the ministry of truth

Good News For People Who Love Bad News

Researchers at VoxEU say that understanding recent inflation behavior in the United States requires some modification to the traditional Phillips Curve (“high level of unemployment causes inflation to fall over time”).  Specifically, they suggest that anchored inflation expectations and short-term unemployment are critical features of the new relationship between employment and inflation.  Meanwhile, the Phillips Curve is doing its thing in Europe: “figures released Wednesday showed consumer prices [in Europe] were lower in December than a year earlier, the first such drop since October 2009.  Economists expect prices to continue to fall in January and February.”  So…deflation?  “Many economists and central bankers believe that falling prices do not by themselves constitute deflation.  For that chronic condition to take root, consumers and businesses have to cut back on spending because they expect prices to fall further, the outcome being a decline in output and employment that pushes prices even lower.”  The ECB “wants households, businesses and investors to disregard short-term variations and remain convinced that policy makers will do their job and succeed in hitting the [2% inflation target]…over the medium term.”  Meanwhile, the Federal Reserve isn’t super convinced (alt): references to “insufficient” foreign policy responses in the minutes from their December meeting “amounted to a warning…that markets and the global economy more broadly could respond negatively if foreign policy makers don’t deliver on expectations for action.”  Meanwhile, European stocks are rallying thanks to the terrible great news on deflation inflation expectations.  “Confirmation of outright deflation in the eurozone was taken as good news…as investors judged that it made QE this month all the more certain.”  Also, the euro is trading at $1.17 and may have “further room, given expectations that QE may be announced [Jan. 22].”  Meanwhile, Frances Coppola says “calls for QE seem to have more than a hint of the politician’s fallacy about them; ‘We need to do something.  QE is something.  Let’s do it’…’because nobody’s got any better ideas.


Good News For People Who Aren’t True Believers In Oil’s Natural Price

Investors betting oil will rebound from the lowest prices in 5-½ years poured the most money in more than four years into funds that track crude…The U.S. Oil Fund (USO), the biggest oil ETF, attracted $629.9 million in December…There are a lot of true believers in the commodity space.  A lot of people are attached to the idea that oil’s natural price should be $100, not $50.”  Meanwhile, the people at Moody’s aren’t exactly true believers in Russian debt: “Moody’s…has lowered the maximum rating allowed for Russian firms to two notches above junk — in line with how it currently rates Russia.”  Two notches above junk may have something to do with this: “debt levels (including hidden debt issued offshore, or “dark debt”) for the majority of EM countries look manageable at the macro level, as they are not of a magnitude what could trigger a self-fulfilling currency crisis given FX reserve levels and low global rates…The exceptions are the countries that have seen declining GDP and/or idiosyncratic currency tensions.  This group includes Venezuela, Ukraine and Russia.”  Also, exposure to energy isn’t helping (again, Venezuela and Russia top the list).


EU: Merkel Subjects Greece To Risky Tough Love

“On one hand, [Germany] doesn’t want to become Europe’s main paymaster, funding the currency area’s stricken periphery economies, thus encouraging unsustainable policies.  On the other hand, German policymakers are seriously worried about the economic and political repercussions of a euro collapse.”


WM: Being A Contrarian In Oil Is So 2014

Meanwhile, Jim O’Neill (of BRICS fame) calls for China’s big year ahead.


What: Bill Gross’ Favorite Investment Is Bill Gross (Alt)


WaitWhat: Bill Ackman Is Either Brilliant, Or We Are Dumb, Or OMG Look At This List!


BrandZ top brands 2014The Digital Finance Revolution And The Future Of Wealth Management

Michael Casey says that China is the fragile epicenter of a digital finance revolution.  First thing to consider is that China is really two economies: there’s the state-owned and controlled economy, which is “kept afloat by cheap loans from state-run banks subsidized by repressed Chinese savers,” and there’s the online, e-commerce economy, represented mostly by Alibaba and Tencent.  “The problem is that regulators can’t control the vibrant new economy and its 500 million independent actors with anywhere near the same hands-on control they apply to the state-run economy.”  Meanwhile, the United States has no idea how big the peer-to-peer economy is: “we are, in sum, looking for answers to several questions: How many people are layering this type of Internet-enabled more nebulous work (e.g. giving a ride on UberX, selling crafts on Etsy or hosting someone on Airbnb) on top of more traditional labor?”  Speaking of Airbnb, the “cyber-cowboy” peer-to-peer pioneer has agreed to share information about its hosts with the NY attorney general (alt), who wants “to pursue anyone who’s running illegal hotels.”  Furthermore, “the marketplace of the Internet — and the lowered barriers of related services like PayPal and Square — has turned these activities into something larger, something potentially more viable for many people.”  Meanwhile, “legions of advisers have broken away from the big Wall Street brokerages (alt) to join an independent firm or create their own…The ranks of independent investment advisers have swelled to 47,000 from 36,000 in 2007…the number of wirehouse advisers (Merrill Lynch, Morgan Stanley, Wells etc.), now at about 48,000, is projected to shrink to 41,000 by 2017.”  Also, the traditional brokerages “have all expanded their Bay Area operations as firms like Facebook have gone public.”  They are chasing the newly minted millionaires in Silicon Valley “who are skeptical that the wealth management industry offers much value.”  Furthermore, young tech entrepreneurs “don’t really believe that a person is going to be watching their money 24/7, but they believe that a computer is.”  Also, articles like this don’t really help.  Meanwhile, Rebecca Lynn said some things about the future of wealth management: “U.S. investors have $13 trillion in mutual funds that are unadvised..if you have a ton of money there is no way after the Madoff scandal you are going to put all that money in one person…FutureAdvisor is disrupting, but at the same time, they will find ways to work with the financial services companies.”  Then she went all Sarah Palin on Tesla: “people ‘Geek Out’ on these really cool technology things, like Tesla.  And I look at that and I think, ‘That’s just not America.’  But I do think being a mom and being a woman helps and forms some of my decisions in terms of products and what’s really going to resonate.”

