Share of Population who don't want jobs because they are retiredFederal Reserve Dots, Tantrums And Headfakes

“The Federal Reserve played down forecasts by some of its own policy makers that interest rates might rise faster than they previously predicted…Some [Fed officials] expressed concern the rate forecasts ‘could be misconstrued as indicating a move by the committee to a less accommodative reaction function.’”  Meanwhile, after examining broad asset class ETFs and how they performed on the day(s) after a market surprising FOMC conference (i.e. 6/19/2013: “Taper Tantrum”, 9/18/2013: “Taper Headfake”, and 3/19/2014: “Yellen First Conference”), “there really seems to be a ‘Fed risk factor’ on which some investments load…what is particularly interesting, however, is that it is not the long-term bond funds that bear the most risk.  It is the intermediate-term bonds…this might be because the Fed likes to buy in the intermediate part of the curve…what is remarkable is how strongly correlated the reactions are among the investments on the three dates.  In other words, the same investments that react the strongest to one event also reach the strongest to the other two.”  Jamie Dimon, for one, ain’t worried: “Dimon says the end of quantitative easing is a good thing and will most likely be uneventful…Dimon does think interest rates will rise, perhaps to 5% on the 10-year Treasury bond, which is double where it is today.  But he says that it is unlikely to slow the economy.  Companies already have a lot of cash.  And a stronger economy means they only will be generating more of it.  So he doesn’t think the higher borrowing costs will affect them much.”  

Global Value And The Eurozone Recovery

It’s important to keep one thing in mind as you read this: the author is here to sell you on his Global Value ETF.  That being said, he makes some really good points about global value and investing in general: “The challenge is that most investors want to think in binary terms: Either I’m bullish and I’m buying, or I’m bearish and I’m selling.  But the reality is that there’s a full spectrum of probabilities…If you look at the rest of the world, the bad news is the U.S. is expensive.  The good news is the rest of the world is really cheap…Anything under a year is not going to give the deep value stocks [enough time] to rebound…the best returns can come from when things are horrific, and go from ‘horrific’ to ‘not as bad,’ to merely just ‘bad.’…recognize you likely have a home-country bias.  In the U.S., that means around 70 percent of your portfolio is likely in domestic equities.  Then, realize that breaking that market-cap link is the best thing you can do.  Investors should have a lot more money in foreign stocks, and we think it should be in value stocks.”  Meanwhile, looks like European companies also have a “too much cash but not sure what to do with it” type of situation on their hands: “European companies have pushed cash balances to 2 trillion euros ($2.8 trillion), close to the most since at least 2003…’There is money, but companies don’t want to invest in big capex programs,’…an increase in mergers and acquisitions may signal that companies will move away from using cash to boost share buybacks and dividends to instead start growing their businesses…’We’re trying to shift focus from dividend-paying companies into M&A kind of companies.”

Silicon Valley: When Those Who Stood Up To “The Man” Turn Into “The Man”

Rob Cox is warning against “coattails equity”: “it offers little beyond a chance to tag along with entrepreneurs from Wall Street, Silicon Valley and China.”  Thanks to recent changes in the class structure of shares (see Google, Facebook, and the upcoming Virtu Financial), investors are required to “give up rights that have traditionally accompanied the ownership of common shares, like a representative voice in corporate decisions…in many cases the businesses concerned are innovative and disruptive.  But when it comes to shareholder democracy, they’re retrograde.”  Meanwhile, Silicon Valley has a trust problem: “There is a level of suspicion and confusion that we haven’t had before…And it’s made worse by the increasing politicization of Silicon Valley, and the transformation of its leaders from rebels into what Joel Kotkin calls ‘the new oligarchs,’ people who once talked about technology as liberation, but who now seem more interested in using technology as an instrument of control.”  Also, here’s why Heartbleed, the latest cybersecurity scare, matters.  And here are 5 things to do about it.

Viva La Revolucion Shale

“The North American energy revolution and rapid industrialisation in Asia have effectively reversed the flow of energy round the globe.  For most of the 20th century, the primary flow was from East to West.  Now the main flow is from West to East.  The shale revolution has also shifted the marginal source of supply from the Middle East, Africa and Latin America, where investment and production are tightly controlled by governments, to Texas, Oklahoma, North Dakota and other states, where production is driven by the private sector.  Not since the mid-1980s, when new oil fields came onstream in the North Sea, Alaska and the Soviet Union, have world oil supplies been so diversified.”  Not sure that OPEC would use “diversified” to describe the situation, but OK.  “New shale developments seem likely to emerge in China, Ukraine, South Africa, the United Kingdom, Argentina and other countries by the end of the decade, provided oil prices remain above $100 per barrel.”  Meanwhile, new research suggests that “China’s excessive growth adds a premium to the price of oil which increases over time,” which makes for just one more reason why we should be cheering for a slowdown in China’s economy.

