dog with robo dog

Incentive Based Returns

“God knows how any of you can place your vote based on ISS or Glass Lewis,” says JPMorgan CEO Jamie Dimon.  “If you do that, you are just irresponsible, I’m sorry.  And you probably aren’t a very good investor, either.”  Or you probably aren’t in favor of Dimon’s last paycheck: “investors are seeking that a greater portion of executives’ incentive pay be based on performance…Proxy advisers [ISS and Glass Lewis] had recommended investors reject the pay resolution.”  Meanwhile, “S&P 500 companies returned a record $242 billion to shareholders in the first three months of the year via buybacks and dividends, surpassing the previous high of $233 billion in the second quarter of 2007…While dividends and buybacks prop up stocks in the near term, they can come at the expense of long-term growth initiatives.”  Meanwhile, “productivity has declined in all the major developed economies.  This fall is not a mystery, as is often claimed.  Poor productivity is a consequence of low investment, and in the UK and the US a major cause of low investment is the incentives created by the bonus culture…Bonuses encourage managers to put more emphasis on the short term for which they are rewarded and pay less attention to the longer-term dangers their companies face…We should therefore expect the rise in short term incentives to have been accompanied by low investment and high profit margins.  This is exactly what has happened…Bonuses should be linked to increases in productivity as well as to profit targets.”



Here are some things you could know about hedge funds: “the top 11% of managers controlled 92% – or $2.78 trillion — of total hedge fund assets at the end of Q1 2015…Of these top firms, more than 400 managing $1 billion to $4.9 billion collectively controlled $892 billion while 22 managers with $20 billion or more, had $790 billion all together…On average, managers with more than $20 billion were established in 1992.”  To which Josh Brown thinks that “if you founded a hedge fund in the early 1990’s, you probably had 100 serious competitors in chasing down the alpha that used to be the lifeblood of the hedge fund game.  Cramer was running like a hundred million and he was considered to be a big dog back then…It’s not that hedge fund managers are unskilled — it’s that way too many of them are so highly skilled.  This is why alpha is so hard to come by.”  Here’s another theory: it’s not that hedge fund managers are unskilled — it’s that way too many passive algorithms are highly skilled: “the middle of the day has become awfully quiet on the U.S. stock market, as index funds and computer models push the action toward the end of the trading day…These include programs that dribble out trades at intervals, known as ‘volume weighted average price’ algorithms.  Their proliferation has led volumes to snowball at times when investors are already active, such as at the close…Another factor behind the shift has been the proliferation of passively managed investments…buying or selling a stock at its closing price better aligns their performance with the index they are trying to emulate.  Actively managed funds, in contrast, aim to beat, not match, stock indexes.”


China: Stock Market Plunges More Than 6% (Alt)


USA: Fed’s Latest Survey On Financial Conditions Of American Households


ICYMI: Los Angeles Has Taken The Baton From Seattle


WM: Damodaran: “Why Low Interest Rates & Large Cash Balances Skew PE Ratios”


AAPL: Dropping Lots Of Car Hints


porky pig

A Th-Th-Th-That’s All, Folks!

