IL RISCHIO REALE PER I MERCATI FINANZIARI DEL 2015 NON E' UN MELT DOWN MA UN MELT UP COME NON SI VEDEVA DAL 1998-2000

"Deflation" and "boom" are not two words that normally go together. They are almost like "sad happiness," "low-cal donut." But in their very unlikely pairing they appear to do a good job of explaining the unusual economic and market environment that may lie ahead.

It’s a term discussed this week by  (CONTINUA A LEGGERE QUESTO ARTICOLO FONDAMENTALE PER IL TUO PORTAFOGLIO)

Cornerstone Macro analyst Francois Trahan to describe a rare condition in which a country’s economic activity rises but inflation falls. He believes that is the right interpretation of the Philadelphia Fed data released on Tuesday that showed output in the region up but prices paid falling, as shown in the chart below.

The improvement of the Philly Fed can be seen in part as a result of the stimulative effect of falling crude oil prices, and their ripple effect on the broad economy. The chart below, created by Cornerstone, shows the Philly Fed Index (green line) charted against the six-month percent change in the price of Brent Oil, advanced four months (gray) and inverted.

The oil price is advanced four months to show the lagged effect that oil has on economic activity. In other words, when oil falls in price it takes about four months for the change to have an effect on end users’ decisions.

You can already start to see the effect of lower oil and interest rate stimulus in the fact that the last four major economic data releases — Empire Manufacturing, NAHB Housing, Philly Fed and Kansas City Fed — have been better than expected, the first time that has happened in quite a while.

What we are starting to see, Trahan argues, is news that demonstrates we are in an “all stimulus, all the time” backdrop, with more boosts to global economic activity coming every day. The latest of course were the monetary policy announcements by the Chinese and Japanese, and the wink to suggest sovereign bond QE in the eurozone. The chart below shows a checklist: The Fed is still stimulating with super-low rates and not trimming its balance sheet of all the bonds bought during three years of QE; oil prices are dropping; long term interest rates are still falling; and the U.S. dollar is rising.

A “deflationary boom” in the United States occurs when the prices of raw materials — ranging from crude oil and precious metals to grains and cotton — fall, stimulating consumers to buy more, lifting demand from factories and service providers.

This is all pretty weird because we are used to seeing a stronger U.S. economy generate higher inflation, particularly as a result of wage growth and greater demand for raw materials. But companies are managing to keep wages relatively low through productivity increases, and commodity prices are sinking because of lower demand from emerging markets and the eurozone.

In short, a deflationary boom is not supposed to be able to happen, but it appears to be a byproduct of globalization.

In this environment, which was last seen in the 1990s, the shares of “early cyclical” companies like airlines, railroads and specialty retailers should go up, while late-stage cyclicals like miners, metal producers and energy producers should go down — pretty much what has been happening in the second half of this year.

Falling inflation boosts consumers’ free cash flow, or disposable income, which leads them to spend more on clothing, travel, cars and the like. For a variety of reasons, Trahan observes, the Phlly Fed tends to be one of the first indexes to respond and rise dramatically, and then activity in other Fed regions — Chicago, Richmond and Dallas — then to follow.

Cornerstone argues that investors who wish to position themselves for these conditions in 2015 should overweight the following “risk-on” industries and sectors: Financials, semiconductors, communications equipment, computer hardware, computer storage, electronic components, machinery, airlines, autos and steel. And they should underweight the “risk off” industries: utilities, food, staples, groceries, health care equipment, consumer services, insurance and software. 

No wonder we’re seeing the odd pairs trade of long Apple, short oil work out so well in the past five months, as shown above.

Summing it up into a single point of view, the Cornerstone team is looking for stronger growth and lower inflation to result in higher P/E multiples next year to go along with higher profit growth. If it’s true that risk-on will surpass risk-off next year, then investors should simply emphasize cyclicals over defensives in their portfolios.
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Europe: Blood In The Streets Signals A Buying Opportunity, Especially Germany

Nov. 28, 2014 11:18 AM ET  |  Includes: DAX, DBGR, DXGE, EWG, FGM, HEWG, QDEU, VGK

Disclosure: The author is long SPY, VGK, EWG. (More...)

Summary

• The European authorities will likely use the same game plan as the U.S. and Japan, and fire up more stimulus.
• More stimulus should juice the stock markets in Europe as it did the island nation and the U.S.
• A weak euro boosts demand for German exports, while falling oil prices lowers corporate production costs.

If the ideal moment to buy stocks is when there is blood in the streets, investors must flock to Europe. Stock market bargains spawn from fear and financial uncertainty - not euphoria and glowing prospects. The European authorities will eventually use the same playbook as Japan and the U.S., and fire up more stimulus. That should juice the stock markets in Europe as it did the island nation and the U.S.
The Federal Reserve's third installment of quantitative easing - known as QE Infinity - unleashed September 13, 2012, has since boosted the S&P 500 42% through November 25. Japan's iteration, Abenomics, has lifted its stock market 70%. The European Central Bank's balance sheet, now totaling 725.5 billion euros, is deep below its all-time high of 1.14 trillion euros seen in August 2012. So adding to its balance sheet from the present levels would be seen as reasonable.
Policy interest rates have been lowered to a new record of 0.05%, from 0.25% at the start of 2014. If there is no incentive to buy risk-free assets, investors must resort to the stock market for capital appreciation and yield income, especially at the current cheap valuations.


SPY has a P/E of nearly 18, P/B of 2.45 and P/S of 1.7, while yielding 2%.iShares MSCI Germany ETF (NYSEARCA:EWG) - Offering exposure to Europe's largest economy, the ETF trades at a forward P/E of 14. EWG has a P/B of 1.6, a P/S ratio of 0.75 and a dividend yield of 2.6%. It sank 8% year-to-date through November 25. The flagship iShares MSCI EAFE ETF (NYSEARCA:EFA), a benchmark for foreign developed markets, outperformed it by slipping only 1.4%, while the S&P 500 surged 14%. The tide will eventually turn, owing to the law of mean reversion. Institutional investors will want to take their profits in the U.S. stock market as it soars to new highs by the day, and invest in undervalued areas.
A weak euro boosts demand for German exports, while falling oil prices lowers corporate production costs. German exports dipped 0.2% quarter-over-quarter in the first quarter. They bounced back in the second quarter, increasing by 1.2% over Q1, and then climbed 1.9% in the third quarter. A strong labor market and healthy wage growth at a time of sliding oil and food prices offer consumers more spending power. What's more, consumers have no incentive to save with 0% interest rates.
Germany's domestic consumption is being driven by pent-up demand, rising disposable income and soft inflation. In addition, residential construction is being supported by accommodative credit markets and demand driven unexpectedly by increase in immigration the past two to three years.
IHS Global Insight projects that Germany's GDP growth will accelerate from 0.2% in 2013 to 1.4% in 2014, 1.6% in 2015 and 1.9% in 2016.
We must keep in mind that we're buying companies and not countries. It's debatable whether European governments are making the right decisions, but companies are. Companies are positioned for takeovers, turnarounds, restructurings and spin-offs when the economy appears on the brink of collapse.