USA: A Closer Look At Labor Force Participation Rate Since 2007

 

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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.”

Robot workers of the worldClimate Change, Tigers And Flies

ExxonMobil isn’t all that worried about climate change (alt): in a report on the implications of climate change on Exxon’s business, “[Exxon] accepted that carbon dioxide emissions created by burning fossil fuels were raising global temperatures, and that warming created risks, but argued that the threat needed to be weighed against other objectives, including the need for energy in developing countries.”  Furthermore, “we are confident that none of our hydrocarbon reserves are now or will become ‘stranded’.”  Meanwhile, the latest report from the U.N. Intergovernmental Panel on Climate Change (IPCC) says “India’s high vulnerability and exposure to climate change will slow its economic growth, impact health and development, make poverty reduction more difficult and erode food security.”  Furthermore, “the report predicts a rise in global temperatures of between [0.5 to 8.6 Fahrenheit] and a rise of up to [32 inches] in sea levels by the late 21st century due to melting ice and expansion of water as it warms, threatening coastal cities from Shanghai to San Francisco…evidence suggests tourists will choose to spend their holidays at higher altitudes due to cooler temperatures or the sea level rises, hitting beach resorts.”   Meanwhile, former Chinese president Jiang Zemin is worried about a different kind of footprint (alt): “[Zemin] has urged the current leadership to rein in the toughest anti-corruption campaign in decades, which is threatening the interest of some Communist party elders…In the past few weeks, producers of high-end spirits like Diageo, Pernod Ricard and Remy Cointreau have reported double-digit first-half collapses in sales in China and have explicitly blamed Beijing’s austerity drive for their woes.”  President Xi Jinping’s effort to purge China of all its tigers and flies (alt) has become a seriously dangerous ordeal for those in China described as part Dick Cheney, part J Edgar Hoover with an annual spending budget of around $100bn.  Also, a closer look at the “anti-vice driven growth in Chinese government deposits” suggests that the anti-corruption campaign could be dragging Chinese GDP down by about 90bps.

Eurozone Recovery

“On balance [the bullish purchasing managers’ reports] suggest euro-zone manufacturing is picking up, with the French and Italian surveys beating expectations and helping to offset a slight undershoot in Germany.  Indeed, overall the survey details suggest euro-zone manufacturing performance is starting to converge at a modest but steady clip.”  Meanwhile, “German unemployment fell for a fourth consecutive month in March…highlighting the strength of the job market in Europe’s largest economy and boding well for expectations that domestic demand will drive growth this year…Germany’s unemployment rate is considerably lower than the euro zone average, where the jobless rate was at 11.9 percent in February.”

USA: Krugman Debunks The Skills Gap Myth

Paul Krugman loves to kill zombies.  Here’s the latest: “the belief that America suffers from a severe ‘skills gap’ is…a prime example of a zombie idea — an idea that should have been killed by evidence, but refuses to die…In an ever-changing economy, there are always some positions unfilled even while some workers are unemployed, and the current ratio of vacancies to unemployed workers is far below normal.  Meanwhile, multiple careful studies have found no support for claims that inadequate worker skills explain high unemployment.”  For what its worth, Boston Consulting Group concurs.  Meanwhile, the Economist asks, How productive are robots?: “There is an enormous difference in the intensity with which robots are used in the manufacturing sectors of different economies…this difference can partly be explained by the composition of the manufacturing sector; robots are used most intensively in car manufacturing, and so economies that devote a larger share of manufacturing resources to car production will use more robots.”

USA: Tech Titans Are Vying To Be Your Pocketbook

“Some of the biggest technology companies are now making how they are paid a priority.  Having a hand in how people exchange money, they are realizing, has huge potential to deliver profits — and valuable data.  At stake is not only billions of dollars in revenue, but also the ability to shape how people buy, sell and pay in the future.”  Furthermore, “as smartphones enable users to take their digital wallets into brick-and-mortar locations, retailers and payment providers are reassessing how online money and in-store products might interact.  Beyond just enabling e-commerce on the go, many smartphones offer in-store purchases with digital wallets like PayPal and Google Wallet, using near field communication, or N.F.C., technology.”  Also, “Kiss Your Bank Branch Goodbye” is a common headline these days.

USA: US Equity Investors Ignore Warning Signs (Alt)

“As US equity investors bid adieu to the weakest first quarter in five years, few are dwelling on the lacklustre performance.  Indeed, many appear to be ignoring any warning signs about the economy’s prospects: a disappointing 0.5 per cent gain on S&P 500 in the first three months, set against the strong performance of long-dated bonds since January…’There is still a bit of suspicion in the bond market that there is something more to the economy’s slowdown than the cold weather.’…This has played out in the equity market, with economically sensitive sectors such as consumer and industrial stocks lagging behind, while bond-like proxies, notably utilities and real estate investment trusts, have rallied sharply.”

