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Cost Of "Breakfast In America" Soars To Highest In Over 2 Years

Zerohedge - Wed, 04/23/2014 - 09:43

Another day, another indication that 'real' inflation - the kind that reduces standards of living and leeches away purchasing power for 'real' people - is anything but under control... and anything but stable. With the Oz-ians in the Eccles Building pulling levers to run the world based on their "inflation" measures, it seems that if the price of 'things that matter' soars but the Fed doesn't see them, there is no need to tighten. Last week we discussed the surge in the price of beef, pork, eggs, and shrimp, but this week, as Bloomberg notes, the price of breakfast is soaring. Between droughts affecting coffee prices and insects spreading disease in Florida, the "breakfast beverage" index is at its highest in over 2 years.

 

 

Source: Bloomberg








Categories: blogroll

Emerging Money Audio Call – April 23

Emerging Money - Wed, 04/23/2014 - 09:28

Welcome to the Emerging Money Audio Call for April 23. Emerging Markets down 1.2% three day move against the S&P underperforming coming back on emerging market vs. domestic market spread, something to look at. We have several charts on the site to explain some opportunities at this point.

456px-AudiopaletteWe will review the China data last night and visit what it means for U.S multinationals corporate’s that have exposure to China (FXI, quote).

We are noticing some interesting stuff it’s not in concert with what the headline numbers are telling you. Tune into your account today to listen to full audio call. We will also getting to Apple and China Mobile’s deal.

Don’t miss out on another day of emerging market insight and trades from Tim Seymour.

Subscribe Now as Tim helps Emerging Money Subscribers navigate emerging market events around the globe while taking advantage of Tim’s 17 years of trading Emerging Markets.

Be first to hear what Tim is trading as he lays out his strategies, below is snap shot on what Tim will be covering in the audio call.

Mobile Users Please Click on Mobile Icon.

 

Not a member yet? Plans & Pricing

 

 

 

 

 

 

Categories: blogroll

Emerging Money Audop Call – April 23

Emerging Money - Wed, 04/23/2014 - 09:04

Welcome to the Emerging Money Audio Call for April 23.  Emerging Markets down 1.2% three day move against the S&P underperforming coming back on emerging market vs. domestic market spread, something to look at.  We have several charts on the site to explain some opportunities at this point.

456px-AudiopaletteWe will review the China data last night and visit what it means for U.S multinationals corporate’s that have exposure to China (FXI, quote). 

We are noticing some interesting stuff it’s not in concert with what the headline numbers are telling you.  Tune into your account today to listen to full audio call.  We will also getting to Apple and China Mobile’s deal.

Mobile Users Please Click on Mobile Icon.

 

 

 

Categories: blogroll

This Is "Why" Caterpillar Is Trading At Two-Year Highs

Zerohedge - Wed, 04/23/2014 - 09:02

Moments ago CAT stock touched 52 week highs, or a level not seen since April 2012. Why? The chart below which shows Caterpillar dealer retail sales by region surely has something to do with it. With global sales sliding again now that the third consecutive dead cat bounce is over, and dumping the most since February of 2013 or 12% from a year ago, when sales had in turned dropped 11% from 2012, driven by a collapse in Asian-Pacific, Latin American and EMEA sales, all of which crashed by more than 20%, we can only assume the company is well on its way to an epic collapse in its top and bottom lines as well.

And since this is nothing short of the bizarro, insane new normal, it is only a matter of time before the crash in retail sales sends the stock to plus infinity.








Categories: blogroll

BoToX ACTiViSM...

Zerohedge - Wed, 04/23/2014 - 08:51








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Russia Warns West "Remove Forces"; Begins Military Exercise On Ukraine Border

Zerohedge - Wed, 04/23/2014 - 08:50

UPDATE: Dutch fighter jets were scrambled after Russian bombers approached Dutch airspace; the Russian planes turned away

With both sides appearing to have entirely un-de-escalated and the truce deal now a thing of the past (besides a few hundred Dow points), the Russians are speaking up today - and are not happy:

  • RUSSIA IS EXTREMELY SURPRISED BY KIEV AND WASHINGTON'S "DISTORTED" INTERPRETATION OF AGREEMENT REACHED IN GENEVA LAST WEEK ON DE-ESCALATION OF UKRAINE CRISIS - FOREIGN MINISTRY
  • RUSSIAN FOREIGN MINISTRY SAYS KIEV AND WASHINGTON "CLOSING THEIR EYES" TO PROVOCATIVE ACTIONS BY NATIONALIST FORCES IN UKRAINE

And, on the heels of Turchynov's official restart of the so-called anti-terrorist operation, Russia is calling on Ukraine to pull back military from Ukraine's southeast... and rattles its sabre by undertaking a military exercise on the border.

