invezz.

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