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The Charts That Matter: Global Bond Yields Take a Dive

Welcome back. 
In this week’s magazine, we look at the challenges facing the G7’s plan to impose a minimum rate of corporation tax rate around the…

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Welcome back. 

In this week’s magazine, we look at the challenges facing the G7’s plan to impose a minimum rate of corporation tax rate around the world in an attempt to get a hold of some of the profits of the world’s biggest multinational companies. Is it a good idea? Will it come to anything – and can it be made to work? We also look at buying foreign shares. Most investors stick to their home markets, but it makes sense to look abroad, too. Cris Sholto Heaton gets stuck in to the whys and hows of investing abroad.

For this week’s podcast, we’ve got something of a treat for you. Merryn is joined by the FT’s Gillian Tett – but this week it’s available on video as well as audio. Gillian talks about how her training as an anthropologist has helped her make sense of the markets and the global economy, and why it’s so important for everyone – corporations, governments and individuals – to not just look at cold hard economic facts, but to take human nature into account, too. Watch the video here.

This week’s “Too Embarrassed To Ask” looks at passive investing – sometimes known as index investing – buying funds that just track an index, rather than ones that are made up of stocks picked out by an active manager. Find out more here.

Here are the links for this week’s editions of Money Morning and other web stories you may have missed.

Now for the charts of the week. 

The charts that matter 

Gold has steadied after falling from its recent high.

Gold price chart

(Gold: three months)

The US dollar index (DXY – a measure of the strength of the dollar against a basket of the currencies of its major trading partners) is also treading water.

US dollar index chart

(DXY: three months)

While the Chinese yuan (or renminbi) just keeps getting stronger (when the red line is rising, the dollar is strengthening while the yuan is weakening). 

USD/CNY currency chart

(Chinese yuan to the US dollar: since 25 Jun 2019)

The yield on the ten-year US government bond has dropped back to a level not seen since early March.

US 10-year Treasury bond yield chart

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year bond has also taken a dive.

Japanese government bond yield chart

(Ten-year Japanese government bond yield: three months)

And the yield on the ten-year German Bund, followed suit.

German Bund yield chart

(Ten-year Bund yield: three months)

Copper is drifting from its recent high.

Copper price chart

(Copper: nine months)

The closely-related Aussie dollar continued to meander sideways.

AUD/USD currency chart

(Aussie dollar vs US dollar exchange rate: three months)

Bitcoin has so far failed to regain its recent losses.

Bitcoin price chart

(Bitcoin: three months)

US weekly initial jobless claims took another fall, down 9,000 to 376,000, compared to 385,000 last week. The four-week moving average fell to 402,500, down 25,500 from 428,000 the week before. 

US initial weekly jobless claims chart

(US initial jobless claims, four-week moving average: since Jan 2020)

The oil price kept on climbing.

Brent crude oil price chart

(Brent crude oil: three months)

Amazon rose sharply.

Amazon share price chart

(Amazon: three months)

And Tesla made something of a recovery after the previous week’s losses.

Tesla share price chart

(Tesla: three months)


Earnings, Multiples, & Untold Truths About Forward Valuations

Earnings up, multiples down. Such seems to be a straightforward rationale for why investors should pile into markets as it enters a "new phase." 


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Earnings up, multiples down. Such seems to be a straightforward rationale for why investors should pile into markets as it enters a “new phase.” 

Such was the suggestion made recently by Yahoo! Finance anchor Myles Udland.

The stock market is entering a new phase. Investors right now are faced with a simple question: how much? How much do they want to pay for earnings growth that continues to blow away expectations but might also be peaking?”

It’s a good question. 

With wealth investors expecting to earn 17% average annual returns, there currently does seem to be little concern about valuations.

“According to a new survey from Natixis that surveyed households that have over $100,000 in investable assets in March and April of 2021. Those same investors report they expect to earn 17.3% above inflation in 2021, which, while high, may be understandable.

However, to assess “how much,” we need to understand what it means when the media makes comments about “forward earnings” and “future multiples.”

Not A New Cycle

We need to start by dispelling the myth that begins the article. The market is “not” entering a “new phase.” Yet, in a rush to pitch the bullish case for stocks, the media has continued to suggest the March 2020 decline was a “bear market cycle.” Such would support the idea a new “bull market cycle” has started.

However, as discussed in “Confusing Bear Markets & Crashes,” March was a “correction” within a “bull market cycle.” To wit:

“As Sentiment Trader notes, the 20% rule is arbitrary. The question is, after a decade-long bull market, which stretched prices to extremes above long-term trends, is the measure still valid? “

If a 20% decline is arbitrary, what measures accurately define a “bull” or “bear” market? To answer that question, let’s clarify the premise.

