The enhanced investor weekly macro 5/7/17 by seitys

The Enhanced Investor Weekly Macro

May 7, 2017

ENHANCED INVESTOR WEEKLY WRAP & UPDATE Market Wrap-Up Hi Everyone! Thank you all for your patience as finals week comes to a close. I appreciate the side-notes and pings from those of you who have the propensity to reach out. Thanks again. As per our usual, I’d like to compile a quick review of what occurred last week in the market, so that we can gauge a direction for this week and beyond. First, as many of you already know, the Federal Reserve left interest rates at .75% to 1%. Although the Fed downplayed relatively weak Q1 data, the Fed is still prepared to raise rates again in June should the labor market continue to produce better than, or accelerated employment. This was the case on Friday when the Department of Labor produced economic data, which resounded with a healthy 211,000 jobs, which trounced the forecast of 185,000. Additionally, the unemployment rate fell to 4.4%, its lowest since May of 2007. Gold continues to remain under pressure due to a healthy economy, experiencing its third week of decline. Oil fell (again) on the speculation that OPEC will not continue its production cuts due to the US stockpile additions. Having said that, “driving season” is upon us and may reduce that glut more this year than ever. As families become more and more confident in the economy, the marginal propensity to consume will increase, thus leaving the likelihood of spending to ramp up even more than usual. Lastly, France just wrapped up their election wherein Emmanuel Macron has won as a pro-business and free-trade president-elect. This is a huge win for the international finance and trade community, and should be reflective in financials and futures this week and beyond.

The Enhanced Investor Weekly Macro

May 7, 2017

Market Preparation With political risk in the EU having subsided with a positive election result in France, there will be German, French, and Italian production data released this week. All are expected to show growth, adding to evidence that the euro zone's economy is gaining momentum. The US Commerce Department will publish data on April retail sales on Friday. The consensus forecast is that the report will show retail sales rose 0.6% last month, which is positive after two straight declines. Core sales are forecast to increase as well to 0.5% after holding steady last month. Traditionally, rising retail sales over time correlate with stronger economic growth, while weaker sales signal a declining economy. Consumer spending accounts for as much as 70% of U.S. economic growth. At the same time Friday, the Commerce Department will publish April inflation rates. Market analysts expect consumer prices to move up 0.2%, while core inflation is forecast to increase 0.2%. On a yearly base, core CPI is projected to rise 2%. Core prices are viewed by the Federal Reserve as a better gauge of longer-term inflationary pressure because they exclude the volatile food and energy categories. The central bank usually tries to aim for 2.5% core inflation, or less even though last year Chair Yellen said she preferred 3%. Rising inflation would be a catalyst to push the Fed toward raising interest rates. Besides the inflation and retail sales reports, this week's calendar also features U.S. data on JOLTS job openings, producer prices, initial jobless claims, and the Michigan consumer sentiment - highly important economic data as it serves as a gauge of how consumers view the economy and apply their spending accordingly. China is to release April trade data at around 03:00GMT on Monday. The report is expected to show that the countryâ&#x20AC;&#x2122;s trade surplus widened to $35.5 billion last month from a surplus of $23.9 billion in March. Exports are forecast to have climbed 10.4% in April from a year earlier, following a jump of 16.4% a month ago, while imports are expected to rise 18.0% after increasing 20.3% in March.

The Enhanced Investor Weekly Macro

May 7, 2017

Additionally, on Wednesday, China will publish data on April consumer and producer price inflation. The reports are expected to show that consumer prices rose 1.1% last month, while producer prices are forecast to increase by 6.9%. China's foreign exchange reserve balance for April will also be in focus. Authorities in Beijing have been turning the screws on financial stability risks and looking closely at credit in recent weeks, so April's figures will be of particular interest. Lastly, the BoE (Bank of England) will make a monetary policy announcement on Thursday, with analysts expecting no change in policy. Market players expect BOE policymakers to remain cautious for at least the next few months as they assess the extent of any consumer slowdown while waiting to see how EU divorce negotiations pan out. The central bank will also publish its QIR (Quarterly Inflation Report) at the same time on Thursday. Besides the BOE, traders will focus on monthly manufacturing and industrial production figures for further indications on the continued effect that the BREXIT decision is having on the economy.

