the charts that matter - 04.03.15 - overweight cash

The Charts That Matter Risk is expensive! Buy low, sell high. We are high.

March 4, 2015

Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015

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US stocks

Are we here? Are we here? Are we here?

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Views in a nutshell

Assets 04.03 S/T view

04.03 L/T view

02.02 S/T view

02.02 L/T view

Comments

Cash Keep cash for opportunities

Investment grade bonds Bubbly, buy dips

High yield bonds Only special situations

Sovereign bonds Bubbly in Europe, US OK

Convertibles bonds Equity-like risk

European equities Short term overextended, long term looks ok

US Equities Still waiting for a 10% correction, at least…

Japanese equities Long term trend is positive

Emerging equities Buy dips

Precious metals Attractive levels

Oil Stabilization

Hedge funds CTAs and Macro strategies continue to be attractive

Volatility Buy volatility on dips

USD Looks stretched short term

Negative Positive No view


Previous views Current views

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The Citi Economic Surprise Index measure data surprises relative to market expectations. A positive reading means that data releases have been better than expected A negative reading means that data releases have been worse than expected So if US economic data is worsening, why are markets going in the opposite direction?

US stock markets ego-trip continuing… …while US economic data is deteriorating


S&P500

Citigroup US economic surprise index

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Nasdaq 5’000 Is this time different?

No, its bubbly again - especially in social media and most of biotech stocks (high P/E) Reason current growth figures are impressive but are not sustainable… Tesla will not become the new VW but Apple’s iCar might well be ;-)


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Nasdaq By the way, mind the gap(s)!!

Markets hate to leave gaps open ! One day or another, gaps are always closed! The lowest gap in a year of observation is @ 4316 = -13% from current levels Conclusion : in order to continue to move north, close the gaps please…

If we close the gap, I will sell my house and buy TESLA shares ;-)


-13%

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S&P500 Are stocks expensive?

US stocks are getting expensive @ 17.1x earnings (left chart) However, pray for top line growth because on the bottom line everything has been done

already… buybacks, cost reduction, … On a historical basis, except for financial services, most of the sectors are above their

historical averages (right chart) however, can we compare history with the current unprecedented period?


Current Vs historical average

?

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S&P500 Corporate America loves shareholders

Corporate America has been great with Wall Street distributing dividends and buying back shares but…

corporate America has not been great with Main Street – cutting jobs and not increasing wages…

This is obviously not sustainable. I believe that wage inflation is round the corner…


S&P500 including dividends 14x since March 88

S&P500 excluding dividends 7x since March 88

DOUBLE !

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Its not the economic data (deteriorating) It’s not the earnings (stagnant) It’s the huge share buybacks !!

What’s fuelling the markets? Corporate action of course


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Is it the [cold] weather? Is it the end of QE? Is it the end of the business cycle?

US: recession looming? Manufacturing surveys suggest bad news…


We are here

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Most corrupt European countries : Spain, Greece and Cyprus (you see what I mean) Greece shadow economy : 25% of GDP Will one generation be enough to change the mind-set of southern countries?

How to fix “club-med” countries? Change the mentalities!


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January 15th, 2015 – The Swiss National Bank shocked the world (not us) by removing the 1.20 EUR/CHF peg.

Since then, Swiss stocks have recovered most of the loss! Driven by… CHF weakness and institutional panic buying…

Swiss stocks and the CHF Je t’aime, moi non plus


SMI index

EUR/CHF

Who follows who?

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Second half GDP figures don’t look good >> not a scoop! Seems that the “dePEG” is to blame ;-) However, if the CHF continues to weaken at this pace, we might have positive second

half!

“I believe that the SNB is much smarter that we think. They might have deliberately de-pegged the EUR/CHF in order to temporarily weaken the Swiss economy in order to mechanically weaken the CHF!”

Swiss economy Second half looks tough … or not


Citigroup US economic surprise index

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European stocks – Eurostoxx 50 Target reached. And now?

3500 target reached (see last edition of the Charts That Matter) After a 13% rally, do European stocks still have room for improvement? All the good news [Greece, Russia, QE, EURO weakness, better macro data, …] priced into

stocks? To break or not to break?


Eurostoxx 50

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European stocks – Dax index End of the road?

German stocks are now above the +2 standard deviation mark! Historically, this is as far as it got… before experiencing fast and furious corrections But this time is different right? Super Mario is here to create bubbles ;-)


Dax Index

??

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Zoom on a DAX index constituent : Bayer AG Irrational exuberance?


Bayer AG

+275% since

31.12.2011

The following took place between 31.12.2011 and 31.12.2014 : EPS increased by +25% - Top line increased +15.6% - Free cash flow increased +7.9% -

Numbers are alight but what [rationally] justifies a +275% raise of the stock in 3 years? Answer: default stock bought by institutional money and ETFs. Why?

Index heavyweight (hot), pharma sector (hot), dividend yielder (hot), low vol stock (hot).

Bayer, was noch?

Fly me to the moon

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Portuguese 10yr yields lower than US yields Seriously?

Thank the ECB, Draghi and the QE I have a tough question : which of the two countries is more likely to pay you back in 10

years? Answer : probably neither of them ;-)


“Whatever it takes” Mario Draghi, July 26,

2012

Portuguese 10yr yields

US 10yr yields

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Baltic dry index Secular low?

