Market Cheat Sheet Sept. 4, 2018

“YTD August 31, 2018, undisrupted champion of global equities is the NASDAQ, up 17.47% and S&P is a distant second, up 8.52%. Since 2014, USD is up 20+%. 5-yr interest swap at 2.877% and 10-yr at 2.9035%” – Jefferies

“The forty year period before 1982 experienced a bear market during which the 10-year bond yield rose from under 2% to over 15%. During that period the US had nine recessions. Yields did fall during the recessions but the structural trend was for them to rise. The worry must be that the July 2016 low in the 10-year yield of 1.36% marked the turn into a multi decade inflation cycle. The mounting evidence of brewing inflation from tightening labor markets, reduced disinflation from Asian manufacturing, and political exhaustion on austerity policies all point to the possibility that bonds have finally turned” – Notz Stucki

“Even with our base case of some multiple contraction this year and next, we expect US equities to provide a total return of about 7% in 2018 and about 5% in 2019. Equities have traded at higher multiples in periods of low and stable inflation. While current valuations may seem high when compared to long-term medians, they are substantially less so when compared to the median levels seen since April 1996, when the US entered a period of low and stable inflation. US equities are about 13% overvalued when factoring in the current inflation regime. While Treasury yields have increased and are close to the midpoint of our 2018 range of 3%, we do not believe they have increased to a level that will derail this bull market. Historically, 10-year Treasury yields have averaged about 5% before negatively impacting equities. About 90% of S&P 500 debt is fixed and only 10% matures each year. Thus, it will take a number of years of higher interest rates before the aggregate interest expense of US companies meaningfully increases. In the current economic and inflation environment, interest rates closer to 4% may become a limiting factor, but at this point we are far from that level. Ongoing economic growth has overwhelmingly favored positive equity returns in the past, with high odds of positive returns and low odds of large losses. Only one quarter of US bear markets have occurred during expansions. Equity returns have remained favorable until about 5 months prior to the onset of an economic contraction, highlighting the penalty for prematurely exiting the market in the absence of elevated recession risk” – Goldman Sachs 2018 Midyear Outlook

Trump’s pitch to end quarterly reports would follow EU, Australia [REUTERS]

“…the 44 E&Ps we track reported $21 billion in pre-tax operating profits in the first half of 2018, up from $6.2 billion in the first six months of 2017, and over $50 billion in operating cash flow, up from $39 billion a year ago. Most notably, these companies are on pace to garner an astonishing $30 billion in free cash flow… earned $10 billion more and generated nearly $7 billion in additional cash flow in the second quarter of 2018 compared with a year earlier… primary determinate of the improved peer group profitability was the $5.77/boe in additional revenue the peer group received ($34.29/boe vs. $28.52/boe) due to stronger oil prices. However, a near $5/boe reduction in write-downs provided a significant uplift to second-quarter pre-tax operating income. Reductions in normal depreciation, depletion and amortization ($0.37/boe) and exploration expenses ($0.42/boe) also added to the bottom line. Lifting costs — $0.94/boe higher — were the only expense that impaired profitability: production costs were $0.50/boe higher, while oil and gas price-influenced production taxes added another $0.44/boe to lifting costs. All this resulted in pre-tax operating profits of $9.86/boe and $23.30/boe in cash flow.” – RBN Energy

Tiffany’s $250 Million Bet on a 78-Year-Old Store: “In an internet age, why are companies pouring so much money into brick-and-mortar shops? Because the customers are still coming… Target has consistently increased online sales, but ecommerce represents less than 6% of its revenues. Online sales are closer to 7% at Home Depot but under 4% at Walmart… Tiffany & Co. Chief Executive Alessandro Bogliolo, hired to run the jewelry giant in October, is selling investors on his store-renovation message. Representing as much as 10% of the company’s $4.2 billion in annual net sales, the flagship pulls in as much revenue as Pinterest.” – WSJ

China Internet Report 2018 [Abacus]