Mohamed El-Erian’s portfolio is mostly concentrated in cash right now: “Central banks look at growth, employment, at wages.  They are too low.  They don’t have the instruments they need, but they feel obliged to do something…They hope that they will trigger what’s called the wealth effect…There is a massive gap right now between asset prices and fundamentals.”  “Why is this the most mistrusted bull market in recorded history?  Because no one thinks it’s real.  Everyone believes that it’s a by-product of outrageously extraordinary monetary policy actions rather than the result of fundamental economic growth and productivity — and what the Fed giveth, the Fed can taketh away.”  Meanwhile, “there are two common delusions about the Fed: [1] They know something we don’t [2] They are stupid.” Meanwhile, “there seems to be a conflict between low liquidity in markets requiring more and more predictability and the Fed wanting to have more flexibility…If economic conditions demand that [the Fed] raise rates this year it will simply have to contend with the existing, broken model.”  Meanwhile, “the easy part of the dollar rally is definitely behind us” (alt) …”On Friday, the dollar took its biggest tumble in almost two weeks following slower-than-expected U.S. job growth for March.  The Labor Department reported nonfarm payrolls grew by 126,000.  Economists…had forecast an increase of 248,000…the expected likelihood of a Fed rate increase in September dropped to 28% from 33%, according to the fed-funds futures market.”  Meanwhile, Josh Brown says “the preconditions for active management outperformance are present!”  He argues that the current outperformance of small caps over large, as well as international stocks over domestic, provide plenty of “alpha” potential.  Furthermore, “dispersion has shot up — dispersion representing the degree of standard deviation between stocks from one another.”  Also, “cash is also not as big of a drag this year as it was last year.”  “The question is, will these conditions remain present long enough for the active funds to post a (sorely needed) banner year for the industry?  It would make things a lot more interesting and could cause quite a stir here in the Index Utopia.”  Meanwhile, The Tide In Europe Is Turning Towards Active Management.  Also, Would Benjamin Graham Have Hated Index Funds?


USA: What Happens If My Algorithm Is Wrong?”


USA: [Insert Noun Here] Asian Infrastructure Bank Has Convinced Larry Summers Of One Thing!

renminbi new choice

Currency Envy

According to Duke University, two thirds of U.S. exporters say “the appreciation of the dollar has had a negative impact on their businesses.  And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result…’We are in a midst of an ugly contest to see whether the eurozone, Japan or Canada can depreciate the most against the U.S. dollar, and China is probably next.”  There is a growing debate over this last point.  On the one hand, Chinese exporters would benefit from a depreciated currency much in the same way people are expecting German exporters to benefit from a depreciated euro.  On the other hand, China is in the middle of attempting a massive rebalance away from export and investment driven growth, and the $US denominated debt on Chinese corporate balance sheets doesn’t help either.  Which brings us to this: “Britain’s announcement Thursday that it intends to join the Asian Infrastructure Investment Bank, which China is largely funding in hopes of becoming the dominant influence in Asian affairs, has bolstered the fledgling bank’s reputation even before it begins operations…Washington views the Chinese venture as a deliberate challenge to [the World Bank and other global financial institutions], which are led by the United States and, to a lesser extent, Japan.”  Some are expecting this decision to influence authorities in South Korea and Australia who “have seriously considered membership but have held back.”  “Having South Korea as a founding member would be a considerable coup for Beijing.”  Someone in the Obama administration even went so far as telling the Financial Times that they are worried about Britain’s “constant accommodation” of China (alt).  Draaamaaa.  Meanwhile, “in the past year, the dollar’s share of total global financial transactions grew to more than 43 percent from a bit less than 39 percent…At the same time, China’s currency became the world’s fifth favorite medium of exchange, up from seventh at the start of 2014.”  And here’s something fun: Bank of China has a billboard up outside of Bangkok International Airport advertising the renminbi as the “new choice” for “the world currency”.  “China is literally advertising its currency overseas, and it’s making sure that everyone landing at one of the world’s busiest airports sees it…They know that the future belongs to them and they’re flaunting it.”


WM: Basically Everyone Failed To Beat The Market Last Year


Global: A Half Century Of Debt Buildups (Check Out Japan On This Chart)


Oil: Have Oil Prices Hit Their Floor?

Meanwhile, is the February bounce done?


USA: Household Net Worth Numbers

It’s The Guvment, Stupid

skynet google car

Throwing Oil On The Fire-Sale?

