GDP vs earningsXhoursXpayrolls

The Whites Of Larry Summers’ Eyes

“The vast US interest rate futures market now reflects odds of 65 per cent that the policy makers will shift borrowing costs higher by June.  That is up from about odds of 40 per cent earlier this month…’Rates are way too low and investors have made a mistake in thinking the Fed would tighten policy at the end of this year or in 2016.’”  Matt Busigin looks at the jobs report from last Friday and says goodbye to the new normal: “Nominal GDP, as estimated by January’s employment report (i.e. average weekly hours X average hourly earnings X payrolls), is now running at the fastest rate (5.18% y/y) since 2006.  For January, that number is 8.35% annualized.  The deflationary scare is just that — a scare.”  Meanwhile, Larry Summers is trembling (alt): “The core consumer price index has averaged 1.1 per cent over the past six months…Perhaps most troubling: market indications suggest inflation is more likely to fall than rise…I cannot recall a moment when the gap between what the markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large…the Fed could inject much needed confidence in the economy today and minimise future risks by announcing and following a strategy of not raising rates until it sees the whites of inflation’s eyes.”  So that’s where we’re at now: “what is inflation (headline, core and expected) doing?” is the question on everyone’s mind.  Meanwhile, an Economist journalist has a theory about lackluster wage growth: “At the end of December 2013, Congress refused to reauthorise legislation that provided very long-term benefits to the unemployed…As people lost benefits, so they were willing to accept lower wages…Now that a year has passed since the reform of the benefits system, its effect may be wearing off.  People who shifted into low-wage jobs may have built up some experience (and some courage), and may now be asking for wage rises.”  Meanwhile, James Pethokoukis says there was some “weird stuff” in the jobs report: “As good as the January jobs report was…official GDP growth wasn’t that hot as 2014 came to a close…Maybe the technology optimists are right, and economic metrics made for a wheat and steel economy are increasingly inadequate for a digital economy.”  Furthermore, there was some divergence in wage growth between managers and all workers, which he says is “more evidence of an ‘average is over’ economy where high- and low-skills jobs are growing, but not those in the middle thanks to automation and globalization.  Only tech-savvy workers and managers see steadily higher wages.”  Speaking of managers’ wages, meet HourlyNerd: the Uber of business consulting.  “You get access to really smart people without having to make an annual commitment and pay benefits.”  Also, here’s something interesting to consider: Teach for America is experiencing a sudden decline in applications.  “In the shadow of the recession, college graduates are moving away from public and service-oriented work and gravitating towards professions they perceive as more stable and financially sustainable.”


The Fruits Of Production, Revisited

“The near 50 per cent fall in oil prices since mid-June cannot be solely explained by changes in consumption and production (alt), according to the Bank for International Settlements, which says heavy trading on commodity futures markets has also played a part…daily futures volume in oil has risen from 3.4 times global demand in 2005, when the International Petroleum Exchange went electronic, to 17 times at the end of 2014 and has ratcheted up even further to over 20 times since the beginning of the year.”  Furthermore, “the indebtedness of energy companies (“a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets”) combined with a new operating environment when it comes to the trading of swaps and bonds appears to have reinforced the slippery decline in oil prices.”  Izzy Kaminska isn’t too sure: “while we’re not trying to suggest that high sector indebtedness isn’t a problem, it’s [just] a very different sort of financialisation effect — and one that doesn’t necessarily make sense on cause and effect grounds.”


USA: Strong Dollar → Higher Capital Requirements?


EU: Alan Greenspan Is Pretty Sure Europe Was Joking About The Euro

Meanwhile, it’s very possible that Europe really was joking about the euro.

Also, He Who Shall Not Be Named is recruiting Italians.


USA: Why Google And Others Are Excited About Selling Driverless Cars


WM: Leaked Documents Reveal How Swiss Banks Helped Clients Avoid Taxes


WM: Rumors That Goldman Would Like To Double Down On The Whole “Most-Hated” Thing


What: Ukraine’s Currency Just Collapsed 50 Percent In Two Days


UncertaintyGetting Cozy With Slow Expansion, Hedge Fund Landlords, Fannie And Freddie

Some economists are starting to point at the dragging recovery and current business cycle expansion as getting a bit long in the tooth.  “Although the current expansion is roughly the same age as that of the post-war average, it is young when compared against the expansions of the Great Moderation period.”  Some believe that “recoveries following housing-bust-driven contractions…tend to be long-lived,” suggesting that “economic growth in the US and the UK has room to accelerate.”  The flip side to that argument is this: “the latest financial crisis and recession happened in the middle of already-weird (i.e. stagnant) times for the economies of the developed world.”  Furthermore, “given these trends, the danger is that with the recovery proceeding at such a painfully shallow slope, some of the damage to the economy’s productive potential becomes permanent or semi-permanent.”  Speaking of permanent (psychological) damage, hedge funds are now our saviors: “lenders are selling pools of soured mortgages as they face new regulations that make bad debt more expensive to hold.  Banks sold $34.7 billion in nonperforming loans last year, up from $13.1 billion in 2012.”  The nonperforming loans are sold at a significant discount to hedge funds and other smaller private firms, because A) Jamie Dimon is done with the pain, and B) “They’re a lot more flexible than a bank…and they can basically set their own rules,” said one man who friends presumably would describe as being “optimistic.”  Meanwhile, there’s been a lot of activity on Capitol Hill (alt) recently re: Fannie and Freddie.  While unlikely to gain much support in the Republican-led House, Representative Maxine Waters (D-CA) believes “Fannie Mae and Freddie Mac’s return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether (they) need any reform at all.”

Citigroup And Bank Of America: Maybe Experiencing Jamie Dimon-Level Headaches

The Federal Reserve announced yesterday they have “rejected the capital plans of five of the 30 large banks (alt), including Citi, as well as the US units of HSBC, Royal Bank of Scotland and Santander.  Among the 25 that had their capital plans approved, Goldman Sachs and Bank of America lowered their initial capital requests after last week’s first-round stress tests in order to secure the Fed’s backing.”  Despite having passed the Fed’s “quantitative” stress tests last week, the Fed’s objections to capital plans were based on “‘qualitative’ measures, which include banks appropriately addressing potential risks, the strength of their capital planning process such as risk management practices, and corporate governance issues.”  What they’re talking about here is “the challenge of finding solid lending clients in a country where the line between big business and political cronyism can become blurred.”  Meanwhile, Bank of America has settled a mortgage backed securities dispute with the Federal Housing Finance Agency for a mere $9.3bn (says Jamie Dimon): “Bank of America said that it will make cash payments of roughly $6.3 billion and also purchase securities from Fannie and Freddie worth more than $3 billion.”

IMF Bails Out Ukraine; EU Says “Securitize It”; Bertrand Badré Says “Criticize It”

The IMF has pledged a $14bn-$18bn rescue package for Ukraine (alt): “[Ukrainian] foreign exchange reserves have fallen to barely two months’ import cover, and the finance ministry warned this week it expected the economy to contract by at least 3 per cent this year…total international support [is] set to amount to about $27bn over the next two years…the IMF package comes with significant strings attached.  They include Ukraine moving to a flexible exchange rate and away from a currency peg that long kept the national currency, the hryvnia, pegged to the dollar at an artificially high level.  A second condition is fiscal tightening, with a target of reducing the budget deficit by about 2.5 percentage points of gross domestic product by 2016…Kiev announced on Wednesday that household gas prices would rise by 50 percent from May 1.    Also, “the European Union will look for ways other than the region’s banks to finance infrastructure projects and invest in start-up companies, according to plans the EU published on Thursday…some EU laws will be changed to ease curbs on what pension funds, which total 2.5 trillion euros in the EU, can invest in.  The plan will also try to nurture new forms of finance, such as crowdfunding or online peer-to-peer lending.  The EU plans will start to rehabilitate securitization, the process of bundling loans into a bond.”  All of this “to help provide the trillion euros needed for new telecom, transport and energy networks by 2020.”  Meanwhile, Bertrand Badré, Director and CFO of the World Bank Group, says “infrastructure investment requires more than money…governments should pay more attention to the selection, quality, and management of infrastructure projects, as well as to the quality of the underlying investment climate.”  Meanwhile, here’s a Q&A with the former head of the IMF, explaining why the dollar remains the reserve currency and he doesn’t see that changing anytime soon.

