kermit rainbow connection

The Lovers, The Dreamers And Me

Analysts at Citibank and The Economist are coming to Chinese equities’ defense: “The Shanghai index, which includes China’s biggest companies from banks to oil majors, is trading at a forward PE of about 15, in line with its ten-year average.  From this perspective, the rally looks more like a ‘mean-reversion trade’ than something wildly unsustainable.”  “When investors tell us that China is a bubble and expensive all we need to do is highlight…a market which is very certainly an investor favourite, India.  This market is even more expensive relative to all the other markets, and it isn’t as if investor after investor we meet tells us, ‘oh boy that Indian market is hotter than your average Vindaloo.’”  (Side note: valuations suggest that investors are expecting the highest EPS growth rates in India (6.5%), Poland (6.4%), South Africa (6.3%), Indonesia (6.2%) and the Philippines (6%))  “The most striking feature of the Chinese rally in recent weeks has been its crossing of borders…A programme to connect the mainland and Hong Kong stock markets has provided a corridor for channeling excess liquidity out of China.  With A-shares still trading at a 20% premium to H-shares, Chen Li, a strategist at UBS bank, predicts the convergence will continue.”  Meanwhile, “there has been speculation in certain quarters of the markets that a ‘Singapore-China’ stock connect may be in the pipeline.


But Wasn’t Distortion Always The Point Of Extraordinary Monetary Policy?

“The European Central Bank has barely started its €1 trillion-plus asset purchase program and already there are mutterings about how it might need to be wound down early.  There are signs of a solid pick-up in the eurozone economy,” as well as “rising bank lending as firms turn more bullish on their growth prospects.”  Yet “on the other side of the equation there are clear market distortions.”  For example: “all over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates…some banks have faced the paradox of paying interest to those who have borrowed money from them…In Spain, Bakinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.”  Meanwhile, Eurostat says the savings rate is moving back up, which may “send minor alarm bells ringing for those who fear that households may respond to falling consumer prices by postponing discretionary prices.”  Then again, Ben Bernanke says higher wages in Germany are good news for everyone: “In a world that is short of aggregate demand, Germany’s trade surplus redirects spending away from other countries, reducing output and incomes abroad.  Higher wages in Germany should promote spending by German households on both domestic goods and imports, reducing the imbalance.”



“One of the most important questions for economists about the past year’s collapse in oil prices is whether it was driven by supply or demand.”  The IMF says “it started out as a bad-news demand story, but turned into the good-news supply story.”  Meanwhile, “China is on an oil-buying spree again.” (alt)


USA: Home Services Is One Of The “Few Pots Of Gold Left”


USA: Aswath Damodaran Ain’t Buyin The Small Cap Premium


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

bond yields mystery 2014Draghi Basically Can’t Not Surprise Markets At This Point

“A slowdown in the recovery of eurozone manufacturers (alt) was confirmed on Monday, with a closely watched poll of purchasing managers falling to its lowest level in six months in May…’Taken together, the PMI surveys [for manufacturing and services activity] are pointing to a second-quarter GDP increase of about 0.5 per cent’…The reading for [Germany] fell to a seven-month low of 52.3.”  Meanwhile, German inflation data released this morning was disappointing: “data from six states showed annual inflation rates ranging from 0.6 percent to 1.1 percent…Euro zone inflation stood at 0.7 percent in April – well below the ECB target of close to but just below 2 percent.”  So yes, the market is going to be pretty fixated this week on the ECB announcement, “and expectations are high when it comes to action from President Mario Draghi…with the euro near a three-month low against the dollar – a much more comfortable level for the ECB after the single currency fell more than two percent over the last month – the risk is that Draghi falls short of expectations.”  Which seems really likely since expectations range from “bond-buying bazookas” to “no-drama anti-heroism.”  Meanwhile, as interest rates and inflation have stayed low over the past year, and the dollar has weakened against the euro, there seems to be a competition brewing between the European Central Bank and the Federal Reserve (alt) “to weaken currencies and stimulate economies.”  Furthermore, “the ECB would prefer to go no further.  In its best-case scenario, a pick-up in eurozone growth will eventually push inflation higher — helped by a strong dollar and a correspondingly weaker euro.  If that does not happen, the ECB may well find itself, reluctantly, in a currency war with the Fed.”  Also, currency wars appear to be a zero sum game, just look at the euro relative to the yen: “with domestic demand running at subdued levels in both Japan and the euro zone, both Japanese and European policymakers have attempted to grow their economies by…trying to sell more abroad than they import…Japan’s search for inflation probably helped to spread deflationary pressures elsewhere (Europe).”  Meanwhile, new research suggests the Eurozone is overbanked: “the European banking system has reached a size where its marginal contribution to real economic growth is likely to be nil or negative…the academics wrote that Europe’s banking sector was associated with imbalances such as over-investment in housing and diversion of talent from non-financial sectors.  An increasing bias in Europe’s financing structure over the last 15 years towards banking and away from securities markets had bucked the global trend.”