USA: Markets Are Efficient

 

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?

Chinese Shadow Banking by RegionGetting To The Core Of Japanese Inflation, Nuclear Energy And Tripartite Security

“For months now, you’ve been hearing that Abenomics – or at least the monetary policy of Abenomics – has been a solid success.  Japanese inflation, you’ve heard, is climbing up toward the 2% target… The problem is, the Japanese inflation that people are looking at is the Japanese “core” rate (includes energy), not the “core-core” rate (doesn’t include energy or food)…Take energy and food — which is also probably under upward pressure in part due to yen depreciation — out of CPI and it is only up 0.7% y/y as food prices themselves are up 2.2%.”  Meanwhile, Abe is steering domestic policy in a U-turn over nuclear energy (alt): “the draft of a new Basic Energy Plan, made public on Tuesday, calls nuclear power an ‘important baseload electricity source’ and effectively reverses a decision made by a previous government in 2012 to close all of Japan’s atomic power plants over the next several decades.”  Also, “while India’s relationship with the United States has been faltering of late, following the arrest and mistreatment of an Indian consular official in New York, its ties with Japan are flourishing.”  Furthermore, “with China’s rise having shifted Asia’s balance of power, Indian and Japanese leaders have been seeking new security assurances… Even with a significant deepening of ties, however, bilateral relationships alone will be inadequate to counterbalance China.  Achieving an internal Asian balance of power will require India, Japan and South Korea to build a tripartite security arrangement.”  Meanwhile, “ministers in 12-nation Trans-Pacific trade talks said on Tuesday they had yet to reach agreement on tariffs and other market access issues, with the timing of a completed deal looking increasingly unclear.”

Changing Trade Patterns Could Threaten Euro Zone

“The euro zone’s formation was driven by the belief that trading links between its members would grow ever greater, transforming the currency area into a single, integrated unit that resembled the U.S. rather than a grouping of 11, and now 18, individual national economies.”  But when you have a fragmented recovery, thanks in part to rising exports to countries outside of the Eurozone (“By 2020 Italy and Germany will export more to emerging/developing markets than to euro-area partners, while the contrary will be true for France, Spain, Belgium and the Netherlands”), we may see a shift in the “cost/benefit analysis of membership in the currency area.” (e.g. “increase the likelihood of what are known as ‘heterogenous shocks,’ or setbacks that affect some euro-zone members more severely than others”)  Also, Paul Krugman would like the “Myth of German Austerity” to go away, please.  Finally, here’s something the French can be proud of?: “German workers will die five years earlier than their French neighbors if company pensions forecasts are to be believed.”

EM: Buy Johnson & Johnson, MasterCard For Emerging-Market Exposure

“Roughly one-third of S&P 500 sales are sourced from abroad.  While it would seem logical that globally oriented S&P 500 stocks would behave quite similarly to other global developed market franchises, our work indicates that they are 3X more correlated to emerging market equities.  For this reason, we recommend overweighting U.S. companies with high foreign sales (e.g. Johnson & Johnson, Estee Lauder, MasterCard, Flowserve and Apache).”

Bitcoin: Adieu

“Cyber criminals have infected hundreds of thousands of computers with a virus called ‘Pony’ to steal bitcoins and other digital currencies, in the most ambitious cyber attack on virtual money uncovered so far, according to security firm Trustwave.”  Meanwhile, ”Mt. Gox, once the world’s largest bitcoin exchange, has gone offline, apparently losing hundreds of millions of dollars due to a years-long hacking effort that went unnoticed by the company.”

Buffet: An Excerpt From Buffett’s Upcoming Letter To Shareholders

GS: @GSElevator Tattletale Exposed

UK: My Life In London’s Houseboat Slums

“I’ve often heard people ask how anyone can afford to live in London on low paid, insecure work. The truth is that some don’t really live at all; they merely exist, and their existence is bleak and unforgiving. It is not only the explicit dangers of the boats that cause this but the drudgery of daily life.”

China: A Map Of China’s Shadow Banking Exposure

USA: Labor Department To Cut Export-Price Data Due To Budget Constraints

“The export price data is part of a program that also collects data on import prices.  The department compiles a monthly report on import and export prices using data collected from U.S. companies.”

Labor Force Participation Rate by GenderIs Obamacare Killing Jobs?

The Congressional Budget Office (CBO) released their Budget and Economic Outlook: 2014 to 2024 yesterday and it’s, like, really long.  There’s a lot of stuff in there about how they expect the deficit to normalize at an average level (~3% of GDP), spending should outpace GDP growth as the population gets older, publicly held federal debt is a concern, the participation rate in the labor market will take a long time to recover (maybe never will) and post-2017 America is gonna be real slow going GDP-wise (~2.5%).  And while the deficit should normalize, interest paid on our debt may reach 3.3% of GDP by 2024, coming close to what we will spend on Medicare for that year.  The CBO also expects only one third of the people who dropped out of the labor force to come back; thanks in part to Obamacare, since working more and making more money means no subsidy for health insurance and higher marginal taxes.  The Manhattan Institute calls this a “major self-inflicted problem.”  The Economist says Obamacare creates a supply-side problem and argues “supply-side reforms that encourage the elderly, the poor and the partially disabled to work more should be introduced gradually.”  Then again, Financial Times thinks that “a big part of why Obamacare decreases employment is because it allows people to quit jobs they only still have because they are afraid of losing insurance.”  Also, taking gender into consideration makes the debate even more fun: labor force participation rates have diverged significantly between the Eurozone and the United States since 2010 and it appears to be attributable to Euro women over the age of 45.  And while President Obama may tout the statistic that women make, on average, $0.77 for every $1.00 earned by men in America, it really is closer to $0.81 or even $0.95 when you weight the samples of men and women for similarity (e.g. full-time women and full-time men with same level of education).  The Manhattan Institute goes on to say that “Women have won in America” and that “a choice of more time at home rather than more time at the office is not a social problem in need of a government solution.”  So is Obamacare killing jobs?  Kind of.  Maybe it’d be better to say that Obamacare makes the 40 hr workweek less necessary or attractive?  And maybe spreading the workweek around would be good for us?

Emerging Markets: Some Cold Cuts Are Just Better Than Others

Capital Markets, a London-based research company, groups Emerging Markets like so: 1) Mismanaged (government policy issues) — Argentina, Ukraine and Venezuela; 2) Living beyond means (unsustainable consumption) — Turkey, South Africa, Thailand, Indonesia, Chile and Peru, 3) Weak banks — Hungary, Romania and Bulgaria; 4) Domestic structural problems — India, China, Brazil and Russia; and 5) Brightening outlook — South Korea, Philippines, Mexico, Poland and the Czech Republic.  Meanwhile, here’s 5 takeaways from the Emerging Markets Private Equity Association’s annual report: 1) Investment still declining among BRIC countries, 2) The amount of available capital is also declining, 3) Emerging Asia still attracts the most private capital, 4) Brazil’s star starts to wane in Latin America, as Mexico’s rises, and 5) Emerging markets are still a private equity destination.  Meanwhile, Bill Gross says he likes to “call China the mystery meat of emerging-market countries.”  “Nobody knows what’s there and there’s a little bit of bologna, so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.”  Also, Bill Gross Gets Medieval On Your Assets.

Puerto Rico Downgraded To Junk, Italy Sues S&P For Cultural Illiteracy

“S.&P., which lowered its rating to BB+ from BBB-, said it had decided that Puerto Rico was no longer qualified as investment grade because its government was losing its ability to raise cash through the Government Development Bank…A good portion of Puerto Rico’s debt was issued with promises to make cash payments if it fell below investment grade, and ready cash is precisely what Puerto Rico lacks…Puerto Rico has roughly $70 billion of debt outstanding and is — despite a population of fewer than 4 million people — the third-largest issuer of municipal bonds in the United States, after California and New York.”  Meanwhile, Italy is trying to pull an Uncle Sam on Standard & Poors by threatening to sue: “S&P never in its rating pointed out Italy’s history, art or landscape which, as universally recognised, are the basis of its economic strength…The latest Italian case may be the first time the powerful ratings agencies have been accused of cultural illiteracy, but they already faced charges of poor maths and dismal economic forecasting.”

USA: Bonds Are Suddenly The Hot Investment

“As the investing world headed into January, it was almost universally accepted that 2014 would be a bad year to own bonds and bond funds…Suddenly, bonds are the hot investment, the thing experts are saying to buy.”  Also, betting against treasuries may be a fool’s game.

OilByRail: Buffett Railroad’s $5 Billion Spending Tops Union Pacific

FB: What Facebook Knows About You

“Pearson explained it as such: Your mouse hovers over an image of a pickup truck a little longer than usual one day. A few days later, you post something about pickups or ‘like’ someone’s photo of their truck. The next thing you know, there’s an ad from Chevy in your feed.”

USA: U.S. Private-Sector Job Growth Slowed In January

“Small businesses, defined as having fewer than 50 employees, showed the largest growth by business size, with 75,000 jobs added.”  Coming up: Friday’s Employment Situation.  Last month, that report indicated 74,000 new jobs added in December.  Some analysts are expecting around 155,000 this month…

USA: Services Growth Quickens In January

USA: Mobile Data Traffic To Jump Nearly Eight-Fold By 2018

“The findings contribute to the growing concerns in the telecommunications industry that demand for data will soon far exceed the networks’ capacity, and connection speeds will slow.  Though some have argued that technological advancements may prevent the crisis, wireless companies say they need more airwaves to evade the spectrum crunch.”

Middle Class Retailers, Teens, Amazon and All-Carrot Diets

“As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all.  The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away…In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995…Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”  Also, teen apparel retailers are dealing with the same problem as Facebook: “When 19-year-old Tsarina Merrin thinks of a typical shopper at some of the national chains (American Eagle, Abercrombie & Fitch, Aeropostale etc.), she doesn’t think of herself, her friends or even contemporaries.”  Reasons for this could be high teenage unemployment (“20.2 percent among 16-to 19-year-olds”), cheaper fashion trends, online shopping, shifting priorities among teens (e.g. an iPhone is more important than $150 jeans) etc.  Meanwhile, Amazon stock is definitely overvalued (P/E ~ 600), but this is what investors are paying for: “revenues are likely high enough to push Amazon past discounter Target on the list of the top U.S. retailers ranked by revenue,” “Amazon has about 20-million Prime customers and the base is growing at 20-30% per year.”  Finally, “like dieters vowing to trade cupcakes for carrots, a number of American shoppers are making a new pledge: cash only.”  While extremely anecdotal, this article probably captures one of the attitudes floating around the American shopper’s mind these days; however, I think we all know what happens to the all-carrot diet once we get to mid-February.

Motif Investing and ETFs: Offering Sophistication To The Little Guy

Michael Steinhardt, “Wall Street’s Greatest Trader” (“from 1967 to 1995 his pioneering hedge fund returned an average of 24.5% annually to its investors, even after Steinhardt took 20% of the profits”), is back and “positioning himself as an advocate for the little guy” with WisdomTree Investments, a firm which specializes in ETFs.  Steinhardt believes that “exchange-traded funds have similar disruptive potential (as hedge funds once did), with individual investors (and some savvy operators like him) reaping the benefits.”  “With $35 billion under management, WisdomTree has only a 2.1% share of the $1.7 trillion (assets) ETF market, but that’s up from less than 1% in 2010, and it has been steadily chipping away at BlackRock and State Street, which have a combined 61.9% market share.”  Meanwhile, rebalancing day for ETF firms like WisdomTree can make for easy money on Wall Street: “traders take note when big ETF managers like Good Harbor step into the market, moves that can affect prices.  At times, they may try to profit by jumping ahead of Good Harbor, potentially chipping away at returns for its investors.”  Also, check out Motif Investing, an online site “whose goal is to make it easier for small investors to do what more sophisticated investors have been doing — make investments based on themes or long-term trends.”  For example, investors can put their money in The Seven Deadly Sins, a motif of alcohol, tobacco, fast food etc. stocks; or No Glass Ceiling, a collection of companies headed by women.  Finally, “an unlikely alliance of investors, board members and advisers has formed in an effort to counter the disproportionate influence of activist hedge funds on corporate America.”

Emerging Markets: Debate Provides Opportunity

Reserve Bank of India Governor Raghuram Rajan said, last week, “International monetary cooperation has broken down” as the industrial countries take a strategy of “We’ll do what we have to do, the markets adjust and you (developing countries) can decide what you want to do.”  The Peterson Institute is scolding Rajan for finger-pointing and ignoring the fact that “no country adopts policies that are not in its own self interest.”  So there’s quite a lot of Us vs. Them going on in the financial blogging world in regards to the emerging markets crisis.  Ultimately, here’s what matters to investors: “a return to currencies whose value is set by market forces, rather than heavy-handed intervention, could actually be a boon to emerging markets.”  According to Rob Arnott, CEO of Research Affiliates, “emerging market stocks at current prices represent the best buying opportunity, anywhere, any time, in any asset class, since the mini-crash of 2011.”  Moreover, The Telegraph proposes that “value” investors should focus on Russia, Hungary, Turkey, Austria, Italy, Brazil, South Korea, the Czech Republic and China.  So now the question becomes “Why are they cheap?”