USA: Activist Investors Often Leak Their Plans To A Favored Few (Alt)

“For a new breed of ‘activist’ investors, tipping other investors is part of the playbook…in doing so, they build alliances for their planned campaigns at the target companies.”  One corporate lawyer/activist destroyer sees it like this “They are building a constituency…[they] are using, in effect, the pop in the stock price to help pay these people for being on their side in a coming battle against the target company.”  One activist investor/corporate raider see it like this: “I’m happy to give people my thoughts on things I own and I’m happy to learn about how other people think.”  Also, he’d like to add that he only pursues “conversations that are permissible under the rules.”

FantasticHeadline: Now You Can Use Bitcoin To Buy A Smart Rifle



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)

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.”

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

Export Destinations of RussiaTrade Sanctions Are Totally Not Cool On The Playground

Here’s an idea being kicked around: “In response to Russia’s aggression in Ukraine, Europe could adopt the Magnitsky principle by making life unpleasant for Putin’s oligarch friends, who have turned Europe into their playground.” (e.g. Cyprus is the Cayman Islands of Russia)  But that could be hard, since everyone seems to really like the playground: “Russia is the EU’s third-biggest trading partner after the U.S. and China.  Trade in goods totaled a record 336 billion euros ($462 billion) in 2012, more than 10 times the volume between Russia and the U.S.”, and in case you didn’t know, “Russia is the EU’s single-biggest supplier of energy.”  Some are using that fact to support lifting the export ban on American natural gas: “greater access to U.S. supplies would blunt the ability of Russia to use energy as a weapon.”  “The EU is also Russia’s largest investor, according to the European Commission, which estimates that 75% of all foreign direct investment in the former Communist country comes from EU member states.”  HBR has a great piece on visualizing the economic ties between Russia, Ukraine and Europe: “Ukraine’s economic tug-of-war mirrors the political and cultural balancing act it faces in deciding how to align itself between Russia and Europe.  As an economic matter, it cannot give up access to one without needing much more from the other.”  Meanwhile, “the European Union says it is freezing the financial assets in Europe of 18 people held responsible for misusing state funds in Ukraine.”

Political Tit-For-Tat

“On Tuesday, the Obama administration released an interesting if dead-on-arrival 2015 budget.  The big message is that the White House wants to bolster support for the poor and middle class, paying for such measures with increased taxes on high-income households.”  And while the White House budget proposal calls for shifting “away from harmful short-term deficit reduction by replacing remaining sequestration cuts with smart, balanced long-term deficit reduction…Mr. Obama’s budget assumes that there will be no recession for the next decade — indeed, he sees a moderate but strengthening recovery.  History suggests those might be the most unrealistic numbers in the document.”  The budget also directs the U.S. Treasury to “assess the future of currency,” specifically in regards to the costs/benefit of making pennies and nickels at $0.08 and $0.09 per unit.  “This budget isn’t a serious document, it’s a campaign brochure,” said House Budget Committee Chairman Paul Ryan, a day after releasing a campaign brochure of his own: a 204-page report concluding “that the expansion of anti-poverty programs, which number more than 90 and cost almost $800 billion last year, have done little to achieve President Johnson’s Great Society goals.  The 17.3% poverty rate in 1965 is not much different from today’s 15%.”  Unfortunately for Ryan, the economists/researchers he cites in his brochure don’t seem to remember saying anything like that.  Also, here’s another deficit chart: this one really puts the “The deficit has been shrinking under Obama!” claim in perspective.

Scared Of Heights And The Relentless Bid

Barry Ritholtz argues a somewhat obvious yet necessary point about market highs: “one of the most bullish things that can happen to any market is for it to reach new multi-year highs.”  Meanwhile, Josh Brown has a theory behind the market’s “relentless bid” (i.e. buying equities simply to put money to work coupled with an agnostic attitude towards the news of the day): “The nation’s largest traditional advisory firms have accelerated their push toward fee-based management and away from transactional brokerage.  This has a huge impact on how the money itself is managed and this in turn greatly affects the behavior of the stock market.”  Also, even if you are terrible at timing the market and invest only at market peaks, you would still generate a pretty nice return.

EM: “Growth Is Slowing” Is Not A Valid Reason To Dump Emerging Market Stocks

USA: SEC Can Explain Why It’s So Good At Selling Stocks

I’ve been ignoring this for a few days but it seems to be picking up speed so here goes: a lot of people are talking about this paper titled “Stock Picking Skills of SEC Employees” which concludes that some SEC employees are making a profit by selling stock in companies they are about to investigate (keyword: about).  Here’s a guy who thinks the whole thing is bogus.  I’m moving on.