Tea Leaves: Consider Yourself Read

The Wall Street Journal has a pretty good “case-closed” feeling article explaining the drop in bond yields over the last two weeks (alt).  “This isn’t about the economy,” seems to be the consensus opinion; here’s what’s happening behind the scenes in bonds: 1) rising demand from pension funds and insurance companies, 2) weak supply of longer-term bonds, 3) low interest rates in Europe and Japan, 4) short-covering, and 5) rebalancing to bonds after a big year in stocks.  Meanwhile, “after unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion…’As far as predicting direction up and down, I don’t think they have much value,’ [says one money manager] referring to bond-market models used by forecasters.”  Meanwhile, against all odds, “almost all [Goldman Sachs] clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market.”  Also, you shouldn’t worry (Level 8).

USA: A Guide To Obama’s New Rules To Cut Carbon Emissions From Power Plants

“On Monday, the Obama administration announced its biggest policy yet to address global warming — a proposed rule to cut carbon-dioxide emissions from the nation’s power plants as much as 30 percent below 2005 levels by 2030…Electric utilities in each state will be given a variety of options for cutting their emissions — using more efficient technology, boosting their use of solar or wind or nuclear power, or even joining regional cap-and-trade systems that require companies to pay to emit carbon-dioxide.  There’s a lot at stake here.  Coal and natural gas plants were responsible for about 38 percent of all US carbon-dioxide emissions in 2012.”

USA: Housing On The Mend, Ever So Gradually (Alt)

“Since the financial crisis intensified in 2008, banks have sold more single-family homes than builders have, as they sold homes taken from owners who could not meet their mortgage obligations.  The level of bank sales is declining as the economy recovers.  But in eight major metropolitan areas, they still sell more than 20 percent of homes that change hands.  In only four of the 20 [cities researched] did builders outsell banks.”

USA: Corporations Don’t Like Paying Taxes

USA: Hedge Fund Investors Aren’t As Dumb As They Look

Peanut Butter Jelly TimeIt’s Peanut Butter Nervous Time!