The Enhanced Investor Weekly Macro

May 7, 2017

Market Will Continue its Run on Growth by Profits Iâ&#x20AC;&#x2122;ve been getting a bit more inquiries than usual regarding the economic layout relative to the market as a whole. As we know, weâ&#x20AC;&#x2122;ve got to dissect the sectors within, so I picked out a few that are incredibly relevant for this week given the French election, Chinese data - considering its implications on Japan - and the UK/US. Looking ahead, it is reasonable to assume that corporate (non-energy) sales growth will be largely similar to the nominal economic growth rate of 4-5% (numbers below are real; from Bloomberg).

GDP Growth: Eurozone:Japan:UK:US 2001-2017

The dollar has stabilized, with YoY appreciation tracking just 3% for 2Q17. Currency effects are minor under these conditions (second chart from JPM).

The Enhanced Investor Weekly Macro

May 7, 2017

! Trade Weighted USD 2013-2017

! USD: YoY % Change Quarterly 2012-2017

The energy sector remains the biggest wildcard for future sales and EPS growth. At present, energy should continue to be a tailwind to sales and EPS growth: the yearover-year change in oil is tracking about a 20% gain. But the overall dollar level of energy EPS is still less than half of its prior level (second chart from JPM). The Enhanced Investor Weekly Macro

The Enhanced Investor Weekly Macro

May 7, 2017

Crude Oil Prices 2012-2017

! Energy Sector Earnings 2012-2017

Oil has fallen roughly 20% in the past month. As we have seen, the negative impact of lower oil prices on the energy sector is far more significant than any positive affect on other sectors. As an example of minimal affect of lower prices on the rest of the S&P, consider the following: the price of oil fell from over $100 to under $50 between

The Enhanced Investor Weekly Macro

May 7, 2017

mid-2013 and mid-2016, but non-energy sector operating margins were 10% in both instances. Where the bears have a valid point is the valuation of the sector as a whole. Even excluding the troubled energy sector, valuations were rich at the end of 2014 and are even more so today. These valuations are higher than in mid-2007 when the prior bull market ended (from Yardeni).

! SPX ex-Energy, Forward Earnings and Valuation 1995-2017

With economic growth of 4-5% (nominal), it will likely take excessive bullishness among investors to propel S&P price appreciation at a significantly faster annual clip. Why? When investors become bullish (blue line), valuations rise (red line). Investors had been pessimistic a year ago; they are now optimistic once again. If oil prices and the dollar stabilize, earnings growth may be only 5% year-over-year, but valuations could still push the equity market much higher (from Yardeni).

The Enhanced Investor Weekly Macro

May 7, 2017

! SPX Forward P/E and II Bull/Bear Ratio 1988-2017

Importantly, valuations have almost no bearing on the market's 1-year forward return (left side). But over the longer term, current valuations suggest that single digit annual returns are odds-on (right side; from JP Morgan).

The Enhanced Investor Weekly Macro

May 7, 2017

! Forward P/E and Subsequent 1-Y, 5-Y SPX Returns

The Enhanced Investor Weekly Macro

May 7, 2017

Additional Info For any newcomers who don’t know me, I’ve been contributing via the Enhanced Investor Weekly Macro Reports under #WatchList for over a year now. I began the education portion of this newsletter back in November due to the market action at the time. My in-depth knowledge of bubbles relative to political shifts and global economics, emerging markets, and monetary/fiscal policy needed to be shared, so I decided that it was simply not enough for beginners, or even intermediate traders because in order to have the ability to synthesize what’s truly happening - you need to be operating at the MBA/PhD level. As I’ve noted before, unfortunately, some PhD’s forget the basics. Whether that’s due to moral hazard, or plain and simple hubris, I can’t comment on that. Anyway, as I said a few weeks ago, it’s not fair for me to assume that all of you have what those at investment banks call “financial sophistication”, but that’s why we’re working together here at Enhanced Investor. Monitoring Wall Street and Washington helps us gain the upper edge. It’s why we do this. Anyway, I am more than happy to help, so if for some reason I don’t receive a tag in the #mainstockchat, or you don’t direct message me on Discord, please feel free to email here adamwood@fas.harvard.edu or you can tag me on StockTwits @ EILeadMacroAnalyst. Don’t fear a bubble - ever. We do not fear bubbles here at Enhanced Investor. Why? Because we’re armed with the strategic, tactical, and historical knowledge of every major bubble that has ever occurred. From the Tulip Mania of 1637 to the Housing Crisis of 2008 and the current market conditions - we’re prepared.

The Enhanced Investor Weekly Macro