Jess Delaney says that “oil-exporting nations may raid their sovereign wealth funds to plug budget holes, but the funds’ asset allocation remains unchanged…Oil exporters have four basic ways of responding to oil price shocks: cutting spending, issuing debt, tapping their sovereign wealth funds and, in the longer term, diversifying their economies.  In today’s circumstances, [Terrence Keeley, global head of BlackRock’s official institutions group] sees debt issuance as the first recourse for hard-pressed exporters…[So far,] there’s little sign that sovereign funds are altering allocations…’There really is no linear relationship between a country’s break-even oil price and its appetite for risky assets.’”  Meanwhile, Chevron Corp issued $6bn in debt yesterday, 30% of which is priced at 50 bps above US treasuries, and, in total, “gives Chevron a lower borrowing cost than the average of company debt with similar ratings and maturities.”  Speaking of corporate debt, “the supply of corporate bonds has more than doubled since the precrisis period, with a little more than 80 per cent of that growth coming from a boom in the supply of highly-rated bonds…Whether corporates will be able to deliver the same level of profitability when (if?) rates end up rising is unclear.”  Meanwhile, liquidity is still a concern (alt): “Regulations aimed at bolstering stability at the core of the financial system, combined with a growing demand for liquidity, may eventually lead to increased instability and fire-sale risk in the periphery” (read: illiquid bonds and alternatives).  Furthermore, “ETFs are being used not only by end investors looking for instruments with daily liquidity, but also by mutual funds seeking to mitigate the differences between the liquidity their investors expect versus the (poor) liquidity available in the underlying bonds.”


Creation — Destruction

Fortune magazine is pretty worried about “deploying 3,000-pound robots on public streets.”  “Self-driving cars are the first potentially deadly robots the public will meet, but they won’t be the last.”  And for MIT professor Erik Brynjolfsson, driverless cars represent a significant advancement towards technology replacing (alt) “the uniquely human skills of judgment and dexterity.”  “It’s gotten easier to substitute machines for many kinds of labor.  We should be able to have a lot more wealth with less labor…But it could happen that there are people who want to work but can’t.”  Meanwhile, the classroom next door is taking “the non-alarmist view”: “fear has outpaced reality…humans can do many things without being able to explain how…if a person can’t explain how they do something, a computer can’t be programmed to mimic that ability.”  Furthermore, “if we automate all the jobs, we’ll be rich — which means we’ll have a distribution problem, not an income problem.”  Meanwhile, a Barclays analyst thinks that “economists have probably been far too generous in their accounts of potential output and most likely under-estimated the scale of potential growth destruction that has taken place in the global economy as a result of the financial crisis.”  Furthermore, he argues that even pre-recession, developed economies were already transitioning from “manufacturing toward less-productive services as competitiveness worsened, and trends toward part-time work and more flexible working arrangements weighed on hours.”  Meanwhile, Klaus Schwab sees an age of disruption leading us into new waves of growth: “in this new era, economic growth will occur more slowly — but potentially more sustainably — than it did before the crisis.  And technological change will be its driving force…One outstanding feature of this revolution is the scope and scale of its disruptiveness (i.e. the “Uber of X” phenomena)…Gone are the days of big fish eating small fish.  In the post-post-crisis world, fast fish will dominate — and slow fish will die.”  Speaking of slow fish


WM: Hate, Hate, Hate (For Active Management)

“While it is possible to imagine that the current disdain for actively managed mutual funds among individual investors will eventually subside and possibly even be replaced by enthusiasm, there are all sorts of institutional forces that will keep pushing money out of active funds and toward cheaper passive ones.  And while it was once believed that the rise of index investing would make markets less efficient and thus create new opportunities for active money managers, the new thinking is that…the lack of retail punters and their harvestable mistakes cuts off one of the most reliable historical sources of alpha for sharp-eyed managers.”


USA: JPMorgan To Close 300 Branches By End Of 2016


USA: How Unemployment Warps Your Personality Over Time


Charts: I Love Mountains, Don’t You?

europe is beating expectations feb 2015

What Are You Expecting?