Global bond rates dropped to their lowest levels of the year Wednesday, as central bankers signaled their determination to jolt the world’s largest economies out of their malaise…The yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest level in more than six months…In the U.S., despite rock-bottom interest rates, housing activity remains relatively depressed, companies have yet to pick up hiring and inflation has remained worryingly low.”  Bonds have done pretty well so far this year, surprising basically everybody, as investors seek “safe places to put cash as they fret about the flagging U.S. economy.”  That makes this seem even worse: Pimco “recorded net outflows of ($30.0 billion) between January and March 2014.”  Meanwhile, the market has David Tepper shakin’ in his boots (alt): “on Wednesday he struck a cautious note, worried about slow U.S. growth and the risk of a global economy that will worsen unless the European Central Bank takes aggressive action (which actually looks somewhat likely)…’The market is kind of dangerous right now.’…’I think it’s nervous time.’”  Journalists don’t seem to agree with Mr. Tepper: “Oh, sure there’s the selloff in biotech and tech stocks, and there’s the geopolitical threats of an unraveling in Ukraine.  But in general, those things just aren’t getting much of a pulse out of the market…the market is boring.”  Meanwhile, “U.S. homebuilder sentiment slipped unexpectedly in May to its lowest in a year with a darkening view of the current sales environment for single-family homes outweighing a modest pickup in expectations for activity in the next six months…builders have consistently raised concerns about stiff credit conditions for buyers and tight supply of building lots and labor.  In May, they said financial insecurity among potential buyers was a culprit.”  Meanwhile, Trulia takes a closer look at the housing market and finds that among the most expensive cities, “the housing stock is growing slowly, even though these are the places where it would be most profitable to build.  That’s because these cities tend to have geographical constraints that prevent further sprawl, and have adopted zoning codes that make it difficult to add more housing by building density.”  This is pretty much what’s happening in London as well: “tight planning rules and a shortage of land mean that relatively little new housing is being built, even as a booming economy and spectacular population growth create lots of demand for it…As a result, in London, though prices are 25% above the 2008 peak, construction is still about 20% below it…That suggests that unless there is more construction, prices in London and the south east will continue to climb, at least as long as interest rates stay low, the population keeps growing and there isn’t another financial crisis.”  Also, here’s one important difference between the auto and housing markets: “Both of these markets have had some favourable underlying demand-side pressures building in the last few years…Yet access to car loans has been relatively less constrained than access to single-family mortgages.”  Meanwhile, the property bubble in China is really confusing, but here’s what you should know: 1) “Overall credit has grown from about 120 percent to 190 percent of GDP in just the past five years,” 2) “Local incomes can’t support rents or down payments for [sleek inner-city digs].  Instead, wealthy Chinese are buying up multiple properties as investments, while simultaneously investing in the shadow banks that finance this property-building to begin with,” 3) As the property bust starts to settle in, the government is gonna let the system crumble a little, 4) But they won’t let it completely collapse,  5) Even if real estate investment drops significantly in China, global GDP will only take a minor hit (says the IMF),  and 6) But there are two groups that will likely feel a bigger impact: countries exporting raw materials to China, and Europe, where a devalued yuan could lead to deflation (although you could make the same argument for United States I think?).  All of this is especially confusing for Bank of America: “A spokesman for Bank of America said that the don’t-worry view is from the bank’s macroeconomic team while the do-worry view is from the corporate-strategy team.  ‘These two have been known to take different views,’ the spokesman said.  ‘It’s our effort to give a 360- (degree) view.’”

Mario Draghi Better Get His Game Face On

“A crucial new piece of information now makes it virtually certain that the ECB will act in June.  The case for waiting…was that a burgeoning recovery would gradually start to counter disinflationary forces by eroding excess capacity…But today’s report from Eurostat shows that growth in the first quarter of 2014 was sluggish…Output across the 18-country zone rose by only 0.2%, much lower than the 0.4% expected by the markets which was roughly the central projection made by the ECB in its previous forecasts.”  Here’s 5 things you should know about economic growth in the Eurozone: 1) The recovery is fragmented; unequal, 2) Low inflation, even outright deflation, isn’t the end of the world, 3) Growth in the UK and the Eastern fringe (Hungary and Poland) looks pretty good, 4) The ECB basically has no excuse not to pull on its monetary levers, and 5) What levers?  The ECB seems somewhat interested in doing some QE type stuff, but they basically don’t have a market for bonds backed by the credit of a singular Eurozone entity.  This is why most people expect the ECB (alt) to 1) boost lending to small and medium sized businesses (SMEs) in the Eurozone by charging banks to keep money at the ECB, combined with another long-term refinancing operation (LTRO) which would basically be a bunch of cheap money for Eurozone banks to lend out and create SME-loans-backed securities, and 2) purchase these SME-backed securities à la Quantitative Easing.  

Global: BlackRock Signals Bond Trading Shake-Up (Alt)

As the bond market dries up thanks to financial regulation (e.g. higher capital requirements and no proprietary trading), BlackRock is swooping in for the kill:  “The alliance with Tradeweb’s trading network of dealers means that users of BlackRock’s Aladdin risk management system will be able to access a broad number of interest rate markets, including US Treasury bonds, European, Japanese and Australian government bonds, US mortgage and agency debt along with interest rate swaps.”

