Stocks and oil both rallied on Thursday after Wednesday saw a big intraday reversal as the markets continue their volatile week.
First, the scoreboard:
- Dow: 16,684, +200, (+1.2%)
- S&P 500: 1,950, +21, (+1.1%)
- Nasdaq: 4,578, +36, (+0.8%
- WTI crude oil: $33.00, +2.7%
Wells Fargo’s Gina Martin Adams has slashed her 12-month price target for the S&P 500 to 2,100 from 2,245. This outlook, however, still implies the benchmark US stock index will gain about 8% over the next year.
Undergirding Martin Adams’ view is a contention that earnings growth will return to US corporates.
This is usually what makes stocks go up.
The problem is that earnings have been under serious pressure for most of the last year and look poised to remain under pressure as energy prices and the strength of the US dollar continue to pressure the bottom lines of most US corporates. According to RBC Capital Markets, earnings for the S&P 500 are set to fall 4.5% in the fourth quarter.
Meanwhile in things that investors might want to buy, Chris Brightman at Research Affiliates suggests emerging markets.
“From the rear-view mirror, the bear market in emerging markets has been painful,” he said in a post on PIMCO’s blog.
“When we look out of the windshield, however, these very asset classes offer the highest potential returns available to today’s opportunistic investor. So, the exodus from emerging markets is a wonderful opportunity — and quite possibly the trade of a decade — for the long-term investor.“
And so I think it’s not a shock to too many folks that if there’s an attractive stock-related trade that focuses primarily on the value one can get for expected future earnings, emerging markets are going to be at or near the top of most lists. Certainly pegging this as potentially the “trade of a decade,” got us and others reading, but the logic — at least that you’re never going to really love something before it goes up a lot in price — is sound.
Recession Watch, 2016
(*Recession meaning global growth of less.)
In a note to clients on Thursday, Citi’s economics team led by Ebrahim Rahbari, Willem Buiter, and Cesar Rojas, wrote:
We believe that we are currently in a highly precarious environment for global growth and asset markets after 2-3 years of relative calm. The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies (AE), a large increase in the uncertainty about the AE outlook (notably for the US) and a tightening in financial conditions everywhere. Unlike most of the previous years, the most recent worsening in global growth prospects and global sentiment is therefore driven by the advanced economies rather than EM … It is likely, in our view, that global growth will this year once again underperform (against long-term trends and previous year forecasts). Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese mismeasurement). But in our view, the risk of a global growth recession (growth below 2%) is high and rising.
So that all seems bad.
Meanwhile, John Silvia and his team at Wells Fargo think there’s a 23.5% chance of recession in the next six months. Or, more accurately, according to one of their models there is a 23.5% chance of recession in the next six months.
The average probability of its other models suggest a 37.3% chance of recession. But, you know, economics is hard.
In other economic or market-related indicators that are showing something bad happening somewhere in the world, the US IPO market has almost entirely dried up, (there’ve been just three US-based companies go public this year), which is not the kind of thing you want to see when you’re looking for the marginal bid for risk assets in a decidedly risk-off environment.
US Treasurys rallied on Thursday.
The Berkshire Hathaway annual letter to investors will be released on Saturday morning, the company announced Thursday.
And for what to expect, a report over at Bloomberg noted that the thing Berkshire CEO Warren Buffett does most often in these letters is plug GEICO.
This has been a good business for Buffett, and so it makes sense that he would plug the thing. Also: they spend a lot of money on advertising. So, you know, what’s a little space in the annual letter?
But this week we’ve been looking back at some of Buffett’s reflections from last year and so today we bring you his thoughts on UK-based grocery chain Tesco, one of his worst investments in recent memory.
Here’s Buffett from last year’s annual letter:
Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments, is now absent. An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.
At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the U.K. and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the market value was a similar amount.
In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realising a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behaviour “thumb-sucking.” (Considering what my delay cost us, he is being kind.)
During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.
We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444 million, about 1/5 of 1% of Berkshire’s net worth. In the past 50 years, we have only once realised an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper.
Goldman Sachs’ Jan Hatzius has some thoughts about the savings rate.
And basically, people are saving more than you’d expect and this points to the potential for an uptick in consumer spending.
“The personal saving rate — the difference between disposable personal income and personal outlays — is currently estimated at 5.5% as of December 2015,” Hatzius wrote in a note to clients on Wednesday.
“This number is high relative to the net worth to income ratio, as shown on the left panel of Exhibit 1.A simple model of the saving rate finds that the gap between the actual saving rate and the ‘equilibrium’ saving rate (which depends on the net worth to income ratio as well as labour market slack) has risen in the last two years. Assuming a flat 5.5% personal saving rate and marking to market the net worth ratio, using current equity and house prices, and the forecasted levels of slack and income suggest that the saving rate is now roughly 1.5 percentage points above its equilibrium value. Taken at face value, the high NIPA saving rate suggests upside risk to our consumer spending forecast. However, in isolation the saving rate needs to be handled with care as a real-time indicator due to frequent revisions.”
And Exhibit 1:
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