Brand Value

Boeing really wants to be more like Apple, but maybe they should want to be more like Google?  “Innovation, artificial intelligence and a whole bunch of valuable partnerships helped push Google to the top of the BrandZ Top 100 Most Valuable Global Brand rankings for 2014.  In the process, the backer of the Android mobile OS knocked Apple off the lead spot for the first time in three years…In third, fourth and fifth place respectively were [IBM, Microsoft and McDonald’s].”  Also, the guy who commissioned the survey said “this year’s index marks ‘the end of the recession,’ with brand value recovering across the board and real growth across every category.”  Meanwhile, GM has already recalled more cars this year than it sold all last year.

More On Housing

“The National Association of Realtors said on Thursday existing home sales increased 1.3 percent to an annual rate of 4.65 million units, marking the second increase in sales in nine months.  While that was a bit less than the 4.68-million unit pace that economists had expected, it was a hopeful sign for a sector that stumbled in the second half of 2013…the months’ supply increased to 5.9 months, the highest since August 2012, from 5.1 months in March.  Six months’ supply is normally considered as a healthy balance between supply and demand.”  Meanwhile, Goldman Sachs would like to clear up the debate on the affordability of purchasing a home.  On the one hand, mortgage rates are at record lows, and home values are still below their bubble-era peak.  In fact, “the National Association of Realtors’ housing affordability index shows that housing is still more affordable than anytime between the early 1990s and 2008.”  While this may be true for the median homebuyer, Goldman says the reality is much different, however, for first-time and marginal homebuyers, thanks to two things: their incomes aren’t as strong, and their credit isn’t as good.  Also, don’t even think about mentioning He-who-shall-not-be-named around this guy: “I’m quite confident that a significant, sustained economic recovery will go a long way to ease credit conditions and eventually revert homeownership to the mean and we can stop with the ‘cart before the horse’ orientation.  While homeownership has never been right for everyone, recent calls that it’s not right for anybody is just as flawed.”  Meanwhile, VoxEU thinks it has an explanation for the high-youth savings rate phenomenon in China: “sharing the parental home is a potential mechanism for lowering consumption by the young, thus permitting higher savings rates.  If a young adult desires to save, subsidisation of consumption via shared housing can facilitate savings.  Of course, this begs the question of why the young would want to save.  One reason is the high costs of housing, which would also make shared residence more desirable.”

Global: China And Russia Sign $400bn Gas Deal (Alt)

But did Putin win?

Consumer Price Index breakdownPCE Price Index breakdownBrighter Financial Future: New Neutral Edition

“The United States posted a $107 billion budget surplus in April, according to Treasury Department figures released on Monday, suggesting the federal government was on track to slash its annual deficit.  Washington usually runs a surplus in April because households have a deadline for settling tax bills that month.”  Also, overall debt-to-GDP projections for the United States are looking better: “Right after the credit crisis, projections showed the ratio of debt to gross domestic product in the U.S. reaching 225 percent by 2040.  Improvements to the economy since then have increased tax receipts and lowered demand for safety net programs.  According to the latest forecast, debt-to-GDP ratio will be a bit more than 100 percent by 2040.”  The Federal Reserve Bank of Cleveland has an Inflation 101 report meant to prepare the public for long-term lowflation.  Meanwhile, Bill Gross is calling his outlook for the next three to five years the “New Neutral”.  He sees “a global economy that remains under the weight of a lot of debt, including a ‘sharp increase’ in debt in China, and at the same time an economy that can’t generate demand that keeps up with potential output.”  Furthermore, “the investment implications are striking: low returns yet less downside risk than investors currently expect; an end to bull markets as we’ve known them, but no perceptible growling from the bears.”  Meanwhile, a new study finds that some investors “are living in a world of unrealistic expectations and conflicting sentiments, leaving them hoping impractically that events will work out their way because they see no other route to success.”  Jeffrey Gundlach seems to agree with Bill Gross, however he is adding his own “No Normal” spin: “more retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments.”  Also, Mark Gilbert is on the hunt for the market volatility killer: if “‘New Neutral’ has replaced the ‘New Normal’ as the prevailing economic backdrop, low volatility is (1) due to economic fundamentals and (b) here to stay.’”  Meanwhile, “investors have increased their holdings of cash to the highest levels in nearly two years (alt) and scaled down risk-taking, amid fears of geopolitical instability and questions about the strength of the global economic recovery… One-third of the global panel believes the possibility of Chinese debt defaults poses the biggest risk… Europe is the region most in favour (“eurozone periphery debt is seen as the most crowded trade globally”)… The US is the least-favoured region… Forward-looking sentiment for emerging markets has improved slightly over the past month.”  Also, S&P 500 companies have about $650 billion in cash sitting in foreign banks (alt) earning low interest; “if investors aren’t applying some sort of haircut to the valuations of companies with hefty amounts of cash overseas, perhaps they should be.”

