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The Charts That Matter
Risk is expensive! Buy low, sell high. We are high.
March 4, 2015
Investir.ch powered by SEQUOIA Gr...
2
Views in a nutshell
Assets 04.03
S/T view
04.03
L/T view
02.02
S/T view
02.02
L/T view
Comments
Cash Keep cash for oppor...
3
 The Citi Economic Surprise Index measure data surprises relative to market expectations.
 A positive reading means th...
4
Nasdaq 5’000
Is this time different?
 No, its bubbly again - especially in social media and most of biotech stocks (hig...
5
Nasdaq
By the way, mind the gap(s)!!
 Markets hate to leave gaps open !
 One day or another, gaps are always closed!
...
6
S&P500
Are stocks expensive?
 US stocks are getting expensive @ 17.1x earnings (left chart)
 However, pray for top lin...
7
S&P500
Corporate America loves shareholders
 Corporate America has been great with Wall Street distributing dividends a...
8
 Its not the economic data (deteriorating)
 It’s not the earnings (stagnant)
 It’s the huge share buybacks !!
What’s ...
9
 Is it the [cold] weather?
 Is it the end of QE?
 Is it the end of the business cycle?
US: recession looming?
Manufac...
10
 Most corrupt European countries : Spain, Greece and Cyprus (you see what I mean)
 Greece shadow economy : 25% of GDP...
11
 January 15th, 2015 – The Swiss National Bank shocked the world (not us) by removing the
1.20 EUR/CHF peg.
 Since the...
12
 Second half GDP figures don’t look good >> not a scoop!
 Seems that the “dePEG” is to blame ;-)
 However, if the CH...
13
European stocks – Eurostoxx 50
Target reached. And now?
 3500 target reached (see last edition of the Charts That Matt...
14
European stocks – Dax index
End of the road?
 German stocks are now above the +2 standard deviation mark!
 Historical...
15
Zoom on a DAX index constituent : Bayer AG
Irrational exuberance?
Investir.ch powered by SEQUOIA Group – Loïc Schmid –
...
16
Portuguese 10yr yields lower than US yields
Seriously?
 Thank the ECB, Draghi and the QE
 I have a tough question : w...
17
Baltic dry index
Secular low?
 The Baltic dry index aggregates prices of dry bulk shipping rates (see chart below )
 ...
18
 Account for roughly 30% of global population, 10% of global GDP, but only 1% of global
equity market capitalization!
...
19
Forget Greece, now its Ukraine
Economic mess
 Official hyperinflation is 28.5% YoY but according to Prof. Steve H. Han...
20
Bonds
Where is the yield gone?
 It is hard to believe but there is hardly nothing left to bite in corporate bonds
 Ou...
21
Have central banks lost control?
21 interventions so far this year!
Source : zerohedge
Investir.ch powered by SEQUOIA G...
22
Keep children away!
2015 world growth expectations
Source : zerohedge.com
Investir.ch powered by SEQUOIA Group – Loïc S...
23
Bonus chart
Just a reminder of what happens to gold when [hyper]inflation soars 
Source : wikipedia.org
Investir.ch po...
24
Key takeaways
 US equities – be very cautious – late cycle – recession looming?
 European stocks – watch and wait
 S...
Disclaimer
ECB
25
The information contained in this material should not be construed as a recommendation or solicitation t...
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The Charts That Matter - 04.03.15 - Overweight cash

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The Charts That Matter - 04.03.15 - Overweight cash

  1. 1. The Charts That Matter Risk is expensive! Buy low, sell high. We are high. March 4, 2015 Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 1 US stocks Are we here? Are we here? Are we here?   
  2. 2. 2 Views in a nutshell Assets 04.03 S/T view 04.03 L/T view 02.02 S/T view 02.02 L/T view Comments Cash Keep cash for opportunities Investment grade bonds Bubbly, buy dips High yield bonds Only special situations Sovereign bonds Bubbly in Europe, US OK Convertibles bonds Equity-like risk European equities Short term overextended, long term looks ok US Equities Still waiting for a 10% correction, at least… Japanese equities Long term trend is positive Emerging equities Buy dips Precious metals Attractive levels Oil Stabilization Hedge funds CTAs and Macro strategies continue to be attractive Volatility Buy volatility on dips USD Looks stretched short term Negative PositiveNo view Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Previous viewsCurrent views
  3. 3. 3  The Citi Economic Surprise Index measure data surprises relative to market expectations.  A positive reading means that data releases have been better than expected  A negative reading means that data releases have been worse than expected  So if US economic data is worsening, why are markets going in the opposite direction? US stock markets ego-trip continuing… …while US economic data is deteriorating Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 S&P500 Citigroup US economic surprise index
  4. 4. 4 Nasdaq 5’000 Is this time different?  No, its bubbly again - especially in social media and most of biotech stocks (high P/E)  Reason  current growth figures are impressive but are not sustainable…  Tesla will not become the new VW but Apple’s iCar might well be ;-) Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015
  5. 5. 5 Nasdaq By the way, mind the gap(s)!!  Markets hate to leave gaps open !  One day or another, gaps are always closed!  The lowest gap in a year of observation is @ 4316 = -13% from current levels  Conclusion : in order to continue to move north, close the gaps please… If we close the gap, I will sell my house and buy TESLA shares ;-) Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 -13%
  6. 6. 6 S&P500 Are stocks expensive?  US stocks are getting expensive @ 17.1x earnings (left chart)  However, pray for top line growth because on the bottom line everything has been done already…  buybacks, cost reduction, …  On a historical basis, except for financial services, most of the sectors are above their historical averages (right chart) however, can we compare history with the current unprecedented period? Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Current Vs historical average ?
