Data Dependency Feels Bad, And Then It Feels Good, And Then It Feels Bad, And…

“This week’s sell off might have been because too many investors believed bond yields would only go down; crowded positioning left the market vulnerable to small shifts in sentiment.”  Interesting to consider that “when fears about a eurozone break-up rise, German yields generally fall;” therefore, higher yields = less worry about Greece?  Maybe not: “right now (read: Thursday) the market is in a state of shock…A lot of people are staying clear, and that makes the market less liquid, which is helping to exaggerate market moves…the moves have reversed so sharply that [European yields] are back where they were before the stimulus was announced…’In one week we had a total unwinding of all QE-related trades.’”  Speaking of liquidity, Mohamed El-Erian says “tighter regulations and less patient shareholders have restricted the ability of broker-dealers to deploy their balance sheets counter-cyclically.  As such, they have limited appetite when it comes to accumulating inventory in the event that a large chunk of the investor base decides to go the other way.  The result has been a series of sudden out-sized price moves in quite a range of markets, from sovereign bonds to foreign exchange, emerging markets, and high-yield corporates.”  So as you can probably tell, things got a bit panicky this week; we even had a moment with Janet Yellen calling stocks overvalued and prices stretched and all that (very déjà vu).  To be fair, the panic was coming from bond markets, which have this strange ability to convince people of more things than the stock market.  But all of that is going away fast: the April jobs report came out this morning and investors are all like, “oohh…reassuring.”  🙂  “Payrolls rose 223,000 in April, following a 85,000 gain in March…The unemployment rate slid further to 5.4 per cent…more Americans entered the labour force, pushing up the participation rate to 62.8 per cent from 62.7 per cent the previous month.”  “The standard story that economists have been telling is that this is just another messy winter with worse-than-usual weather…But there’s a ‘show me’ dimension to that conclusion…So what the new jobs numbers offer is relief that the crummy first-quarter data was indeed an aberration, not a new trend.  At the same time, they are soft enough that they include no real evidence of an acceleration into a new, stepped-up rate of growth” (read: acceleration into Fed tightening).  Here are the charts.  Also, German bund yields have dropped back down to 0.53bps, and you shouldn’t feel bad if you missed out on the Gross Short of a Lifetime because apparently Bill Gross missed it as well.


China: Pinky Swears No QE


WM: Risk ≠ Volatility, Maybe


WM: Case For Indexing In Bonds Is Far Less Clear Than It Is For Stocks


What: The “Cylon Detection” System Finds 10 To 20 Spoofers A Day, On Average


WaitWhat: You Know That All Startup Founders Dropped Out Of College And Hate English, Right?



Geography: Categorical Convenience And Tourist Capital

The geographical reach of listed companies is a more important driver of index returns than ever before, according to research by the EDHEC-Risk Institute…Between 2003 and 2013, the report found that the S&P 500’s exposure to regions outside the Americas grew from 19% to 27%.  For the STOXX Europe 600, exposure to non-European regions grew from 36% to 45%…The total market cap of companies exposed to foreign markets rose dramatically in the 10 years to the end of June 2013.  In the S&P 500, this figure grew from $2.9 trillion to $5.6 trillion…’It would be a shame if asset allocators compromised their asset allocation policy, which is often based on macro-economic scenarios that use regional dimensions, through poor evaluation of the geographic reality of their portfolio or benchmark.’”  Meanwhile, Mohamed El-Erian thinks “the concept of an ‘emerging markets asset class’ may no longer be a sufficiently useful and accurate catch-all classification for investors.”  Furthermore, “macro decisions to allocate or withdraw capital from EM — particularly through index and index-like vehicles — tend to be significant drivers of return, volatility and correlation behaviors, which too often leads to valuations that are decoupled from individual fundamentals…this phenomenon is amplified as the market influence of a relatively small base of dedicated investors is subject to the vagaries of less well-informed ‘crossover’ funds (that is ‘tourist’ capital)…Today, this means recognizing that EM is in a technical phase of unsettling volatility.”  Meanwhile, Ben Bernanke thinks EM vendors may want to stock up on pretzel and bratwurst: “An important source of the global saving glut I identified before the financial crisis was the excess savings of emerging market economies (especially Asia) and of oil producers.  The good news is that, for reasons ranging from China’s efforts to reduce its dependence on exports to the decline in global oil prices, the current account surpluses of this group of countries, though still large, look to be on a downward trend.  Offsetting this decline, however, has been a significant increase in the collective current account balance of the euro zone.  In particular, Germany, with population and GDP each less than a quarter that of the United States, has become the world’s largest net exporter of both goods and financial capital.”


