The Charts That Matter - 04.03.15 - Overweight cash

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?

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

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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
04.03.2015
Previous viewsCurrent views

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
04.03.2015
S&P500
Citigroup US economic
surprise index

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 ;-)
04.03.2015

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 ;-)
04.03.2015
-13%

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?
04.03.2015
Current Vs historical average
?

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…
04.03.2015
S&P500 including dividends
14x since March 88
S&P500 excluding dividends
7x since March 88
DOUBLE !

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
04.03.2015

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…
04.03.2015
We are here

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!
04.03.2015

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
04.03.2015
SMI index
EUR/CHF
Who follows who?

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
04.03.2015
Citigroup US economic
surprise index

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?
04.03.2015
Eurostoxx 50

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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 ;-)
04.03.2015
Dax Index
??

15
Zoom on a DAX index constituent : Bayer AG
Irrational exuberance?
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
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 ;-)
04.03.2015
“Whatever it takes”
Mario Draghi, July 26,
2012
Portuguese 10yr yields
US 10yr yields

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
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
 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?
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
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
04.03.2015
USD Vs UAH
Ukraine CDS
Ukraine inflation
Gold in UAH

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?
04.03.2015
results
Source : Bloomberg

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Have central banks lost control?
21 interventions so far this year!
Source : zerohedge
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

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Keep children away!
2015 world growth expectations
Source : zerohedge.com
04.03.2015
China(+),
Europe (+),
India (+)

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Bonus chart
Just a reminder of what happens to gold when [hyper]inflation soars 
Source : wikipedia.org
04.03.2015

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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 >>> 
04.03.2015

Disclaimer
ECB
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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.
04.03.2015

The Charts That Matter - 04.03.15 - Overweight cash

The Charts That Matter - 04.03.15 - Overweight cash

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