Corporate Profits Vs. Employment

Corporate earnings are a leading indicator for jobs growth. We saw a gap in 1999 and 2016 between profits and jobs growth and the result was a quick deterioration in employment. So we expect sluggish employment in the years to come.

Correlation: CNY Vs. S&P 500

A peculiar correlation has come up between the CNY and the S&P. Whenever China devalues its currency, it seems that the S&P will drop a few weeks later.

Here is a close up: The yuan is a leading indicator. So watch what the chinese are doing and you will know what the stock market will do.

Merk Webinar: Black Swans?

I attended the Merk Webinar today and here is a summary of what I picked up.

- Japan's government bonds are being crowded out by central banks.
- VIX has been coming down, which signals overcomplacency.
- Terrorism has increased bets on Brexit.
- Elections can have effect: e.g. trade wars which will be negative for deficit countries like U.S.
- U.S. dollar will weaken on trade wars.
- Margin debt is peaking.
- Chinese yuan is leading indicator for S&P.
- Bearish Japanese yen.

Stock Screener: Day 1: HCI Group: Going Live!

Correlation Economics is going live with the Stock Screener Technique. I will post live podcasts on my channel here, maintain a "Stock Screener" portfolio and prove that this technique works! (if it turns out it doesn't work, I'll probably try something else)

Remember my post on KYN, SIMO, TAICY, TYG, EWZ, XIN, GIMB, ARG? All have been doing well. ARG has given a handsome dividend of 4%/year while appreciating 10%, I'm amazed how well this stock screener idea works. I'm still keeping this stock in my portfolio as it is undervalued and can continue to rise, but let's go to another stock for our readers.

Track record 8-0.Time to move on.

If I don't have any ideas anymore what to buy, I use the stock screener.

What you want to do is filter on 4 attributes: market cap, P/E, dividend yield and percentage change.

1) Market Cap: do not choose small companies as they are mostly fraudulent or don't have sustainable earnings. Don't choose big companies because these are not volatile enough to get fast profits from. I'd filter between 200 million and 4 billion.

2) P/E ratio: choose the companies with the lowest P/E ratio, these companies are dirt cheap while still having earnings. Cheap is below P/E of 5. But do not choose below P/E of 2 because those are mostly companies that are going bankrupt or have bad growth.

3) Dividend yield: always choose companies that have dividends, because these companies have real earnings and can prove they have sustainable earnings to reward investors. The higher the better of course, but don't push it above 7% as those companies probably don't have the money to pay out dividends on a regular basis. I'd go for companies with dividends between 3% and 7%.

4) Volatility: don't choose companies that are so volatile. Maximum year over year change should be between the 20% range.


We use the exact same parameters as above and our next winner is: HCI Group (HCI). This time I took a stock from the NYSE.

I always say, buy a company that has earnings and this one has it all. Very nice earnings around 4 dollars a share a year, which means a P/E of 7, not too shabby but it's ok in this world of high equity valuations. I will make an exception on the P/E ratio today (outside the range of 2-5). Market cap is at 300 million USD. Share price has fallen in the past year. Dividend is increasing in time, it is around 3-4% dividend. Dividend is also stable, they started to pay out already many years ago. Is trading at around book value, so valuations are normal. The company will also buy back 20 million USD in shares, which is almost 10% of market cap. 20% of shares are insider held. I'm buying it. Technically, the stock has bottomed out. This is a nice dividend generator. Let's go for 9-0.

Stock Screener: Take 9: HCI: HCI Group

Remember my post on KYN, SIMO, TAICY, TYG, EWZ, XIN, GIMB, ARG? All have been doing well. ARG has given a handsome dividend of 4%/year while appreciating 10%, I'm amazed how well this stock screener idea works. I'm still keeping this stock in my portfolio as it is undervalued and can continue to rise, but let's go to another stock for our readers.

Track record 8-0.Time to move on.

If I don't have any ideas anymore what to buy, I use the stock screener.

What you want to do is filter on 4 attributes: market cap, P/E, dividend yield and percentage change.

1) Market Cap: do not choose small companies as they are mostly fraudulent or don't have sustainable earnings. Don't choose big companies because these are not volatile enough to get fast profits from. I'd filter between 200 million and 4 billion.

2) P/E ratio: choose the companies with the lowest P/E ratio, these companies are dirt cheap while still having earnings. Cheap is below P/E of 5. But do not choose below P/E of 2 because those are mostly companies that are going bankrupt or have bad growth.

3) Dividend yield: always choose companies that have dividends, because these companies have real earnings and can prove they have sustainable earnings to reward investors. The higher the better of course, but don't push it above 7% as those companies probably don't have the money to pay out dividends on a regular basis. I'd go for companies with dividends between 3% and 7%.

4) Volatility: don't choose companies that are so volatile. Maximum year over year change should be between the 20% range.


We use the exact same parameters as above and our next winner is: HCI Group (HCI). This time I took a stock from the NYSE.

I always say, buy a company that has earnings and this one has it all. Very nice earnings around 4 dollars a share a year, which means a P/E of 7, not too shabby but it's ok in this world of high equity valuations. I will make an exception on the P/E ratio today (outside the range of 2-5). Market cap is at 300 million USD. Share price has fallen in the past year. Dividend is increasing in time, it is around 3-4% dividend. Dividend is also stable, they started to pay out already many years ago. Is trading at around book value, so valuations are normal. The company will also buy back 20 million USD in shares, which is almost 10% of market cap. 20% of shares are insider held. I'm buying it. Technically, the stock has bottomed out. This is a nice dividend generator. Let's go for 9-0.

ECB cuts interest rates: No bank deposit flights yet

The ECB cut interest rates to -0.04%.

 

This is a real problem for banks as their profit margins get squeezed. Banks will not gain a lot of money when they can't lend at normal rates. On top of that, some European countries like Belgium have a minimum deposit interest rate that needs to be paid to customers like us (0.11%). So banks get less money from loans but still need to pay depositors 0.11% interest.

Another problem is that depositors will think: "Hmm I can't earn any money on my deposits, so I'll take the cash out of the bank." And if we ultimately see negative deposit rates, people will certainly take their cash out of the banks.

That's why it's very important to see what the deposits are doing.

I created a chart of the deposits of Euro Area Residents, to be found here.

I had expected that when the ECB cut interest rates below zero since 2014, that we would see a deposit flight happening. But we actually see more deposits on the banks. Very counterintuitive and needs to be monitored in the next months.

Equation for Interest Rate Vs. Savings Rate

It seems like Japanese, Swiss, European people are saving more when we have negative interest rate policy. Why are people saving money when their money yields nothing?

The fact is that the higher the interest rate, the more you save as it gives nice returns on the bank. But when the interest rate hits 0%, weird things happen. Suddenly people start to save more due to uncertainty (in physical cash of course). No normal person will buy stocks because banks will collapse as they see their deposits go up in smoke. No normal person will buy bonds at negative interest. And no person will leave their cash in the bank. See chart below.

This is how I see the equation.

Update on Gold ETF holdings

Gold ETF holdings have been on a tear this year, just as we saw inflows in GLD.


But when you compare it to a year ago, the holdings are still flat, see below. So there is a lot of upside still to come.