Friday, October 19, 2018
J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata


Early signs are pointing to some relief from the yesterday’s selling.  Europe is closing the week out flat and futures are pointing to small gains on the open.  We are still watching the bonds closely, as they can’t seem to catch much of a bid.  The battle around 3.20% for the 10 year Treasury continues, pushing US mortgage rates ever higher.

US mortgages, as measured by the Bankrate national average 30 year rate, are breaking out to 7 year highs, pushing affordability lower for Americans.  One interesting thing to watch is the US Homebuilders index (as measured by the XHB ETF), which has seriously underperformed the broader market this year, having lost 22% vs. gain of 3.5% for the S&P 500.

One thing we identified early as a problem with cryptocurrencies is their custody.  Highly audited and transparent solutions for auditing investments are the cornerstone of institutional fund management, and it just has not existed for crypto currencies.  Bloomberg reports that solutions to those problems are now underway.  Does this mean a flood of institutional money into the crypto space?  Time will tell.
Macro-man takes a step back from the price charts which still look horrible and focuses on valuations. Though earnings are still solid, P/E’s are re-rating. As yields rise, P/E’s tend to fall. Some, like Morgan's equity strategist now see 16 as the ceiling for the market, not the floor. His reasoning is that higher interest rates impact investors risk premium. Something to think about. With the re-rating comes opportunity, as long as EPS estimates don’t’ start to turn down.
In our chart of the day we note the current forward valuations across various markets. If risk is relative to the price paid for an investment, one could argue markets are less risky now compared to any point in the past few years.
Musings on Markets yet another piece on the opportunity in the cannabis space. Higher and Higher: The Money in Marijuana!. We’re obviously skeptical of current valuations, and even the CEO of Aphria see’s prices plummeting. Like any commodity, it is susceptible to boom/bust cycles and he see’s the market being oversupplied a year from now.

Disputes over US tariffs, accompanied by retaliatory measures from other states, have created 12 requests for adjudication at the WTO. The dispute procedure begins with a 60-day window for talks to attempt to reach a settlement, which have already failed. The next step is a drawn-out litigation process. China, the EU, Canada, Mexico, Norway, Russia and Turkey are all complaining about US steel and aluminum tariffs, while the US is complaining about the response from Canada, Chine, Mexico, and the EU.

Diversion:  We’ll add this one since it relates to our dancing robot dog diversion from a couple of days ago. From Vice: I Don't Care if This Robot Dog Can Dance, It Will Still Kill Us All
$1800 for a Beatles White Album themed turntable?  Perhaps the vinyl resurgence has gone too far.


Rogers reported strong results this morning adding more than 124,000 postpaid cell phone subscribers. They also increased their guidance for the remainder of the year. Procter & Gamble posted better than expected results with revenues growing at 4% with the street expecting 1.9% growth. Their bottom line is improving as well, as billions in cost cuts has boosted profits despite rising commodity prices. PIMCO is prepping for the next recession designing a fund that restricts redemptions making sure that investors do not bail at the wrong time and limit their ability to invest in destressed opportunities. If you are a fellow fan of the Bills or Giants, this article helps explain why they suck! Since 1994 NFL teams in low or no tax states have won two more games than those in high-tax states like New York. A $10,000 cap on business expenses does not work out well for millionaire athletes that pay high union dues, trainers, agents and an entourage.  


Oil is up 0.99% to $69.33 . Prices are rising after reports of “surging demand” in China, where refinery throughput rose to a record high of 12.49 million bpd. Still, WTI remains near recent lows due to concerns about trade wars and U.S. inventories, which climbed for the fourth week in a row.

Gold is up 0.22% to $1,232.80 . Precious metals are rising even as EURUSD approaches new lows for the week. 10s are holding at ~3.18%, which may prevent gold and silver from breaking out to the upside. That said, both metals are on track to close out the week with gains.

In other commodities news…

MEG Energy seeks bidding war after rejecting Husky's $3B bid” – BNN BBG

China has ample soybean supplies, big price moves unlikely: agriculture ministry” – RTS

Shell bets on shale for flexibility in energy transition” – $FT

Exclusive: U.S. asks for WTO panel over metals tariff retaliation” – RTS


“We have two ears and one mouth so that we can listen twice as much as we speak.” --- Epictetus
Well now, this is going to be interesting. The Bank of Canada is set to provide a monetary policy update next Wednesday that was assuredly supposed to culminate in a 25 bps hike to the overnight rate target. This was the scenario being postulated for much of the past six weeks, and so much so that the tightening move was almost completely priced in. The picture today however, isn’t quite as lucid as before. A pair of missed primary data points is clouding the picture and making us wonder if the Bank realizes our economy isn’t as rosy as they might think. Canadian retail sales fell by -0.1% in August that missed the +0.3% consensus and marked the third decline in the past five months. Stripping out autos, core sales were down -0.4% for its worst showing since last December. Purchases of goods were down across the board with furniture (-1.4%), building materials (-1.1%), clothing (-1.2%) and at fuel stations (-2.0%) all lower. Note that net sales at our nation’s retailers have failed to grow since May this year. Adding to the negativity was a more recent update on inflation --- CPI in September slowed by -0.4% to miss the +0.1% badly and post the worst showing since last December. The monthly drop pushed the annualized cost of living down to +2.2% from +2.8% and at the lower end of the Bank’s target range (which surprisingly comes a week after Governor Poloz talked about how they risked underestimating cost pressures). Gasoline prices slowed by -2.3% to lead the subsectors and further underscores the concerns surrounding the near $50 discount between Western Canadian Select and WTI crude prices. Reaction to all this sees our loonie taking it on the chin, with the USD/CAD up a full penny to 1.3120 immediately while the two year Canada bond yield loses four bps to 2.27%. OIS spreads are still showing a 98.1% likelihood of a hike on October 24, but we hope that officials at the Bank are listening with both ears before they speak, and considering a possible pause before deciding to hike.



Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

– Seth Klarman

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