Financial Advice by sourceWealth Management: Robo-Advisers, Cautious Investors And Survivorship

Robo-advisers, or “algorithmic investment services,” are becoming more popular these days.  Here are some things to consider: “It seems possible that an algorithm could determine a person’s financial ability to take risks, but an algorithm is assuredly less effective than a human practitioner in determining a client’s emotional ability to take on those same risks…Although they do not currently present an obvious competitive threat for traditional advisers, they soon may, as individuals from Generation X and Millennials come to make up the majority of advisory clients.”  Meanwhile, here’s an interesting survey of investors from STA Wealth Management: “When asked what is most important to them the survey showed that, by a wide margin, the majority are more focused on loss avoidance rather than chasing stock market returns.  That mentality is reflected in their asset allocation models with the roughly on 44% [sic] invested in stocks and 48% in bonds and cash…The loss of capital, due to both declines and inflation, combined with the loss of ‘available time’ to save for retirement has crippled investor psychology on many levels.  The problem is that investors today have ‘seen this film’ before and are fairly confident in how it ends.”  Also, take a second to notice that only 2% of these investors said they receive financial advice from watching television.  Meanwhile, the current tech/momentum selloff is different from the 2001 tech meltdown in at least one way (alt): “A Wall Street Journal analysis of 148 U.S. tech companies with recent or pending initial public offerings found none on a path to burn through their cash within a year, based on their pace of spending in 2013.”  Also, here’s something to watch out for when considering a fund’s historical performance: survivorship bias.  Generally speaking, when historical returns for a category of funds are calculated, “funds which have shut down are thrown out of the tally.  Since the failures take a lot of bad performance with them to the grave, category averages look better than the returns investors experienced in the real world.”  Therefore, actively-managed funds will overstate performance relative to their low-turnover, more diversified passive brethren, thanks to active funds’ lower rate of survival.

Global Trade Update

“The US, EU and others have framed the Information Technology Agreement (ITA) negotiations as a test case for China as it seeks to join much larger US-led discussions to set new global rules for the $4.6tn annual trade in services (alt)…Talks to update the ITA with 256 additional tariff-free product categories ranging from flat screen TVs to next-generation semiconductors broke down last November after China, which is now the world’s largest exporter of IT goods, sought to maintain its tariffs on more than 100 of those products.”  Meanwhile, “US steel imports surged 25.7 per cent in the first quarter (alt), fueling concerns that it is foreign producers, rather than American manufacturers, that are reaping the benefits of the shale gas revolution…The oil and gas boom is increasing the size of the market for steel tubes used in drilling, pipelines and processing plants, and reducing the cost of energy used in steelmaking…However, these companies are facing growing competition from imports… ’American producers are increasingly losing sales to foreign competitors like Korea because OCTG (Oil Country Tubular Goods) imports are being dumped into the US market.’”  Also, “to promote manufacturing services such as logistics, marketing, information and technology and research and development, China will encourage more financing and relax market access to the sector, the cabinet said after its weekly meeting.”

EU: ECB Readies Package Of Rate Cuts And Targeted Measures

“The ECB’s deposit rate already stands at zero and a cut into negative territory would see it essentially charge banks for holding their money overnight – a move that could spur more lending, though analysts are unsure how banks would react…’This will be the first major central bank to move to a negative deposit rate.  That would move the exchange rate.’…Should it decide to cut rates, the ECB is looking at also deploying either a targeted long-term loan operation, or LTRO, or else announcing a purchasing programme to buy asset-backed securities (ABS) comprised of bundled SME loans…The idea behind this second option is to build the market in Europe for SME loans bundled as ABS, with a view to making it larger and more liquid to aid the flow of credit to the smaller firms that form the backbone of the euro zone economy.”

USA: Someone Is Front-Running The Fed

Researchers have found “robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee (FOMC) monetary policy announcements…Across the four markets that we examine, estimates of informed traders’ aggregate dollar profits during lockups ahead of all FOMC’s surprise announcements range between $14 and $256 million…we find no evidence of informed trading ahead of nonfarm payroll, CPI, and GDP data releases by other government agencies.”

USA: In Shift, Regulator Says Fannie And Freddie Should Stay In Housing Market

“Watt said that the government’s takeover of the companies should not be viewed as a ‘permanent condition or a desirable end state.’  But to arbitrarily reduce the companies’ share of the market without having an alternative plan in place would be ‘irresponsible.’”

How the world sees climate changeGive The Lady What She Wants!