What You Google Is All There Is

“As the Internet has become a nearly ubiquitous resource for acquiring knowledge about the world, questions have arisen about its potential effects on cognition.  Here we show that searching the Internet for explanatory knowledge creates an illusion whereby people mistake access to information for their own personal understanding of the information…Searching for information online leads to an increase in self-assessed knowledge as people mistakenly think they have more knowledge ‘in the head.’”  Meanwhile, “jumping to conclusions on the basis of limited evidence is so important to an understanding of intuitive thinking, and comes up so often in this book, that I will use a cumbersome abbreviation for it: WYSIATI, which stands for what you see is all there is…WYSIATI facilitates the achievement of coherence and of the cognitive ease that causes us to accept a statement as true.  It explains why we can think fast, and how we are able to make sense of partial information in a complex world.  Much of the time, the coherent story we put together is close enough to reality to support reasonable action.  However, [WYSIATI helps] explain a long and diverse list of biases of judgment and choice.”


USA: April Employment Report Will Be Key To Fed


EU: Spain Joins Negative Yield Club


WM: “Constraints Imposed By Tax-Efficient Asset Management Do Not Have Significant Performance Consequences”

Rouhani tweet Iran nuclear deal

Negative Yields And The Current Strength In The U.S. Labor Market

“If financial theory is grounded in one principal, it’s the ‘time value of money,’ or the idea that individuals prefer consumption today over consumption in the more uncertain future…Currently 25% of the European sovereign bond market is trading with a negative nominal yield…Why would anyone pay to lend money?  There are several reasons.”  1) “you expect a significant decline in prices,” and 2) buy low, sell to the ECB.  “What does a persistent regime of negative yield mean for investors?”  1) “income-producing stocks in Europe have a natural edge,” 2) strong dollar, and 3) “they are suppressing U.S. rates.  It’s hard to reconcile a sub-2% U.S. 10-year yield with the current strength in the U.S. labor market.”  …


Black Swans Shocking Headlines And The Current Weakness In The U.S. Labor Market

“US companies scaled back hiring sharply last month, adding to evidence that the economy has lost momentum since the start of the year….Payrolls increased by 126,000 in March (alt), well below Wall Street expectations (244,000) and snapping a 12-month spell of gains above 200,000…The previous two months’ readings were also revised down by a net 69,000, while the unemployment rate was unchanged at 5.5 per cent…The data pushed the dollar down to the $1.10 mark against the euro, while the yield on the 10-year note fell 8 basis points to 1.84 per cent…None of the 98 economists polled by Bloomberg had forecast such a low figure.”  “Now you’ll see economists ratcheting down their job creation expectations for next month, next quarter, the full year etc.  They’ll also be pushing back their expectations for when the Fed will first raise interest rates from June to September or even sometime in 2016.  The one thing they won’t be doing is ending the forecasting nonsense.”  Meanwhile: Are The Best Days Of The Recovery Behind Us?  Why Are Wages Growing Slowly Despite McDonald’s, Wal-Mart Raises?  Bottom Line: Ouch.


Teraflops Of Tweets And Jay-Z

“Scientists at the firm, Two Sigma Investments LLC, program itcs machines to cull torrents of information from sources like newswires, earnings reports, weather bulletins and Twitter…the firm has more than 100 teraflops of power — more than 100 trillion calculations a second — and more than 11 petabytes of storage, the equivalent of five times the data stored in all U.S. academic libraries.” Meanwhile, “people lost maybe as much as a few hundred thousand dollars because, for a brief stupid minute, they thought Tesla was introducing…a watch?  No, of course they didn’t.  They thought Tesla was introducing a thing called the Model W, and they didn’t read any further than the headline, and they bought Tesla stock hoping the Model W, whatever it was, would be a huge success…And when I say ‘people’ I mean mostly ‘algorithms,’ which are faster and more literal than humans.”  Meanwhile, “shares in music streamer Aspiro, a majority of which was bought earlier this month by hip-hop star Jay-Z, soared on Tuesday to as much as 11 times the price at which remaining shares will be acquired in a compulsory squeeze-out only days away…buyers [look] set to face losses of some 90 percent…’There are reasons to suppose that some have not noticed the communication around the bid.’


Global: Krugman On Summers And Bernanke


Oil: Iran Nuclear Talks End With “Framework” (Alt)

Oil dipped 5% on the news.

Also, here’s a neat gif of Warren Buffett making a lot of money.


WM: Bond Traders Switching To Currencies?

“While the amount of marketable Treasuries outstanding has almost tripled since 2007 to $12.5 trillion at the end of last year, trading has fallen 11 percent.”


WM: ETFs Are All About Active Sector Selection

Airbnb Bets On Boom In Cuba Tourism

retail sales vs consumer confidence China Mar2015Retail sales vs consumer confidence USA Mar2015

Reinvesting The Dividend

Franklin Templeton analysts say “consumers have spent only about 25% of the drop in energy prices and the rest has gone into savings and paying down debt.”  They offer two reasons for why cheaper fuel hasn’t spurred consumer spending: 1) “people think the cheap gas is temporary,” and 2) “an usually cold and snowy” blah blah blah.  Meanwhile, “US drivers consumed the most petrol for the month of January in seven years…totalled 8.7m barrels a day in January, up 6.2 per cent from the same month a year earlier…about 9.5 per cent of estimated world liquid fuels consumption for the month…US traffic volumes had grown 4.9 per cent on the year in January to 237.3bn vehicle miles.”  Meanwhile, Toyota’s North America CEO says “March auto sales are strong as buyers continue to favor light trucks over cars…sales volume is almost 55 percent truck and SUV…In February, industry car sales fell 1.4 percent as light truck sales were up 12 percent.  Larger SUVs had an especially strong month.”


“China’s Stock Market Sure Looks Like A Bubble”

People are pretty worried about Chinese equities: “Now they’re nowhere near their 2007 highs — in fact, they’re barely halfway there — but Chinese stocks are still looking plenty frothy right now…[They’ve] been the world’s best performing asset class the last nine months, up almost 80 percent.  And that’s despite the fact that China’s growth has slowed to a 20-year low and its industrial profits just fell 8 percent.  Why are stocks up so much if the economy isn’t?”  (Why why why)  Meanwhile, one analyst says that “consumer confidence has surged to its highest level in recent years, a highly unusual development considering the weak growth environment,” which is a pretty good point to be making about Developed Markets–oh, nevermind.  To be fair, this should raise a brow or two: “the securities companies that have facilitated the stock market boom are capitalizing on their own ballooning share prices by issuing huge amounts of new stock, raising billions in the process…Increasingly, [Chinese investors] are turning to margin financing, or borrowing funds from brokerage firms to buy stocks — raising the risk of even steeper losses for ordinary investors if the boom turns out to bust.”  Meanwhile, Reuters is picking up on rumors about Chinese deposit insurance to arrive in May.


