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

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

Monumental Shifts On The Horizon For Crude Oil And Internet

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

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

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

USA: The Best Stock Research Money Can Buy

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

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

Global: Nobody Reads Reports From The World Bank

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

KutcherJobsHead-Scratching Data Provoke Head-Scratching Reactions

“America’s recent economic data have not exactly been the easiest to interpret.”  Just to refresh your memory (wine tasting this weekend?): 0.1% GDP growth and 288,000 new jobs in the same week.  The Economist doesn’t seem to take the 0.1% number too seriously (weather weather weather), and argues that The Taper is further complicating the issue: “at faster rates of employment growth the Fed begins to worry about inflation pressures (or is perceived to worry about such pressures).  The expected pace of policy tightening and inflation expectations adjust accordingly, and the economy appears to slow back to a ‘safe’ rate of labour-market recovery.”  Furthermore, they argue that wage growth is a more critical indicator than headline unemployment and jobs growth, and “the question then becomes how willing the Fed is to tolerate wage growth that is rising toward ‘normal’ levels (of about 4%, compared with the 2% growth of the past few years).”  Meanwhile, the market reaction to the big jobs report last Friday involved a lot of head scratching: “It seems like the bond market is telling you one thing and the stock market is telling you something else, so which do you believe?”…”It’s almost a schizophrenic reaction from the markets here.”  While the strong economic data did produce some predictable behavior (growth-sensitive stocks rose), bonds and gold also rallied.  Utilities stocks fell ~2%, however, which are sometimes traded as a proxy to bonds.  Merrill Lynch is attributing “some of the muted reaction in rates to a tepid stock market reaction and short positioning in rates.  Other factors such as lower supply dynamics in agencies and the reserve growth in China may be helping longer term yields.  Unfortunately, we have no concrete evidence of the factors driving the bid.”  The tepid stock market reaction seems to suggest that it will take more than good job creation to boost stocks much higher: “It will take some catalyst, a genuine acceleration in economic activity or a sign that corporate America can expand profit margins from already record-high levels.”

World’s Biggest Economy Is A Hoax Work In Progress

“Smaller Chinese banks have ramped up their shadow lending activity (alt), adding to the financial risks that threaten to trip up the world’s second-biggest economy (first-biggest?).”  The Financial Times reports 10 unlisted banks whose “exposure to shadow credit assets soared last year.  For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012…For Bank of Zhengzhou, almost two-thirds of its non-standard credit went to local governments, property developers, construction companies and miners — all of which struggle to obtain normal loans because regulators have classified them as risky borrowers.”  Meanwhile, “six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.”  The gradual progress so far has included “simplified business registration,” “removal of distortions in pricing of resources such as gas, and services like rail transport and healthcare,” “special economic zones,” etc.  Further reforms are expected, however, and include “stripping big state firms of an implicit government guarantee,” “reforms to China’s residence registration system and land property rights,” “revamp of how revenues, spending and responsibilities are split between Beijing and local governments,” etc.  Meanwhile, Nomura says that “China’s great real-estate bust has begun” thanks to “a combination of a huge oversupply of housing and a shortage of developer financing…producing a housing market downturn that could drive China’s GDP to less than 6% this year.”  Here’s something to cheer us up: “A narrower gap between China-HK trade balances suggests that the amount of hot money entering the mainland via over-invoicing exports has been efficiently cracked down during the past few months.”  Meanwhile, local governments in the Pearl River Delta (“the manufacturing workshop of the world — in south China”), “are allowing manufacturers to pay lower pension contributions than required (alt) as they worry about companies leaving, particularly as factories face double-digit wage rises each year.”  Here’s the dilemma: “while they want to keep factories, they also want to avoid the kind of strikes that raise concerns in the eyes of potential investors.”  

EU: Deflation Risks In Euro Zone Very Low” Says European Commission

USA: Organic Is Going From Hippie To Mainstream

Jobs growth volatility in headline numbersYou Call This Anemic?!

