As a value focused investor, the US market forced me to look abroad over the past few years and fortunately I did and where values still lie. Right now though I feel like road kill in my constant search for value in the US and I reached the height of cluelessness watching the US market rally Thursday on the good jobs number and rally further Friday on the weak jobs number. We loved QE and zero rates and now we love no QE and rate hikes. Tax reform is great but who cares when it happens. A persistently flattening of the US yield curve doesn’t matter, etc… I’ve basically thrown in the towel of trying to make sense of anything in US stocks but I certainly know markets will do what they do. In the constant search for something washed out I do though believe there is an area that has been left for dead and that is agriculture and the fertilizer stocks within that. You want value, go look there. You want momentum, that’s easy to find because everyone is doing it. Anyway, sorry for the diversion but here is a chart reflecting the extinction of the value investor, it measures the median price to sales ratio for the S&P 500 and you can see where it is relative to the year 2000:
The private sector weighted Caixin Chinese services index for May rose to 52.8 from 51.5. and brings the manufacturing and services composite index to 51.5 from 51.2 and vs 52.1 in March. This is the 2nd lowest read since September 2016 and points to the likely impact the credit crackdown is having on their economy, along with the general slowdown we’ve been seeing for years. Caixin said this, “The improvement in the services sector bolstered the Chinese economy in May. However, the rapid deterioration in the manufacturing industry is worrying.” The Shanghai comp and H share index were both red while the yuan was mixed after last week’s violent rally. Of note, overnight SHIBOR is approaching again its highest level since 2015 reflecting continued uneasiness with Chinese intentions on credit growth. And, copper is trading down 1% and iron ore is down by 3.3%, giving back Friday’s rally.
Japan’s services PMI from Markit rose to 53 from 52.2 and that’s the best since August 2015 and brings their composite index to 53.4 from 52.6 and that is the highest level in more than 3 years. The jobs component within was a particular bright spot. Markit said “manufacturing employment rose at a solid pace” and “was the best recorded since November 2007. Service sector jobs were created not only in response to increased volumes of incoming new business, but also in line with positive projections for activity in the coming 12 months.” As for the desperate search for inflation on the part of the BoJ, “Average input prices faced by service providers continued to increase during May. Inflation has been recorded consecutively for over 4 ½ years, with the latest rate the sharpest since February. Companies reported that inflation had been underpinned by higher transport costs and rising wage costs. In response, a number of firms chose to raise their output prices, although the overall aggregate increase was again only marginal.” For manufacturers though, “competitive pressures meant that output prices charged by manufacturers continued to rise marginally.” Markets in Japan overnight were uneventful as the Nikkei was flat, the yen is down slightly and JGB yields are little changed.
The services PMI in India rose 2 pts to 52.2, lifting its combined index to 52.5 which is the best since October. I remain a big Modi fan and a bull on India. Singapore’s PMI fell to 51.4 from 52.6 and Hong Kong’s weakened to 50.5 from 51.1 as they remained tethered to the Chinese weakness.
The European services and manufacturing composite index for May was left unrevised at 56.8, a 6 year high and “Optimism about the one year outlook for output rose to its highest level since data for this series were first collected in July 2012.” There is no question that Europe’s economy has nicely rebounded but growth this year is still only expected to be between 1.5-2% so robust growth there is of course relative. Ahead of Thursday’s ECB meeting, “price pressures meanwhile remained elevated, despite some easing in both input cost and output charge inflation. In both cases, rates of increase were nonetheless only moderately below highs reached earlier in the year.”
In the UK, their services PMI for May fell 2 pts to 53.8 and that was below the estimate of 55. As for the outlook, “Optimism about the year ahead is running below the long run average, weighed down principally by concerns over Brexit, political uncertainty and weaker spending by households.” Fortunately for the average UK citizen, “input cost pressures have eased, suggesting consumer price inflation may likewise cool later this year, alleviating some of the squeeze on household budgets from higher prices.” Based on the recent polls we now know that the election on June 8th is more of a wildcard, not for May’s chances of winning but what the make up of her Parliamentary coalition will look like. However a poll today was favorable for the Tories and maybe why the pound is bid. There are pockets of strength in the UK economy, particularly on the manufacturing side but the consumer is under major pressure with falling real wages. Mark Carney and the BoE as a result are in a box where I don’t know how they think they’ll get out of this unscathed. I guess we can say that about other central banks as well. As always the case, the UK markets are shrugging off the terrible events over the weekend with the pound in particular at the highest level in more than a week vs the US dollar for the reason just mentioned.