 

Bloomberg reports,

Russia is surprised by distorted interpretation of Geneva accord from govts of Ukraine, U.S., RIA Novosti reports, citing Russia’s Foreign Ministry.

 

*RUSSIA CALLS ON UKRAINE TO REMOVE MILITARY FROM SOUTHEAST: RIA

 

Russia says Ukraine, U.S. closing eyes to provocations by right-wing extremists: RIA

 

Russia still believes partners are serious about resolving crisis in Ukraine: RIA

and in addition

  • RUSSIAN MILITARY CONDUCTS MILITARY EXERCISE IN ROSTOV REGION, BORDERING UKRAINE - DEFENCE MINISTRY OFFICIAL

All of this sets the scene for an important set of meetings next week...

Russia ready to host EU, Ukraine energy officials in Moscow or consider other cities for talks, Russian Energy Ministry spokeswoman Olga Golant says by phone.

 

Golant confirms EU Energy Commissioner Guenther Oettinger invited Russia to gas talks

 

Slovakia planning talks on use of gas pipeline in reverse to supply Ukraine on Apr. 28 in Bratislava, Eustream pipeline operator spokesman Vahram Chuguryan says by phone

So to sum it all up:

  1. The truce deal is dead
  2. Russia blames Ukraine/West for breaking deal and misunderstanding it
  3. Ukraine/West blame Russia for not unilaterally pulling back its forces
  4. Russia is warning Ukraine to pullback military from Russia-held southeast Ukraine ("or there will be retaliation")
  5. Russia is rattling its sabre by military exercises on the Ukraine border (after US sends another warship into the Black Sea)
  6. Against all this tension, gas pipeline talks are set to begin shortly.

Still buying the fucking dip on the back of Ukraine 'calming down'?








Categories: blogroll

CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

Advisor Analyst - Wed, 04/23/2014 - 08:27

SIA Charts Daily Stock Report (siacharts.com)

The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the S&P/TSX 60, S&P/TSX Completion and S&P/TSX Small cap We overlay these powerful reports with our extensive knowledge of point and figure and candlestick chart signals, along with other western-style technical indicators to identity stocks as they breakout or breakdown. In doing so we provide our Elite-Pro Subscribers with truly independent coverage of the Canadian stock market with specific buy and sell trigger points.

Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices, and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian Exchange Traded Fund, and Funds by issuer (iShares, Horizons, BMO) or as components of Equally Weighted Fund Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).

CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone

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CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

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309711_NORMAL_20111101_200_1_NFC_844_844

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Important Disclaimer

SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.

Copyright © siacharts.com

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Who Made More, Facebook VCs or Its Founder: The True Cost of the VC Preferred Stock Control Premium

Zerohedge - Wed, 04/23/2014 - 08:23

So, I'm off to the races to raise money for UltraCoin, my uber-disruptive startup, and I come across the resistance of certain parties to take common stock. Now, the standard in the professional VC community is to take preferred stock with a stack of anti-dilutive measures, control premiums and liquidation preferences. VCs and their lawyers say this is the only way to do it because it protects them on the downside and allows them to maintain control of their investment and manage dilution on the upside. Basically, the say, it a hedge. I have some very prominent, very successful and experienced investors coming in doing the right thing. The reason is because they "get it". My task is to educate the rest. 

Marc Andreesen characterized VC start-up stock as an out-of-the-money call option on the success of the company. Well, I agree with this in part. The founders common stock is more like an OTC ATM call, or warrant, on the success of the company. The preferred stock, which is what most VCs go for, is more akin to a straddle consisting of an ATM long-dated OTC call paired with a long dated ATM put. This put is not free. It's not even cheap, and it is not as necessary if the deal is properly sourced and underwritten.

Now, I'm not the typical Fintech entrepreneur. I'm a little older than most, I'm probably better than forensic valuation than the vast majority (see Who is Reggie Middleton?), and I'm more than willing to point out when and where I think the establishment is doing something wrong. "Because everyone else is doing it" or "Because that's the way we've always done it" are not acceptable reasons.

Case in point, the preferred stock myth. Let's address the reasons given for demanding preferred stock.