“The US economy added 288,000 jobs in April as the unemployment rate dropped to 6.3 per cent (alt), sharply beating expectations and offering new hope that the US recovery is accelerating.”  Not only that but “there were hefty upward revisions for the months of February and March,” which makes it the third month in a row we’ve seen jobs creation above 200,000/month.  And while “the share of the long-term unemployed as a fraction of the overall jobless…dropped to 35.3 per cent as 287,000 more of them found jobs…the labour force participation rate dropped to 62.8 per cent, from 63.2 per cent in March.”  But here’s a grain of salt for how the participation rate is measured.  Another “cloud in today’s employment report is worker pay is stagnating.  Average hourly earnings held at $24.31 in April, and were up 1.9 percent over the past 12 months, the smallest gain this year.”  Meanwhile, government jobs are still missing from the recovery (although they weren’t really part of the jobs lost either).  Also, here’s something to consider as you read the headlines about jobs.

Eurozone Manufacturing Rebounds, BCG Stands By Their Guns: Manufacturing Is Coming To USA

“The recovery in euro zone manufacturing accelerated at the start of the second quarter with solid growth across most of the bloc although French factories struggled to maintain momentum, a business survey showed on Friday.  Growth was again led by Germany, Europe’s largest economy, and previously-lagging companies in Spain and Italy reported better business last month.  It was the first time since November 2007 that all PMIs in the region indicated growth — coming in above the 50 break-even level.”  This is all pretty great, but here’s one concern: “factories cut goods prices for a second straight month — and at a slightly steeper pace.”  Meanwhile, BCG is out with another report analyzing the current state of manufacturing cost competitiveness around the globe.  Using wages, productivity growth, energy costs, and exchange rates to form their index, the report ranks countries into four groups based on competitiveness: Rising Stars (United States and Mexico), Holding Steady (Netherlands, India, Indonesia and United Kingdom), Losing Ground (Mostly central European countries) and Under Pressure (Brazil, Russia, China, Poland and Czech Republic).  Once qualitative factors (corruption, infrastructure, overall “ease” of doing business) and exchange rates are considered, BCG sees China, The United States and South Korea standing apart from the rest of the world’s top 10 exporters.  All this being said, “higher costs have not yet impacted Chinese export competitiveness.”

Foreign Central Banks And Major US Banks Are Supporting Treasuries As Fed Tapers

“in the first two months of this year, foreigners purchased $92.2 billion of Treasuries, more than a third of last year’s total, lifting their holdings by 1.6 percent in the process.”  Furthermore, “the overall foreign buying has helped keep Treasury yields down this year, experts say.  ‘There has been a broad-based increase in demand for Treasuries…Foreign demand is part of that…I think there will be very steady demand from Japanese investors…And with low yields in the euro zone, [even in] Italy and Spain, U.S. interest rates will look more and more attractive to foreign investors.’”  Meanwhile, “with a lackluster job recovery (today’s data probably impacts this statement but roll with it) and higher mortgage rates damping loan growth, banks are tapping record deposits to plow more money into government debt as regulations designed to limit risk-taking take effect.  The demand helps explain why Treasuries are rising from the deepest losses since 2009, confounding forecasters who foresaw declines as a strengthening U.S. economy prompted the Fed to cut back its own bond buying.”  Furthermore, “the simmering conflict between Russia and Ukraine has also boosted demand for the safest assets.”

“Select All” Option Doesn’t Reduce The Amount Of Homework Required For China’s A Share Market

“Buying stocks in Hong Kong is easy for U.S. ETF investors:  There are a few dozen options.  But China’s ‘A Share’ market until recently has been off limits to most foreigners, leaving it by some estimates with just 1% foreign ownership.”  But that’s changing, thanks to Deutsche Bank’s new db X-Trackers Harvest MSCI All China (CN) fund.  While BlackRock’s popular iShares China funds only stick to Hong Kong and U.S. listed equities, CN “gives U.S. investors the opportunity to invest in mainland shares, known as A-shares,” and “provides investors with the most comprehensive exposure to China by investing across the spectrum of Chinese securities.”  Awesome quote: “You still have to do homework these days, but the new ETF is something close to a ‘select all’ option.”

SEA: Seattle Announces Plan For $15 Minimum Wage, Highest In Nation

“The proposal is least forgiving for large businesses with more than 500 workers, which will have to reach the new $15 minimum by 2017 if they don’t give workers tips or health coverage; if they do, they’ll be given another year to reach $15.  Businesses with fewer than 500 workers will have until either 2019 or 2021 to hit $15, depending on the benefits they offer.”  

