Oil prices rise to $33. Storage crisis easing. Supply curtails to 11.5 million b/d. Fuel demand increases and stockpiles reduce 5 million barrels. States ease lock-down and travel rises. Demand uptick matched with OPEC supply cuts, and U.S. wells shutdown. But gasoline demand is still soft, and outlook is still fragile with low prices discouraging production.
ActiveAllocator dynamic constructed portfolio over-performed the 60/40 portfolio by 300 percent YTD. Over-performance attribution from reduction in maximum draw-dawn, arresting negative skewness, wider asset class universe, active active management. Adding typical financial advisor fees of +1% further increases differential in performance.
YTD ActiveAllocator +6.34%
YTD 60/40 Blend -3.1%
Q1 GDP contracts -4.8%, -$234B . Consumer -5.3%. Business -1.2%. Personal consumption -7.6%. Services -10%. Goods-1.3%. Business -8.6%. Q2 GDP estimated to contract by 40%
#ActiveAllocator Research: Official numbers that have come in today confirm our model’s projections. U.S. Economy slips into recession during Q2. Real GDP Shrinks 4.8% Q1 2020. Mayday! Mayday! And Q2 data is going to be 10 times worse.
Oil price collapse spreading as June WTI futures drop. Storage tanks, pipelines and tankers overwhelmed. Kuwait starts cutting oil output ahead of OPEC May 1, but OPEC action unlikely to buoy market.
Petrodollar wealth accumulation will drastically slow. Existing sovereign wealth fund (SWF) portfolios have been battered. Pressures on transfer from SWFs to meet government budgets will erode balances. Interest growing in M&A and acquiring international distressed assets, but national barriers to such investments being erected.
Both self-tender offers and open market repurchase programs have historically generated abnormal excess returns which persist for long periods.
Direct relationship between share repurchase size and excess returns at announcement. Multiple re-purchasers benefit more from large repurchase announcements. Smaller buyback announcements tend to be anticipated and partially priced in. Market reaction to buyback announcements is the uncertainty about whether the buyback will be executed. Larger repurchase correlated with greater abnormal return.
With earnings and therefore dividends to remain low, companies should reduce outstanding shares to increase per share price through share buybacks. They ought to return value to shareholders and provide investors the option to benefit from continued appreciation and defer taxes by selling shares at later date.
Historical long-term and YTD 2020 performance. Over $3.5 trillion life support stimulus props markets.
Weekly growth rate in cumulative cases slows but mortality rate climbs to 7%, 150,000 deaths, including 34,000 in U.S. Cases approaching 2.2 million level. Fatalities 35 times outside China. Wuhan numbers jump 50% and remain suspect. Widespread testing and social distancing is critical to slowing spread.
ActiveAllocator Research: Large Cap equities now valued at 18.5x P/E, slightly over long-term average of 16x P/E.
Rising government debt to 110 percent of GDP in 2020 will pressure ability to make future payments, to increase borrowing costs, and government bond yields. Investment grade corporate downgrades to increase and duration changes expected.
Amount of goods and services produced (output) compared with the number of labor hours used in producing varies with stage of economic development of country. Our simulation results suggest convergence around 2050.
With temporary unemployment in the U.S. at 20 million during April 2020 examining labor productivity is instructive. Amount of goods and services produced (output) compared with the number of labor hours used in producing those goods and services highest in China and declining in OECD. Real output per labor hour declining in the United States.
Share of working age population in total population to reduce. Labor force will continue to age, with the average annual growth rate of the 55-years-and-older cohort to grow at multiples of rate of growth of the overall labor force. Immigration unfriendly policies to further depress labor productivity, an important factor input.
Over long periods inflation has been positive. In past decades bonds have received a premium over cash which has varied considerably. Equity returns have compensated for higher risk over bonds. Long term anchoring of risk premium has held.
European bank shares were significantly downgraded from “pre-Lehman Brothers collapse” levels in 2008. However, better news was provided by CDS spreads, which narrowed for most banks (indicating higher creditworthiness) mostly due to government actions. This forward view captures underlying value better than traded shares prices.
#ActiveAllocator.com Research: Even though the U.S. banking sector is sound at the moment I find that banks usually are slow to write down distressed assets and raise new capital during previous crisis– whether from government, government agencies, or the market. When banks get stressed their stock price falls and capital buffer reduces, a negative feedback loop which adds to the problem of raising capital. The Global Financial Crisis of 2008 offers valuable lessons – more so for countries such as India.
Rising government debt to 110 percent of GDP will pressure ability to make future payments, to increase borrowing costs, and government bond yields. Investment grade corporate downgrades to increase and duration changes expected.
Safe investments decline in purchasing power. Surging bond prices reduce nominal yields and darkening consensus for growth prospects, reflects in negative real yields. Traditional fixed income relationship with other asset classes breaks down. Challenges for investment and spending policies and strategic asset allocation revision. Expectations of reduced inflation, but not outright stagflation.
Coronacrisis resolution, positive news, slowdown in infections to reduce safe-haven asset demand and reduce US$ valuation. Federal Reserve’s stimulus to debase currency. US trade deficit narrows to $40 bn. Feb imports fall 2.5 percent to USD 247.5 billion and exports edge down 0.4 percent to USD 207.5 billion. Goods deficit with China narrows. Developed markets rates difference narrows as yields fall.
ActiveAllocator Research: Surging bond demand drives up price of U.S. Treasuries, diminishing yields to less than 1% until 10 Year maturity. Strong signal of recession, global slowdown, worsening outlook, rise in risk aversion, aggressive monetary policy. Fed to boost purchases to inject liquidity, further driving up bond prices, and reducing yield.
Low oil prices, reduced demand across all sectors, rising unemployment, stagnant wages to keep inflationary pressures in check during 2020-2021. Annual inflation rate fell to 1.5% in March of 2020 from 2.3% in February – fall in gasoline costs, apparel prices, prices of shelter, airline fares, consumer prices were key contributors. We estimate inflation to be around 0.5% in 2020, 1% in 2021 and 1.5% in 2022.
Fixed income is no longer fixed. A much better diversification strategy is purposively across interest rates, credit spreads, illiquidity premiums, active management and alternative sources of income.
ActiveAllocator Research: Increase in value of corporate equity held has been largest (over 70%) contributor to improving household finances and balance sheets. Real estate, debt and other assets have improved too, but with de minimis effect. Increase in household asset value from $70 trillion to $135 trillion (mainly through corporate equity held), with liabilities increasing a minuscule 5.5 trillion to 16.5 trillion is responsible for $58 trillion increase in net worth.