IBM: Will Invest $3Bn Over 4 Years Towards “Internet Of Things” Division


USA: Housing Share Of GDP Holds Constant

A Stunning Number Of People Find Work Without Even Looking For It

largest restaurant and retail employers in US


A modest bidding war has broken out among the retailers who hire from the bottom of the labor pool, buoyed in part by improving sales…Turnover in the retail sector has been steadily rising and now stands at 5 percent a month.  At this rate, if Walmart’s workforce were to hold to the national average, over a full year it would be losing 60 percent of its sales staff.”  Meanwhile, “employers added 295,000 jobs in [February] (alt), up from an average gain of 266,000 over the previous 12 months and comfortably above Wall Street expectations…The rate of unemployment fell from 5.7 per cent to 5.5 per cent…Pay growth was muted, however, with average hourly earnings rising by 3 cents, leaving earnings up 2 per cent on the year…The [participation rate] was little changed at 62.8 per cent.”  The dollar is trading higher on the news; EUR/USD exchange rate is now 1.08.  Meanwhile, “since December, 22 major foreign currencies have declined an average of 4.5 percent against the [$US].  A cheaper currency makes exports less expensive and thus more attractive to foreign buyers.  A devalued currency also drives up import prices, which discourage domestic consumers from purchasing foreign goods…Call it currency manipulation or domestic economic policy…almost every country in the world want their money to be cheaper.”  Keyword: almost.  “The renminbi has weakened against the dollar by about 4 per cent since October, a meaningful change in a semi-fixed exchange rate regime…This has been driven mainly by a reversal in private sector capital flows, which have traditionally been in large surplus but are now in deficit…The capital outflow has also tightened the domestic money markets, a very unwelcome development for the People’s Bank of China given the powerful contractionary forces that have taken hold in the domestic economy…Although the renminbi has fallen against the dollar, the semi-fixed band has resulted in China’s overall effective exchange rate rising by 11 per cent since early 2014…China is finding it increasingly difficult to remain tied to the dollar bloc at a time when the US Federal Reserve is tightening monetary policy and the dollar is rising…Other countries may complain about ‘currency wars’, but a gradual renminbi adjustment would be far safer for the world economy than a failed attempt to maintain a fixed rate that has outlived its usefulness.”  Meanwhile, here are some insane statistics about China: 1) There are more internet users in China than there are people in the United States and Europe combined, 2) Chinese construction firms broke ground last year on enough homes for the entire population of Australia, 3) They also built or at least worked on 143k miles of road, which is longer than five times the circumference of the earth.


USA: Grain Of Salt

Despite the positive jobs report this morning, there have actually been quite a few negative economic data points from the United States recently.  


WM: Funds Indexed To The Dow Are Gonna Have To Buy Apple And Sell AT&T


EU: Being A Tourist In Greece Is About To Get Real Awkward (Alt)


USA: Researchers Say 1 In 8 Spinoffs Preceded By Suspicious Trading In Options Markets


WM: JPMorgan Is Super Good At Returns

live die repeat

Hiring Up, Wages Flat, Inflation Low…The ECB Is Gonna Do Something!

Forgive me if you’ve heard this before: “There’s a lot of good news in the latest [jobs report], but also disappointment, particularly about the seeming lack of upward pressure on wages.”  For example, “employers added 252,000 net positions in December, and revised the two earlier months up by an additional 50,000.  For good measure, the unemployment rate fell a couple of ticks, to 5.6 percent from 5.8 percent…The big disappointment was on wages.  In the November earnings, one of the brightest signs was an 0.4 percent rise in average hourly earnings…It turned out to be a false signal.  In Friday’s revisions, November wages rose only 0.2 percent.  And even worse, in December they fell 0.2 percent.”  Here are some charts and some people who are “left wanting”.  “A critical question for the Fed in the months ahead will be how low the jobless rate can go before generating wage pressure and broader inflation.”  Meanwhile, Janus Capital dissects the low nominal interest rate environment into two parts (real interest rate and inflation expectation) and says we are in a disinflationary boom, “the ideal type of economic growth.”  “What we are seeing today is a market developing through productivity.  This scenario is optimal because companies can generate cash flows and earnings without having to worry about the uncertainties of inflation and needing to hedge that inflation with higher prices.  Such an environment leads to broad-based growth, rather than growth in only those industries that have pricing power.”  Furthermore, “disinflationary boom periods like the one we are in now have historically been good for risk assets.”  Meanwhile, the “relative dearth of high quality short term assets” in Europe has pushed two-year yields of Germany, Finland, the Netherlands, Belgium, Austria and France below the “zero lower bound”.  “The stock of negative yielding euro debt (~€1.2tn) is now nearly equivalent to the entire size of the euro investment grade credit market.  Or more than four times the size of the high yield market.”  Meanwhile, Mario Draghi has a message for Greece: the ECB has “presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets…Greek bonds are currently rated junk at all three major rating companies…’The idea of focusing on investment-grade assets is clever as it avoids the Greek issue.’”