10 year yields have risen sharply over the last three weeks (eg. US Treasuries “from this year’s low of 1.68% on February 2 to 2.13% on Friday”).  Ed Yardeni highlights three reasons for the rebound: (1) better than expected payroll employment data, (2) better than expected German factory orders data, and (3) better than expected Japanese GDP and exports data.  In fact, European economic data has been better than expected this year.  PMIs, consumer confidence, and even GDP, especially from eastern European countries, are all signaling a rebound in exports, spending and activity.  Let me guess…you don’t buy it.  But consider this: your disbelief that European economic data could actually be positive is precisely what this data is measuring.  Tomfoolery is seductively entertaining, and it can dominate the senses.  Don’t let it.  Meanwhile, “volatility and trading volumes have collapsed this month as U.S. stocks have marched to fresh records, a respite that few investors foresaw and few expect to continue.”  A lot of investors are going long America (observe: the $US, US equities), and the crowded dollar has some people worried about EM debt: “Portfolio managers in the global bond market may dump EM debt very quickly as interest rates begin to rise, forcing some EM corporates to buy dollars to redeem maturing debt.  This could push the dollar higher, tightening monetary conditions even more.  And this would reduce capital investment in the EMs, raising the risk of recession and inducing bond managers to dump more EM credit into the market.”  Speaking of emerging markets, some are expecting a “manufacturing exodus” out of China this year: “Notably, Japanese companies are moving back to Japan, in part due to the cheaper yen and perhaps expectations of further weakness in the yen.  China, on the other hand, is squeezing its low cost manufacturers with a stronger yuan.”


Fed: All Eyes On Yellen’s Testimony Before Congress This Week


ICYMI: Active Management Is Under Heavy Fire (Alt)

“Having watched smokers quit and drivers adopt seat belts and folks lose weight, I am unable to imagine large numbers of active investors quitting the Great Game.”


USA: We’re Not Just Building Supersized Homes For The Rich Anymore


C’mon: Climate Change Scientist Lobbyist Was Funded By Fossil Fuels Industry


What: “To Prove That Economics Is More Valuable Than Peace, The Prize Would Have To Sell For More Than $1.1 Million”

mechanical bull

Surprise → Frustration → Hubris → It’s A Stock Picker’s Market Again You Guys

“Global financial markets made a series of epic moves in the second half of 2014: toward a sharply lower price of oil, much lower interest rates, and a far stronger dollar…[Yesterday was] a reminder that for every American enjoying a cheaper tank of gas or a more affordable mortgage, there are also major employers wrestling with less investment in new oil exploration and lower earnings from abroad.”  Meanwhile, the Financial Times says look to balance sheets for clues on the future winners and losers of lower crude prices: “The key point, however, is that at the same time as the oil industry as a whole was adding debt, it was betting — through its choice of projects — on sustained high oil prices…In five years’ time, which companies will know that they got it right: those that saw $50 oil as a floor and assumed a return to $100?  Or those who planned for $50 oil to last years, organised their finances accordingly, and so could treat anything more than that as an unexpected bonus?”  Meanwhile, “the thing about currency wars is that somebody has to lose them” appears to be the general attitude these days.  Josh Brown’s latest article further illustrates this attitude: “The no-vol, sleepy grind higher has been replaced with all sorts of drama.  Confusing economic data points abound…the profits for just showing up (i.e. 2013) aren’t quite so automatic so far this year and the large-cap US stock rodeo seems to be coming unhinged.”


AAPL: The Staggering Numbers

Apple is trading higher today (up 6% at 8:15 am) after last night’s huge earnings beat: Earnings per share rose nearly 50%, exceeding expectations by 18%; revenue increased 30% to $75 billion, exceeding expectations by 10%.


EU: Greek Stocks Are Getting Hammered

But they’re good enough for Robert Shiller.

A lot of people are worried about Marxists in the cabinet, and their decision to “halt the sale of state assets” smells a bit like nationalization.