USA: Manufacturing Growth Slows In January

EU: Central Europe Recovery Gains Steam As PMIs Hit Multi-Year Highs; Eurozone Deficit Shrinks To Almost Within EU Limit In Q3

China: Manufacturing At Six-Month Low Signals Growth Easing

MEX: Mexican-Origin Population Living In USA, By County

Relative Sales Growth Amazon vs Other RetailersEmerging Market Central Bank Owls Try The Ol’ “Shock And Awe” Play

Raghuram Rajan raised the Reserve Bank of India’s repurchase rate to 8 percent from 7.75% on Tuesday.  Analysts had been expecting no change.  “Further tightening isn’t anticipated in the near term if consumer-price inflation slows from about 10 percent now to 8 percent by March 2015.”  And yes, good question, Mr. Rajan’s spirit animal is the owl.  Meanwhile, Turkey’s central bank “raised interest rates to 12% from 7.75% at the conclusion of an emergency meeting convened late Tuesday night Ankara time to address the pummeled lira…by going so much higher than expected, the central bank clearly was adopting a ‘shock and awe’ maneuver to drive out a market assault…the lira jumped 2.6% against the dollar in a matter of minutes.”  But that was yesterday.  This is today: “A surge in the Turkish lira following the country’s aggressive interest-rate increase has come apart this morning.”  Also, South Africa is getting in on the “raise rates to keep the money” game and so far the reaction is kind of meh so, yeah, emerging markets are still stuck between a rock and a hard place (i.e. a Fed tapering and a current account deficit).  Investors don’t seem to be taking this opportunity to buy the cheap, battered emerging markets — and here’s a few reasons why: 1) they’re a value trap and will get even cheaper, 2) outflows and technical pressure will continue working against them, 3) emerging markets were only floated by Fed easing, which is ending, 4) emerging markets as a single investment bloc is an obsolete concept, 5) the real emerging markets now are in peripheral Europe, or 6) it’s all too complicated and difficult to predict.  But big business doesn’t seem to agree: big multinational companies are putting their long-term bets on the developing world.

USA: Highlights From Obama’s State Of The Union Address

Here’s what I cherry picked from the address: President Obama “called on Congress to increase the federal minimum wage for all workers to $10.10…the Treasury to create a bond called MyRA that can be offered through employers as a ‘starter’ retirement account…cut red tape to help states build factories that use natural gas [and] propose new incentives for trucks that use alternative fuels like natural gas…end tax benefits for the oil industry and use revenues to invest in advanced vehicles that use cleaner fuels…expand the earned-income tax credit…launch more high-tech manufacturing hubs…partner with leading U.S. companies to help long-term unemployed…overhaul U.S. surveillance programs to restore public confidence.”  Also he’d really like it if people would sign up for Obamacare.

Asia: Chinese Homebuyers Thronging Sydney Make Mini-Bubble Frenzy

“A second-hand house in northwest suburban Eastwood sold for as much as A$1 million more than the expected price…95 percent of the more than 100 people at the auction were locally resident Chinese…Behind the growing demand for homes in Australia is a push by Chinese to leave the mainland in search of better education for their children, a clean environment and higher income…about 60 percent of high-net-worth Chinese — those with at least 10 million yuan ($1.7 million) — have left China or are considering it…Chinese demand for luxury properties is also fueled by Australia’s so-called significant investor visa…the visas offer temporary residency for foreigners investing more than A$5 million.  While residential real estate doesn’t qualify as an investment, the rules allow [visa] recipients to purchase homes.”

Global: Everybody Hates Hedge Funds Right Now

EU: The Real Problem With The Economy Is “The Human Being”

And other thoughts from some ivory tower in Europe…

Apple: Just Good Enough For Carl Icahn

Apple has a uniquely captivating presence in the investment world as one of those stocks people seem to care deeply about; but is the story getting stale?  “Analysts and investors went into [Monday’s] release hoping to see an upside surprise just like the Apple of old.  What they saw instead was the new Apple, or put another way, the old Microsoft.”  Then again, maybe Apple will just never be good enough: “no matter how well [Apple] does, a whole different school of stock market physics seems to apply…in a sense, the problem with Apple is that all the numbers have become so large, they can’t get any larger.”  The earnings release was just good enough, however, to convince Carl Icahn to buy $500mn shares and, of course, tweet something about a buyback program.  Also, while still very speculative, rumors are floating that Apple may be considering mobile payments as a new opportunity.  And this shouldn’t surprise anybody, but the age of the iPod is over.

USA: What Shopping Tells Us About The Middle-Class Recovery

Here’s a really interesting piece on how “stock performance among retailers that target different income classes has diverged a lot since the recession started.”  While luxury and budget retailers are prospering, middle income retailers are suffering.  Furthermore, Amazon is taking everyone to school when it comes to relative sales growth.