  7. 7. 7 S&P500 Corporate America loves shareholders  Corporate America has been great with Wall Street distributing dividends and buying back shares but…  corporate America has not been great with Main Street – cutting jobs and not increasing wages…  This is obviously not sustainable. I believe that wage inflation is round the corner… Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 S&P500 including dividends 14x since March 88 S&P500 excluding dividends 7x since March 88 DOUBLE !
  8. 8. 8  Its not the economic data (deteriorating)  It’s not the earnings (stagnant)  It’s the huge share buybacks !! What’s fuelling the markets? Corporate action of course Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015
  9. 9. 9  Is it the [cold] weather?  Is it the end of QE?  Is it the end of the business cycle? US: recession looming? Manufacturing surveys suggest bad news… Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 We are here
  10. 10. 10  Most corrupt European countries : Spain, Greece and Cyprus (you see what I mean)  Greece shadow economy : 25% of GDP  Will one generation be enough to change the mind-set of southern countries? How to fix “club-med” countries? Change the mentalities! Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015
  11. 11. 11  January 15th, 2015 – The Swiss National Bank shocked the world (not us) by removing the 1.20 EUR/CHF peg.  Since then, Swiss stocks have recovered most of the loss!  Driven by… CHF weakness and institutional panic buying… Swiss stocks and the CHF Je t’aime, moi non plus Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 SMI index EUR/CHF Who follows who?
  12. 12. 12  Second half GDP figures don’t look good >> not a scoop!  Seems that the “dePEG” is to blame ;-)  However, if the CHF continues to weaken at this pace, we might have positive second half! “I believe that the SNB is much smarter that we think. They might have deliberately de-pegged the EUR/CHF in order to temporarily weaken the Swiss economy in order to mechanically weaken the CHF!” Swiss economy Second half looks tough … or not Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Citigroup US economic surprise index
  13. 13. 13 European stocks – Eurostoxx 50 Target reached. And now?  3500 target reached (see last edition of the Charts That Matter)  After a 13% rally, do European stocks still have room for improvement?  All the good news [Greece, Russia, QE, EURO weakness, better macro data, …] priced into stocks?  To break or not to break? Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Eurostoxx 50
  14. 14. 14 European stocks – Dax index End of the road?  German stocks are now above the +2 standard deviation mark!  Historically, this is as far as it got… before experiencing fast and furious corrections  But this time is different right? Super Mario is here to create bubbles ;-) Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Dax Index ??
  15. 15. 15 Zoom on a DAX index constituent : Bayer AG Irrational exuberance? Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Bayer AG +275% since 31.12.2011  The following took place between 31.12.2011 and 31.12.2014 :  EPS increased by +25% - Top line increased +15.6% - Free cash flow increased +7.9% -  Numbers are alight but what [rationally] justifies a +275% raise of the stock in 3 years?  Answer: default stock bought by institutional money and ETFs. Why?  Index heavyweight (hot), pharma sector (hot), dividend yielder (hot), low vol stock (hot).  Bayer, was noch? Fly me to the moon
  16. 16. 16 Portuguese 10yr yields lower than US yields Seriously?  Thank the ECB, Draghi and the QE  I have a tough question : which of the two countries is more likely to pay you back in 10 years?  Answer : probably neither of them ;-) Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 “Whatever it takes” Mario Draghi, July 26, 2012 Portuguese 10yr yields US 10yr yields
  17. 17. 17 Baltic dry index Secular low?  The Baltic dry index aggregates prices of dry bulk shipping rates (see chart below )  In other words : the price paid to transport commodities (Iron ore, coal,…) by ship  The index is at record lows due essentially to Chinese slowdown and overcapacity  Too much supply, poor demand = falling prices Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Every working day, a panel of international shipbrokers submits their view of current freight cost on various routes to the Baltic Exchange. The routes are meant to be representative, i.e. large enough in volume to matter for the overall market. These rate assessments are then weighted together to create both the overall BDI and the size specific Supramax, Panamax, and Capesize indices. The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:[3] Chinese bubble Chinese growthDry bulk shipping stocks Baltic dry index
  18. 18. 18  Account for roughly 30% of global population, 10% of global GDP, but only 1% of global equity market capitalization!  Urbanization creates tremendous growth – remember China last decade?  Demographics are very positive for most of frontier markets Frontier markets What else? Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 projections Burma GDP/Capita to reach 2’000$ in 2019 … Switzerland current GDP/CAPITA = 55’485$ Cities with a projected 2030 pop of more than 10 million
