Almost Daily Grant's

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Thursday, August 30, 2018

Back to the Future

It sounds vaguely familiar: A potent U.S. bull market runs headlong into an emerging markets crisis. Might the so-called Asian Contagion of 1997 and 1998 provide a roadmap for today’s investors as Argentina, Turkey, Brazil and others see their currencies spiral lower and borrowing costs lurch higher?  Let’s review the script from last time for potential clues to the future. 
 
As the S&P 500 had entered the teeth of the 1990’s bull rampage (the index was up 111% from April 1994 to July 1997), Thailand was forced to float the baht on July 2 as declining FX reserves made the country’s peg to the dollar untenable. The Bank of Thailand tried to limit the damage by raising interest rates 200 basis points to 12.5% and pledged to spend up to $5 billion to defend the baht, but to no avail. The currency lost roughly half its value in the next six months.  
 
 
Thai baht/U.S. dollar cross, January 1997 to August 1999. Source: The Bloomberg
 
Stateside, the summer of 1997 saw choppy but largely sideways price action in the S&P 500, with an abrupt 11% decline in October all but erased by year-end.  The bull market resumed in full swing in the first half of 1998, as the S&P 500 tacked on 20% through July. 
 
But as U.S. investors resumed their party, the Thai crisis duly spread to other emerging markets, with the South Korean won and Indonesian rupiah losing 54% and 80% respectively against the dollar in 1997 and 1998.  The EM crisis eventually culminated in the Russian debt default of September 1998 and subsequent bailout of U.S. hedge fund Long Term Capital Management. This time, overseas troubles made their way to the shores of the U.S., as the S&P 500 endured a 21% decline from July to October 1998, briefly entering a bear market.
 
But the U.S. equity bulls had an ace in the hole in the form of Federal Reserve chairman Alan Greenspan. In late September 1998, the Fed cut the federal funds rate by 25 basis points, to 5.25%.  When stocks continued to fall in October, Greenspan delivered another, intra-meeting 25 basis point rate cut on Thursday, Oct. 15, 1998, right before monthly options expiration. CNN Money reported at the time that: “As the news of the rate cut hit the floor of the New York Stock Exchange, traders actually cheered and investors rushed to buy stocks and bonds.”
 
They had good reason to cheer. The S&P 500 fully regained its losses by the end of November, then tacked on another 30% upside through the March 2000 peak of the Nasdaq.  While Greenspan’s rate cuts came from a far higher base (the current effective Fed funds rate is just 1.92%), chairman Jerome Powell could always press pause on the QT balance sheet run-off if the unfolding EM panic puts a dent in U.S. asset prices. 

Great moments in corporate communications

Yesterday, China Properties Group Ltd. (1838 on the Hang Seng) reported disappointing operating results for the first half of the year featuring a 72% year-over-year revenue decline.  While the outcome was disappointing, investors could at least enjoy a most entertaining “management discussion and analysis” commentary that accompanied the press release.  An excerpt:
 
10 years ago, the U.S. printed money like crazy and exported U.S. dollars all over the world.  Now the U.S. has become a global enemy, trying. . .  to undermine the asset markets of other countries and the global supply chain order.  No wonder the U.S. has made a lot of enemies. Fortunately, Trump does not have the same wisdom as Mao Zedong in making alliance with one while fighting another.  He wants to fight the world.
 
Nevertheless, Chinese are savvy and resourceful. Deng Xiaoping said, “we should grope our way across the river, one step at a time.” Jiang Zemin said, “keep a low profile to make a big fortune.” Han Xin demonstrated his immense ability to endure humility [sic] in order to preserve his existence for future accomplishments. Such wisdoms contributed to the creation of incredible historic achievements one after the other.
 
Stateside, steel drum producer Greif, Inc. (GEF on the NYSE) and subject of a bearish analysis in Grant’s (Sept. 22, 2017) reported third quarter results following the market close yesterday, with a stronger than expected top line partially offset by a revenue forecast  and implicit guidance cut for the rest of the year.  One anonymity-seeking investor points out a recurring theme from the company’s last four conference calls; a bone to pick with Mother Nature:
 
From the fourth quarter 2017: "Operating profit before special items was negatively impacted by $5.3 million associated with adverse weather events."
 
