The currency war is getting out of control. Here's a snapshot of the week so far in central banking.» Read More
Now is not the time to panic. The time for that, in fact, was about a month ago.
That's the view from Jeffrey Saut, the widely followed chief investment strategist at Raymond James, who believes investors missed a selling opportunity in December and now need to ride out the current volatile wave.
Saut warned clients in late December that his timing models suggested a tumultuous period ahead for markets. He repeated that call during 2015's first week of trading when he noted that he was looking for "increased volatility in the first couple months of the year" after a 15 percent rally from the October lows.
During that period, he said, investors should have been raising cash as they waited for signs that a bout of selling was over.
"It is too late to panic," Saut wrote in a note to clients Thursday morning. "The time to raise cash was a month ago, not now. Now it is time to make your 'shopping list,' looking for the opportunity to selectively redeploy that cash into preferred equities."
The rout in crude oil prices isn't hurting just the U.S. shale drillers that have ramped up production in recent years. It's also punishing one of the world's wealthiest nations: Norway.
The small Scandinavian country, known for its picturesque fjords and family-friendly social policies, is also a major petro-nation, accounting for more oil exports than any other country in Europe. That means that $45-per-barrel crude has been punishing for Norway, whose central bank said in a recent report that oil at levels below $70 "will have relatively substantial consequences" for its economy.
And that's certainly what the market seems to think.
Since oil's plunge began last fall, the Norwegian krone has seen a 12-year low; the country's national oil company, Statoil, has canceled projects and reported its first loss since going public in 2001; and the government has cut interest rates in order to stimulate the economy, signaling that further monetary easing could also be in the offing. Late Thursday in Europe, senior Norwegian officials were preparing for an emerging meeting on Friday to discuss plans for a potential stimulus package, according to multiple reports.
The anxiety over Norway is such that the noted hedge-fund manager Kyle Bass said at a recent investment conference in Oslo that the nation "trades like an emerging market because of its dependence on crude," sparking additional debate about the impact of cheap oil on both Norway and other crude export-driven economies, including Russia, Iran and Venezuela.
JPMorgan Chase CEO Jamie Dimon doesn't want a breakup.
Dimon expressed that sentiment in response to a bevy of analyst questions about the future of the big bank's business model amid onerous new regulations highlighting the government's perceived views that JPMorgan is still too big to fail.
"The views and the facts are completely different, OK?" Dimon said, after being asked whether the bank's efforts to build its capital base will still fail if the government's ultimate intent is to break up the bank.
Dimon recounted again that JP Morgan was able to absorb failing banks Bear Stearns and Washington Mutual during the financial crisis, and that its balance sheet is even stronger now: It has more capital and less credit exposure and risk as a percentage of the balance sheet, more long-term debt and more liquid assets.
"When [regulators] talk about risk, they're mostly talking about size," Dimon continued. "They look at size, and it scares them."
In December, Federal Reserve officials suggested JP Morgan was the only bank that would need additional capital—some $20 billion, they estimated—to meet strict new rules. That claim further fueled the debate over whether the firm would benefit from splitting into multiple banks, rather than one large institution that requires a massive capital cushion that may divert funds from shareholder returns.
For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington.
Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring.
Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding.
So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring.
"Stuff happens when QE ends," said Peter Boockvar, chief market analyst at The Lindsey Group. "It's no coincidence that the market started going into a higher volatility mode, it's no coincidence that the decline in commodity prices accelerated, it's no coincidence that the yield curve started flattening when QE ended."
As big U.S. banks approach earnings this week, they're taking a page from a familiar playbook: Under-promise and over-deliver.
That's been the strategy since the financial crisis, as low interest rates have crushed margins, consumers continued deleveraging and trading activity bumbled along. A boom in mortgage refinancing in 2012 was billed a surprise, as was one in corporate borrowing in 2013 and 2014—both thanks to the Federal Reserve keeping bond yields near all-time lows.
Without those surprises, bank investors found little to like. Revenues have risen only slightly, and legal costs have skyrocketed. The Department of Justice took in more than $25 billion in 2014 alone, thanks in large part to hefty settlements from Citigroup and Bank of America. In the face of those headwinds, banks have been forced to reach their profit targets by cutting costs and releasing money previously saved to cover bad loans.