USA: Wall Street’s Quiet Turnabout On Swaps

“Banks can make more money from derivatives trading by locating it in their insured subsidiaries.  These subsidiaries usually have higher credit ratings than other parts of the bank, in part because of their implied government support…Dodd Frank’s swaps push-out rule seeks to reduce those effective government subsidies on Wall Street trading…Though the banks have long had a strong aversion to the idea of pushing out derivatives, something appears to be changing…the banks have started to shift substantial amounts of derivatives trades into offshore affiliates that the parent banks do not guarantee…the banks want to lessen the impact of new rules, also part of Dodd Frank, that aim to improve pricing transparency in the derivatives markets.  Trades done through the banks’ offshore nonguaranteed affiliates are more likely to be beyond the reach of the American transparency overhaul.”

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

 

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)

electric tuk tukFed Running On Auto Pilot With Foreign Reserves

Gavyn Davies at Financial Times argues that “the behaviour of the major central banks, which had dominated market attention for so long, [will] not be the decisive element for asset prices in 2014,” thanks to a broad, slow recovery and the Federal Reserve’s “tapering by auto pilot.”  Furthermore, he predicts that “in the longer term, it is likely that wages will emerge as the indicator that matters most for the FOMC…markets should therefore watch the monthly wages data even more closely than they watch the non farm payrolls in the future.”  Meanwhile, economists at the Bank of International Settlements (the “central banker’s bank”) are warning that revising forward guidance policy or keeping interest rates low for too long may create financial instability.  “While forward-guidance policies have helped subdue one-year interest-rate volatility, they are less effective at influencing longer maturities, the BIS report said.”  Also, “because of changes in charges levied by the [FDIC], foreign banks accounted for almost half of the reserves held at the U.S. Federal Reserve in December…at the end of 2013 these foreign bank branches held almost $1 trillion of the $2.2 trillion in reserves at the Fed, or 43% of the total.”

Solar-Powered Tuk Tuks

Here’s a chest-thumper about the success of solar-generated electricity and renewable energy in general: 1) “The average price of a solar panel has declined an estimated 60 percent since the beginning of 2011, and this year the total photovoltaic capacity in the United States is projected to reach 10 gigawatts, the energy equivalent of several nuclear power plants,” 2) “solar installations — primarily photovoltaic rather than solar thermal — grew by a third last year alone,” and 3) “The Solar Foundation’s Solar Job Census estimated that there were almost 143,000 solar workers in the United States in 2013, a nearly 20 percent increase over employment totals in 2012.”  Meanwhile, an Australian-based energy company is building solar-powered tuk-tuks (the taxi of Southeast Asia) for the Cambodian market.

USA: New-Home Building Is Shifting To Apartments

“Single-family homes accounted for about two-thirds of housing starts last year, down from their peak of 87% in 1993 and about 80% in the years leading up to the recession.”  Possible explanations of this trend include 1) “As the job market improves, larger numbers of young adults are leaving their parents’ homes and forming their own households — adding more to the demand for rentals,” (Although, somewhat paradoxically, “Moody’s Analytics estimates that four jobs are created for every new single-family-home start, versus two for multifamily units”) 2) “The baby-boom generation is moving into retirement and empty-nesthood, prompting many to downsize to smaller quarters,” 3) “The generations behind them, meantime, are having fewer children, later in life, so need less space,” and 4) “Single-family homes were built at the expense of apartments during the mid-2000s housing boom.”

EU: Mr. Putin’s Clever Bond Issue

Remember when Russia gave Ukraine $3bn not so long ago?  That came with a “Debt Ratio” provision allowing Russia to declare payment immediately if Ukraine’s Debt-to-GDP ratio rises above 60%.  “Having cut ties with Russia, Ukraine needs a substantial debt relief package from the EU and is likely to receive it (along with some IMF assistance).  The question though is how much of that relief will come from an EU taxpayer bailout and how much will come from haircuts to the claims of private creditors…The more unpalatable the creditors, the less willing taxpayers are going to be to subsidise them.”  Furthermore, “if one factors in the loss of Crimea, the inevitable economic consequences of the unrest throughout the country and — lest we forget — the inevitable drop in GDP that follows IMF-prescribed austerity, that ratio is probably going to clear the 60 per cent threshold.”