Income Inequality May Exacerbate Recessions Depending On What Triggers Them

“Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession…What explains these different outcomes?…we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash.  The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending.  What about the tech crash?  In 2001, stocks were held almost exclusively by the rich.  The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.”

Brighter Financial Future: Wal-Mart Edition

The banks operating in Wal-Mart are pretty good at charging fees (alt): “some customers at banks inside Wal-Marts said they previously used payday lenders but switched to overdrawing bank accounts because it is less expensive.  That was the case with Frank Owens, 38, who opened his Woodforest account in the Cleveland Wal-Mart because of ‘financial difficulties’ at another bank.  Mr. Owens said he overdrew $300 in January and Woodforest repaid itself $330 from his next disability-check deposit three weeks later, the equivalent of a 174% APR.”

Fire All Phasers!

Sanctions against Russia are about to go to “Phase 3”:  “One option being discussed is a plan that would prevent western companies from exporting high-end energy technologies to Russian companies (alt)…Existing projects would be protected, but any new programmes would either receive extended scrutiny or be blocked…Russia is hoping to open up new oilfields in areas such as the Bazhenov shale of Siberia and the Arctic Kara Sea, which will be very difficult to develop without the most modern western technology and expertise.”

Declining services spendingLosing Momentum: Momentum Stocks, Profit Margins And Domestic Cash Piles

“A group of 24 [momentum stocks] compiled by Credit Suisse has lost $63 billion in market value, or almost 19 percent, so far in March…while it all stands as a warning to those who joined crowded trades in richly priced stocks, it is good news…for investors who spend their time searching for unrecognized gems trading at bargain-basement levels.  It also indicates that the investing world may be returning to more normal rules, that includes sharper assessments of the risk in different sectors.”  Josh Brown believes “the best way to gauge general risk appetite is to look at momentum sectors.”  Meanwhile, “America’s profit-margin miracle (alt) has gone on for so long that rather than cheering it on, investors might want to ask what companies are actually doing to keep it going.”  Profits as a share of GDP in Q4 “hit a new record of 11.1%.”  Average corporate profits as a share of GDP in the 90s was 5.4%.  The problem with the profit-margin expansion is what companies are doing to achieve it (e.g. slashing jobs, not raising wages, low capital spending, relying on low interest rates and low taxes).  “Barring an unforeseen surge in economic growth, meeting Wall Street’s piqued expectations will tempt companies to continue underinvesting.  Ultimately, though, that leads to deteriorating sales — making it even harder to preserve profits.”  Here’s something to consider: “The S&P 500 cash mountain is more like the Matterhorn than Mount Rushmore; all of the growth in cash (for some companies) is overseas.”  This may have something to do with the fact that cash deemed to be held indefinitely overseas for reinvestment will avoid deferred tax liabilities and, therefore, drive cash and book tax rates lower.  Furthermore, some companies (including Amazon) appear to have higher retained foreign profits than their reported foreign income, which “might be due to a mix of profitable and unprofitable foreign subs throwing this ratio out of whack or it might signal some serious profit shifting.”  Meanwhile, Facebook is building drones, lasers and satellites “to beam Internet to people from the sky.”  Also, expect the surge in temp jobs to continue.

EU: Total And Lukoil In Talks Over Russian Shale Deal (Alt)

Total, a major French utility conglomerate, is saddling up with Lukoil, “the largest private energy company in Russia,” to “co-operate on the production of ‘difficult oil’ in Russia…the talks highlight the desire among some international companies to continue doing business in Russia despite the deteriorating political relations.  On Wednesday, Joe Kaeser, the chief executive of Siemens, met president Vladimir Putin in Moscow and promised to continue the German company’s investments in Russia and its co-operation with Gazprom.”  Furthermore, “Western oil companies have rushed to join forces with Russian groups to take advantage of tax breaks for so-called ‘difficult oil’ projects, which came into effect in September.  Rosneft has joint ventures with ExxonMobil and Statoil, while Gazprom Neft, the oil subsidiary of Gazprom, has a tie-up with Royal Dutch Shell.”

EM: Turkey Calls Syria Security Leak “Villainous,” Blocks YouTube

The battle between Turkish Prime Minister Tayyip Erdogan and “his political enemies, particularly a Turkish Islamic cleric based in the United States,” has reached a new low (high?): someone anonymously leaked “a recording of top security officials discussing possible military action in Syria to the video-sharing site YouTube.  Turkish authorities ordered the shutdown of the site.”

USA: Judge Urges Dismissal Of Mortgage Suit Against Bank Of America

“The lawsuit cites emails from the bank’s employees expressing concern about the quality of the mortgages underling [sic] the securities, including one employee who wrote that some mortgages were ‘like a fat kid in dodge ball, these need to stay on the sidelines.’”