  • A bull market is when the price of the market is trending higher over a long-term period.
  • A bear market is when the previous advance breaks, and prices begin to trend lower.

The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and valuable.

Correction Bear Market, #MacroView: March Was A Correction, Bear Market Still Lurks.

This distinction is vital for investors, particularly when discussing the starts of “new market cycles.”

  • “Corrections” generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
  • “Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

The decline in March did not meet any of the criteria necessary to be classified as a “bear market.” 

  • The decline was unusually swift and did not break the prevailing bullish price trend. 
  • The recovery to new highs occurred quickly; and,
  • Valuations did not revert from previously elevated levels.

Stocks Are Eating Earnings

As noted, the correction in March did not revert the overvaluation in the markets that existed in February of 2020. While earnings declined, the price advance was so fast it kept valuations elevated throughout the “economic shutdown.” Thus, while valuations did not get more expensive, they did not get cheaper either.

“The chart, which came from Credit Suisse equity strategist Jonathan Golub, showed that while stock prices had been in rally mode for months, the market wasn’t getting more expensive.” – Myles Udland

In other words, the rise in prices “ate the recovery” in earnings. If this had been a “real bear market,” investors would have shunned stocks keeping prices depressed as earnings recovered, thereby lowering valuations.

That is also another characteristic of “bull market correction” and a “real bear market.” Following a “bear market,” investors do not rush back into the riskiest of assets. 

Most importantly, you don’t see investors piling into leverage at the beginning of a new “bull market cycle.”

The Problem With Lower Forward Valuations

However, here is the “ugly truth” of “forward valuations.” Let’s start with Myles’s analysis as a baseline.

“Right now, the S&P 500 currently trades at roughly 22x forward earnings. You might hear this referred to as the market’s multiple or its valuation. The terms are roughly interchangeable. And we say roughly because there are always exceptions. 

So a simple way of thinking about the earnings multiple for the market is how much you need to pay as an investor for $1 of earnings power.”Myles Udland

The S&P 500 recently traded at 4,353. According to the latest data from S&P, earnings estimates for the index at the end of 2022 are $189. Divide the index level by the expected annual earnings for the index, and you get the earnings multiple. In this case, 4,353 divided by 189 is 23.03. So, for every $22.03 you put into the S&P 500, you can expect to get back $1 in earnings based on today’s estimates.

Read that again.

23-Years To Get Your Money Back

While investors take this to mean the market will be cheaper in the future, therefore using that rationalization to “buy stocks,” such is not the case.

The correct way to interpret valuations of 23x earnings is to realize two things. 

For earnings in the future to catch up with the market’s current price, price returns over the next 18-months must be ZERO. 

If stocks continue to appreciate during the period, valuations can decline if earnings growth is faster than the price of appreciation. However, such does not necessarily resolve the overvaluation of the market.

Secondly, and to Myles’s last point, while it may seem like a “bargain” to pay $23 for each $1 of earnings, that is not precisely what that means. Here is the math:

“If you pay $23 for $1 in earnings, and the company distributes that $1 of earnings to you each year, it will only take you 23-years to get your money back.

All of a sudden, that doesn’t sound like such a good deal.

Valuations Are Astronomical

In 2013, valuations on stocks were around 19x trailing earnings. While certainly expensive, valuations had not yet eclipsed previous “bull market” excess of 23x earnings. As shown below, even if we assume no increase in the index price, the market will remain well above 20x earnings over the next two years assuming analyst estimates are correct.

I recently quoted Carl Swenlin on earnings. As Carl noted, there is nothing normal with GAAP earnings. But, of course, today, most companies report “operating” earnings which obfuscate profitability by excluding all the “bad stuff.” 

The following table shows the expectations for reported earnings growth:

  • 2020 (actual) = $94.13 / share
  • 2021 (estimate) = $161.62  (Increase of 71.69% over 2020)
  • 2022 (estimate) = $189.48  (Increase of 101.29% over 2020)

The chart below uses these earnings estimates and assumes NO price increase for the S&P 500 through 2022. Such would reduce valuations from 41x earnings currently to roughly 22x earnings in 2022. (That valuation level remains near previous bull market peak valuations.)

However, as stated above, investors always bid up prices as earnings increase. With earnings expected to double over the next two years, if we reduce wealthy investor return assumptions to just 15% annually, the picture changes. Instead of valuations declining, the increase in price keeps valuations hovering near 27x earnings.

Potentially Disappointing Outcomes

Given that markets are already trading well above historical valuation ranges, such suggests that outcomes will likely not be as “bullish” as many currently expect.

