Is The Latest Equity Market Euphoria Justified?

Stocks have breathed a sigh of relief following earnings season. Nevertheless, cracks are spreading beneath the surface. The chart shows a compilation of nonconventional indicators that are waving a yellow flag. Breadth is thinning, as evidenced by the downtrend in the NYSE A/D line. Sentiment is also poor, with bullish investors throwing in the towel at an accelerating pace (second panel). Rather than view this contrarily, it can often be a sign that selling may accelerate. Moreover, once vibrant M&A activity is cooling rapidly (top panel), and the news has been recently dominated not by deal making, but by deal break ups. This may reflect increased trepidation about further adding debt to already bloated corporate sector balance sheets (third panel). Bottom Line: Resist the temptation to deplete cash balances, and continue to favor defensives over deep cyclicals. A capital preservation mindset is still warranted.

For additional information, please visit our U.S. Equity Strategy website at


The Playbook For U.S. Treasuries

Whether the Fed lifts rates in June, July or September has little bearing on our recommended U.S. bond investment strategy.


With the OIS curve discounting barely one more rate hike by the end of the year, we think that U.S. Treasury yields have scope to rise further in the near-term. For this reason we maintain duration at benchmark for now, but are looking for an opportunity to move back to above-benchmark before financial markets discount too much Fed tightening.

Risk assets, as proxied by the stock-to-bond total return ratio, have been trading in a wide range since late 2014. We have now witnessed three examples of the stock-bond ratio approaching the top of its range, leveling off for a time and then selling-off abruptly. In each episode, the catalyst for the steep decline in risk assets has been market expectations of an unduly restrictive Fed, as illustrated by the 10-year Treasury yield near the top-end of its similar trading range.

Recently, the stock-bond ratio has once again been leveling off near the upper end of its range. A persistent hawkish shift from the Fed seems likely to send yields higher in the near-term, until they become too elevated for risk assets to handle. The subsequent decline in risk assets will then be the catalyst for the next down-leg in Treasury yields.

If the next rate hike occurs in June, then this move higher in yields will occur very quickly. If the next rate hike is delayed until September, then it could take a few more months. Regardless, in our view the correct investment strategy is to maintain duration at benchmark for now and look to extend duration as the 10-year yield rises to 2%.

China Needs More Debt

The latest Global Investment Strategy Weekly Report entitled “China Needs More Debt” focuses on the premise that China has fallen into the same sort of “fiscal trap” that ensnarled Japan in the 1990s. Unprofitable investment projects undertaken by Chinese state-owned enterprises are a necessary evil, comparable to Japan’s “bridges to nowhere”. China’s underlying problem is not that the economy suffers from overinvestment. Instead, the country is demand deprived; discussions of overinvestment confuse the symptom with the disease. Structural factors will ensure that China continues to churn out ample savings for years to come. Any efforts by the Chinese authorities to curb credit growth will result in a sharp economic downturn. China will continue to generate excess capacity and export deflation to the rest of the world, which is positive for bonds. The government will stealthily backstop bank loans in order to ensure that banks keep lending without the embarrassment of having to undertake highly-dilutive capital raises. We recommend going long the most hated equity sector in the world: Chinese banks.

To access the report entitled “China Needs More Debt”, please click here.


Global Equities Are Hanging By A Thread

The unintended consequences from the continued altering of the capital structure of firms, by issuing debt and retiring equity at a time when operating cash flow growth is showing signs of fatigue is disconcerting. This artificial massaging of EPS is not sustainable and if non-financial corporate credit quality has peaked for the cycle as seems likely, the equity risk/reward tradeoff remains skewed to the downside.

Bottom Line: A capital preservation mindset is still warranted. Continue to prefer global defensive over cyclical sectors.

For additional information, please visit our Global Alpha Sector Strategy website at


Helicopter Money: A Semi-Hostile Q&A

The latest Global Investment Strategy Weekly Report entitled “Helicopter Money: A Semi-Hostile Q&A” examines this very topical issue and concludes the following points:

  • Helicopter money is coming, and once deployed, will prove to be much more successful than most people imagine.
  • Investors should stay long Japanese and German inflation swaps.
  • USD/JPY and EUR/USD are ultimately likely to reach 140 and 0.9, respectively, over the next two years.
  • The U.S. economy will remain resilient enough to make helicopter money unnecessary but a strengthening dollar will greatly curtail the ability of the Fed to raise rates.
  • Investors should overweight Treasurys relative to bunds and JGBs.
  • Helicopter money will benefit gold as well as the beleaguered European and Japanese stock markets.

To access the report entitled Helicopter Money: A Semi-Hostile Q&A, please click here.