USA: Spacey Urges “House of Cards” Tax Break With Real Lawmakers

“I don’t know if it’s life imitating art or art imitating life [but] it offends my sensibilities.” said Senator Pinsky (D-MD), doing his best impersonation of Frank Underwood.

Emerging Markets: MIKTA, Goats And The Yummy

Giles Merritt at Project Syndicate sees a Post-Russian world order forming as a result of their land grab in Crimea.  “The first result of the West’s standoff with Russia is that is spells the end of BRICS…The more important outcome, though, will be how Russia’s former BRICS partners realign with other major emerging economies in the G-20.  Cue the arrival on the world stage of MIKTA — a new group made up of Mexico, Indonesia, (South) Korea, Turkey, and Australia…What the MIKTA countries share are rapid economic growth and increasing influence outside of their own borders.  They have development problems, but they are also models of economic dynamism and innovation with a substantial stake in the way post-WWII global institutions and rules should be reshaped.”  Meanwhile, the G8 is now officially the G7: “If Russia did not change its behaviour, the G7 threatened to up the ante considerably by introducing ‘sectoral sanctions’ including the targeting of Russia’s vital oil and natural gas industries.”  “German Chancellor Angela Merkel said ‘at the moment the G8 does not exist either as a summit or as a format.” Meanwhile, Gary Shilling tries to separate the herd of emerging markets: “When the smoke clears, the securities of the sheep economies (possibly South Korea, Mexico, China and Australia?) may be cheap enough to be interesting.  Still, I don’t expect growth in North America and Europe to be strong enough to absorb the sheep’s exports.  The goats (Brazil, Russia, India, Indonesia, South Africa, Turkey and Argentina) may not collapse, because their government debt is mostly in local currencies, not dollars and other hard currencies, as was the case in the late 1990s.”  Finally, make way for the Yummy: “Yummy stands for ‘Young Urban Male’ and denotes a new ‘metro-sexual shift’ in men’s shopping habits that is set to drive spending on luxury goods for years to come…While HSBC thinks that the shift is a world-wide phenomenon, emerging markets will be the engines of growth in the luxury sector as urbanisation and GDP growth propel social change.  In fact, the ‘metro-sexual shift’ coincides with another trend; luxury goods buyers are getting younger.”

Federal Reserve: Large Legal Costs On The Horizon; “Prime Broker” In Repo Market

$151 billion.  That’s the amount of “operational risk” (legal costs) the Fed deducted from hypothetical future bank balance sheets last week as part of their stress test.  “An official said the Fed decided to increase the deduction by about 45 per cent because of the higher-than-expected negotiated settlements over the last couple of years.”  While mortgage backed securities litigation may be easier to calculate, there is some difficulty with estimating total future legal costs when you consider the recent interest rate/foreign exchange manipulation lawsuits, hiring “princelings” in Asia etc.  Meanwhile, reverse repo at the Fed may be working too well: “Since September, the Fed has been providing bonds from its balance sheet to lenders of cash in the repo market, who take the bonds as collateral and earn money from such activity.  It has now captured a 17 per cent share of daily trading, thus depriving established banks of a significant chunk of their business.”  Furthermore, one broker “says it looks like the Fed has become the ‘prime broker’ – providing a range of trade-related services – to the banking industry.  He adds that shadow bankers are happy to tell their clients they have the Fed as a counterparty.”  Says one Citigroup strategist, “while supporting the shadow banking system in times of crisis is potentially welcome, if it amounts to crowding out dealers and an associated reduction of liquidity in the market, that would at a minimum be a significant offset.”

Those Meddling Investors

A new study suggests that “when companies move their annual meetings a great distance from headquarters, they tend to announce disappointing earnings results and experience pronounced stock market underperformance in the months after the meeting.  Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists and the media.”  Meanwhile, a chief justice in Delaware is calling for (alt) “a rollback of shareholder powers to prevent a ‘deluge’ of corporate governance votes that he says are distracting managements and costing companies a small fortune.”  Furthermore, without taking his proposals (e.g. “limiting the frequency of say-on-pay votes and charging investors to submit proposals to a company’s annual shareholder meeting”), Justice Strine thinks investors could “turn the corporate governance process into a constant ‘Model United Nations’ where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes.”

EU: Interactive Chart: How Europe Can Replace Russian Gas

EM: Secret Handshakes In India Rackets Fuel Inflation

“The [Reserve Bank of India] in January cited agriculture market cartels for exacerbating price spikes as Governor Raghuram Rajan raised the benchmark repurchase rate to 8 percent.”

EU: France’s Far-Right National Front Party Makes Gains

USA: Nearly 33% Of Americans Have Been Banking Without The Branch

“The survey specified that using an ATM didn’t count as having gone to a bank.”