“Historically, price has usually remained below the top of the normal value range (red line); however, since about 1998, it has not been uncommon for price to exceed normal overvalue levels, sometimes by a lot. The market has been mostly overvalued since 1992, and it has not been undervalued since 1984. We could say that this is the ‘new normal,’ except that it isn’t normal by GAAP (Generally Accepted Accounting Principles) standards.” – Carl Swenlin

Siegel Stocks 30%, #MacroView: Siegel On Why Stocks Could Rise 30%

The hope, as always, is that earnings will rise to justify the over-valuation of the market. However, when earnings are rising, so are the markets.

Most importantly, analysts have a long and sordid history of being overly bullish on expectations of growth which fall well short. Such is particularly the case today. Much of the economic and earnings growth was not organic. Instead, it was from the flood of stimulus into the economy, which is now evaporating.


While Myles’ analysis is typical for mainstream media, it is essential always to consider the context in which it gets structured.

Throughout history, overvaluations of markets have never been resolved by earnings catching up with the price. Secondly, the two-fold problem of the temporary nature of the stimulus and inflation leaves the market vulnerable to a downshift in earnings expectations over the next couple of quarters. As noted, Wall Street has ratcheted up expectations to try and justify current prices.

However, a bit of analysis suggests that over-estimating earnings will lead to a price correction when it becomes realized. While that is something we do not expect immediately, we think markets will likely wake up to this reality in the last half of the year.

While monetary interventions allow market participants to ignore the reality of the economic ties to the market, such does not preclude hair-raising volatility and significant declines, as we saw in March 2020.

In 2021 and 2022, earnings are likely to come in once again lower than analyst’s exuberant estimates. But such shouldn’t be a surprise since they are never accurate historically. More importantly, if the Fed backs off, whether by its design or due to inflation, slower economic growth, or massive debt overhead, rich valuations will matter.

The risk of disappointment is high. And so are the costs of investing based on analysis without all of the facts.

The post Earnings, Multiples, & Untold Truths About Forward Valuations appeared first on RIA.

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Lithium Prices up 100% in 2021, With ‘No Imminent Pullback’ in Sight

The electric vehicle sector continues to pour fuel on a red-hot lithium sector, with Benchmark Mineral Intelligence’s latest lithium price…

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The electric vehicle sector continues to pour fuel on a red-hot lithium sector, with Benchmark Mineral Intelligence’s latest lithium price assessment flagging huge year-to-date price increases.

Battery grade carbonate pricing is now up 101% in 2021, with prices between $13,325-$13,950/tonne, and averaging $13,650/tonne.

Hydroxide prices are up 85.7%  YTD, and robust demand and limited supply expected to continue to push up them higher.

A year ago, desperate Australian spodumene producers were accepting sub-$US400/t prices for their product. Now “market contacts report expectations that spodumene feedstock prices will rise above $800/tonne (FOB Australia) in late Q3 as converters scramble for material,” Benchmark says.


“Seasonal supply from Qinghai province brine projects continues to ease market tightness as production ramps up during China’s summer months, with highest evaporation rates in June, July and August, alleviating upward pressure on carbonate prices,” Benchmark says.

However, it  anticipates the carbonate market to return to rising prices in H2 2021, “as seasonal production within China subsides against a backdrop of rising global demand.”

Benchmark is also anticipating no imminent pullback in hydroxide prices as “improving downstream demand for high-nickel cathode chemistries, both within China and internationally, continues to drive up prices”.

Pic: Benchmark Mineral Intelligence

The post Lithium prices up 100pc in 2021, with ‘no imminent pullback’ in sight appeared first on Stockhead.

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Weekly Investment Update – July Outlook?

Stronger economic data is now being interpreted as a sign that growth may soon be peaking. This view is reflected in further falls in US interest rates. …

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This article was originally published by Investors Corner.

Stronger economic data is now being interpreted as a sign that growth may soon be peaking. This view is reflected in further falls in US interest rates. 

COVID-19 – Herd immunity in sight?

New Covid-19 cases around the world have risen and now stand at 390 000 a day. Rises in Europe, Asia, and Africa are offsetting a decline in South America. The UK accounts for more than a third of daily new cases in Europe; the spread of the Delta variant among younger age groups with no or just one dose of the vaccine has fuelled the surge.

Evidence points to vaccines limiting the severity of symptoms; so far, the rise in new cases in the UK has not led to a material rise in hospitalisations.

Based on the current pace of vaccinations, the majority of countries across Europe are expected to reach a level of vaccine coverage consistent with herd immunity by the end of September.