USA: Invisible Shrinking Management Fee

“This past week, WiseBanyan, an online-only investment adviser, publicly launched a service that builds and manages diversified portfolios of exchange-traded funds for nothing. There is no minimum account size; nor is there any fee to sign up, to buy the funds or to hold them (other than the underlying expenses of the funds, averaging less than 0.14% annually).”  Structuring clients’ portfolios “is often highly mechanical and a computer can do it for nothing, as WiseBanyan shows with its ‘algorithmic’ method of determining which portfolios to recommend.”  This algorithmic method comes up short in one area, however: the complexities of tax, estate and retirement planning.  Meanwhile, Bank of America is gonna start charging clients $5/month to keep them from overdrawing their checking account…

USA: The Current Bull Market: By The Numbers; also Five Bears Who Turned Bullish During Five-Year Rally

Social Media Valuations Per UserFacebook Buys WhatsApp, Proves Something About Tech Bubbles And Markets Or Maybe Not

So Facebook bought WhatsApp yesterday for $19 billion: $4bn in cash, $12bn in shares and $3bn in restricted stock bonuses to employees and founders.  “Mr. Zuckerberg is clearly willing to spend big to acquire hot messaging technologies, which typically attract younger people than Facebook does.”  People are using it to talk about overvaluations in the tech sector and possibly frothy bubble conditions in the market in general; however, “a back-of-the-envelope calculation shows that at least on one key metric — the valuation per user — is not far off the mark set by previous deals in the industry.”  And WhatsApp helps Facebook with global market share: “you might wonder how WhatsApp will ever earn back the money it cost to buy, but this acquisition wasn’t about increasing Facebook’s total revenue.  It was about surviving the global shift to mobile.”  Here’s a great overview of what exactly Facebook is buying.  Also, Facebook is the real life LexCorp.

FOMC

Here’s the Washington Post’s 5 takeaways from the minutes of the FOMC meeting last month: 1) The Taper is working! 2) But we might need to Taper the Taper at some point, 3) Low participation in the workforce is either “all hope is lost” dropouts or the result of an aging population combined with longer years spent in school (St. Louis Fed President James Bullard thinks the declining participation rate is natural and, therefore, the recent decline in unemployment is real.  He also thinks he and Jimmy Fallon have something in common), 4) Forward guidance is lacking in actual “guidance”, (note: Stanley Fischer, arch-nemesis to “forward guidance” should be confirmed in time for the next meeting) and 5) The US economy is either losing steam or we can blame global warming, either way though: not good.  Also, apparently “a few” members “indicated that ‘before the middle of the year’ would be an appropriate timeline to consider a rate hike” in the federal funds rate.

Global: The Auditing Roadblock: It’s Not Just China

“The Public Company Accounting Oversight Board is out with a list of 58 international audit firms that it has been unable to inspect for at least four years…There are eight Chinese firms and another eight based in Hong Kong…But for sheer numbers, Europe is the biggest scope of the problem.  Forty of the audit firms are based in the European Union…Italy, France and Sweden lead the European list with five uninspected audit firms each, followed by Belgium with four.”

EM: What Executives Really Need To Know About The “Emerging Markets Crisis”

EM: Behind A Pattern Of Global Unrest, A Middle Class In Revolt

Onshoring: Italian Gunmaker Brings Factory Jobs To U.S.

Ok, so Chiappa is doubling its U.S. workforce from 14 to 30 people but still…Onshoring.

Oil: Keystone Pipeline Faces New Obstacle In Nebraska

USA: WalMart Is Half-Heartedly Considering Not Fighting The Minimum Wage Increase

WA: Legal Pot To Generate $190 Million For Washington

Facebook Demographics growth 2011 2014Facebook Will Try To Buy Their Cool

When Mark Zuckerberg started Facebook, he decided that in order to eliminate the technical advantages enjoyed by Amazon, Google and Yahoo (what with their proprietary global computing systems), he would need to take an open-source approach to compete.  It seems to have worked, and saved them a lot of money in the process.  But here’s the interesting thing: even though Facebook’s profits are soaring, their demographics are getting older.  Their original freeloading teenage fan base doesn’t think Grandma being on Facebook is very cool.  So now Zuckerberg’s open-source, damn the man, freelove approach is working perfectly for the only growth strategy left: acquisitions.  “Facebook is a partnership company,” because it is no longer a “cool” company.  Then again, there’s not much to dislike about this.