GOOG: Welcome To Googletown

FB: Facebook Wants In On The Drones Game

Market Declines and Recoveries Since WWIIUkraine: “Symbolic Battleground” Probably Doesn’t Get You A Great Credit Rating

The Russian occupation of Crimea is taking its toll on the emerging economy: “Moscow stocks have endured the worst bloodbath so far, with a 12 percent plunge on Monday…the rouble has plunged to record lows, forcing the central bank to raise interest rates by 1.5 percentage points.”  Furthermore, “losses will escalate if Western nations hit Moscow with economic sanctions.  [Secretary of State John Kerry] has named asset freezes, visa bans and trade isolation as possible measures.”  (Russian markets are rebounding this morning, however, as Putin appears to be reconsidering violence in Ukraine)  Here’s something to consider: the state-owned gas company Gazprom is projecting increased European dependence on Russian gas supplies, but there’s a kicker: most of that supply flows through a Ukrainian pipeline.  Mohamed El-Erian says that while Ukraine may not be systemically important to the global economy, it may become a symbolic battleground for the East vs. West geopolitical rift which has been surfacing in other parts of the world as well (e.g. Syria).  All this comes at pretty much the worst timing: “Over $2 billion has fled Russian equity funds this year, Morgan Stanley estimates, after 2013 outflows of $4.2 billion.”  Here are 5 things (really 3 things: #s 1-3 are just different examples of why asset allocation is a good idea) investors need to know about the Ukraine crisis: 1-3) With proper diversification and asset allocation in your portfolio, you should be prepared for something like this (e.g. holding U.S. Treasuries even after a year like 2013, holding natural resources and gold as “conflict-insurance”), 4) Use selloffs as an opportunity to buy on the cheap (e.g. “the Russian market overall is on just five times forecast per-share earnings”) and 5) U.S. equities could be unaffected by this for several different reasons (how do this affect the taper schedule? Investors usually flee to the $, etc.).  Also, in a study of “how U.S. stocks reacted since World War II to anything ranging from wars, near wars, assassinations, assassination attempts, terrorist attacks and financial collapses,” the median % drop in the stock market is about 5, and recovery typically takes about 14 days.  That being said, “a U.S. trade boycott of Russia…could do some damage to Washington exporters including Boeing Co. and seafood producers…Russia ranks No. 14 among nations receiving exports from Washington state, importing $1.5 billion in goods in 2003, of which $1.2 billion was aircraft.”  Speaking of sanctions, Sergei Glazyev, “who is often used by authorities to stake out a hardline stance but does not make policy, was cited by RIA news agency as saying Moscow could recommend that all holders of U.S. treasuries sell them if Washington freezes the U.S. accounts of Russian businesses and individuals.”  Also: Russian companies shouldn’t pay back their U.S. bank loans.  Also: he feels pretty good about coming out of this thing with a “big profit to ourselves.”  Meanwhile, Putin does care about bond yields; doesn’t care about Western Leaders showing up to his G8 summit.

On The Radar: Municipal Pensions

The City of Philadelphia has reached a $1.86bn deal with UIL Holdings Corporation over the sale of Philadelphia Gas Works (PGW): “If the deal is approved, the city will use the sale money to pay off PGW’s bond obligations and liabilities — including fully funding the PGW pension plan.  [Philadelphia Mayor Michael Nutter] said he expects another $424 to $631 million to remain left over.  That money would be put towards funding the city employee pension fund, which is currently less than 50 percent funded.”  Meanwhile, Detroit’s new number: $85 million.  And this one includes casino revenues.

JPN: With Too Few Borrowers, Japan’s Regional Banks Are Urged To Merge

“Regional banks are largely tied to the fortunes of their local prefectures.  Aside from Tokyo, Osaka and a few others, the outlook for the working-age population — and thus the prospect for loan demand — is grim…Twenty-three Japanese banks melded into today’s four major banking groups over the tumultuous 15 years of post-bubble economic and financial crisis through 2005.  Regional banks, which extend roughly half of Japan’s $4 trillion outstanding bank loans, have largely been spared the knife so far.”

MEX: Citigroup Affiliate’s Troubles Multiply As Money-Laundering Subpoenas Follow Fraud

Banamex USA, a Mexican based bank affiliated with Citigroup, is at the root of a $400mn fraud investigation, as well as a separate money-laundering investigation.  “Mexico accounts for some 13 percent of Citigroup’s total revenue.”