The Baltic dry index aggregates prices of dry bulk shipping rates (see chart below ) In other words : the price paid to transport commodities (Iron ore, coal,…) by ship The index is at record lows due essentially to Chinese slowdown and overcapacity Too much supply, poor demand = falling prices


Every working day, a panel of international shipbrokers submits their view of current freight cost on various routes to the Baltic Exchange. The routes are meant to be representative, i.e. large enough in volume to matter for the overall market. These rate assessments are then weighted together to create both the overall BDI and the size specific Supramax, Panamax, and Capesize indices. The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:[3]

Chinese bubble

Chinese growth Dry bulk shipping stocks

Baltic dry index

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Account for roughly 30% of global population, 10% of global GDP, but only 1% of global equity market capitalization!

Urbanization creates tremendous growth – remember China last decade? Demographics are very positive for most of frontier markets

Frontier markets What else?


projections

Burma GDP/Capita to reach 2’000$ in 2019 …

Switzerland current GDP/CAPITA = 55’485$

Cities with a projected 2030 pop of more than 10 million

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Forget Greece, now its Ukraine Economic mess

Official hyperinflation is 28.5% YoY but according to Prof. Steve H. Hanke (Hopkins University) the unofficial inflation rate is … +261.9% based on the black market UAH/USD exchange rate

Default risk is soaring - currency is collapsing - people dying – people crying… Monsieur Hollande, Frau Merkel, what’s next?

Ukraine crisis


USD Vs UAH

Ukraine CDS

Ukraine inflation

Gold in UAH

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Bonds Where is the yield gone?

It is hard to believe but there is hardly nothing left to bite in corporate bonds Out of 346’369 straight corporate & governments bonds in USD, my screenings

gave 174 results !!! Screening based on the following boundaries Equities, what else?


results

Source : Bloomberg

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Have central banks lost control? 21 interventions so far this year!

Source : zerohedge


Date Country Action

Jan. 1 UZBEKISTAN cuts refinancing rate to 9 percent from 10 percent

Jan. 7/Feb. 4 ROMANIA cuts key interest rate by a tota l of 50 bas is points , taking i t to 2.25 percent

Jan. 15 SWITZERLANDscrapping the franc's exchange rate cap to the euro + cut interest rate on certa in s ight depos it

account balances by 0.5 percentage points to -0.75 percent.

Jan. 15 EGYPT50 bas is point cut in i ts main interest rates , reducing overnight depos it and lending rates to

8.75 and 9.75 percent

Jan. 16 PERU cut in i ts benchmark interest rate to 3.25 percent from 3.5 percent

Jan. 20 TURKEY lowers i ts main interest rate by 50 bas is points

Jan. 21 CANADA cut interest rates to 0.75 percent from 1 percent

Jan. 22 EUROPEAN CENTRAL BANK launches a government bond-buying programme which wi l l pump over a tri l l ion euros

Jan. 24 PAKISTAN cuts i ts key discount rate to 8.5 percent from 9.5 percent

Jan. 28 SINGAPORE eases pol icy

Jan. 28 ALBANIA cuts i ts benchmark interest rate to a record low 2 percent

Jan. 30 RUSSIAcuts i ts one-week minimum auction repo rate by two percentage points to 15 percent, a l i ttle

over a month after ra is ing i t by 6.5 points to 17 percent

Feb. 3 AUSTRALIA cuts i ts cash rate to an a l l -time low of 2.25 percent

Feb. 4/28 CHINAcut i ts interest rate by 25 bps , when i t lowered i ts one-year lending rate to 5.35% from 5.6% and

i ts one-year depos it rate to 2.5% from 2.75%

Jan. 19/22/29/Feb. 5 DENMARKcuts interest rates a remarkable four times in less than three weeks , and intervenes regularly

in the currency market to keep the crown within the narrow range of i ts peg to the euro.

Feb. 13 SWEDEN cut i ts key repo rate to -0.1 percent from zero

Feb. 17 INDONESIA cut i ts main interest rate

Feb. 18 BOTSWANA benchmark interest rate was cut by 1 percentage point to 6.5 percent

Feb. 23 ISRAEL reduced i ts interest rate by 0.15 percentage points , to 0.10 percent

Jan. 15, March 3 INDIA25 bas is point cut in rates to 7.75 percent (jan15) cut rates one more time, this time to 7.50%

(3mar)

Mar. 4 POLAND lowered i ts benchmark seven-day reference rate by 50 bas is points to 1.5 percent

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Keep children away! 2015 world growth expectations

Source : zerohedge.com


China(+), Europe (+), India (+)

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Bonus chart Just a reminder of what happens to gold when [hyper]inflation soars

Source : wikipedia.org


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Key takeaways

US equities – be very cautious – late cycle – recession looming?

European stocks – watch and wait

Swiss stocks – watch the CHF

Frontier markets – opportunities

Is it the low for shipping and mining stocks?

No yield left in the bond markets

Risk is very expensive right now…

Overweight cash [I know it costs… but at least capital is preserved]

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Disclaimer

ECB

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The information contained in this material should not be construed as a recommendation or solicitation to buy or sell any security, or to participate in any investment strategy. It does not take into account the specific investment objectives, financial situations, or the particular needs of any specific entity or person. Investors should make their own appraisal of the risks and should seek their own financial advice regarding the appropriateness of investing in any securities or participating in any investment strategy. This material should not be construed as legal, business or tax advice. While the information (including any historical returns) in this material has been obtained from sources deemed reliable, SEQUOIA Asset Management S.A. does not guarantee its accuracy, timeliness or completeness. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Past performance is no indication of the future return. This information document or any part of it should not be copied, reproduced or distributed to anyone without the prior written approval of SEQUOIA Asset Management S.A.


the charts that matter - 04.03.15 - overweight cash

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