USA: (Presumably Former) Morgan Stanley Economists Say 2016 For First Rate Hike


WM: Hubris Is Why The Next __ Years Will Be A Modest Investor’s Market

Explaining the ECB negative deposit rate effectsMunicipal Debt: A Win-Win Situation For Everyone Present Generations

Despite how badly the United States could use an infrastructure upgrade (e.g. “Globally, the U.S. ranks 19th — behind Spain, Portugal and Oman — in the quality of its infrastructure), state and local governments are holding back, thanks to 1) heavy debt hangovers from the financial crisis, and 2) projects in limbo as the federal government’s Highway Trust Fund runs out of money.  “To finance big infrastructure projects, state and local governments usually go to the municipal bond market, but in the last few years, they’ve issued few bonds for new capital projects despite historically low interest rates.”  Meanwhile, “issuers from California to New York have scheduled $11.7 billion of long-term sales in the next 30 days, the busiest calendar in three months.”  So supply is going up, but what about demand?  “Municipal investors receiving $104 billion of principal and interest payments in the next three months” could help extend the muni rally even further in 2014.  Meanwhile, Moody’s would like you to know that Illinois politicians are running this thing into the ground.

Hog Farmers Concerned About Growing Hogs, Potential For Slaughter

“The Fed’s growing worry (alt) — which could influence future interest rate decisions — is that if investors start taking undue risk it could lead to economic turbulence down the road.”  How’s that for irony?  Reuters says Fed officials “are right to worry, but in casting blame, policymakers need to look in the mirror.”  Meanwhile, “the business of bundling junk-rated corporate loans into top-rated securities is booming like never before after the implementation of regulation aimed at making the financial system safer.“  Also, “lenders such as Ireland’s Allied Irish, Spain’s Bankia and Portugal’s Millennium BCP were once regarded as having little chance of long-term survival.  But today international investors are prepared not just to lend them billions of euros — they are doing so without collateral.  One reason such crisis-hit banks have returned to favour (alt) is that investment funds have taken on more risk in the hunt for better yielding assets…’Right now everyone is a yield hog.’”

Alibaba’s Money Market Fund Is Now 4th Largest In The World

The explosive rise of Yu’e Bao (Alibaba’s online money market fund) surprised everyone, including Alibaba, which is proving to be a potential disintermediator for the entire financial industry…High yield with perfect liquidity has made Yu’e Bao an unbeatable product, draining 400 billion yuan from banks in a click.”  Meanwhile, Chinese state media is printing things like this (alt): “foreign technology services providers such as Google and Apple can become cybersecurity threats to Chinese users…To resist the naked hegemony, we will draw up international regulations, and strengthen technology safeguards, but we will also severely punish the pawns of the villain.”  I guess that’s a no-go for Facebook Autofill and Google Wallet in China?

USA: The Rebirth Of U.S. Manufacturing: Myth Or Reality?

HBR argues that the debate over a U.S. manufacturing renaissance “is less black and white than either the cheerleaders or the naysayers would suggest.”  The results of an L.E.K. Consulting survey indicate “modest improvement in U.S. manufacturing but not a wave of reshoring.  More companies are investing in the U.S. or considering it as a location for new manufacturing facilities.  But this is essentially a rebalancing after many years in which manufacturing shifted overwhelmingly to lower-cost nations such as China.”

Fed: The Chicago Fed Doesn’t Wanna Hear It From Small Banks

“Interest rate changes generally have small effects on bank profits, but changes in economic conditions do matter relatively much more.”

Global: Can We Talk About Portfolio Concentration And Risk Tolerance For A Second?

Also, even Warren Buffett doesn’t practice what he preaches.

EU: Apparently Belarus Is The North Korea Of Europe

consumption of non-durable goods comparing recessionsconsumption of services comparing recessionsGetting To The Bottom Of Anemic Growth

