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Yen trouble. Bond rally.

Brouwer & JanachowskiApril 8, 2016

The week started slow. But then stumbled. The stock market realized that i) earnings are not going to be great ii) that the Fed’s “low rates for longer” message means “low growth for longer” and iii) international markets wrestled with what zero bound means. U.S. stocks were flat, the Japanese market fell 6% and U.S. long Treasuries were up 1.5%. Here's what caught our eye:

  1. The Yen: when the Bank of Japan cut rates into negative territory, they assumed the currency would weaken and stocks, with their high correlation to the Dollar/Yen rate, rise. But, no. The markets remain unconvinced that inflation will take off and, following publication of the FOMC minutes on Tuesday, the Yen rallied. Here’s the slightly surreal yield curve in Japan:Blog 4816AsianBondsOnline_-_Bond_Market_Data

The lower line shows that Japanese bonds yield less than zero all the way out to 12 years. The Yen appreciated (it’s back to where it was in 2014) and stocks headed lower. Here’s what it look like, with the German market thrown in for good measure because they have more or less have the same problem.Blog 4816NIKKEI 500 INDEX, N500-NIK interactive charting - copy

  1. U.S. Stocks: paused. There was little to work with on the economic side and investors seem determined to sit on their hands. That gives us a moment to address one of our pet peeves: stock buyback. Yes, everyone does it. About 65% of S&P 500 companies had some sort of reduction in share count last year. Great for stocks, no? Well take a look at this, which compares companies with high buybacks against those with steady dividend increases:Blog 4816$SPHYDA,$SPX,SPYB - Performance Workbench copy

These are year to date numbers but over ten years, the advantage for dividend payers remains and with 50% less volatility. Why don't we like buybacks?

  • Companies announce them and then don't do them
  • They do them at market tops…
  • …And at value premiums
  • It’s leverage to increase ROE

Still, we’re stuck with them.

  1. Bonds: U.S. Treasuries rallied higher by nearly 1.2%. Some of that was technical (lower supply on the way), some because of lower growth and weaker wholesale trade numbers, and some, dare we say it, the Wisconsin primaries, which adds a modicum of political uncertainty into the mix. Always good to have those Treasuries standing by.

Bottom Line: earnings season starts next week. They’ll be better than last quarters’ but look carefully at the revisions and forward statements. We’ve had a nice rally in the market. We expect it to trade sideways for now. Consolidation is good.



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--Christian Thwaites, Brouwer & Janachowski, LLC


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