USA: Can Listings Be Used To Predict Home Prices?

“As economists blend the standard listing information with other data about sellers, they are vastly improving their predictions for what final sales prices will be.  This could potentially help home buyers, real-estate agents and home builders — or anyone betting on housing stocks — get an earlier read on where prices are going.”  So we’re trying to make real estate easier to day trade.  Also, I think the home price index is called Trulia?

Gross: Bill Gross’ Dartboard Has A Lot Of Rings

Fed: How Unconventional Are Large-Scale Asset Purchases?

For some reason the Fed would like us to believe that QE is actually pretty conventional, you guys.

USA: Modell’s CEO Impersonated Dick’s Exec In Spy Scheme

China: China Now Biggest Driver Of Gold Prices

ImageWindows Into Global Growth Risk: Diverging Inflation, Emerging Markets, The Third Industrial Revolution And Little Fishies With Feet

The OECD is warning that “sweeping reforms are urgently needed to boost productivity and lower barriers to trade if the world is to avoid a new era of slow growth and stubbornly high unemployment.”  Countries with aging populations (eg. Germany, Japan, South Korea) are encouraged to attract more women to the workforce, while others (UK, Australia, Canada, US) should focus on improved access to education, lowering healthcare costs and lifting barriers to foreign investment.  Meanwhile, inflation in the United States is diverging between goods and services: “goods inflation is exposed to global trade” (eg. slowdown in emerging markets and China forces commodities prices down, imported goods down etc.) whereas “services inflation is highly exposed to domestic housing and the cost of domestic labor.”  So while services inflation has stabilized around 2.5%, we probably won’t see any significant headline inflation gains until global growth accelerates.  Also, Michael Spence argues that investors are overshooting the downward “correction” in emerging markets and that “downside risks are becoming the consensus forecast.”  He defends China and other emerging markets with a current-account surplus, suggesting they “will experience a transitional growth slowdown but will not be derailed by shifts in monetary policy in the West, with high growth rates returning in the course of the coming year.”  Furthermore, investors should really start paying attention to the beginning of a vast middle-income transition to take place over the next 20 years; Kandeh Yumkella argues such a transition will be focused around the integration of renewable energy sources and Internet connectivity (“The Third Industrial Revolution”).  Finally, don’t worry be happy!  Gloominess about the economy is a choice: “just as little fishies evolved out of the oceans, grew feet, and went to work on Wall Street, our economy is evolving now and we are creatively adding new capabilities.”

Non-Banks Making Strides In Online Banking; Spanish Bank Buys Portland, OR Online Banking Startup

“As banks recover from the downturn, non-banks are taking advantage by proceeding aggressively with digital innovations and capturing more and more of the banking value chain.  Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020…To be a profitable sector, banks cannot simply rely on providing accounts and access to funds.  The future of the sector will depend on its ability to provide services that help customers save and better manage money in their everyday lives.”  Meanwhile, Spanish bank BBVA has purchased the Portland,OR-based online banking services startup Simple.  “Simple will remain a separate brand within BBVA and will retain its Portland headquarters.  The deal comes with an additional, undisclosed financial commitment to expand the operation, and Simple said it is seeking bigger offices in Portland to accommodate anticipated hiring.”  Also, Royal Bank of Scotland Group is pulling out of investment banking and the United States to focus on “U.K. retail, business and corporate banking segments, while also allowing for significant cost cuts and reinvestment in new technology.”

Global: Plain Vanilla Strikes Again

“Vanguard Group published an interesting study last month on the phenomenon of ‘go anywhere’ funds, whose managers are freed from the usual constraints of style, asset class and so forth…From 1998 through mid-2013, the majority underperformed a plain-vanilla passive portfolio of 60% stocks and 40% bonds.”  Meanwhile, hedge funds are testing the advertising branding waters.

EU: Opposition Leaders Sign Deal With Yanukovych To End Ukraine Crisis

USA: The Little CDO On The Prairie

Here’s a really fun to read history of one historical example (other than the 2008 subprime mortgage crisis) in American finance where bundling securities led to financial ruin.  In other news, Wall Street is charging ahead with rental property based mortgage-backed securities.

Bitcoin: Winkdex

It’s here, finally.  Thank you Winklevoss Twins.