A lot of Fed officials released official reports and said official things to Congress over the last two days.  Here’s a wrap up: First, the Fed “is in no rush to decide the appropriate size of its balance sheet, but if it ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Fed Chair Janet Yellen said on Thursday…While the central bank could sell the mortgage-based bonds it has accumulated, in the past it has telegraphed that it would more likely simply stop re-investing funds from expired assets and then, over years, let the assets run off the balance sheet naturally.”  Meanwhile, Yellen pointed out long-term unemployment and income inequality as two “disturbing trends” but basically says they are out of the Fed’s hands.  Also, the Fed seems pretty content with its grip on short-term interest rates: “As of April, total reserves at the Fed amounted to about $2.66 trillion — only about $80 billion was actually required — up from about $1.83 trillion in April of last year…Interest on the reserves is ‘one of the tools they’ll use in normalizing monetary policy in the years to come…In order for that to be effective, you need to at least have some banks willing to take money from non-bank institutions and leave it on deposit at the Fed, and that’s how it transmits itself to the broader system.’”  Speaking of which, the Fed is conducting “another series of eight operations offering seven-day term deposits through its Term Deposit Facility (TDF).”  Meanwhile, the fed has proposed a new rule to limit the size of merged banks: “The rule would prohibit a bank merger if the new company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies…Companies subject to the rule would be depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and non-bank financial companies designated ‘as systemic’.”  Also, “the Federal Reserve says that while it clearly takes stock of the weather’s impact on the economy…climate change and its impact is currently a background concern.”  The same could be said for Americans in general, really.  Overall, Yellen ain’t too worried about another financial meltdown, then again that’s basically her job.  Also, Yellen Wants A Community Banker On The Federal Reserve Board

Monumental Shifts On The Horizon For Crude Oil And Internet

The Obama administration could make some pretty significant decisions pretty soon regarding domestic energy and the shale oil boom.  Not only are they expected to make a decision on the Keystone pipeline (keep in mind: it’s an election year), but a senior official says “the White House is examining the longstanding US ban on exports of crude oil (alt).”  Furthermore, they are “‘taking an active look’ at the strains caused by the US shale oil boom…The oil industry is conflicted, with producers firmly supporting freer trade in crude and refineries divided on whether to keep the export ban.”  Interestingly enough, the senior official tasked with revealing all this used to lead a think-tank in Washington which supports the ban on crude oil exports.  Meanwhile, the internet and media may change forever this summer: “It is entirely possible that 2014 will end with the traditional cable bundle broken, a fundamental change to the free and open internet, and the emergence of Comcast as a telecom behemoth more powerful than the old AT&T even dared to dream.  It is also possible the complete opposite of those things will happen.”

EU: Europe’s Bad Bank Assets Since 2008 Top $2.5 Trillion

The Wall Street Journal says “the total value of assets at all the state-backed and privately-held bad banks set up in Europe since 2008 has now gone through the $2.5 trillion mark, making them collectively bigger than J.P. Morgan Chase & Co., which had a balance sheet of just over $2.4 trillion at the end of last year.”

USA: The Best Stock Research Money Can Buy

According to three accounting professors studying brokerage stock reports, “We fail to find significant differences in the quality of paid-for analyst research relative to matched sell-side analyst research in terms of bias, accuracy, or ability to distinguish favorable from unfavorable future performance.”  One conclusion to this could be: “Our results suggest paid-for research offers potential benefits to investors in small-and mid-cap equity markets where sell-side coverage has declined.”  Another conclusion might be: sell-side researchers aren’t getting paid enough by the companies they follow.  This is pretty funny: “One limitation in the study’s analysis, which the professors duly noted: About 75 percent of the paid-for stock recommendations and earnings forecasts in the authors’ sample came from two firms, J.M. Dutton & Associates and Taglich Brothers.”  I’m assuming the professors were paid to duly note that small companies should be giving more money to Dutton and Taglich for their “as-good-as-sell-side” quality reports.

USA: Tech Startup Offers Shares To Journalist; Journalist Cries Bubble

Global: Nobody Reads Reports From The World Bank

Quote of the day: “Now, granted, the bank isn’t Buzzfeed.”

