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No rebound yet

Brouwer & JanachowskiMarch 4, 2016

The fast cycle phase of markets continued this week. As of Friday morning, and so before the employment numbers, the market was up 3% on the week, up 9% from recent lows but still down 2.5% year to date. Here’s what caught our eye:

  1. Banks: After a miserable two weeks, financials in the US and Europe recovered. While banks are not our favored investment, we watch them carefully because:
    1.  they’re reasonably good indicators of bad loans and loan demand and…
    2. if things go wrong in banks (name your problem: regulation, capital, trading, write offs) the rest of the economy suffers.

The recent problem was with an asset called a Co-Co. A rather silly name for a type of permanent capital that absorbs losses so taxpayers don’t have to. European banks issued them to beef up their permanent capital (so not a bond) while paying discretionary coupons (so not an equity). They carry ratings like a bond but are typically below investment grade (i.e., close to junk) even though the issuing bank may have strong credit. So they’re volatile.

Anyway, concern about negative rates, oil loans and the next phase in the European economies, meant these securities came under pressure. Bank stocks sold off. They have since recovered but it’s a sector that concerns us.

  1. Wait was that Inflation? Last week’s Personal Income report showed a nice rise in private sector wages of around 5%. But there’s also the tricky question of PCE inflation. Here’s the chart:This, not the CPI, is what the Fed targets and the uptick was enough to concern markets. The Fed’s year-end target is 2.0%. If it reaches there sooner, and employment comes through, then the ever-so-gentle rate rise we foresee may accelerate. One reason why we like TIPS and, because we don’t think the long end will change, longer duration bonds.1 fablog432016pcefredgraph
  2. Depends what you call a bear The market trades in a narrow range. We hope it stays there. We need one good earnings season for the market to regain confidence. You can see from this chart that we have been in bear-correction territory for 12 months.2 fa blog 432016cpxPrint SharpCharts from StockCharts

Those bands in the graph just tell us where the short-term move might come. Don’t pay too much attention to those. Do, however, pay attention to this, which compares this correction to post-war corrections:

This correction

Average post war correction

Peak to trough



Length in days



Biggest one-day loss



Worst Sector


Tech or Financials

Worst Style



Average 1 Year Price Change from trough



Yield at peak



Yield at trough



Peak P/E



So, we can see reasonable valuations and that, while the duration of the correction is long, it is not severe.


Bottom Line: We are still in a central bank driven market. The doves have the upper hand for now. The ECB will probably take some easing action next week. We continue to like bonds. Again, expect more sideways action.


The biggest crisis in China is ageing

Borrowing in a foreign currency rarely ends well

Mortgage delinquency rates on the rise

What makes Government Bonds “safe”?

Kansas on China: not growing so much

The tech world worries about how emojis affect us


--Christian Thwaites, Brouwer & Janachowski, LLC


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