USA: A Look At Case-Shiller By Metro Area

hawk or doveYellen’s Ad Hocery

In her first press conference as Federal Reserve Chairman yesterday, Janet Yellen announced the FOMC would continue The Taper at a $10bn/meeting rate (bringing us down to $55 billion by the end of April), that US growth expectations haven’t really changed at all since December, that the weather is probably at fault for some of the poor data, and that the 6.5% unemployment threshold is no longer useful.  People are really divided over whether the announcement would be a hawk or a dove if it had a spirit animal (Robert Shiller, for one, loves him some spirit animals).  On the one hand, you have the screeching (alt): an “upward drift” in the interest rate forecasts of Fed officials (John Hilsenrath of WSJ is screeching real loud about this), and statements like “sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.”  Then again, you have the cooing (alt): “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”  Somewhere in the middle of all this confusing bird noise is more (planned) confusion: forward guidance is becoming more qualitative.  Ms. Yellen said the Committee will assess progress through a “wide range of information, including measures of labor market conditions, indicators of inflation pressures…and readings on financial developments.”  Here’s the statement and some reactions.  I especially like this one: “The more qualitative approach means looking at a wide range of variables, but ultimately is euphemism for ad hocery.”  Ad hocery does seem like the best way, however, to kill Bernanke’s monster (i.e. forward guidance).  Also, here’s the key question for Yellen: Is this as good as it gets?  Meanwhile, on Twitter

The Problem Of Ukraine’s Russia Bond

The Finance Ministers in Ukraine and Russia would like you to believe that all is well in the world of debts owed between quasi-warring countries.  That being said, Russia will not be bailing anybody out, OK?  Also, Ukraine has a bit of a catch-22 situation on its hands in regards to the $3bn owed to Russia.  On one hand, it probably doesn’t feel like paying anything to the country that just claimed its beach paradise.  On the other hand, Ukraine’s debt is in the form of a Eurobond, meaning it can be sold on the market.  Meaning it can be sold to a vulture-fund outside of Russia, where Western courts treat hedge funds differently than they would Vladimir Putin.  Meaning this isn’t very good for Ukraine at all.  Then again, another route for dealing with Yanukovych’s “Goodbye” bonds may be found in Odious Debt theory: “the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable.”  Here’s a question: “When your creditor takes some of your territory — can you make that territory take some of your debt?”  i.e. Can Ukraine just saddle up Crimea with the $3bn in debt (or probably less) and wish them well?  Meanwhile, here’s 12 ways in which Putin’s rhetoric matches that of Nazi Germany circa 1938.  Also, Merkel isn’t Russian (…) to impose any sanctions.  However, the EU is adding (alt) “12 new names to add to the 21 already on their list of Russian officials subject to visa bans and asset freezes.”   So that brings the number of rich Russians with frozen assets to 39 (7 by the United States).  Seems like there is a really strong argument for income inequality here…

BigData: When To Act On A Correlation, And When Not To

“Causality is dead,” say the priests of analytics and machine learning.  They argue that given enough statistical evidence, it’s no longer necessary to understand why things happen — we need only know what things happen together…For consumers of big data, the key question is ‘Can I take action on the basis of a correlation finding?’  The answer to that question is ‘it depends’ — primarily on two factors:” 1) Confidence that the correlation will reliably recur in the future, and 2) The tradeoff between the risk and reward of acting.

YHOO: Impatient Funds Load Up On Synthetic Alibaba Shares (Alt)

“Though the [IPO] of [Alibaba] is in motion, some hedge funds in Hong Kong have already been loading up on synthetic shares, sold by investment banks as certificates.  The process involves taking one of Alibaba’s two biggest shareholders — Yahoo or SoftBank — evaluating their constituent parts, and then using short positions to remove everything that the company owns other than its Alibaba stake.”

Tax: Havens Set Deadline For Reporting Investors’ Tax Details (Alt)

44 countries, including The British Virgin Islands, Liechtenstein, India, Argentina and Colombia, have agreed to “a deadline of September 2017 for reporting investors’ tax details to their home governments, under pioneer plans aimed at leaving ‘no hiding place for tax evasion.’”  “The details to be reported include interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated from assets held in the account.”

USA: Activist Hedge Funds Are Making Friends

SV: Silicon Valley Won’t Stop Using Terribly Inappropriate Historical Metaphors (Also)

Non food commodity exports to China as a share of total exports to ChinaDownshifting: Emerging Markets and Londongrad

The Financial Times has ranked EM countries by vulnerability/exposure “to a slowdown in net non-food commodity exports to China.”  Chile, Colombia, Russia, South Africa and Peru top the list.  Meanwhile, here are a few trends and considerations to keep in mind as emerging market countries expand their middle class and shift to consumer-based economies.  Furthermore, Western investors may get into trouble if we rely on assumptions for predicting future shifts and growth.  For example, “in India, it isn’t unusual to see a family of four on a motor scooter, so we expect them to want a car.  Which they do — until too many people get cars, and then people want scooters in order to get around the cars that are stuck in traffic.”  Meanwhile, “over the last four years, big investors have sunk $325 billion into stocks and bonds issued by Russian companies and the country’s government…of that, $235 billion has been directed toward corporate borrowings by the likes of Gazprom and state-owned banks like Sberbank.”  As tensions build in Crimea, some large socially responsible emerging market funds will have to decide “whether the changing geopolitical situation will alter the calculus.”  Take Pimco’s Socially Responsible Emerging Markets Bond fund, for example, which has over 30% ($90mn) of the fund invested in Russian corporate and government bonds.  If Russia were to leave certain global equity indexes or become underweight due to heightened governance risk, Russian companies and bond investors could be at the mercy of billions of dollars flowing out automatically.  Also, Western sanctions are threatening Londongrad dealmakers: “Russian companies have made $180 billion in deals globally in the past two years, providing steady profits to London bankers, lawyers, and image crafters as the city has become a hub for such transactions.”  Finally, Russia’s Warren Buffet is dumping American and buying Chinese: Alisher Usmanov sold his $100mn in Apple shares and ~10% stake in Facebook for Chinese tech and internet companies (e.g. Alibaba).