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

Alibaba transaction volume compared to Amazon and eBayEinhorn Cries Bubble, Apple Splits 7-1

David Einhorn of Greenlight Capital says “we are witnessing our second tech bubble in 15 years,” and “what is uncertain is how much further the bubble can expand, and what might pop it.’  He described the current bubble as ‘an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.’”  Einhorn gives 3 reasons for his bubble call: 1) “the rejection of ‘conventional valuation methods,’” 2) “short sellers being forced to cover positions,” and 3) “big first-day pops for newly minted public companies that ‘have done little more than use the right buzzwords and attract the right venture capital.’”  Even though he isn’t “predicting a complete repeat of the collapse [of the first Tech bubble ~ 2001], history illustrates that there is enough potential downside in [momentum “Cool Kid” stocks] to justify the risk of shorting them.”  And, oh yeah, “the last time the internet bubble burst in the early 2000s, Cisco Systems dropped 89% and Inc. fell 93%.”  Speaking of which, “Amazon raised the stakes in its battle with Netflix (alt) for supremacy in online video streaming by striking a deal with HBO to gain access to some of the most popular shows from the pay-TV channel’s library.”  Meanwhile, “Apple Inc. raised eyebrows Wednesday afternoon by announcing a 7-for-1 stock split along with its (positive) second-quarter earnings…At Wednesday’s closing price of $524.75, the split would price shares at $74.96.”  Here’s something to consider: Apple stock priced at ~$75 as opposed to ~$500 makes it eligible for inclusion in the Dow.  Not only that, but “It makes the stock more attractive to the smaller buyers…It’s better priced and more people will buy it.”  Furthermore, stock splits can sometimes create “a shift in ownership toward less sophisticated individual investors…This creates more liquidity in the stock.”  Which is kind of an argument for market inefficiency?  Meanwhile, here are 5 things to know about Alibaba’s IPO.  And finally, MIT’s 10 most significant breakthroughs in technology over the past year.  

GM Recall Also Looks Bubbly

General Motors recorded its worst quarter (alt) since returning to public listing in 2010 after the costs of its botched ignition switch recall slashed first-quarter net income to $100m.  The results — down 89 per cent in the same period in 2013 — were hit by a $1.3bn charge for the costs of car recalls, mainly related to the ignition switches on a series of older compact cars.”  Meanwhile, “General Motors’ liability for defective ignition switches in its cars is complicated by its bankruptcy in 2009.”  Furthermore, “it seems that the bankruptcy case will probably mean that G.M. has no legal obligation to pay a good chunk of these claims.  Whether it faces political pressure to pay nonetheless is another story.”  Meanwhile, while everyone talks about Mary Barra getting thrown under the bus, I can’t help but notice the warm water and suds everywhere.

Liquidity Drops, ECB Plays “Fantasy” QE

“The amount of spare cash in the euro zone banking system fell to its lowest levels in 2-½ years on Thursday, pushing up short-term money market rates and adding impetus for the ECB to loosen policy further…The last time liquidity fell so low it nudged the ECB to introduce its Long-Term Refinancing Operation, a series of emergency loans to banks…The euro zone overnight bank-to-bank lending rate, settled around 0.22 percent, up about 2 basis points from the previous day but still below the rate of 0.25 percent which the ECB charges banks to borrow cash, known as the refinancing rate.”  This adds fuel to the “QE in Europe” debate; the Financial Times thinks that an ECB asset-purchase program would be ineffective in boosting investor confidence (alt), and that “the ECB is trying to talk the euro lower by playing fantasy QE.”  The more probable scenario for monetary easing could come from sterilization of the ECB’s Securities Market Programme.

Housing-Led Recovery?

Goldman Sachs would like you to know that mortgage-lending standards are choking a housing recovery.  That being said, we may want to temper our expectations for a housing-led recovery in the United States.  While growth in housing prices has been pretty strong over the last two years, the number of people borrowing cash against their home (cash-out refinancing) has been very little, and indicates there is “very little spending out of housing wealth currently.”  Also, “home builders have not been responding to rising home values nearly as aggressively as they did prior to the Great Recession.”