Life After The Taper: Good GDP Is Actually Good, Investors Flee Emerging Market and Dividend-Paying Equities

GDP: “Gross domestic product — the broadest measure of economic activity — grew at a 3.2% annual pace in the fourth quarter…although it’s not indicative of gangbusters growth, the data seems to show the economy is moving forward modestly…Consumer spending picked up at a 3.3% annual pace, and U.S. exports to other countries outpaced imports.”  Furthermore, in a world where the Federal Reserve is tapering away from QE, strong GDP growth is “pretty impressive”: “as the massive fiscal drag diminishes, U.S. economic growth is accelerating.” And?  But?  Nope.  Its just good.

Emerging Markets: “Do not be surprised if the initial, post-FOMC statement slide in emerging-market currencies morphs into another, bigger rout in the days ahead.  Don’t be surprised, either, to see a backlash from governments in these countries, stoking international tensions and making everyone’s jobs at managing the current turmoil all the more difficult.”

Dividend-Paying Stock Funds: “Instead of prizing the funds as a complement to bonds as they did when long-term interest rates were flat lining, they are starting to rotate in other directions, in some instances to alternative funds using hybrid stock and fixed-income investment strategies.”

Chinese Consumption, Corruption and Cute Critters

“Moves to encourage consumer spending are part of a marathon effort by the Communist Party to transform China from a low-wage factory into a high-income creator of technology with self-sustaining economic growth.”  And yet, as President Xi Jinping cracks down on corruption “and perhaps maintain social stability as the [Chinese] wealth gap widens,” retail sales growth slowed from 14.3% to 12.8% in the first half of 2013; GDP growth may even see a 0.1 to 0.2% drop as politicians wean themselves off of lavish funerals and shark fin soup.  Apparently “the campaign could be positive for the economy in the long run” because something about confidence and trust or something.  Meanwhile, “in recent years there’s been a noticeable shift in Chinese attitudes…toward the protection of endangered, or just plain cute, species…aided by China’s transformation from an agrarian culture which views animals in utilitarian terms, to one in which a burgeoning middle class embraces pet ownership.”

The Post Office Kinda Wants To Get Into Shadow Banking

The USPS Inspector General has endorsed turning the post office into a micro-lending hub for the “nearly 68 million Americans — over one-quarter of U.S. households — who have limited or no access to financial services…Post offices could deliver the same services at a 90 percent discount, saving the average underserved household $2,000 a year and still providing the USPS with $8.9 billion in new annual profits.”

People Are Really Excited About Mexico These Days

Mexico boasts free-trade agreements with over 40 countries and a trade-to-GDP ratio — a common measure of economic openness — above 60 percent, surpassing the United States, Brazil, and even China.  And whereas oil once represented over 75 percent of Mexico’s exports, today it is manufactured goods that produce three out of every four export dollars.”  Furthermore, rising wages and energy costs in China are now competing with Mexico’s high productivity and proximity to the United States.  Mexico’s middle class is also growing, and now “comprises anywhere from 40 million to over 60 million [of] a population of 116 million.”

Wall Street’s “Emerging Frontier In Securitization”

“Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world.”  This article, amazingly, is from yesterday; not 2004.

myRA Already Off To A Great Start

In case you missed it, President Obama mentioned something about a new government sponsored “starter” retirement account called myRA in his State of the Union Address.  Turns out there’s also a stock with the ticker symbol MYRA.  It trades over-the-counter for $0.0001.  Someone bought ~1 million shares on January 17th, almost two weeks before the speech.  So.

Windows 8 Is A Flop.  What Is Microsoft’s Next Move?