  1. It protects them on the downside - This is true, but venture capital is a very high risk, high return asset class. Its much more additive to the risk/reward proposition to manage downside risk primarily through the investment selection and underwriting process, ex. spend your resources selecting and vetting the best management team and investment prospect rather than trying to manage downside before you even get a stab at the upside. Think about the groom that puts more time into the pre-nup than he does into finding out what his bride to be is actually about.  
  2. They say, it a hedge. Well, in the investment world hedges aren't free. They have a real cost and the determination of the effectiveness of any hedge has to take into consideration the cost of said hedge. If it's too expensive then the risks of the hedge may well outweigh the rewards. This is particularly true for investments that go well from a capital appreciation perspective.
  3. It allows them to maintain control of their investment and manage dilution on the upside and downside. The energies, time and resources dedicated to and consumed by the competition to gain and maintain control and proportionate share in a company materially detracts management from running the company as well as pitting multiple factions (equity holding management, common shareholders and founders, Series A, B, C [& X, Y and Z] shareholders and executives) against each other. If there was one uniform, common share class these factions could be fighting for the betterment of the company as a whole versus the betterment of their own individual positions (often to the detriment of fellow security holders and management and/or the company as a whole).  

These costs and detriments are real. Let's take the case of the very successful example of Facebook's VC funding and eventual IPO. Who do you think made more money in this deal, the founders/original common shareholders or the VCs who chose the preferred/hedged/put-call straddle route?

Just to make things interesting, I included one of the most prominent of Facebook's VCs in on the discussion via Twitter: 

@ReggieMiddleton Sure, often true when the work :-).

— Marc Andreessen (@pmarca) April 22, 2014

The True Cost of the VC Control Premium  Here is the spreadsheet that generated the chart. Feel free to play with it yourself. Hopefully, more people will realized the value of going after a strong management team with a strong product amongst a disruptive opportunity. Focus more on the attainment of reward. Proper reward underwriting is its own risk management.

 








Categories: blogroll

Explaining The Horrendous Home Sales Report: It Snowed Everywhere But In The Northeast

Zerohedge - Wed, 04/23/2014 - 08:19

This is our best attempt at playing clueless propaganda cheerleaders also known as economists:

Q. Why did new home sales crash in all regions except the traditionally coldest, wettest, and snowiest Northeast, where sales rose?

A. Uhm, because it obviously snowed everywhere except in the Northeast.

And there you have it: spin 101 for braindead zombies and vacuum tubes.

 

And for those confused about the current state of the "housing recovery", here is a longer-term chat:

Source: Bullshit Bureau








Categories: blogroll

New Home Sales Collapse To 8 Month Lows

Zerohedge - Wed, 04/23/2014 - 08:07

New Home Sales collapsed 14.5% month-over-month to its lowest since July 2013. A mere 384k versus 450k expectations is the biggest miss since July. So much for the Spring buying season... This is a 7 standard deviation miss against the smart economists' estimates! Whocouldanode that when the free-money sponsored fast money leaves the game that real people with real debt and real wages are simply priced out of buying a new home? Supply of unsold new homes jumps to 6 months, its highest since Oct 2011 (as once again the visible hand's interference has produced yet another mal-investment boom as the 'if we build it, they will come' builders face an ugly reality).

 

 

The Economists nailed it... (Deutsche's Joe Lavorgna was above consensus at 460k)

 

 

Charts: Bloomberg








Categories: blogroll

US PMI Drops, Misses By Most In 8 Months

Zerohedge - Wed, 04/23/2014 - 07:54

That February spike that was the catalyst for oh so much aggressive JPY selling and US equity buying and "see, we told you so, here comes the post-weather pent-up-demand exuberance" has been crushed by the sad and painful truth of reality. For the 2nd month in a row, Markit's US PMI dropped and missed expectations... despite weather being a thing of the past. Sadly the story gets worse, as Markit notes "on the inflation front, manufacturers experienced a
further solid increase in average cost burdens in April," adding that pricing pressures, "will feed fears that the
recovery remains on a weak foundation of intense price competition
." Need moar snow...

 

 

And the full breakdown...

 

Source: MarkitEconomics








Categories: blogroll

Not So Fast: Allergan Adopts Poison Pill, Valeant CEO "Disappointed" - What Happens Next

Zerohedge - Wed, 04/23/2014 - 07:25

As we reported yesterday, Bill Ackman bought up only $76 million in Allergan stock knowing well in advance Valeant would submit a bid for the company, guaranteeing (as in absolutely no risk at all) that the stock would soar, with the rest of the purchase comprising of AGN calls. It is unclear just how much actual capital at risk he put up but indicatively May $150 call options that cost $1.55 per contract on Monday were trading at $15.53 in midmorning trading on Tuesday, a roughly ten-fold increase in one day.