EU: Slump In Eurozone Money Supply Growth Highlights Deflation Risk

USA: The $956 Billion Farm Bill In One Chart

Are US Equities Expensive or Not?: The Debate Over Shiller’s CAPE Ratio

There’s a debate on the pros/cons of using Robert Shiller’s CAPE (cyclically adjusted price earnings) ratio happening on the world wide web.  First of all, what it is: CAPE, or Shiller P/E, or P/E 10 Ratio “uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle.”  Basically you take the annual EPS for an equity index like the S&P 500, adjust for inflation, find the average, then divide the current by the average to find the CAPE ratio.  Here’s the problem: the CAPE ratio is currently at about 26, which is significantly above its historical mid-teens average and therefore suggests US equities are expensive.  Here’s another problem: using the CAPE ratio, some argued that US equities were overvalued by 40% in October 2009, which, turns out, was not the case (roughly 77% return for the S&P 500 since then).  Josh Brown argues that CAPE is useless as a market timing tool as it is “incapable of incorporating the evolution in some of the most fundamental influencers (changes in accounting standards, increase in stock ownership by household, new industries with new valuations etc.) on stock prices and then recalibrating itself accordingly — which means that its ability to make even long-term predictions is in doubt as well.”  John Hussman argues that CAPE may not be perfect, but the evidence speaks for itself: the CAPE ratio has correlated with real returns over 90% of the time since 1932.  The Financial Times sums it all up as a debate about how the world works and “seems to be a mirror for any preexisting optimism or pessimism.”  Goldman Sachs may be in the pessimistic camp, saying that “US equities are expensive relative to their own longterm history, as well as that of other developed and emerging markets.”  But don’t worry, Goldman doesn’t see a bubble since 1) credit growth isn’t excessive, 2) flows into US stocks haven’t been excessive, 3) sentiment isn’t frothy and 4) implosion isn’t an option (official Goldman decree!).  Furthermore, in a real bubbly scenario, “there seems to be a hinge point where investors go from thinking about quantifying economic trade-offs to a kind of binary framework where anybody who disagrees with them is demonized.”  So are US equities expensive?  Relative to Euro, Japanese and Emerging Market equities, Yes.  Relative to their own historical average?  It seems as if we could be on the expensive side of the spectrum, but I would argue that we aren’t at that hinge point just yet.  Also, a lot of investors think the market is overdue for a healthy correction; ask and ye shall receive.

USA: Lawmakers Unveil Massive $1.1 Trillion Spending Bill in Bipartisan Compromise

Looks like we aren’t going to shutdown the government this time: “Congressional negotiators unveiled a $1.1 trillion funding bill late Monday that would ease sharp spending cuts known as the sequester while providing fresh cash for new priorities.”  There’s a lot of new stuff in the bill (cut in funding to Afghanistan, cuts to the TSA, no more incandescent lightbulbs in Obama’s office), but I thought this was interesting: “In response to allegations that the administration has been stockpiling ammunition for use by federal agents, the measure also requires Homeland Security to provide detailed reports on its purchase and use of ammunition.”  Could be an interesting report for ammunition stocks like Alliant Techsystems Inc (ATK).

Stigma: Federal Reserve Discount Window and Pawned Bentleys

Apparently borrowing from the Federal Reserve makes you look weak or something: “[Discount Window] stigma is generally defined as banks’ reluctance to approach the DW out of concerns that, if detected, depositors, creditors or analysts could interpret DW borrowing as a sign of financial weakness…The economic consequences of DW stigma may be particularly severe during financial crises, preventing the Fed from effectively disseminating liquidity when it is most needed.  In addition, a bank that delays accessing the DW may resort instead to costly alternatives (such as fire sales of assets), which may further weaken the bank and add to financial system instability.”  Meanwhile, high-value pawnshops aren’t struggling with any stigma: “That pawnshops exist to lend money to those who fall on hard times is either a necessary or unfortunate facet of life, depending on one’s point of view.  But how does someone who once had enough money to buy a $450,000 Mercedes McLaren end up pledging it as collateral for a $190,000 pawn loan at a monthly interest rate of 2.5 to 4 percent?”

Holiday Retail Sales Somewhat Muted

Consumers didn’t lose track of their budget this holiday season: “57% of consumers said they spent what they planned during the 2013 holiday season, a bit better than the 54% saying that in 2012.  Another 26% said they managed to spend less, while only 14% spent more than expected.”  Meanwhile, “retail sales ticked up 0.2% in December…big-ticket items that are generally considered staples of the holiday season weighed on the number.  Sales at electronic and appliance stores fell by 2.5%, and auto dealers saw a 1.9% drop.”

Eurozone Industrial Production Gains; Spanish GDP Continues Slow March Upwards

“Industrial production across the [Eurozone] in November rose at the fastest pace in three and a half years, an indication that the currency area’s economy likely grew for the third straight quarter as 2013 drew to a close.”  Meanwhile, “Spain’s economy likely grew 0.3% in the fourth quarter from the third, as the country’s dire unemployment picture showed signs of improving more quickly than previously expected.”