This article spends a really long time hating on Windows 8, mostly for being a radical strategy “to force touch, force Metro, on every customer in the hope that they would see the benefits, then take to new touch-enabled PCs, and — if Microsoft was lucky — gravitate to its tablets as demand pushed developers into quickly creating a massive app market.”  That strategy has made some techies angry.  Microsoft’s only option at this point may be to abort mission and focus on their next product (Windows 9) which is basically what they did with Vista, but that may be harder to do in a world where Microsoft is competing with Android and iOS.

USA: Jobless Claims Rise More Than Expected

China: PMI Dips To Six-Month Low In January As New Orders Weaken

 

Tesla stockEmerging Markets: SKAM (South Korea And Mexico) And The Rest

Last week was rough for emerging markets: “The benchmark MSCI Emerging Market Index (.MSCIEF) dropped nearly 4 percent over the last five trading days, and after Wall Street’s dramatic selloff on Friday it is expected to fall further on Monday. Investors have pulled money out of emerging markets stocks funds in six of the last seven weeks, including a $422 million retreat in the week ended January 22.”  The Economist argues that even though the “rich world’s central bankers do not have much of a clue how to tame the beast they have created in the form of ultra-loose monetary policy,” the “doom-mongers are too pessimistic” for, more or less, one reason: the sell-off has been discriminating.  Whereas before, Brazil, Turkey, Argentina, Mexico and South Korea were all likely considered equal parts of the same “Emerging Markets” category, we should take notice of how they are splintering away from one another in terms of financial reforms and social upheaval.  The Financial Times agrees, and says “there are clear divisions emerging, and understanding which countries influence into each other more directly than others matters now more than ever.”  Brazil, for example, may be hit rather hard with both the tapering as well as China’s slowdown as much of its economy relies on basic material exports to China.  On the flip side of the coin are countries like South Korea and Mexico, whose “exporters earn revenue in dollars, reducing their exposure to volatility in local currencies.“  Speaking of Mexico, Finance Minister Luis Vadagaray believes the Mexican economy “will grow nearly four percent this year and is looking forward to attracting significant investment due to a string of economic reforms passed by President Enrique Pena Nieto.”  And as the Federal Reserve “steers policy based on only domestic economic considerations…the Fed is likely to trim its bond purchase program further at this week’s meeting.” But its hard to imagine they wouldn’t at least consider the global deflationary risks: “with inflation rates already worryingly low in the euro zone and uncomfortably so in the U.S., there’s a risk the emerging markets currency crisis will drag them lower still.  Labor costs in these crisis economies will fall as will import demand which will feed into global deflationary pressures.”

DOJ Would Like To Choke Out Online Shadow Lending

“Federal prosecutors are trying to thwart the easy access that predatory lenders and dubious online merchants have to Americans’ bank accounts…in the new initiative, called ‘Operation Choke Point’…As a growing number of states enact interest rate caps that effectively ban the loans, the lenders increasingly depend on the banks for their survival.  With the banks’ help, the lenders that typically work with a third-party payment processor that has an account at the banks are able, authorities say, to automatically deduct payments from customers’ checking accounts even in states where the loans are illegal…The more questionable the merchant, the greater fees Four Oaks stood to collect, prosecutors say.  Every time consumers spot an unauthorized withdrawal and request money back, the bank makes money to process the return.  And fees for processing returns, according to prosecutors, can dwarf the fees Four Oaks earned for processing the original withdrawals.”

Onshoring: Foxconn Chairman Says U.S. Is A “Must-Go Market”

“Taiwan’s Foxconn Technology Group, the major supplier of Apple Inc.’s iPhone and iPads, may build high-tech factories in the United States and low-cost plants in Indonesia as the appeal of ‘made in China’ fades into a burden.”

USA: That Jamie Dimon Raise

Income inequality is kind of a big deal these days (but not for the folks partying in Davos), and what better way to frame the discussion then a 74 percent raise for Jamie Dimon?  Financial Times likes it.  Reuters doesn’t.  This guy thinks the American one-percent are akin to Jews in Nazi Germany.  Move along.

USA: Tesla Stock Killed A Guy With A Ph.D. In Economics From Harvard

Official Wizard Of Walla Walla Prediction: Google is building a robot butler/services bot…

Check out the list of Google’s recent acquisitions and tell me I’m wrong.  Technologies purchased include security, facial recognition, package delivery, social prediction, deep neural networks, natural language processing, gesture recognition technology, humanoid robots, home automation and, as of yesterday, an artificial intelligence company dedicated to “machine learning and systems neuroscience.”