ETF Stories Come With Plot Twists; Hedging Adds Speculation

Thematic ETFs have been gaining popularity recently, as investors appear to be drawn to investing in portfolios as a constructed investment thesis or story (or sometimes they drink too much Guinness and, well).  We should be careful, however, not to jump to any conclusions about specific theme’s market performance when there may be other factors at work.  Take the Workplace Equality Portfolio Fund (EQLT) for example.  EQLT “tracks U.S. companies that provide equal benefits for lesbian, gay, bisexual and transgender employees, [and] is a progressive new spin on the socially conscious investment theme.  [However,] when you dig into how EQLT works, a different story line emerges.  Like many of its thematic peers, EQLT tracks an index that weights stocks equally…Right now, an equal-weighting strategy is paying off for many theme ETFs.  Small-cap stocks have outperformed large-caps by a wide margin over the past five years.”  Also, investors should be cautious with currency-hedged ETFs, as conventional wisdom regarding their volatility and market performance may be wrong.  Indeed, “nominal equity prices and the currency they are quoted in are fundamentally connected and reflect economic reality in tandem.”  Furthermore, hedging “is really speculation and not investing.  It depends not on the profitability of the underlying businesses, but on macroeconomic forces.  And those forces are notoriously hard to predict.”  Meanwhile, Barry Ritholtz has a chart depicting how “simple beats complex, and low cost trumps expensive” over the last decade.  And there’s a persuasive argument for asset allocation in there, too.

USA: Wall Street Trains Fire On Idea Of A Bank Tax (alt)

BofA, Citi, Goldman and JPM “are marshaling opposition on Capitol Hill to kill a proposal by House Ways and Means Committee Chairman Dave Camp (R., Mich.) to tax the nation’s largest financial firms…The proposal has galvanized Wall Street in a way largely unseen since the financial crisis.  While banks have pushed back on postcrisis regulation, they rarely act as one, since the rules affect firms differently.  This time, banks large and small are coordinating the resistance.”  “We’re going to beat this like a rented mule,” said Cam Fine, President of the Independent Community Bankers of America.

USA: Inflation Muted Despite Food Price Increases; Housing Starts Slip

 USA: S&P 500 Companies Blame The Weather

EU: EU Auto Demand Revs Up; New Car Registrations Rise 8% In February (alt)

Foreign holdings of US Treasuries March 2014Bubble Bubble: Bonds Edition

Gillian Tett over at Financial Times says we might be in a bubble, but its probably not the bubble you were expecting: “In recent years an astonishing amount of money has quietly flooded into fixed income funds…And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse — creating destabilising shocks for regulators and investors alike.”  Furthermore, last year’s “taper tantrum” proved that bond markets can be just as skittish as their equity counterparts, “and since it is now the bond funds, not banks, that hold the lion’s share of corporate bonds, if another taper tantrum does take hold that could be very destabilising.”  Meanwhile, “over $8 billion of new municipal debt came to market [last] week — and that’s not even counting the $3.5 billion of bonds sold by Puerto Rico…it made for the most active week of new muni issuance so far this year.”  Foreign holdings of U.S. Treasuries, however, saw a record decline and has some people believing that “Russia is shifting its Treasury bond holdings out of the Fed and into offshore accounts.  That way, Russia would be able to buy or sell its portfolio if the U.S. and its European allies impose economic sanctions amid growing geopolitical tensions in Ukraine.”  So yeah, things are getting kinda spooky for bond investors.  Then again, some believe there is simply a rising bubble in bond-bubble chatter.


“The People’s Bank of China announced Saturday that it would double the allowable trading range for the yuan against the dollar to 2% from a midpoint rate it sets every day…Many investors have always viewed the yuan, also called the renminbi, as a safe bet — a one-way appreciation game.  But the Chinese government is now trying to show that its currency markets are just as susceptible to outside factors. Doing so may boost outside confidence in the yuan and help promote offshore hubs for the currency.”  United States Treasury Secretary Jack Lew could be heard muttering “game on.”  Meanwhile, shares of China’s four largest banks have sold off $70 billion in valuation on market concerns over a slowing economy and a credit meltdown.  “The slowdown is making it harder for Chinese borrowers to repay their debts…Some lenders are increasingly financing insolvent companies to help them pay off maturing debt in a bid to avoid outright defaults…The practice, known as evergreening, reduces banks’ ability to lend to profitable businesses.”  Furthermore, “investors in Chinese banks are concerned ‘the ongoing interest-rate liberalization will squeeze their profits…Over the short or medium-term horizon, pessimism over the industry is still there and share prices could become even cheaper.’”  Meanwhile, Alibaba (China’s eBay-Amazon-Google all wrapped into one) has chosen the United States for its IPO later this year and is expected to be among the largest ever.

