Monday, August 3, 2015

Fwd: FW: Stock Market Observations | August 2015

FYI, Craig Drill is a widely watched prognosticator, and this is his message to paid subscribers.

---------- Forwarded message ----------
From: MICHAEL SALLETTE <m.sallette@me.com>
Date: Monday, August 3, 2015
Subject: FW: Stock Market Observations | August 2015
To: George Zachar <george@greensward.com>, Monty Bannerman <mbannerman@arcstarenergy.com>




From: Craig Drill Capital <cdrill@cdccorp.com>
Reply-To: <cdrill@cdccorp.com>
Date: Monday, August 3, 2015 at 11:49 AM
To: <mike@greensward.com>
Subject: Stock Market Observations | August 2015

Having trouble viewing this email? Click here
August 3, 2015

Runners Hitting the Wall of China 

The US economy continues in a rather comfortable groove of low inflation, low interest rates, and low economic growth...low at least relative to how we remember past business cycles (Chart 1). Credit and liquidity are plentiful; the economic expansion is making up in length for what it has lacked in strength.

  
 Chart 1 | Quarterly Growth in US Gross Domestic Product  

 

Inflation is still well below the Federal Open Market Committee's (FOMC) long-run 2% objective, so the FOMC can normalize interest rates in a gradual and well-telegraphed fashion that does not alarm markets. In the post-war period, the stock market peaks on average 30 months after the first official rate hike.

 

The FOMC is also reinvesting principal payments from its debt holdings and rolling over maturing securities, preserving highly accommodative monetary conditions. Real (after inflation) interest rates are likely to remain low for a considerable period.

 

With approximately 60% of S&P 500 companies having reported second quarter earnings, 70% of them have beaten expectations. The quality of these earnings, however, remains poor with companies missing on the top-line, but driving bottom-line growth through margin expansion and robust share buybacks.

 

The dividend yield on the S&P 500 Index averages 2% and is rising (Chart 2). Corporate cash balances are substantial. Merger and acquisition activity is booming.

 

   Chart 2 | S&P 500 Dividend Yield 
   

Rising from the near collapse of our financial system and a severe recession, this bull market has lasted longer and advanced further than the average post-war experience. Not surprisingly, absolute measures of valuation suggest stocks are expensive (e.g., market capitalization/GDP, equity market value/equity book value, and the cyclically adjusted price/earnings multiple).

 

Yet, the age of the market cycle, the degree of the advance, and measures of valuation are poor tools for market timing. They will become more relevant -- in retrospect -- once the cycle turns.

 

Wild cards in the outlook come mainly from outside the US. Some are in the headlines and others are harder to glimpse, such as those connected to the super-charged carry trade environment.

 

First and foremost is China in light of what is perceived as a stock market crash, collapsing commodity prices and credits, weakening business activity, and a real estate property downturn. This is of consequence because China is the world's second largest economy and leading generator of growth in 2014.      

 

China has three classes of stock. Foreigners are largely limited to the H shares listed on the Hong Kong Exchange and its benchmark is the Hang Seng China Index. The other two are Shanghai A shares and Shenzhen, which are mostly high tech and small cap.

 

Shanghai is largely a casino and Shenzhen is the Wild West! Shanghai trades at a 14 price/earnings multiple, Shenzhen at 17 times, but Hong Kong H shares at only 9 times. The wheat needs to be separated from the chaff.  

 

The Shanghai A Share Index is actually up 15% year-to-date, but this is on a "soft close" with:

  • almost 20% of stocks trading down the limit on Friday, with trading suspended,
  • banks encouraged to increase lending to investors,
  • interest rates cut,
  • large shareholders (over 5%) still blocked from selling (which has turned off Western institutions),
  • state-owned companies and funds told to buy stocks,
  • initial public offerings frozen,
  • bid/ask spreads at historically wide levels,
  • stock borrowing impossible,
  • short-sellers threatened, and
  • people spreading "rumors" arrested.

 

It is hard to see China through American eyes.

 

Meanwhile, emerging market currencies have fallen to 15-year lows. Brazil's outlook was cut to negative by S&P.

 

Today, trading resumes on Greece's stock exchange, with the short selling ban continuing. Last week, bail-out negotiations started between Greece and its official creditors...with deep differences remaining.

 

The International Monetary Fund and many economists believe that any Greek rescue will not be viable without restructuring Athens' high debt level. Yet, classic haircuts in government debt are incompatible with a country's membership in the Eurozone.

 

Iran and the P5+1 have come to an agreement on temporary limits on certain nuclear activities in exchange for phased sanctions relief, adding to downward pressure on crude oil prices. Israel remains on high alert regarding its security.

 

In our imperfect and dangerous world, the US remains healthy and, on a relative basis, a safe haven for investors. As befits a strong country, our currency is likewise strong.

 

 

 

About the Portfolio Manager

 

Craig A. Drill is the portfolio manager and founder of Craig Drill Capital, a

private hedge fund group based in New York City.    

 

From 1973 through 1987, Mr. Drill was employed by The First Boston Corporation as Vice President of the Equity Department, National Research Coordinator, and a senior member of the firm's Investment Policy Committee.  From 1969 to 1973, Mr. Drill was employed by Burnham and Company as National Institutional Sales Manager and a Corporate Vice President, and he served on the firm's Investment Policy, Buying, Pricing and Marketing Committees.   

 

Mr. Drill holds a BA from Princeton University and an MBA from Harvard Business School. He served as an officer in the United States Navy from 1964 to 1967.

 

 

Craig Drill | Tel 212.508.5757 | Fax 212.508.5758 | cdrill@cdccorp.com

Facebook    Twitter    LinkedIn

IMPORTANT NOTICE

These observations are confidential and proprietary. They are for informational purposes only, and they are not intended to be used, and may not be used, as investment or tax advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the observations herein are no longer current.   These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests of any entities, or to provide investment advisory services. Any such offer or solicitation may only be made to eligible persons by means of approved offering documents. The use of these observations in certain jurisdictions may be restricted by law.

Forward this email



This email was sent to mike@greensward.com by cdrill@cdccorp.com |  


Craig Drill Capital | 724 Fifth Avenue | 9th Floor | New York | NY | 10019



--
Monty Bannerman
ArcStar Energy
+1 646.402.5076
www.arcstarenergy.com

No comments: