CHARTS that MATTER

June 19, 2019

Global Yield Curves Are Inverting

I’ve spilled a lot of digital ink on the yield curve inversion over the last few months.

An inverted yield curve happens when the difference between the yield on the 10-year
Treasury note and the 3-month Treasury bill turns negative.

In the US, the curve first dipped into negative territory in March and has been inverted
since May 24. That is bad news because an inverted yield curve has preceded every
recession in the last 50 years.

And it’s not just happening in the US. Global yield curves have started to invert as well.

Source: Crescat Capital

An inverted yield curve tells us that investors are pessimistic about the short-term
outlook for the economy. In response, they are exiting short-term bonds and heading
into the safety of long-term bonds.

As yield curves invert around the globe, it means investors are pessimistic about the
global economy.

- Robert Ross, editor of Yield Shark and In the Money

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Be Wary of High-Flying IPOs

Investor reactions to initial public offerings (IPOs) are always unpredictable.

Uber (UBER) has gained a modest 6% and Lyft (LYFT) is down 22% since their IPOs.
The early fanfare for these companies did not last long.

Then there was Beyond Meat (BYND)—a company that sells plant-based meat products—
which has seen its shares catapult 572% higher since its IPO. That kind of performance
puts BYND in some rare company.

Source: Bloomberg

But although many IPOs rocket off the starting block, most are unable to hang onto the
gains. The average return of the top performing IPOs since going public is 54.7%.

If you got in early and are sitting on a big gain from the BYND IPO, I’d be very skeptical
that the gain will hold over the long run.

- Robert Ross, editor of Yield Shark and In the Money

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Looking for Value Across the Pond

US stocks have been on an incredible run.

The S&P 500 has returned 215% over the last 10 years versus 41% for the Euro STOXX
50—an index of large Eurozone companies.

This lopsided performance has created a huge gap between US and European
performance.

Source: Merrill Lynch Global Investment Strategy

In fact, the disparity is twice as large than at any time in history.

There are still some major red flags for Europe—Brexit, social unrest in France, and a
bubbling Italian debt crisis are among them.

That said, it may be time to start looking for bargains in European stocks. We currently
own two European companies in In the Money, but I am considering adding more soon.

- Robert Ross, editor of Yield Shark and In the Money

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A Plunge in Confidence
The Morgan Stanley Business Confidence Index (MSBCI) plunged in June to its lowest
point since December 2008, the height of the Global Financial Crisis.

It was the largest one-month decline in the history of the index.

Source: Morgan Stanley, ETF Daily News

The headline index is comprised of several subindexes. The manufacturing subindex fell
to zero, and the services subindex also dropped sharply.

The evidence of a slowing US economy continues to mount. And the number of investors
worried that the economy will slip into outright recession is growing.

- Kevin Brekke, managing editor, Mauldin Economics

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Confidence Dominos
As the prior chart shows, business confidence has taken a huge hit in recent months.

The greater worry is contagion: Will consumers be next to suffer a big loss of confidence?

Source: Charles Schwab

History shows that we should be worried. When consumer confidence reaches a high
level like it did recently and then rolls over, the economy then heads into a recession.

One way to avoid that outcome would be for confidence to rocket to new highs, which is
always possible.

Still, the confidence climate is shaky.

- Kevin Brekke, managing editor, Mauldin Economics

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Dangerous Duo for Q2

We have covered the impact of a strong dollar on earnings and revenue in past issues of
Charts That Matter.

Now, it seems, we have to add trade tensions to the list.

Source: FACTSET

The greatest danger is for companies that earn more than half of their sales from outside
the US.

When trade conflicts are added to currency headwinds, companies with big global
revenue exposure are forecast to see earnings drop over 9%.

And FACTSET expects the Information Technology sector to be the hardest hit.

- Kevin Brekke, managing editor, Mauldin Economics

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High Hope Meets Lower Margins

There is a pretty tight correlation between the ISM Manufacturing Index and net profit
margins.

We have presented charts that show the index is on the verge of slipping into contraction
territory. And that is not a good omen for profit margins.

Source: The Leuthold Group, Advisor Perspectives

The net margin in the above chart is shown with a 12-month lag, meaning a downturn in
the ISM Index leads a squeeze on margins by about one year.

Later this year, we could see high investor expectations for earnings collide with the
emergence of lower margins.

- Kevin Brekke, managing editor, Mauldin Economics

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Gold Enters the Zone

We’ve seen this movie before… many times. In this thriller, the protagonist, gold, makes
a big move to the upside. Then when things are just starting to look good, gold confronts
its nemesis—the dreaded resistance zone.

That’s where we are in the latest gold sequel. Gold has climbed $75 higher over the past
four weeks and just bumped its head against a strong resistance level, shown on the
chart.

Source: StockCharts

Gold has tried several times to push through the $1,350–$1,375 price zone for three years
and failed each time.

It’s once again decision time for the gold bulls. If they fail, a price retreat looks very
likely.

- Kevin Brekke, managing editor, Mauldin Economics

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