Wednesday, September 6, 2023

Morning Note: "Yield is Destiny"

As we've been pointing out during client portfolio review meetings of late, beyond whatever's left in the current cycle (our view is that odds lean toward another round of turbulence along the way), we see a number of what we believe to be very exploitable themes.

Select commodities, and the companies/regions that produce them, being one... Another being a distinct long-term advantage that many rest-of-world equities will have over the US.

There are multiple factors that support the latter, not the least of which being the following expressed by Unlimited Funds CIO Bob Elliot:

"Yield is destiny for long-term financial returns and many equities outside the US are offering much higher (as much as 2x) yield. A simple example, $SPY earnings yield at 4.5% when $EZU (Eurozone) at 7.5%. Plus past returns depressed by the strong dollar.

Scan across markets:

Of course much higher yields don't guarantee a better return over time. But what it does provide is a clear market pricing difference between the US and those economies (in dollar terms).

To break even on the SPY vs EZU above, you would have to expect earnings in the US will grow by ~35% more over the next 10yrs vs. in the Eurozone (in dollar terms). Is that possible? Sure, certainly could. But its a very high hurdle. And even higher hurdle elsewhere:

$SPY at 4.5% and $EWU (United Kingdom) at 8.6%. Most of these companies are international in nature, so it is closer to a play on global stocks (tilted to commodities) than the UK itself.

$SPY at 4.5% and $EWJ (Japan) at 6.6%, with JPY also at secularly low levels in real terms from a dollar based investor perspective.

$SPY at 4.5% while $MCHI (China) at 7.9%. While conditions are soft, it is important to recognize that very weak outcomes are already priced into this market.

$SPY at 4.5% while $EMXC at 8.6% and the dollar pretty strong across most EM crosses. Incredibly soft outcomes here on a secular basis. Notable given many of these countries have low exchange rates, are easing, and benefit from decoupling from China."

Again, and clearly, there are numerous relatively attractive long-term opportunities outside our borders... Now, that said, the operative phrase above comes from our opening paragraph, "beyond whatever's left in the current cycle."  I.e., while we are, in a big way, optimistic when we think, thematically, out a few years, as for the next few months, well... not so much.

So, stay tuned, and stay hedged (for now). 

Asian stocks leaned slightly green overnight, with 9 of the 16 markets we track closing higher.

Europe, on the other hand, is leaning red so far this morning, with 11 of the 19 bourses we follow trading down as I type.

US equity averages are leaning lower to start the session: Dow by 72 points (0.21%), SP500 down 0.57%, SP500 Equal Weight up 0.02%, Nasdaq 100 down 0.80%, Nasdaq Comp down 0.91%, Russell 2000 up 0.02%.

As for Yesterday’s session, US equity averages (save for NDQ 100) closed lower: Dow down 0.6%, SP500 down 0.4%, SP500 Equal Weight down 1.2%, Nasdaq 100 up 0.1%, Nasdaq Comp down 0.1%, Russell 2000 down 2.1%.

This morning the VIX sits at 14.21, up 1.43%.

Oil futures are up 0.18%, nat gas futures are down 2.25%, gold's down 0.22%, silver's down 1.58%, copper futures are down 1.06% and the ag complex (DBA) is up 0.35%.

The 10-year treasury is down (yield up) and the dollar is up 0.11%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 17 -- led by VNM (Vietnam equities), MP Materials, OIH (oil services stocks), AT&T and EWZ (Brazil equities) -- are in the green so far this morning... The losers are being led lower by Albemarle, JNJ, SLV (silver), ICLN (clean energy stocks) and Dutch Bros.

I highly recommend Neil Howe's The Fourth Turning Is Here... It offers up a compelling historical framework that explains how we got here, and, frankly, how "here" is not nearly as historically-unique as I'm certain most people believe. 

Here's a snippet:
"During each turning, most people pay special attention to the new generation coming of age—because they sense that this youthful archetype, alive to the future’s potential, may prefigure the emerging mood of the new turning.
They’re right. This rising generation does prefigure the emerging mood. Yet like the mood of the turning, the personality of the rising generation always catches most people by surprise."

--Howe, Neil. The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End 

Have a great day!

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