Boeing’s Got it Easy

Unhappy workers at a Goodyear tire factory in France decided to take their boss hostage once negotiations for better severance packages broke down earlier this week.  Apparently “Boss-napping” is pretty popular in France (32 incidents between 2008 and 2010), and they don’t mess around (ie. “workers at a haulage hub threatened to pour 8,000 liters of a toxic fuel additive into a Seine tributary, and ball-bearing makers set fire to their machinery”).  “Goodyear’s Amiens employees have retained their radical creativity despite the police interference. They have substituted “Bad” for “Good” in the company name on signs.”  My, my…radical creativity indeed.  Meanwhile, here’s a comparative look at median executive compensation and how it compares to shareholder’s returns broken down by industry.  Also, some chief executives in the UK have already made more money this year than the average British worker will in 2014.

People Like “Tax-Free”

Japan is offering tax-free investment accounts to the people: “part of Prime Minister Shinzo Abe’s economic reform plan, the tax-free NISA system is designed to coax Japan’s chronic savers to put money into stocks, bonds, and other assets to spur domestic growth instead of just parking cash in regular bank accounts.  Japan boasts more than $16 trillion in household wealth, but only about 8% of that is exposed to stocks – compared with 30% for the United States.”  Meanwhile, a professor at Boston University concludes that “the real wages of American workers would grow by 12 percent if the corporate income tax were fully eliminated.”  The corporate tax rate in the United States is more than 14% higher than the developed world’s average.  By eliminating the corporate tax rate, not only would workers see wage increases, but returns to shareholders should increase, “economic efficiency” would increase (by “economic efficiency” we’re talking about all those direct flights from San Francisco to Ireland), and it “would level the playing field between capital-intensive companies and those with fewer write-offs.”  It should be noted that President Obama looks pretty willing to reduce corporate tax rates, but **spoiler alert** Congress has yet to take any action.

Senate Approves Double Edged Sword: Unemployment Benefits

The Senate approved 60-37 to “restore between 14 weeks and 47 weeks of benefits averaging $256 weekly to an estimated 1.3 million long-term jobless who were affected when the program expired Dec. 28.”  Most Republicans did not attach their names to Obama’s Marxist agenda, however those from states with higher unemployment (Dean Heller, Nevada: 9% Unemployment; Rob Portman, Ohio: 7.4% Unemployment etc.) did.  The Congressional Budget Office estimates that reinstating unemployment benefits for a full year “would increase inflation-adjusted GDP by 0.2 percent and increase full-time-equivalent employment by 0.2 million in the fourth quarter of 2014,” mostly because the unemployment rate isn’t going down because people are finding jobs, but because the participation rate is shrinking.  Similarly, “employers are favoring the newly unemployed and leaving behind the Americans who have been out of work for longer periods of time.”  So you can see why this is such a hot debate.  On the one hand, you want to help those who have been hit the hardest by the recession.  On the other, the more you help these folks, the worse off they could be with actually finding a job.  Tricky.  Meanwhile, the ADP reports that “companies added 238,000 jobs in December, up slightly from 229,000 in the previous month…Construction firms hired 48,000 additional workers in December, the most since 2006.  And manufacturers added 19,000 positions.”  Finally, here’s how America’s cities stack up in terms of unemployment.

Apple’s Market Share, A Closer Look

It’s fairly well known that Apple is trailing Android in terms of market share around the world (eg. in China, Android: 78%, Apple: 17%; in the USA: Android 50%, Apple: 43%)  Despite this, “Apple generated over $10 billion in sales through its App Store in 2013, pulling further ahead of second-fiddle mobile computing player Google.  Google Play store has an approximately 35 percent share of the app market compared to Apple’s 65 percent.”  A closer look at mobile app revenues for Apple and Google tells an interesting story: “iOS’s leading source of app revenue was in-app purchases and pay-per-download, while Android made most of its money from both pay-per-download and in-app advertising.  What’s more, developing for iOS yields five times as much revenue per download.”  Furthermore, “IBM came to similar conclusions when it crunched iOS and Android transaction traffic over the Thanksgiving weekend.  It found that iOS users were spending $1.27 for each $1.05 spent by Android users during Black Friday, with iOS traffic being 28.2 percent of all online traffic for that time (Android accounted for 11.4 percent).”

USA: Federal Probe Targets Banks Over Bonds

“So what else is new?” you ask.  This: “Federal investigators are probing whether a number of Wall Street banks cheated clients in the years following the financial crisis by deliberately mispricing a type of mortgage bond that was central to the economic turmoil.  In that postcrisis period, when the economy remained shaky and many markets weren’t yet active again, banks still held on their books billions of dollars in hard-to-price assets.  Regulators are seeking information about whether banks made significant misrepresentations about some of those assets to make deals.”

USA: Train Carrying Oil Derails, Catches Fire in New Brunswick, Canada

Another day, another fireball.

EU: Unemployment in Europe Stays High Amid Signs of Recovery

Eurostat: “The unemployment rate in the euro zone remained at 12.1 percent, a stubbornly high level that has held since April.  For the full European Union, made up of 28 member states, the jobless rate was unchanged at 10.9 percent.”