Fed: Forward Guidance: A Pattern Of Always Expecting Higher Interest Rates In Two Years

Global: Home Is Where The Money Is

TerrificHeadlines: Icahn Looking To Launch An Army Of Mini-Icahns

labor force participation rateJobs

Employers added 192,000 jobs in March, coming in just below forecasts but showing more people are finding jobs in what has been a sluggish recovery for the labor market…The March gain means the private sector has regained all positions lost in the recession…The Labor Department revised January and February’s job gains up by 37,000…The unemployment rate, which is obtained from a separate survey of households, remained at 6.7% in March…Employment in professional and business services rose by 57,000 and hiring at restaurants and bars was up by 30,000 jobs…The average work week for private employees edged up to 34.5 hours, offsetting a net decline over the prior three months.”  Also, “the main reason for the flat unemployment rate was a surge in the labor force — the number of people working or looking for work…After many months of people giving up the job search, that could be an indication more people are coming off the sidelines and back into the labor force.”  The reactions are pretty mixed (the good, the bad and the dirty little secret?).  Here are 5 solid takeaways (with graphs!).

Mario Draghi Appreciates The Advice, Really Not Really

“Although the European Central Bank took no concrete action on Thursday in the face of a decline in consumer price inflation to only 0.5 per cent in March, president Mario Draghi’s statement contained new language which has moved the goalposts for future action by the bank.  By stating that the governing council is now unanimously willing to adopt quantitative easing in order to cope with prolonged low inflation, the statement substantially alleviates the risk of secular “lowflation” that has been worrying investors for some time.” (Yes, seriously, we are calling it “lowflation” now) There’s a couple problems with QE in Europe: 1) “the ECB does not yet have an agreed means of adopting QE,” and 2) “there is no sizeable market for asset-backed securities in bank loans, and therefore no means of attaining transparent pricing for the packages of loans that the ECB might like to buy.”  That being said, rates and inflation in Europe are basically at the lower zero bound, and the ECB has indicated it will not allow the $/euro rate to rise much above $1.40 (currently at $1.37) without further monetary easing.  The Economist agrees that the ECB appears to be ready to “move beyond rhetorical threats and to act in June” if “lowflation” should persist; however “if [the ECB] does resort to unconventional measures, the most likely option would be to charge negative interest rates on funds parked by banks at the ECB.”  Then again, some people see this as more of the same: hot air rhetoric.  Meanwhile, this is what it looks like when central bankers throw down.  Also, this is what it looks like when financial reporters go insane.

OilByRail: Rail Fails Hurt U.S. Ethanol And Coal

The Renewable Fuels Association says “the rail system has descended into ‘sheer chaos’ [stemming] from pileups at BNSF Railway Co. in a critical northern stretch of the country where it is shipping crude oil from North Dakota’s booming Bakken Shale region.”  “The Association of American Railroads said that description is ‘preposterous and unhelpful.’”  Meanwhile, is that the sound of a pipeline being built?

HFT: BATS Corrects President’s Comments From Michael Lewis Debate

BATS President Bill O’Brien claimed in his on-air meltdown bonanza with Brian “The Dark Flash” Katsuyama that the BATS’ Edge exchanges “use the faster direct feeds offered by rival market operators.”  New York Attorney General Eric Schneiderman called him up and got the company to issue a correction saying that actually, scratch that, they “use slower data feeds to price transactions.”  Meanwhile, Charles Schwab thinks “high-frequency trading is a growing cancer that needs to be addressed.”  Also, here is Mark Cuban’s Idiots Guide To High Frequency Trading.

EU: It’s “Showtime For The Developed Market Recovery”

European P/Es have made a dramatic shift: “European shares now trade at their highest multiples for over 10- years and have moved from 10x in late-2011 to 17x now, a re-rating of c70%…European shares are no longer cheap on this basis and are even edging into expensive territory.”

USA: Tracking Billionaires With An ETF

Here’s a new ETF from iBillionaire which “invests in 30 large companies in the S&P 500 in which financial billionaires have allocated the most funds” (e.g. Apple, Wells Fargo, Coca-Cola etc.).  “Most retail investors don’t have a million or more to invest in all these hedge funds we are tracking.  So really what the ETF is about is giving retail investors access to products they didn’t have access to.”

Gross: Top Investors Press Allianz To Step Up Oversight Of Pimco

Three of Allianz’ biggest shareholders say that they are concerned about Pimco: “specifically, they said they wanted the Munich-based firm to rethink the management structure that was put in place at Pimco after El-Erian’s departure…They also want assurances on Gross’s pay and a detailed long-term plan on how Pimco plans to broaden its focus beyond fixed income.”  Meanwhile, the honorary CIO of Pimco, famous for being “less certain about interest rates” and showering with Bill Gross, died last week at 14.