  19. 19. 19 Forget Greece, now its Ukraine Economic mess  Official hyperinflation is 28.5% YoY but according to Prof. Steve H. Hanke (Hopkins University) the unofficial inflation rate is … +261.9% based on the black market UAH/USD exchange rate  Default risk is soaring - currency is collapsing - people dying – people crying…  Monsieur Hollande, Frau Merkel, what’s next? Ukraine crisis Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 USD Vs UAH Ukraine CDS Ukraine inflation Gold in UAH
  20. 20. 20 Bonds Where is the yield gone?  It is hard to believe but there is hardly nothing left to bite in corporate bonds  Out of 346’369 straight corporate & governments bonds in USD, my screenings gave 174 results !!!  Screening based on the following boundaries  Equities, what else? Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 results Source : Bloomberg
  21. 21. 21 Have central banks lost control? 21 interventions so far this year! Source : zerohedge Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 Date Country Action Jan. 1 UZBEKISTAN cuts refinancing rate to 9 percent from 10 percent Jan. 7/Feb. 4 ROMANIA cuts key interest rate by a total of 50 basis points, taking it to 2.25 percent Jan. 15 SWITZERLAND scrapping the franc's exchange rate cap to the euro + cut interest rate on certain sight deposit account balances by 0.5 percentage points to -0.75 percent. Jan. 15 EGYPT 50 basis point cut in its main interest rates, reducing overnight deposit and lending rates to 8.75 and 9.75 percent Jan. 16 PERU cut in its benchmark interest rate to 3.25 percent from 3.5 percent Jan. 20 TURKEY lowers its main interest rate by 50 basis points Jan. 21 CANADA cut interest rates to 0.75 percent from 1 percent Jan. 22 EUROPEAN CENTRAL BANK launches a government bond-buying programme which will pump over a trillion euros Jan. 24 PAKISTAN cuts its key discount rate to 8.5 percent from 9.5 percent Jan. 28 SINGAPORE eases policy Jan. 28 ALBANIA cuts its benchmark interest rate to a record low 2 percent Jan. 30 RUSSIA cuts its one-week minimum auction repo rate by two percentage points to 15 percent, a little over a month after raising it by 6.5 points to 17 percent Feb. 3 AUSTRALIA cuts its cash rate to an all-time low of 2.25 percent Feb. 4/28 CHINA cut its interest rate by 25 bps, when it lowered its one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75% Jan. 19/22/29/Feb. 5 DENMARK cuts interest rates a remarkable four times in less than three weeks, and intervenes regularly in the currency market to keep the crown within the narrow range of its peg to the euro. Feb. 13 SWEDEN cut its key repo rate to -0.1 percent from zero Feb. 17 INDONESIA cut its main interest rate Feb. 18 BOTSWANA benchmark interest rate was cut by 1 percentage point to 6.5 percent Feb. 23 ISRAEL reduced its interest rate by 0.15 percentage points, to 0.10 percent Jan. 15, March 3 INDIA 25 basis point cut in rates to 7.75 percent (jan15) cut rates one more time, this time to 7.50% (3mar) Mar. 4 POLAND lowered its benchmark seven-day reference rate by 50 basis points to 1.5 percent
  22. 22. 22 Keep children away! 2015 world growth expectations Source : zerohedge.com Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015 China(+), Europe (+), India (+)
  23. 23. 23 Bonus chart Just a reminder of what happens to gold when [hyper]inflation soars  Source : wikipedia.org Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015
  24. 24. 24 Key takeaways  US equities – be very cautious – late cycle – recession looming?  European stocks – watch and wait  Swiss stocks – watch the CHF  Frontier markets – opportunities  Is it the low for shipping and mining stocks?  No yield left in the bond markets  Risk is very expensive right now…  Overweight cash [I know it costs… but at least capital is preserved] Did you like the ideas? Contact us for our solutions >>>  Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015
  25. 25. Disclaimer ECB 25 The information contained in this material should not be construed as a recommendation or solicitation to buy or sell any security, or to participate in any investment strategy. It does not take into account the specific investment objectives, financial situations, or the particular needs of any specific entity or person. Investors should make their own appraisal of the risks and should seek their own financial advice regarding the appropriateness of investing in any securities or participating in any investment strategy. This material should not be construed as legal, business or tax advice. While the information (including any historical returns) in this material has been obtained from sources deemed reliable, SEQUOIA Asset Management S.A. does not guarantee its accuracy, timeliness or completeness. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Past performance is no indication of the future return. This information document or any part of it should not be copied, reproduced or distributed to anyone without the prior written approval of SEQUOIA Asset Management S.A. Investir.ch powered by SEQUOIA Group – Loïc Schmid – 04.03.2015

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