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"When doves cry"*

Brouwer & JanachowskiApril 21, 2016

The market continues a solid, if unimpressive, rally. This week, the S&P 500 came within a whisper of its all time high back in May last year. Why?

  1. Earnings better than expected: now, you could say this every quarter given the talk down, mark down, beat and revise up cycle that is the river dance between street and management. This time, however, there was Goldman Sachs, who bottomed out on just about every metric investors care about (heck their ROE fell from 35% to 6% under Blankfein), but….the price rose. Same with IBM: worst quarter in 14 years. Up 5%.

But looking out, the weaker dollar means a better outlook. Remember the S&P 500 gets about 40% of its sales from overseas. For the rest of U.S. business it’s more like 12%. The market is a fearsomely good discounting machine. By the third and fourth quarter, 2015’s weak numbers create a low base effect, which should see earnings growth of 5% to 8%. Here's the rebound from February lows:


  1. Oil: they met in Doha. But there was no agreement. Saudi Arabia will continue to pump. Iran is yet to come fully on line. Given that it took three months to arrange the meeting, during which the price of Brent Crude rose 34%, it was unlikely the market was going to get much benefit. Meanwhile production is falling globally, but still ahead of demand. So, if the worst is over, markets can look ahead. Even if oil stays level, you will hear a huge sigh of relief from banks and the majors (the marginals will stay in trouble).
  1. Labor Market: this was a good day for the roses. Weekly unemployment claims came in at 247,000, its lowest level since 1973. The insured unemployment rate, or the benefit eligible unemployed, is 1.6% compared to the headline unemplyment rate of 5%. It will probably rebound, as there are some statistical quirks in there. Inflation remains tame but investors are loading up on cheap insurance. The 5-Year TIPS auction today went at -0.19% (that’s minus) compared to last December’s 0.47%. Nominal treasuries stayed at around 1.7% to 1.8%.
  1. Another Central Bank tries to reach inflation: a common theme of the big three Central Banks is that they cannot hit their inflation targets. The ECB met this week. European inflation stands at 0%. The target is 2%. They start an unprecedented bond-buying program in June. Eligible issues include foreign borrowers incorporated in the EU. So we will have a bizarre theatre of a central bank buying all and any eligible securities of private sector borrowers at a rate of up to $100bn a month. Given that annual issuance is around $300bn and you get the idea of how big a deal this is.

Bottom Line: We're still in the drift higher camp. But May can be a strange month in the market and we’d rather wait for a correction to add more.




A football (soccer) stadium with a goal in each hemisphere

Why Treasury is reviewing asset managers

Australia is a wonderful island

Big decline in the number of public companies

Some trading aphorisms

How a single accounting rule killed an industry

*Now cracks a noble heart


--Christian Thwaites, Brouwer & Janachowski, LLC



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