“There are two reasonable responses to news of the US economy’s dismal 0.1 per cent annualised growth in the first quarter of 2014: either panic, or else curse the vagaries of economic data, and wait for revisions to straighten out the rather jumbled numbers.”  Here are 5 takeaways (alt): 1) “almost every area of weakness could be chalked up to weather” (but the Weather card is no longer a reasonable excuse going forward), 2) revisions to this GDP number and a Q2 rebound seem highly likely, 3) thanks to Obamacare, higher healthcare spending contributed about 1.1% to the GDP number, 4) this part of the GDP calculation (healthcare spending) may be susceptible to future revision, and 5) “this is more consistent with another year of mediocre 2 per cent growth, than the forecast acceleration towards 3 per cent.”  Meanwhile, here is a closer look at the individual components of GDP and how they compare to other recessions.  While “this type of exercise is tricky because all of these components are a function of the other ones…the mystery of weak GDP growth over the past 6 years is closely related to consumption, particularly consumption of services and non-durable goods.”  Meanwhile, “one out of three Americans now live in a housing market where rent for a three-bedroom home eats up more than 30% of the monthly median income, the traditional threshold for affordability.”  Renters in the Bronx spend “nearly 66% of their monthly income to rent a three-bedroom house — by far the highest percentage of any U.S. county…Renters in Philadelphia, Brooklyn, Baltimore and Miami are paying nearly 50% of their income toward rent.”  Also, “the logistics industry has a recruiting problem.  It’s huge, making up 8.5% of GDP, and growing fast.  But to most job seekers, it’s misunderstood — or invisible…’I think the challenge we have is the same as for lots of manufacturing companies…How do you communicate to college kids that this stuff is cool?’”

Active Managers: Bloated Funds Require Nimble Feet

New research suggests that the growing size of the (actively) managed-fund industry has made it more difficult for individual managers to outperform their benchmark.  “The effect of greater (management) skill is being offset by the fact that there is more money being managed.”  Some reasons for this could be 1) “as the industry grows, more stocks receive heavy scrutiny, so there is less chance a fund manager can find mispriced gems,” 2) “big funds have to invest in stocks of big companies…therefore miss out on the small-stock gems that offer benchmark-beating performance,” and 3) “big buy orders enhance demand enough to raise the stock’s price, so that the same fund’s subsequent purchases of that stock aren’t such good bargains.”  Meanwhile, as more companies pile into M&A deals to “boost their competitive position instead of waiting years for capital expenditure to yield rewards,” investors may want to shift their attention to “companies that have hard-to-replicate activities or unique geographical reach and which sit beside cash-rich peers in the same sector.”  Furthermore, “a wave of value-creating mergers ought to buoy markets.  But for stock-pickers seeking outperformance, it calls for nimble feet.”  Speaking of which, even stock-pickers are realizing that their bread and butter strategy is not in vogue right now.

JPN: No Confidence In Abenomics

It’s officially been one month since the sales tax increase in Japan; the second (third?) arrow in Shinzo Abe’s Quiver Of Fortune Inflation Destiny.  Abenomics doesn’t appear to be having a great effect on consumer confidence, and April manufacturing activity saw a dramatic fall in output and deterioration in new orders.  Expect to hear more about Abenomics and the sales tax in the coming weeks…

EU: Midsized Companies Face A Tough Hunt For Funds

“Medium-sized European companies [are] keen to ramp up capital spending, and mergers and acquisitions are picking up.  And they have to refinance trillions of euros in existing loans.  But with bank lending tight, they’ll have to look hard for funds…Corporate lending remains low down on European banks’ lists of priorities [and] as a result, corporates will have to start to broadening [sic] their funding horizons…’Private placement markets for European issuers have grown in recent years…but these are not always the answer for midsize companies.’”

USA: Regulator’s Report Discovers More Issues With Bank Foreclosure Practices

growth of assets hedge fund industry since 1990Robo-Advisors, Active Myths And Hedge Funds

Articulating value to clients is going to be increasingly important as robo-advisory companies like Wealthfront continue to grow: “this type of log-in, answer-a-survey, get-your-portfolio-underway type of experience has attracted millions of dollars from investors of all sizes…’If people’s expectations of what they can get from a financial advisor were higher, these service providers would have less of an appeal.’”  Furthermore, “’so many people have such low expectations of what a wealth advisor can provide that advisors really end up looking like a commodity’…a true financial advisor acts like an investor’s personal CFO, fulfilling a task that goes well beyond portfolio construction such as accounting and tax advice, but consists of a holistic approach to wealth management that’s worth the cost.”  Also, “robo-advisors might rebalance your portfolio for you, but they won’t stop you from bailing out of your investments in bear markets.”  Meanwhile, “there is no evidence to support the notion that active stock selection is easier when there is wide dispersion among individual stock returns…If stocks are all heading largely in the same direction, (i.e., have relatively low dispersion), in theory, an active stock picker should find it particularly difficult to construct a portfolio that beats a benchmark index.  On the other hand, during a period when individual stocks are acting more like independent assets, there should be a greater opportunity for skillful (or lucky) investors to outperform…although there is higher dispersion among active fund returns during periods of high stock market dispersion, this fund dispersion does not increase the likelihood of outperformance by active managers within the large-cap US market segment.”  Meanwhile, hedge fund assets under management set a record in Q1 2014 at $2.7 trillion; the 7th quarter in a row for record setting asset levels.  “Equity hedge strategies led the way with $16.3 billion in fresh investor cash.  Event-driven funds followed up a 2013 of big inflows with another $4.1 billion in new capital.”

