Thanks to Singapore and a Vancouver readers, your editor is becoming a Mary, Mary (quite contrary) about the need to sell bonds and buy shares, while fleeing emerging markets. Every single macro analyst (at 13 global banks and funds) said to overweight global equities; every single analyst said to underweight fixed income. This is supposed to be the sole way to play the taper of the Fed’s quantitative easing policy.
The Absolute Return Partners newsletter examines skeptically the case for this consensus on the taper zapping bond markets. It questions whether there is “an emerging markets” crisis which will grow more serious as the US cuts its liquidity feeding the rest of the world. It notes that there is an offsetting set of flows, from the US current account deficit.
With the beginnings of a US energy boom and US recovery, deficit spending is set to rise. That will not result in inflation or in US bond yields rising, but instead will generate $400 bn or so of foreign claims on the US. This money will be placed (as always) in US T-bonds, further pushing down yields.
Moreover, US pension plans had a notably successful 2013 and are now 92% funded, a level which was not supposed to be reached until 2017. The plans will buy more US T-bonds this year in a risk-off play after taking chances last.
The newsletter cites a mostly Danish quant shop, Applied Global Macro Research, whose proprietary model names the drivers of the US 10-yr bond yield. “Even in a strong economic environment, the model suggest that the total return on 10-yr T-bonds in 2014 will be close to zero. Yields [will] rise modestly, but the carry will almost fully offset those losses. On the other hand, should the US economy actually weaken, 10-year T-bonds should generate very attractive returns.” I would love to see the Danish report.
Here is an unexamined stock idea in the USA from my favorite CFA; with all the revelations of credit and bank account hacking, you might consider buying into Target whose Xmas sales were hurt by fear of leaks of its house credit card data. A UK newspaper, The Daily Mail, reported today that Barclays Bank suffered a breach of 27,000 full client files sold to thieves. The files included information on the bank’s clients’ earnings, savings, mortgages, insurance, passport, and national insurance and health data. The potential losses are almost unlimited. (The CFA is my son who manages our corporate profit-sharing and pension plans.)
What this means for one of our companies is follows below. Plus more from Israel, Britain, Finland, Spain, South Korea, Canada, India, China, The Netherlands, Brazil, and Portugal.
*Cameco reported late Friday that its audited 2014 Q4 sales rose 15% to $977 mn and full year sales 29% to $2.44 bn, The Canadian uranium miner also reported Q4 gross profits down 27% to $255 mn and full year gross profits up 12% to $607 mn. On this adjusted net earnings came in at 38 cents/sh for the quarter, down 36% and $1.12, up 2% for the year. Even more scary, cash from operations came in down 46% for the quarter and down 8% for 2013. The net earnings boost for the year came because CCJ did not repeat a 2012 write-down in Australia, mainly because of lower realized prices for uranium it mined but higher volumes and prices for uranium it processed. The company also gained because it didn’t continue its spending on exploration at Kintyre down under. Last year it did another but much smaller $70 mn write-down of its Talvivaara Finnish mine, and suffered from the loony’s decline, but gained from lower Canadian corporate taxes.