China: Wholesale Prices Fell 3.3% In 2014, Largest Decline Since September 2012 (Alt)

“Chinese factory gate prices recorded their biggest annual fall in more than two years in December…Consumer prices, conversely, rose 1.5 per cent year on year…Chinese regulators have adjusted down corresponding domestic prices for diesel fuel, gasoline and kerosene by only 20 to 30 per cent [since June].  Chinese [consumer] inflation figures are much more sensitive to food prices, which rose 2.9 per cent in December.”


Oil: Energy Traders Are Now Booking Supertankers To Store Oil At Sea


WM: Turns Out “Facts And Fantasies About Commodity Futures” (2004) Was A Giant Fantasy


What: Steve Ballmer’s Kid Must Be So, Totally Normal


Grind House

He Was Given An Offer He Couldn’t Refuse…

“In the weeks leading up to Christmas, money managers scooped up energy companies (to be fair, money managers scooped up everything leading up to Christmas).  They were attracted by the sector’s steep fall in the second half of the year as the price of crude tumbled.”  In case you are wondering, this is what catching a falling knife sounds like: “There are stocks you can buy right now where you’ll do fine for the next three-to-five years, but the guessing game is whether you’ll be able to get them at even better prices.”  Meanwhile, Mohamed El-Erian says “the world is experiencing much more than a temporary dip in oil prices.  Because of a change in the supply model, this is a fundamental shift that will likely have long-lasting effects.”  Furthermore, “as costs fall for manufacturing and a wide range of other activities affected by energy costs, and as consumers spend less on gas and more on other things, many oil-importing nations will see a rise in gross domestic product.  And this higher economic activity is likely to boost investment in new plants, equipment and labor, financed by corporate cash sitting on the sidelines.”  Meanwhile, “after misreading the direction of the U.S. bond market this year as yields fell and Treasuries rallied 5.7 percent, a growing number of financial professionals are showing renewed confidence in their ability to catch a falling machete Treasuries are due for a selloff…The median forecast calls for yields to reach 3.01 percent [by the end of 2015].  The roughly 0.75 percentage point increase would be almost twice as much as forecasters anticipated for 2014…Combined with projections for yields on the two-year note to more than double to 1.53 percent and those on the 30-year bond to rise 0.89 percentage point to 3.70 percent, the prognosticators are more bearish than any time since heading into 2009.”  Meanwhile, Justin Wolfers says “too much uncertainty clouds the crystal ball to be confident that any particular course of events will play out in the real world.  But we do know something about the sources of that uncertainty.


Holiday Sales Were Good After A Great Year For The American Job Market

“Though it still has a long way to go, the American job market improved a lot more in 2014 than in 2013,” primarily due to one thing: “this year, the participation rate was nearly flat — up 0.1 tenth of a point — revealing a truly tighter labor market.”  Furthermore, “the economy added 246,000 jobs per month in 2014 compared with 112,000 last year…The number of part-timers wanting full-time jobs…also fell faster this year than last, a decline of about 900,000 people in 2014 compared with a decline of about 200,000 in 2013.”  Meanwhile, the National Retail Federation is expecting “a 4.1% increase in sales during November and December, the strongest rate since 2011, when sales rose 4.8%.”  Also, ChannelAdvisor Corp. says online sales “rose 14 percent from Nov. 27 to Dec. 21.”  And here’s something to consider: “the slowing growth on Christmas Day follows a broader trend of a longer shopping season with spending less concentrated on any particular day…’Consumers are spreading their spending around.’”

Net employment change by industry, 2010 to 2014Quality Over Quantity: Unhappy Interns Living At Home And The Next America

