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Investors becoming convinced bond yields have seen their lows? again!

Investors becoming convinced bond yields have seen their lows? again!

Investors becoming convinced bond yields have seen their lows? again! 

Thanks to a subscriber for this report from SocGen which may be of interest to subscribers. Here is a section: 

An integral part of our Ice Age thesis has been to overweight longer dated government bonds as deflation becomes an ever more immediate threat. That strategy has produced superior returns, even relative to global equities. Clearly at some point this 33 year bull market in government bonds will end, but why are market commentators just so keen to pronounce its demise? It is because the continued bond bull market mocks the paucity of the recovery with its accompanying deflation, thereby threatening the asset class they really want to be bullish about ? the equity market.

I have read a lot of very convincing commentary in recent weeks to the effect that we have seen the lows for 10y+ government bond yields with various explanations surrounding the dollar?s recent decline and the recovery in the oil price, etc., etc. And to be sure we did certainly enter some sort of twilight world recently when German 10y yields sank to 0.05%. The sharp dip in German yields below Japanese yields, even at the 30y end of the curve, was also accompanied by a bizarre dive in Spanish yields well below the US ? a curious state of affairs indeed. All that has happened though over the past few weeks is that some sort of normality has been restored (see chart below).

I do not see this as the end of the bull market for long government bonds. Despite the oil price rise, core inflation remains extraordinarily low at a time when the global economy is still struggling to gain traction. Aside from continued growth disappointments in the West, the outlook for the oil price and the Chinese economy will be key. And on that latter score we remain far more concerned about China than most market commentators. And notwithstanding the (over)-confidence evident among central bankers, Europe and the US remain only one recession away from outright deflation. 

Eoin Treacy's view 

A link to the full report is posted in the Subscriber's Area.

This is a big question and it wouldn’t be a market without some disagreement but we rely on the price/yield action to justify our view. If we look at the economic data we are presented with, it would be easy to conclude that there are deflationary pressures and yet if we look around there is evidence of new wage demands which are a major source of inflationary pressure. If I think about the people I know who have moved jobs, it was not because they had to move but because they were enticed with a better pay offer elsewhere. With so much debate I believe it is more important than ever to have some long-term perspective. 

 

OPEC Preview & Revising Down 

Thanks to a subscriber for this report from the team at DNB. Here is a section:

As written above, Saudi Arabia see no reason to let higher cost producers continue to produce while themselves, a low cost producer, should cut oil production in a supply driven downturn. If you cut your output when demand is dropping you do not give your market share to someone else, but if the price drop is due to a supply growth story the situation is different. There were stories also leading up to the last OPEC meeting in November that meetings were held with non-OPEC producers in order to gather support for production cuts also from countries outside of OPEC. It turned out that there was no appetite to contribute from any non-OPEC nations then. The situation may of course however be different this time since now all oil exporting countries have felt the pain of lower prices while that was really not the case last autumn.

Again we are seeing in front of the OPEC meeting, which will be held on June 5, that some OPEC countries are trying to rally support from several non-OPEC producers to contribute to production cuts. Algeria and Venezuela are reportedly in dialog with Azerbaijan, Kazakhstan, Mexico and Oman in order to achieve a collective cut in production between OPEC and non-OPEC producers. The key is however Russia, which is still the world’s largest crude oil producer at 10.7 million b/d. A tiny percentage cut from Russia is more worth than a large percentage cut from Oman to put it that way.

Eoin Treacy's view 

A link to the full report is posted in the Subscriber's Area.

There is no sign yet that the Baker Hughes Rig Count has stopped falling despite the fact that oil prices are now trading in the region of $60; having been closer to $45 in March. As a result we don’t yet know what price will encourage fresh expenditure on drilling but we can conclude it is higher than $60. As a result it is still too early to conclude at what point the market will return to equilibrium. If the Saudi Arabians feel the same way they have no incentive to curtail supply.

 

CalAmp and the Internet of Things 

Thanks to a subscriber for this note from Canaccord Genuity on CalAmp which may be of interest to subscribers. Here is a section: 

We hosted upbeat investor meetings with CalAmp CEO Michael Burdiek on April 29th, in the mid-Atlantic region. Following our meetings, we maintain our belief CalAmp is well positioned for solid long-term growth in the Industrial IoT market through both organic initiatives that include entering new markets and through potential acquisitions. In fact, we believe CalAmp’s recent $150M low-interest rate convertible offering provides the company with increased financial flexibility for its M&A strategy focused on accretive acquisitions in targeted IoT verticals. We remain impressed with management’s longer-term strategy to build upon its strong hardware portfolio and offer an increasing mix of higher-margin recurring revenue solutions. Finally, as evidenced by the strong Q4/F2015 results, we believe CalAmp’s Wireless DataCom business is well positioned to drive strong F2016 and F2017 sales and earnings growth driven by ramping sales to Caterpillar, growing insurance telematics sales, ramping international sales, a growing product portfolio, an increasing list of new customer opportunities, and anticipated steady growth of higher-margin recurring revenue sales. We maintain our BUY rating and $26 PT. 

Eoin Treacy's view 

A link to the full report is posted in the Subscriber's Area.

The Internet of Things represents a myriad group of themes often with little relation to one another. CalAmp for example focuses on automobile connectivity particularly for those with large fleets of vehicles they need to monitor. On the other hand Sensata Technologies produces the sensors that allow diesel vehicles in particular to run self-diagnostics. Both are leveraged to the auto sector and both are in the sensor and enhanced communication segments that contribute to the Internet of Things theme but they are not strictly related. 

 

Email of that day on investing in the Global Corporate Autonomies Fund 

Just a note 

I managed to get this investment done via Davy's stock brokers in case you have any other Irish clients who might be wondering ... 

I have a self-administrated pension and as part of pension trust I have an authorised stock trading account with Davy's 

Davy's completed the set-up of the Autonomies fund a few weeks ago on their system for me and completed the purchase of the Autonomies fund for me through my pension structure... 

All good. I am very pleased to have you on board as the fund manager steering the ship :) 

Do you have an expected return you would like to be returning on a yearly basis? 

Do you have a chart in the chart library that tracks the fund?

Eoin Treacy's view 

Thank you for letting me know and thanks also for your interest in the Global Corporate Autonomies Fund. The fund holds 100 of the 146 Autonomies we have identified at any one time and is reweighted quarterly. In line with the most up to date research from the Cass Business School the fund adheres to an “equalish” weighting so that winners are run for longer and losers are given a little more room to recover. 

We invest in consistent trends for as long as they remain consistent and the Autonomies have provided plenty of those over the last number of years.  A systemic approach is taken to reweighting so that the fund remains diversified between sectors. Overextensions relative to the MA of more than 30% are viewed as opportunities to lighten while reversions to the mean are viewed as buying opportunities. It is envisaged that the fund will outperform the MSCI World by a few percent per annum. I’ve added both the Accumulation and Income versions to the Library. 

 

Speaking Engagement 

Eoin Treacy's view 

Here is the link to the presentation I delivered at the Round-the-Clock-Trader webinar event this afternoon. 

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