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:
- 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:
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.
- 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:
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.
- 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.
Dead cat bounce at Sun Edison
China to Europe by train
“It’s like a dilapidated house in Silicon Valley”: Yahoo in meltdown
Fed up with digital? Adult coloring books
--Christian Thwaites, Brouwer & Janachowski, LLC
Please note that the discussion of the investments and investment strategy of Brouwer & Janachowski, LLC (“Advisor”) (including Advisor’s research and investment process) represent the investments and investment strategy of Advisor at the date of this commentary, and are subject to change without notice. Advisor cannot assure that the type of investments mentioned in this commentary will outperform any other investment strategy in the future, nor can it guarantee that such investments will present the best or an attractive risk-adjusted investment in the future.
References to an individual security should not be construed as a recommendation to buy or sell that security. In addition, the securities noted in this presentation are only several of the successful as well as unsuccessful investments by Advisor, and do not represent all of the securities Advisor has purchased, sold or recommended.
Advisor cannot guarantee the accuracy or completeness of any statements or numerical data in this commentary. Past performance is no indication of future results.