The problem with the current economic recovery isn’t quantity.  It’s quality: “Lower-wage industries accounted for 22 percent of job losses during the recession, but 44 percent of employment growth over the past four years…Higher-wage industries accounted for 41 percent of job losses, but 30 percent of recent employment growth.’  Lower-paid industries like food services, restaurants, temp help, and retail trade accounted for 39 percent of job gains over the last four years.”  Meanwhile, “at a time when the still sluggish economy has sent a flood of jobless young adults back home, older people are quietly moving in with their parents at twice the rate of their younger counterparts.  For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6%…Among 18-to 29-year-olds, 1.6 million Californians have taken up residence in their childhood bedrooms…that’s a 33% jump from 2006, the pace is half of the 50 to 64 age group.”  Furthermore, a recent Gallup survey indicates the average age of retirement is 62 and has been steadily increasing since 2010.  Also, “according to a recent Gallup survey of 5.4 million working adults, 52% say they are not engaged in their work…Another 18% describe themselves as ‘actively disengaged’ — disgruntled and spreading bitterness among co-workers.  With the exception of recession periods, the majority of employees start each new year vowing to look for a new job.”  Meanwhile, “in recent years, internships remain as prevalent as ever — but their ability to confer a real career has faded along with the economy.”  Furthermore, “Millennials would rather take an internship with the hopes of scaling the ladder at an existing business rather than risk being shut out of their desired field or venturing out on their own,” and “many of the Millennials taking internship after internship can only do so thanks to their parents’ resources.”  Finally, here is a look at the Next America: “Demographic transformations are dramas in slow motion.  America is in the midst of two right now.  Our population is becoming majority non-white at the same time a record share is going gray.”  (Do yourself a favor and click on the link.  The website is beautiful and their research is extremely coherent.)

Fama And French And The Shift Back Into Value, Profitability And Investment

“Fama and French are famous for their three-factor model, which uses market, value, and size characteristics to explain stock returns…After more than 20 years, Fama and French have embraced the notion that size and value may not be the best factors to explain stock returns.  Their new paper, the first draft of which was released in June 2013, finds that two additional factors — profitability and investment — make redundant the value factor.  In other words, value stocks — defined as those with low price/book — only beat growth stocks because they historically tended to be more profitable and less voracious users of capital.”  Meanwhile, JC Parets believeswe are now witnessing the shift back into Value and out of Growth.”  Also, the selloff in tech stocks continues, and that’s a good thing:  “hot money is becoming downright respectable (or at least is trying to).  Markets are going through a rebalancing, with money leaving the high-flying stocks with stretched valuations and finding a home in shares of companies with higher dividends and more reasonable price-earnings ratios.  This is something to embrace, not reject.”

USA: Mortgage-Loan Limits Hit Buyers In High-Cost Housing Markets

“Until 2008, there was one national loan limit for the entire U.S.  But when the housing crisis erupted and private lending retreated for larger ‘jumbo’ mortgages, which exceed the conforming limits, Congress raised the limits in certain counties where homes were more expensive…The logic of loan limits is to prevent two quasi-government agencies (Fannie and Freddie) from subsidizing the purchase of luxury homes.  But in some areas of the country, there’s nothing cheap to buy.”  For example, in San Francisco, “a majority of homes — 61% — is above the local loan limit of $625,500,” which is already “50% higher than the $417,000 maximum in most of the rest of the country.”  Meanwhile, here’s a really fun depiction of urban development through Google street view.

USA: Infrastructure: Broken System (Alt)

“Unless it begins to spend more, the US risks squandering the global lead it gained in the 1950s and 1960s, when it invested in big projects such as the Eisenhower Interstate Highway System.”  Here’s the problem: States receive funding for vital transportation and infrastructure projects through the Federal Highway Trust Fund.  The Highway Trust fund relies on a gasoline tax for revenue.  “No politician has dared raise the federal gas tax since 1993.  That decision has conspired with declining fuel sales to bring the Highway Trust Fund close to exhaustion.  The US transportation department estimates the fund could run out as soon as August.”

TOY: Toyota Moving US Base From California To Texas

“Toyota delivered a surprise pink slip to California on Monday, announcing the company would move its U.S. headquarters and about 3,000 jobs from the Los Angeles suburbs to the outskirts of Dallas.”

