What to look out for re:2016 recession

Thus, to change our call and predict a US recession, we would need to see the following:

• The non-manufacturing sector would need to be weak for a recession. A drop in our composite ISM index, which combines the two ISM surveys, to below 49 would be consistent with negative quarterly GDP growth. The most recent reading was 54.4 in December, held up by a still solid ISM non-manufacturing index.

• Weekly initial jobless claims, which typically lead a recession by 6-12 months, would need to rise to around 350k and above to be consistent with recession. The recent reading was 293k (potentially upwardly biased due to seasonal adjustment problems around holidays).

• Gross hiring and voluntary quits, which weakened about 12 months ahead of the last recession, would need to soften.

• Temporary employment, which has rolled over 12 months or more ahead of the last two recessions, would need to drop.

• The Treasury yield curve would need to flatten sharply. An inversion of the yield curve has typically given a 12-month or longer signal ahead of recessions. The message from the yield curve today, with a 120 bp spread between the 10-year and 2-year Treasury yield: zero probability of a recession over the next 12 months.

Ellington is bearish HY credit

http://www.valuewalk.com/2015/11/ellington-management/

“There is a silver lining to all this doom and gloom,” the hedge fund writes. “Despite all of these warning signs, the window of opportunity is still wide open, with market prices and implied volatilities now back around where they were before the market swoon during August and September.” In particular, the fund looks to

Ellington cites opportunities in single name credit default swap derivatives, with a particular mean reversion trade in mind.

The S&P LSTA Leveraged Loan 100 Index, which is a total return index designed to track the performance of the largest institutional leveraged loans, has declined almost 5.9% since June, while the CDX HY S24 index has declined by only 0.1%. These indices, which measure similar risks, tend to move in tandem. Most of this divergence has taken place since late September. In October alone, CDX HY S24 returned 3.5%, compared to -0.6% for the S&P Leveraged Loan 100 Index. This outperformance coincided with by far the strongest month ever for high yield ETF flows.18 Using single-name CDS data, we are able to separate out the components of this outperformance since June to better understand whether we think it will revert. Nearly a third of this outperformance (1.23% of the 4.05% difference) is a move in the basis between the CDX HY index and its constituents.

Ellington calls the move “purely technical, reflecting an unusually large premium at which CDX HY currently trades to its constituents.” The differing trading levels “has historically mean-reverted, especially when the basis is greater than 1 percent of net asset value.” Today the variance stands at to 2 percent of asset value. The conclusion the report makes is “two factors are at work: not only has single-name CDS outperformed the leveraged loan market, but the CDX HY index has outperformed single-name CDS.” When prices mean revert from their historical averages, a counter trend is often anticipated, particularly when fundamental performance drivers haven’t materially dislocated. “The price differential creates a large wedge between CDX HY and leveraged loans, which supports our thesis that synthetic corporate credit is especially overpriced today.”

Latest Odey

Odey:

http://www.valuewalk.com/2015/11/odey-stock-crash/

"$2.5 billion Odey Asset Management OEI MAC fund was down 17 percent halfway through October 30 and -23.7 percent year to date. The causation for the pain is a long / short ratio that is significantly leveraged short, an unusual position when compared to the mean average long / short equity hedge fund strategy."

"“Stan Druckenmiller stunned investors in New York recently by announcing that he thought we were already in a bear market for equities,” Odey says, ominously pointing to a market near record highs. “I suspect people will look back on this time and see it as the last opportunity to get out.”"

"Before a crash, “the first thing that goes is a market is breadth, which narrows,” he told investors on a recent podcast to investors. Market breadth, measuring the number of advancing and declining stocks, fell under 30 on Aug 21, indicating more names were negative than positive. “We broke last Sept lows,” he said, indicating trouble for the market.

“On 21st August 2015, the Dow Jones, the FTSE and the global market index gave the first sell signal since 2007 and confirmed that we are now in a bear market,” he wrote in a September monthly report to investors. The resulting rally since the downturn reflects just how bearish participants were on that day. “Only 16% of shares were still in a bull market, down from 48% only a month and a half earlier.”"

"China will be the catalyst for the market downturn. China has run out of policy options."

"When would we buy the S&P? At 10x EBIT or 1452"

"We expect the Yuan to fall by 30%"

"Odey says that while the 2008 crisis was solved by low interest rates ultimately, “this downturn will only be solved by capacity getting written off.” This is a point in the very distant future. In the near term he recommends watching corporate credit spreads reveal that there is a credit tightening taking place, “which is wholly not what the central banks want to happen.”"

- Argument isn't persuasive. Merely says that monetary policy has been overly accommodative, which is resulting in poor capital allocation, and will chaos as the easing is withdrawn.

The best and the worst performing JSE shares: 2010-2015

http://financialmarketsjournal.co.za/the-best-and-the-worst-performing-shares-2010-2015/

Best on return

Calgro
Finbond
Adaptit
Alaris
Micromega
Eoh
Trustco
Indequity
Santova
Fortress


Best Top 40

Naspers
Mondi
Aspen
Woolworths
Steinhoff
Mediclinic
Richemont
Old Mutual
Discovery
Sanlam


Best risk-adjusted

EOH
CapCo
Coronation
PSG
Calgro
NEPI
Fortress
Mondi
Resilient
Naspers


Worst

Alert Steel
African Bank
Evraz
1Time
Aquarius
Rare
Great Basin Gold
Sea Kay
Delrand

Miranda Mineral 

Jeremy Grantham GMO on markets

"Jeremy Grantham, founder and chief investment strategist of GMO, a $118bn investment house based in Boston, expects the stock market to continue to march higher in the coming year, eventually sucking in retail investors and setting up a serious decline around the time of the US elections in late 2016."

Online Stock Analysis tools

http://quotes.wsj.com/SPG/research-ratings
http://www.nasdaq.com/symbol/spg/analyst-research
http://money.cnn.com/quote/forecast/forecast.html?symb=spg

The life cycle of firms

People tend to parrot Warren Buffett too often. One of my pet peeve "Buffet-isms" is "our favorite holding period is forever". We as humans cannot gauge the future, how the economy will shift, what new technologies will arise, or how consumer preferences will change.

The important message from Warren Buffett is that it is good to have a long term holding period, but personally I think this should be much shorter than 'forever'. You don't want to focus on quarterly performance and overtrade, so a good middle ground is 5-10 years.

A good example of a company that shifts, GAP.
What they sold was just not in fashion anymore. Management, no matter how skilled, cannot fight this trend.

GAP could have been a great buy 10 years ago. But its a very different world now.