USA: Soaring Housing Costs Driving Educated People From Big Cities

Cities like Los Angeles, New York, San Francisco and San Jose — “long magnets for highly-educated people in the U.S. and from abroad — are simply pricing buyers out.  That’s a key reason places like Portland and Seattle in the West and Arlington, Virginia, and Dallas in the South are gaining educated professionals.”

A tale of two recoveries UK vs USA wagesChina: Slowdown Stimulus Expected

“China’s factories continued their dramatic slowdown in March, with manufacturing activity falling to an eight-month low amid a slump in the world’s second largest economy.”  Many seem to be expecting at least some stimulus from the Chinese government, for example: “some analysts expect the People’s Bank of China to cut banks’ reserve requirements, freeing up funds that can be used for lending.”  Or, perhaps “the government is considering a repeat of last summer, when it used a combination of faster infrastructure investment and a gentle loosening of monetary policy to reverse slowing growth.”  Furthermore, “a cheaper currency — or at least slower appreciation — could offer some relief for low-end Chinese exporters who have been struggling with cheaper competition from Vietnam and Indonesia.”  Meanwhile, you may want to consider this next time you read an article on China’s slowdown from Bloomberg News: “[Bloomberg’s] business model is different from that of other media companies.  The content of its news is not its main selling point.  Its financial data and analytics are…And China as a market is different from Wall Street because essentially one customer, the government, controls access…Bloomberg’s model creates powerful incentives to sacrifice the news to business interests.”

Eurozone: Detaching From Emerging Markets, Creating Their Own Emerging Markets

“Yield-hungry investors are flocking back to Greece and Portuguese markets, shunned by international buyers for four years, as the outlook for the bailed-out countries improves and alternatives look more expensive or increasingly risky…While the small size of the Greek and Portuguese markets discourage some investors, it also means that a relatively modest inflow of money into those countries has a large price impact…’It’s not so much an interest-rate driven rally but much more a structural shift and a perception that the euro crisis is behind us.’”  Maybe it’s both?  “Eurozone governments are taking advantage of unexpectedly low borrowing costs to push ahead with debt issuance…debt agencies have raised 29 percent of their estimated 2014 funding goals…more than in any year since 2010…Governments are also issuing more longer term debt…’Europe has become completely detached from emerging markets — they are almost havens.’”  Speaking of which, “Emerging Europe” is becoming the new hunting ground for bad loan investors as Central and Eastern European banks clean up their balance sheets, “creating new opportunities for bad loan investors that are seeing returns dwindle in recovering Eurozone economies.”  “Non-performing loans (NPL) in Romania officially make up about 22 percent of total loans…In Hungary, bad loans are running at 18 percent of all household debt, while in Latvia they are at almost 10 percent…buyers [are] typically hedge funds or private equity firms seeking an annual rate of return of 15 to 25 percent.  That implies getting the loans at a substantial discount, since loans normally return less than 10 percent.”  Quote of the year: “The perennial problem is that views of the buyer and the seller about the price are always very different.”  Meanwhile, the ECB will be just fine without your forward guidance, thank you very much.  Also, the Financial Times has been hating on the imperfect banking union recently; here’s why: the process for bailing out a troubled bank involves “multiple panels and more than 100 decision makers,” the €55bn resolution fund is way too small and will take 8 years to build, and the use of “bail-in” (creditors are first to bear the cost of a bailout).

USA: Workaholic Ex-Bankers Impose Long-Hours Culture On New Colleagues

Says one banker “who moved with his wife and children to Arizona for a better work-life balance: ‘I have made a comfortable life for myself here…There is hardly a day when I have to be in the office later than 11pm.’”

Global: Too Cheap To Replace

Here’s an interesting take on the divergence between UK and US “Wages as a Share of National Income” since the recession began.  “Because low real wages mean that British workers are cheap, firms feel less pressure to economise on them.  They do more hiring (or less sacking) and less automation…because low real wages encourage less substitution of capital for labour, a higher share of income flows to labour, to workers with a high propensity to spend.”

USA: Apple And Google’s Wage-Fixing Cartel

USA: The Internet Is Turning 25

USA: How Much Stimulus Spending Did Your District Receive?