62 Percent Of Americans Enjoy Lying

“A Gallup poll published Monday says that 62 percent of Americans say they enjoy saving, while only 34 percent say they enjoy spending.  This is up from 2013, when 60 percent of Americans said they enjoy saving and 37 percent said they enjoy spending.”  That being said, the average personal savings rate has been declining over the last four decades (11.8 percent in the 70s, currently at 4.5%).  Also, “30 percent of surveyed Americans say real estate is the best long-term investment, followed by 24 percent who opt for gold, and 24 percent who prefer stocks and mutual funds.”  Similarly, a Bankrate survey of over 1,000 households shows that 73% of Americans are “not more inclined to invest in stocks.”  “It all seems counterintuitive until you consider what investors have had to endure over the past 14 years: Two crippling bear markets that saw stocks lose more than half their value, the worst economy since the Great Depression and the perception that market gains are the product of nothing more than rocket fuel from the Federal Reserve that is bound to run out at some point in the not-too-distant-future….One constant among market pros asked about investor sentiment is that the lack of avid enthusiasm is a contrarian bullish sign.”

Chinese Reform Update: Private Capital, Asset Management Holding Companies

“In recent weeks, some of China’s top conglomerates have announced spin-offs and restructuring plans, local authorities have been experimenting with new management structures, and political sources say a group focused on state enterprises plays a prominent role among six teams that form President Xi Jinping’s economic brain trust…Provinces and major cities are already running trials aiming to bring more non-government capital to the firms they control and embracing new management structures and incentives…Guangdong, Hunan and Guizhou are also allowing for the first time senior executives to own shares in firms they manage.  Local governments are also experimenting with using asset management companies to act like value-driven institutional shareholders rather than an extension of government bureaucracy.”  Meanwhile, “China plans to establish a land registration system by 2016 and make it operational within two years, the country’s Ministry of Land and Resources said, part of an effort by Beijing to make the real estate market more transparent.  Also, meet BYD, the Chinese conglomerate producing carbon-free products (like electric buses) near Los Angeles, with the help of Warren Buffett.

USA: Introduction To The Floating-Rate Note Treasury Security

“The new two-year FRN is a fixed-principal security with quarterly interest payments and interest rates indexed to the thirteen-week Treasury bill…From an investor perspective, FRNs have less exposure to rising rates because of the frequent rate resets, and they pay interest more frequently than current coupon two-year securities.  At the same time, FRNs may offer investors a slightly higher yield and fewer transaction costs than consistently rolling over a position in the thirteen-week bill, despite providing nearly identical cash flows.”