First quarter 2018:  "But were negatively impacted by weaker than anticipated Rigid Industrial Packaging & Services volumes in December caused by a temporary winter slowdown."
 
Second quarter 2018: "Our Rigid Packaging segment was impacted by customer operational interruptions, weather issues and rising raw material costs."
 
Third quarter 2018 (yesterday): "partially offset by significantly weaker demand from European agricultural customers due to weather, impacts from events in Brazil and continued value over volume decisions in China."
 
Investors bid GEF shares higher by 2% today, but be forewarned:  Fall is just around the corner.  

QT Progress Report

The tightening train rolls on.  The Fed’s portfolio of securities held outright comes to $4.024 trillion, down $9.7 billion from a week ago as mortgage backed securities rolled off the portfolio this week.  Compared to the trailing four-week average, today’s holdings represent a decline of $17.6 billion.
 
Since QT began just under 11 months ago, the Fed’s total balance sheet is down by 5.31%, for a simple annualized pace of 5.76%. 

Recap Aug. 30

The Brazilian real, South African rand and Turkish lira each lost between 1 and 3% against the dollar, while the Argentine peso was hammered to the tune of 13.5% to a fresh record low of 38.5 per greenback.   In tandem with the latest lurch wider in the EM currency realm, the stock market saw its first pullback since breaking to new highs last week, while Treasury yields dropped across the curve.  
 
A weak stock market and flat CRB Index didn’t stop WTI crude oil from climbing back above $70 a barrel, while the VIX was also well bid, spiking by more than 10% this afternoon to settle at a near-three week high. 
 
- Philip Grant

Friday, May 22, 2020

Angel eyes
Misery loves company.

Recap May 22

Thursday, May 21, 2020

Yellow ledbetter

Wishing well
These coins must have fallen through the couch cracks.

QE progress report

Recap May 20

Wednesday, May 20, 2020

Risk management 2.0

Paper pushers

Northern exposure
Now they tell us.

Recap May 20

Tuesday, May 19, 2020

Pounded dough
The mouse is out of the house.

57 days later
The undead are dancing.

Recap May 19

Monday, May 18, 2020

Noises off

Depreciation day
Grading on a curve, writ-large.

Correction:

Recap May 18

Friday, May 15, 2020

Shelf life
Today, biotech company Sorrento Therapeutics, Inc.

King me
Debt monetization is here.

Recap May 15

Thursday, May 14, 2020

She said it

Rock center
It's good to be king.

QE progress report

Recap May 14

Tuesday, May 12, 2020

Some type of synergy

Liquid courage
A brave new world.

Recap May 12

Monday, May 11, 2020

Bed check

A ripple in the desert
This morning, the Kingdom of Saudi Arabia announced

Recap May 11

Friday, May 8, 2020

He said it

Break on through
A step closer to the other side.

Recap May 8

Thursday, May 7, 2020

Mr. Market's Wild Ride

QE progress report

Recap May 7

Wednesday, May 6, 2020

Learning by doing

Solar city
From the counter-cyclical chronicles:

Pressed juice
What's old is new again.

Recap May 6

Tuesday, May 5, 2020

Green thumb
A closer look at "whatever it takes."

Just add water
The Mortgage Bankers Association

Recap May 5

Monday, May 4, 2020

Model X
Call it Uber diets.

Recap May 4

Friday, May 1, 2020

Thanks for nothin'

Codependency credit
Torrents of red ink down Mexico way.

Recap May 1

Thursday, April 30, 2020

Credit check

Security master
This morning, the Federal Reserve announced it will expand the scope

QE progress report

Recap April 30

Tuesday, April 28, 2020

State of nature
Yesterday, New York governor Andrew Cuomo

Recap April 30

Monday, April 27, 2020

Liquidity check

Something shiny

Smoke 'em if ya got 'em
On April 17, Howard Willard, CEO of tobacco giant Altria Group

Recap April 27

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