USA: New Home Sales Fall For Second Straight Month In December

“The Commerce Department said on Monday sales fell 7.0 percent to a seasonally adjusted annual rate of 414,000 units…Economists polled by Reuters had expected new home sales, which are measured when contracts are signed, to slow to a 457,000-unit pace in December.  The second straight month of declines in sales was likely payback after October’s outsized 14.9 percent increase and may have reflected some drag from cold weather that blanked most parts of the country last month.”

USA: Working Age Americans Make Up Majority Of Food Stamp Households

“Since 2009, more than 50 percent of U.S. households receiving food stamps have been adults ages 18 to 59, according to the Census Bureau’s Current Population Survey.  That compares to 1998, when the working-age share of food stamp households was at a low of 44 percent, according to researchers at the University of Kentucky.  The food stamp program now covers 1 in 7 Americans.”

dude abidesS&P Ratings: Well, That’s Just Like…Your Opinion, Man.

Standard & Poors is sticking it to the Europeans and giving them a more American AA rating: “In our opinion, the overall creditworthiness of the now 28 European Union member states has declined.”  Standard & Poors is apparently concerned about the Eurozone’s budgetary negotiations and financing, however many European officials are pointing out “that the EU has no debt or deficit to speak of and its budget is a standalone entity financed by 28 countries, making it one of the most stable institutions and most reliable borrowers in the world.”  Which makes you wonder…the EU currently has a budget for the next 7 years, approved and backed by all 28 members, 4 of which are in the Top 10 largest economies in the world.  That is, of course, if you don’t include the, um, European Union.  The United States is celebrating the first time in about 30 years that is has been able to get 2 member states (parties) to agree on a budget, and we are, I guess, the same rating.  This all seems…misguided?  Markets don’t seem to care, anyway, so.

The First Step Is Admitting You Are Powerless: Bank of Japan Edition

The Bank of Japan kept its monetary policy unchanged this morning and “expects Japan’s economy to continue a moderate recovery trend,” furthermore they don’t expect their sales tax increase to kill the economy (great!) and they are pretty excited about the United States economic momentum.  Meanwhile, Japan shows there’s no need to fear The Taper because let’s face it, relapse is entirely possible.  Recall Japan’s history with monetary policy and zero lower bound: back in 2005, BOJ Governor Toshihiko Fukui unleashed The Taper on Japan and a year later he raised rates above zero.  The economy did not respond well.  The first thing the next Governor did was resurrect QE and so forth.  Apparently this is all a “lesson from Tokyo that it’s a lot easier to slash rates to zero and beyond than return them to normal.”  Moreover, Japan is a perfect example of how “entire economies tend to get addicted to free money.”  Hmm.  This is not very reassuring?  It’s kind of like telling an addict it’s easier to just keep shooting heroin instead of get sober: “so go ahead and brace for a brutal few years of Fed normalization and financial sobriety.  More likely, Yellen & Co. will be forced to leave the bar open indefinitely.”

Happy Friday: FARK.com’s Favorite Business Headlines of the Year

Borderline inappropriate.  100% hilarious.

USA: US Growth Revised Higher, Economy on Firmer Footing

Commerce Department: Q3 GDP revised higher to 4.1%.  Business spending revised from 3.5% to 4.8%; consumer spending revised up 0.6%

USA: Trees Grow on Money

Here’s an interesting derivative indication of consumer spending during the holidays: “Over the three weeks since Thanksgiving, tree sellers reported sales were up an average of 9% above year earlier levels.  That was well above the 5% average for those three weeks in the survey’s 11 year history.”

USA: Leading Indicators Suggest Economic Pickup in 2014

Conference Board: leading index increased 0.8% last month, fifth straight month of gains.

Global: How Real Income Stacks Up Around the World

The Organization for Economic Cooperation and Development (OECD) have a good graph on how the purchasing power, or real income, per capita has changed between 2008 and 2011 for different countries.  Interesting observations: the US dropped 2.2%, Germany increased 5.5% and the UK fell 10%.