robot at workTaking Orders From Tradebot: The Pros And Cons

“Eric Schneiderman, New York’s attorney-general, in a speech on Tuesday called for (alt) ‘tougher regulations and market reforms’ of high-frequency trading (HFT) firms.  He highlighted contracts that allow high-frequency trading firms to place computer servers inside trading venues and gain access to extra bandwidth to speed their access to information, such as prices and volume.”  Meanwhile, the CFTC is jumping on (alt) the “Anti-HFT Bandwagon”: “The Commodity Futures Trading Commission is investigating deals between large high-speed firms and the two futures-exchange operators, CME Group and IntercontinentalExchange Group (ICE)…the probe is focused on complicated, often opaque incentive programs that give high-volume trading firms financial benefits such as discounts on fees the exchanges charge to execute trades.”  Perfect quote: “[Tradebot Chairman Dave Cummings] said he sees nothing inappropriate about Tradebot speaking regularly with exchanges and requesting order-type features it believes would be useful.  ‘Tradebot is treated the same as any other customer,’ he said.”  Meanwhile, individual investors should probably leave the technical analysis to Tradebot: “individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, [take more risk etc.]…we estimate that for our data, technical analysis costs investors on average approximately 50 basis points per month in raw returns from poor portfolio selections, and 20 basis points from additional transaction costs.”  All in all, high frequency trading by humans costs them about “8.5 per cent a year for normal traders, and about 20 per cent a year for high rollers.”  Also, consider this: Vanguard has some super convenient research on measuring the true value of wealth-management/financial advisors: they say you’re worth about 3bps to clients as long as you stick to their “Alpha strategy modules.”  So all in all, financial advisors practicing asset allocation, rebalancing and “don’t panic” coaching (i.e. sticking to the plan through the scary times) add over 10% in returns for their clients.  Well done.  Speaking of which, here’s some more evidence that bonds are the best “hedge” you can get with a portfolio weighted towards equities (i.e. asset allocation is a good idea).  Meanwhile, a new study “suggests that people can be prodded into doing something they don’t want to do, by a robot.”  During their experiments, “most apparently believed that the robot was issuing requests autonomously (it wasn’t, a human being was behind a glass wall controlling things) and responded accordingly.  They also found that some of the volunteers even tried bartering, either with themselves or the robot, by requesting another task or by suggesting out loud that perhaps the robot was malfunctioning.”

USA: Janet Yellen’s Moment

“Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets.  Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.”  For some reason, people seem to be teasing the idea that Janet Yellen could introduce some fairly radical new monetary thresholds/forward guidance; especially when it comes to overshooting their original 2% inflation target.  The show starts at 11:30 AM PST.

China: Central Bank Holds Bailout Talks With Property Developer

“China’s central bank and one of its largest state lenders are holding emergency talks over whether to bail out a defaulting real estate developer.”  “Failure of a small property developer is not unusual in China or even in Zhejiang Province, where [Zhejiang Xingrun Real Estate] is based.”  Furthermore, “Xingrun’s problems appear to stem mostly from mismanagement and alleged illegal activity.”  Interestingly enough, the PBOC is denying involvement in bailout talks.  Meanwhile, a survey from the American Chamber of Commerce in China finds that U.S. companies are concerned “over intellectual property, the safety of proprietary data and government-sponsored campaigns against foreign firms operating in [China].”

SEA: Seattle Becomes First City To Cap Uber, Lyft Vehicles

Seattle’s millennials are going all “damn the man!” over this; it seems fairly significant, however, in the context of Seattle’s growing reputation as a major West Coast tech hub á la Silicon Valley.  Meanwhile, Silicon Valley counties Santa Clara, San Mateo and San Francisco top the list of highest wages in America in Q3 2013.  Also, apparently Yolo, CA is a real place (#7 on “Percent increase in average weekly wage”).

YHOO: Is Yahoo’s Business Worth Less Than Nothing?

Here’s an interesting piece on how the market doesn’t seem to have a “correct” grasp on Yahoo!’s market value given its massive stakes in Alibaba and Yahoo Japan: “Alibaba and Yahoo Japan could both be overvalued, thereby understating the true value of Yahoo’s core business…Or it’s possible that Yahoo’s shares are too cheap…Or maybe the markets have it right and Yahoo’s business is hopeless.”

Gross: Morningstar’s Current View On Pimco (alt)

“Given our current view, we have lowered PIMCO’s overall Stewardship Grade to C from B, with an A grade being the highest possible and F the lowest.”

USA: One-Third Of Americans Only Have $1,000 Saved For Retirement

USA: Current-Account Gap Narrows To Level Last Seen In 1999

USA: Politics And The Rise Of “Dark Money”