Seeking Justice: IFRS And The DOJ Would Rather Not

A Seeking Alpha contributor has exposed an insider trading/investing tabloid scandal involving IR firm “Dream Team” and at least two companies, Galena Biopharma and CytRx Corp: “Below I will provide detailed documentation (emails and attachments) that indicate management from both Galena and CytRx were intimately involved in reviewing and editing the paid articles on their own stock at precisely the time they were looking to sell / issue shares.”  Meanwhile, “the International Financial Reporting Standards (IFRS) Foundation’s role in governing global accounting rules is under threat after European politicians said they were questioning whether the authority was ‘best suited’ to the position.  The London-based authority, responsible for setting standards in 100 countries, has been severely criticised by MEPs for poor governance structures, a lack of transparency and its ‘close links to the accounting industry.’”  Also, the Justice Department “is simply unequipped — or unwilling — to combat complex financial frauds.”

Global: US And EU Impose Sanctions As Crimea Asks To Join Russia

As expected, Crimea voted to join Russia (by an extremely wide margin: >95%), so now the United States and the European Union are imposing travel bans and asset freezes on 32 people.  Eurasia Group calls the sanctions “a sideshow” and “puts the odds of a Russian military invasion [of Ukraine] at 40%.”

EU: It’s All About The Bin Ladens, Baby

MA370: Finally, A Plausible Scenario Of What Happened To Flight 370 (maybe)

USA: Factories Flex Muscle After Winter Chill; Largest Output Gain In Six Months

USA: One Third Of Uninsured Won’t Sign Up For Obamacare

Stock buybacks 1999 to 2014Sign Of The Times: Volatility As An Asset Class

“The once-disgraced darling of equity bears (TVIX) is making a comeback, with daily volume jumping fivefold to 9.4 million shares a day since 2013.”  TVIX is a 2X Short-Term Volatility ETN “designed to generate twice the daily return of a gauge of tracking futures on the Chicago Board Options Exchange Volatility Index.”  Here’s the problem: TVIX is an ETN product (“overseers create and redeem shares in the open market based on the level of demand from buyers and sellers”) with a tendency to get a bit off track (in 2010, demand for TVIX was much higher than its “overseers” could support, which forced TVIX “as much as 89 percent away from the index it was created to mimic”).  Here’s another problem: “people are getting comfortable now with volatility as an asset class and the revival of the TVIX is probably a sign of that.”  Meanwhile, Northern Trust has done some great research about market volatility and portfolio hedging: “We believe there is no ‘magic bullet’ available through hedging the portfolio via either options or through trading volatility.  Instead, we encourage investors to shift their thinking from ‘protecting your portfolio against volatility’ to ‘reducing your sensitivity to volatility.’ (i.e. asset allocation)”  Furthermore, “we think investors are best served by reducing their sensitivity to the volatility through proper strategic asset allocation, not by chasing the newest volatility reduction tool.”  Meanwhile, stock picking might also be making a comeback: “macro headlines have grown more scarce this year.  As a result, correlations — the tendency of individual stocks to trade in the same direction — have declined and more investors are shifting toward active management.”  Furthermore, “ETF usage typically increases when macro issues dominate and correlation increases since ETFs are a convenient way to move money quickly and shift beta exposures efficiently.”

Calculating The Economic Costs Of A Sanctions War With Russia

“Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case…Still, officials are calculating the economic cost of a sanctions war with the West.  ‘If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country…more than 40 percent of consumption is imported goods.’”  Putin doesn’t appear to be backing down, however: “‘In the modern world, where everything is interconnected and everybody depends on each other one way or another, of course it’s possible to damage each other — but this would be mutual damage,’ Putin told reporters March 4.”  “Mutual damage” aside, here’s 4 reasons why Russia will keep the gas flowing into Europe: 1) “Russia’s weakening economy is heavily reliant on exports of oil and natural gas, with energy accounting for roughly 70% of annual exports,” 2) Demand for natural gas is waning with the changing seasons, 3) “A warmer winter in Europe has allowed countries to build their reserves of natural gas, leaving them better able to cope with any short-term supply disruption,” and 4) European leaders are looking for any excuse to diversify away from Russian energy.

Fed: John Williams: Fed Will Manage A Soft Landing

Here’s an interview with San Francisco Fed President John Williams; notable quotes: Re: Jobs and Weather “It’s pretty clear that the report would have been even better without the effects of the unusual weather.  So looking ahead you would expect a report that’s even stronger.” Re: Tapering “My own view would be to continue the tapering at the pace that we’ve been doing”  Re: Wages “Wages tend to lag a bit so they’re not really a great leading indicator…I wouldn’t want to wait around to see compensation growth pick up.” Re: Inflation “If you have to create a little bit of inflation above your target for a little while that’s exactly what monetary policy should do.”

China: The Scary Factors Behind Copper’s Price Plunge

Copper’s recent plunge in market value may have more to do with the Chinese banking system than you think: “Chinese lenders, especially in the nonbank or ‘shadow’ sector, often allow copper to be pledged as collateral…’As financial conditions tighten, copper is liquidated when loans are either defaulted on or can’t be rolled over, which can lead to worse financial conditions as companies’ collateral loses value,’ Paul Hickey at Bespoke Investment Group explained in a report.  ‘This was the exact same effect that hit the entire U.S. household sector in 2008 when house prices fell, although it’s important to note that a crisis that severe in China stemming from falling copper prices is hypothetically possible but not likely in our view.’”

