Apr 26, 2017
Searching for ways to better understand the fixed income space or looking for actionable ideals in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit every Wednesday. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1 year return profiles for a cross section of the fixed income world.
In this week’s note, we analyze the impact of a possible “tax holiday” (reduced taxes on repatriation of offshore profits) on the US dollar, concluding that the dollar will not rally on repatriation flows, which are extremely likely to be held in USD-denominated instruments already.
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Apr 26, 2017
French equities were the best performers in the world over the last five days, joined by Turkey, Italy, Poland, the broad Euro Stoxx 50. Other European ETFs have also delivered strong gains. Gold miners, silver, Japanese yen, long-term Treasuries, and oil are the worst performing in the universe we track over the last five days.
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Apr 26, 2017
Shares of Seagate Technology (STX) are down over 17% today after the company reported better than expected EPS but came up short on the revenue and guidance front. Recently, the first quarter hasn’t been a particularly positive period for STX as the day after last year’s Q1 report it dropped 19%. While the negative reaction to this morning’s earnings report from STX seems excessive, part of the outsize reaction may be due to the fact that heading into the report, the stock appeared to be on the verge of a technical breakout above its highs from March. For a lot of chart watchers out there, that breakout heading into earnings probably sucked them into the stock on the long side.
Following the disappointing result, though, those traders that were looking for a short-term rally on a breakout have likely rushed for the exits. As it stands now, shares of STX are currently testing support just below $42 — representing the highs from December and the opening level from the gap higher after Q1 earnings. When it comes to chart reading, what a difference a day makes
Apr 26, 2017
The five largest stocks in the US equity market are now Technology stocks, and together they make up more than $2.75 TRILLION in market cap. (While Amazon.com’s official sector categorization is Consumer Discretionary, we consider it Tech first and foremost.)
Below is a list of the 25 largest S&P 500 stocks (through 4/25/17). The top five are highlighted in yellow — Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), and Facebook (FB). It wasn’t long ago that Exxon Mobil (XOM) was the largest stock in the world, and prior to that, it was General Electric (GE). Now XOM ranks 7th and GE ranks 11th. Brick-and-mortar behemoth Wal-Mart (WMT) also used to rank in the top three, but it has slipped all the way down to 15th with a market cap that’s just over half the size of online competitor Amazon.com.
We thought we’d take a look at historical valuations for the five largest stocks in the S&P 500 using trailing 12-month P/E ratios.
As shown below, Apple used to trade much more like a “growth” stock prior to the Financial Crisis. During the current bull market, though, Apple’s average P/E has been 15 — which is more in-line with where a value stock trades. At 17.25x trailing 12-month earnings at the moment, Apple’s valuation is above its bull market average but not excessively so.
Alphabet’s (formerly Google) earnings have been growing nicely since the start of 2016, as its P/E is down even though its price is up sharply. Alphabet’s average trailing 12-month P/E over the last 10 years has been 28.83, and its P/E right now is just above that at 31.4.
Microsoft’s trailing 12-month P/E has been rising sharply along with its stock price over the last seven years. While the stock was considered “dead money” for much of the 2000s after its 1990s heyday, its re-invention in the cloud computing space has turned it back into a “growth” stock that now trades with a higher valuation. While stocks like Alphabet and Apple currently have P/Es that are just a blip above their 10-year averages, MSFT’s current P/E is double its 10-year average (32.7 now vs. 10-year average. of 16.1).
Amazon.com (AMZN) is a stock that has never traded based on the typical valuation metrics that investors like to use. Those investors that have traded the stock based on valuation are ones who have made negative bets on it — to the detriment of their portfolios. Even still, below we show AMZN’s trailing 12-month P/E ratio over the last 10 years. (The P/E was either above 1,000 or negative when you see it disappear on the chart.) Laughably, AMZN’s current trailing 12-month P/E of 183.83 is well below its 10-year average of 250+.
Finally, Facebook’s (FB) trailing 12-month P/E ratio has been drifting lower and lower since the start of 2016. Given that its stock price has been trending higher and higher over this time frame, that means earnings (the “E” in P/E) have been growing even faster than price. Since it IPOd in 2012, Facebook’s average trailing P/E ratio has steadily trended lower to its current level of 44.7.
Apr 26, 2017
We’ve been hearing a lot of talk over the last few days that just a handful of stocks are driving the rally in US equities. This suggests that the gains aren’t representative of broad market strength, but instead strength in just a handful of stocks. We’ll be the first to agree that the S&P 500’s gains this year are the result of gains in some of the index’s largest members, but that’s only because they have grown so large. As we noted earlier this week, the five largest companies in the S&P 500 have a combined market cap of over $2.75 trillion, and the four largest companies in the index have a greater market cap than the entire Russell 2000 small-cap index. Just because the largest companies in the S&P 500 are doing so well doesn’t mean that the rest of the index is doing poorly though.
The first chart below shows the S&P 500 market cap weighted index over the last twelve months. As shown in the chart, after the rally of the last few days the index is currently just 0.52% below its all-time high from 3/1.
Because the S&P 500 is a market cap weighted index, if the largest stocks in the index were driving all of the gains, we would expect the S&P 500 equal-weight index to be underperforming. That isn’t the case, though. In fact, the S&P 500 equal-weighted index is actually down the exact same percentage amount as its market cap weighted peer. With both indices down by the same percentage amount from their bull market highs, it’s hard to argue that just a handful of stocks are propping the market up.