Update on thinking at the US Federal Reserve

The minutes of June’s FOMC meeting can be expected to highlight details of the start of the policy-setting committee‘s discussion on tapering the central bank’s asset purchases. It should also provide insights into participant views on the economic outlook that drove a hawkish shift in the interest-rate projections of committee members.

The market will be looking for any further indications as to Fed Chair Jay Powell’s comments that tapering was at the forefront of the committee’s discussions last month.

Although Powell has reiterated that tapering itself was not yet imminent and has promised advance notice, he has also stated that the Fed would begin reviewing the progress of the economic recovery on a meeting-by-meeting basis.

The next FOMC meeting is on 27-28 July.

The shape of the US jobs market

US non-farm payrolls rose by 850 000 in June, beating consensus expectations. The details of the report were less positive, and indicative of a constrained labour supply. This was also highlighted in the latest ISM services number.

The rise in non-farm jobs was driven in large part by state & local education hiring. This rose by a whopping 230 000. Private sector payrolls rose by a more measured 662 000, again led by reopening-oriented sectors such as leisure & hospitality and retail trade.

Supply should continue to loosen as we move further into the year. Theoretically, we believe the Fed is on track for a detailed discussion on tapering at its July meeting followed by formal communication in September, an announcement in December, and implementation in January.

Meanwhile in the eurozone

European purchasing managers indices (PMIs) for June have confirmed that activity across the eurozone and UK is taking off, supporting expectations of strong GDP growth over the summer months. Improvements in services PMIs are reflecting the reopening of the sector, which is being facilitated by effective vaccination rollouts across Europe.

Encouragingly, manufacturing output has remained resilient at high levels despite reports of persistent supply chain disruptions. The overall picture is of a eurozone economy running hot, with demand recovering rapidly and supply still constricted. All of this is increasing inflationary pressures, which could be more enduring than generally assumed.

ECB strategy review

The European Central Bank will continue to meet this week to discuss the strategy review. The aim of the meeting is to agree on the review, with the possibility of an official announcement, should there be an accord. If there is a communiqué, it is expected to be relatively high level at this stage.

An agreement this week would increase the chances of an earlier change in the forward guidance – as soon as the 22 July governing council meeting. Any change is likely to consolidate a lasting shift at the ECB towards prolonged monetary accommodation. In particular, the central bank may acknowledge a willingness to overshoot on inflation.

Interest rates fall further

Since the start of June, the US yield curve has flattened (i.e. the gap between yields on the longest and shortest-dated bonds has shrunk), while bond yields themselves have fallen significantly. That directly implies a market expectation of lower inflation and an economy that is not so strong that higher policy rates are required to rein it in.

US real yields (adjusted for inflation) are arguably the single best indicator of the state of financial conditions. They are now back to almost exactly -1%, based on 10-year Treasuries. This was a level never seen before the second half of 2020. The sharp rise in real yields that occurred last February has now been retraced almost totally.

This week, the yield on the benchmark 10-year Treasury bond has fallen by 0.02% to 1.35%, marking a four-month low. Germany’s equivalent Bund yield dropped by the same amount to minus 0.28 %, its lowest since mid-April.

Back in March, the 10-year Treasury yield had approached 1.8 % as the price of the debt was depressed by fears that the Fed would respond to a speedy US economic recovery and rising inflation with a series of interest-rate increases.

These fears now appear to have been side-lined. In part, this may be due to an anticipation that US GDP growth, which is expected to have reached an annualised rate of at least 9 % in the second quarter, is about to peak and a slowdown phase of the economic cycle is around the corner.

Some of the worries over inflation may also have been soothed by President Joe Biden cutting the cost of his proposed infrastructure stimulus spending package by more than half to USD 1 trillion.

The outlook

July tends to be a seasonally bullish period for risky assets and a time when market volatility across asset classes trends lower. Given that it is unlikely that we will see any major central bank surprises between now and the Fed’s annual Jackson Hole policy symposium (to be held in-person this year) on 26-28 August, interest-rate volatility should also trend lower over the short term.

While markets may be somewhat overbought with positioning, especially in US equities, is at cyclical highs, current economic and market conditions still create a constructive backdrop for markets and a risk-on stance over the summer. Given the cheaper valuations, we believe European equities offer potential for attractive upside.

In credit markets, the fundamentals have continued to improve, but valuations currently look on the rich side, especially in investment-grade credit. In our view, high-yield and leveraged loans look more attractive in a rising yield world, given their higher income and shorter duration.

From a seasonal perspective, however, credit markets should outperform in July.

We believe the outlook remains constructive for risky assets as they should do well in an environment where economies are reopening, growth is rebounding, and policymakers remain accommodative.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Weekly investment update – Wake me up in Jackson Hole? appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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