USA: Buyback Binge Takes A Breather

“U.S. companies authorized $80 billion in stock buybacks last month, a 32% drop from last year’s record-setting amount but also the third-strongest February on record.”

USA: Core Inflation Visualized

USA: Where Did Consumers Spend Their Money In February?

Municipals - Broker profits and Percentage Held by individual investorsPartying Like Its 1999

“Morgan Stanley’s US quant team has an eye on the market cauldron, and the simmering has a late nineties feel to it.”  Furthermore, “pure growth factors — long term growth rate forecasts, trailing sales growth, R&D spending, headcount growth — are the top performers, with momentum also working well; valuation factors have done poorly at selecting growth stocks.”  Bloomberg argues the current bull market looks pretty good compared to the 90s bull: “while gains are extending to almost every industry, they’ve only been enough to push valuations to close to half the level when the bubble popped in 2000…The broad-based nature of the rally is certainly different than what it was 15 years ago…During the stretch that lasted from March 1995 to March 2000, computer and software makers surged 754 percent, compared with 200 percent in the next-best industry, banks.  By contrast, since March 2009, consumer-discretionary shares have jumped 324 percent, banks are up 259 percent, and industrial companies have risen 243 percent.”  Meanwhile, Jim Paulsen of Well Capital Management advocates a “barbell strategy of getting long cyclical growth and goosing it with high-yield utilities…Paulsen’s theme is that rising commodity prices are going to lead to higher interest rates.  As basic material prices move higher on demand Paulsen thinks the utilities will get bid higher by investors looking to long yield.”  Also, “some market observers are starting to worry about small-cap stocks, thanks to its big gains.”  But you should stop worrying and start meditating: “to help revive their employees, a growing number of firms are turning to the age-old technique of Transcendental Meditation (TM), which involves accessing the deepest, quietest level of the mind by speaking a silent mantra.  It is said to reduce anxiety and increase clear, focused thinking.”

The Cycle: Mom And Pop → Munis → Distressed Debt → Hedge Funds → ETFs → Mom And Pop

“More client-hungry hedge fund managers are looking to put their investment strategies to work in exchange-traded funds, a move that could exponentially expand their pool of investors but require them to slash investment management fees.  That is a tradeoff many managers of smaller hedge funds are willing to make, hoping Mom and Pop investors can fuel their growth.”  Meanwhile, Mom and Pop investors now own “45% of all municipal bonds directly and another 28% through mutual funds, amounting to a combined $2.7 trillion,” and they are “paying about twice as much (alt) in trading commissions as they would for corporate bonds, according to a study for The Wall Street Journal.”  Also, “activism is rarely good news for creditors” (alt): “activist hedge funds are increasingly pushing companies to take steps the activists believe will improve shareholder returns, including raising debt, boosting share repurchases and dividends or breaking a company apart.  While those moves can lift stock prices, they also can drain cash and put a company’s credit rating at risk.”  Also, “[bond] investors have poured $622.5 million into Colombia’s bond market since the start of the year, the biggest inflow into any emerging-market country so far in 2014…Colombia has seen significantly more inflows than its peers, as the only other emerging economies with bond inflows this year — South Korea, Poland and Greece — all have had less than $200 million come into their bond markets.”  Meanwhile, Puerto Rico’s $3bn general obligation bonds hit the market today, “the sale gives the island of 3.6 million people enough cash through June 2015 and time to revive a shrinking economy.”  Given the high risk involved, “these new bonds are aimed at the hedge-fund crowd more than your typical muni-investor, and Puerto Rico is making that institutional bias explicit by requiring a minimum investment of $100,000 to get in on the deal.”

Former Ambassador Offers Insight Into Putin

“Stephen Sestanovich, a former U.S. ambassador-at-large for the former Soviet Union, says Russian president Vladimir Putin’s dramatic steps in Ukraine have been improvised as part of a visceral response to the downfall of president Viktor Yanukovich.”  Furthermore, “Putin’s Ukraine policy has not gone as he had hoped,” there is “a surprising stream of leaks even among insiders talking about the poor coordination of policymaking” (i.e. finger pointing), “Russia’s goal has always been to make Ukraine a friendly and subordinate power,” and “there’s no reason for Putin to back away from business as usual in U.S.-Russian relations if the United States and Europe will be prepared to go along.”  Meanwhile, someone at Forbes believes that in the event of Russian annexation of Crimea (or maybe a Crimean parliamentary “Declaration of Independence”), ethnic minorities in the region could benefit from an online property exchange: “Something like,, Yahoo! Real Estate, or could be run for a limited time…anyone who wanted to cross the divide could list their property…people could exchange their properties as soon as they’re matched with someone from the other side.”

USA: Morgan Stanley, Goldman Said To Swap Fees For Deal Credit

Can one really put a price on rank, reputation and glory?  Investment banks seem to think so : “Morgan Stanley and Goldman Sachs Group both decided last month that it was worth losing millions of dollars in fees to get credit on a big merger they didn’t work on…they each agreed to cut the fees they were due in exchange for being able to claim the league-table credit.  The trade highlights the importance of league tables to investment banks — which use them to pitch for new business — and the lengths to which banks will go to climb the rankings.”