China: Reuters’ China Tea Leaf Index

apprenticeships in America

Skills Gaps

The nice thing about a “skills gap” is that it takes the blame for unemployment/low participation rate off of companies and on to the laborers themselves.  There, that’s my liberal plug, now this: apprenticeships are on the decline in America (alt) (the number of apprenticeship programs “fell 40% in the U.S. between 2003 and 2013”) despite their attractive ability to match the training workers receive to the skills employers want.  “Perhaps the biggest obstacle is that two-thirds of apprenticeship programs in the U.S. are in the construction industry, furthering a blue-collar image that stifles interest among young people and the employers who could create jobs for them.”  Employers say they are skeptical of apprenticeships, however, because of their association with unions, as well as the “fear that employees will leave for better-paying jobs almost as soon as they’ve learned their required skills.”  Obama is making America’s job training program reform a high priority (has announced over $500 million in new grants to develop apprenticeship style programs).  Interesting to note: when it comes to measuring our skills gap deficiencies, Germany is basically the golden standard (e.g. the United States, Great Britain, Canadaetc.).  Meanwhile, here’s how companies can be more “productive, profitable, and provide good jobs with good wages”: 1) “hire people both for their technical skills and their motivation to work together for the mission and goals of the enterprise,” 2) “adopt business strategies that stress quality, innovation…as drivers of profitability as opposed to competing solely on being the lowest-cost,” 3) “implement employment and labor practices that combine investments in training and development,” and 4) “respecting workers’ decisions to be represented by unions if they choose to do so.”

Defensive Strategies Gaining Momentum, Particularly In Small Caps

“In recent weeks, investors have pulled back from the riskier corners of the stock market, and small-company stocks are typically more vulnerable to wide price swings than are large company shares…the result has been two sharp selloffs of small-company stocks this year (alt), yet investors worry that valuations remain lofty and the stocks remain vulnerable to more declines…The Russell 2000 is at trading [sic] around 19 times the expected earnings of its components for the next year…At the start of 2013, the earnings multiple on the Russell was 15.1.”  Meanwhile, “large speculators such as hedge funds are betting $2.8 billion this month that the Russell 2000 Index will fall.  That’s the most since 2012 and the highest versus average levels since 2004…While small-cap shares are usually the first to benefit when economic growth picks up, the selloff reflects a loss of faith by professional investors in the five-year equity rally…’It suggests a market that has become defensive…we somehow have lost momentum in the small-cap space.’…Russell 2000 companies have on average 4.2 percent of their stock on loan…the average short-interest position on S&P 500 shares is 2.1 percent.”  Meanwhile, Goldman Sachs says “while some high-flying stocks have rebounded, investors shouldn’t expect them to return to their previous heights…’Typically quality and momentum have positive correlation.  However, today it is slightly negative, suggesting momentum has been fueled by stocks with ‘lower-quality’ characteristics.’”

Debating China: “Impending Day Of Reckoning” vs. Cautious Optimism?

The Financial Times says “a financial crisis in China has become inevitable,” and postponement of the day of reckoning will only make things worse.  The things that make them most nervous about China’s economy are: 1) the Chinese money supply (M2) “has tripled in the past six years, an expansion four times as large as that of the US over the same period,” 2) the working-age population appears to be declining, 3) “output is being produced, sometimes even in the absence of any demand,” 4) China’s closed capital account will fuel a “huge and persistent balance of payments surplus,” 5) Beijing may decide to walk to the talk when it comes to easing up on “perpetual policy stimulus” and implicit bailout guarantees.  The Peterson Institute for International Economics says that “even with a 50 percent drop in housing prices, Chinese banks could continue to operate relatively normally” with an average non-performing loan (NPL) ratio of 6.6 percent.  Things get complicated, however, when you consider the “whole slew of industries that provide inputs to real estate development,” many of which are highly leveraged and don’t have very far to go to be in default.  Furthermore, because “mortgages are used as collateral for more than 40 percent of bank loans,” a drop in home prices would reduce banks’ collateral for lending.”  Also, more than 40 percent of Chinese households’  net worth is in the equity value of their home (in the US it is closer to 30 percent).  PIEE concludes that “China isn’t in danger of a US-style wave of foreclosures, but the financial sector is certainly not insulated from a real-estate-induced economic slowdown.”  Further complicating the issue is that “official housing data are often of such poor quality that even informed observers can’t be too sure of themselves.”  Also, China’s sheer magnitude (160 cities with population > 1 million; The United States has 9) makes this type of data collection especially hard.

USA: Bank Of America Suspends Buyback, Dividend Increase After Miscalculation

USA: Soured Mortgages Attract Institutional Dollars

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