Investors may see 2014 earnings—when they begin in earnest Wednesday—carry more of the same demons.
Traders smelling blood—or maybe oil—in the water have piled into shorts against energy-related companies.
Recent data regarding which companies market participants are betting against show a strong movement against those whose fortunes are tied to the slump in oil prices.
Specifically, exploration and production companies saw short interest jump 12 percent in the aggregate for the final two weeks of 2014, according to a breakdown from Sterne Agee analysts using New York Stock Exchange data. Short selling happens when traders borrow shares of a stock, sell them to a third party and repurchase later in hopes of pocketing the difference when the shares drop in value.
Things are about to get very risky for the euro.
But that doesn't necessarily mean it's a sell.
Already this week, euro zone consumer price data showed a 0.2 percent dip from this time last year, further adding to pressure on the ECB to plow ahead with bond purchases.
The goal of stimulus would be to boost money supply, lending and economic growth. It could be announced as soon as Jan. 22, the central bank's next policy meeting.
Three days later, the Greeks are expected to vote Syriza to power, a party whose leader has threatened to rip up the country's bailout agreement with Europe and even exit the euro altogether.
With all of those risk factors, it might seem crazy to buy the euro. So, why do some think it looks attractive?
In a year where many hedge funds posted unimpressive returns, Citadel, the Chicago money-management giant known for its swift movement and out-of-stock positions, generated more than 23 percent returns in its equity hedge fund and almost 18 percent in its multi-strategy flagship funds, Kensington and Wellington, according to someone who reviewed the numbers.
Citadel Tactical Trading, a third fund that historically blended high-frequency trading with more traditional long-short stock investing styles, returned more than 26 percent, the person added. (Citadel removed the high-frequency trading component from the Tactical fund in April 2014.) The figures were being shared with Citadel's investors on Monday night.
The results don't amount to a banner year for Citadel, whose Tactical Trading book in particular has seen better annual returns in the past, but they are notable at a time when the average hedge fund has generated far poorer results. The HFR composite index, which tracks a large basket of hedge funds, returned just 3.6 percent for the year 2014, for instance, even as the S&P 500 index was up 11.4 percent.
As individual hedge-fund performance numbers trickle in throughout January, the industry's high fees and light regulation – characteristics that seem less forgivable to some investors at a time of lackluster profits – are in question.
If profits are what really drive share prices, the next several quarters are heading into a tepid time.
Analyst earnings estimates are nosediving for the fourth quarter of 2014 and through pretty much all of 2015. Where expectations once were for companies in the S&P 500 collectively to report an 11.4 percent profit gain from the previous three months, those projections have tumbled all the way down to 4.6 percent as reporting season kicks into full gear.
The news gets no better as the year wears on: First-quarter estimates have fallen from 14.8 percent to 4.8 percent, and the full-year forecast has dimmed from 11.5 percent to 7.4 percent, according to the latest estimates from S&P Capital IQ. And if present trends hold up, they will come down even more.
Much of the pessimism stems from the plunge in oil prices that caught virtually everyone off guard, with Wall Street trying to figure out what it means over the long run.
Most everyone agrees that consumers will benefit to varying degrees, but the downward revisions reflect worry over how much other aspects of the economy such as capital spending will be affected.
Energy companies, in fact, likely will take a 20 percent hit to their bottom lines because of the collapse in energy, according to calculations by Jonathan Golub, chief market strategist at RBC Capital Markets, and others on his team.
It's boom time for private equity.
Deals are happening virtually daily. Money from pensions, ultrawealthy families and other investors is pouring in. Credit is cheap, making levered purchases of companies relatively easy. And businesses are being sold by PE firms at lucrative prices.
All that makes the industry optimistic for more.
"We are seeing positive indications for a strong 2015," Steve Judge, head of the Private Equity Growth Capital Council, the industry's main trade association, said in a recent statement. "Within both the private equity environment and the broader economy, there is enthusiasm for investment and putting capital to work in the coming year."
The currency war is getting out of control. Here's a snapshot of the week so far in central banking.
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