In other words, Ackman not only used material public information to frame his trade - perfectly legally, thank you SEC - but, as is to be expected of a hedge fund manager whose recent track record has been spotty at best, applied massive leverage in the form of calls to make up for any residual humiliation. That said, Ackman may want to consider selling his calls to the primary (and very unhappy because no amount of delta hedging could have offset all the losses) broker he bought them from while they are still solidly in the money, because Allergan may have a very different opinion on promptly selling itself to Valeant than what Ackman thought.

Specifically, Allergan on Tuesday night said that its board of directors had adopted a one-year stockholder rights plan to give it more time to consider takeover proposals. The Valeant offer was made with Pershing Square Capital Management hedge fund, which built up a stake in the company.

The chief executive officer of Valeant Pharmaceuticals, which made a $47 billion unsolicited offer for competitor Allergan Inc. on Tuesday, said during an interview on CNBC that he was "disappointed" with Allergan's so-called poison pill.

"We are disappointed but on the other hand, I think this deal will get done," Valeant CEO Michael Pearson said on Wednesday.

So besides accepting or outright rejecting Valeant's bid, what other options does Allergan have? Here is Bloomberg with the full menu:

Valeant’s proposal currently stands at $48 billion, or almost $161 a share. Sterne Agee Group Inc. said the offer is too low because Allergan has appealing growth prospects as a stand-alone entity. Shareholders may demand a price closer to $180 a share, said Cowen Group Inc. Valeant could face competition. Sanofi, Nestle SA or GlaxoSmithKline Plc could swoop in as white knights, said Shibani Malhotra, a New York-based analyst at Sterne Agee. “They will do everything they can to fight this.” Morningstar Inc. sees Novartis AG and Johnson & Johnson as possible counterbidders.

Valeant is offering Allergan investors $48.30 in cash and 83 percent of a Valeant share for each one of Allergan. The offer was worth about $47 billion, after subtracting Allergan’s net cash, at the close of trading yesterday.

 

Valeant has teamed up with Bill Ackman’s Pershing Square Capital Management LP, which has a 9.7 percent stake in Allergan. Based on stock prices before the announcement, the transaction valued Allergan at 21 times trailing 12-month Ebitda, data compiled by Bloomberg show. The last time Allergan had that multiple was more than six years ago.

 

 

Ackman told a conference yesterday that he is contractually committed to support Valeant’s deal, “unless and until there is a superior offer that Valeant chooses  not to respond to.” If Allergan’s shareholders  deem a competing bid superior and Valeant chooses not to participate, “I guess we’d be cashed out in that deal,” he said.

 

Valeant’s proposal may need to be raised to about $180 a share to win over Allergan shareholders, according to Ken Cacciatore, a New York-based analyst at Cowen.

That would be great news for Ackman whose calls will only raise in value. In fact the only worst case scenario for Pershing Square is if there is a sudden cooling in the pharma M&A bubble, ostensibly driven by a market tumble, which would not only result in a pulling of the Valeant offer which is so massively reliant on cheap and easy debt, but a crash in Allergan stock. Of course, there is the possibiliy that Allergan will simply say no, and no other bidders will appear.

There’s a high likelihood that Allergan will rebuff the unsolicited offer as is, which may force Laval, Quebec-based Valeant to raise it or may create an opportunity for other interested suitors, said Michael Waterhouse, an analyst at Morningstar.

 

“Allergan is seen, in the specialty pharmaceuticals space at least, as probably one of the best managed and one of the best opportunities,” Waterhouse said in a phone interview. “It could stir a little bit of thought from J&J and Novartis that maybe they don’t want this one to get away.” J&J said earlier this month that that it is ending development of PurTox, a potential competitor for Botox. That may make an acquisition of Allergan even more compelling for the company, Waterhouse said. Novartis may be tempted to bid to gain Allergan’s ophthalmology assets, which include Restasis eye drops, he said. Allergan, which also makes products to treat acne and psoriasis, would be a good fit for European drugmakers Sanofi and Glaxo, as well as Nestle, which said in February it’s taking full control of its Galderma skin-care joint venture with L’Oreal SA, Malhotra said.

Sure, Allergan is valuable. But at what price? And how much leverage is any strategic buyer willing to take on in exchange for onboard a cash flow stream that may or may not last for more than a few years.

In either case, keep a close eye on this one: Ackman expected a 10x return on JCP, instead he lost half his investment. In AGN he has already made his profit which means at this point the deal is his to lose.








Categories: blogroll

Lost Decades are Not All That Rare

Advisor Analyst - Wed, 04/23/2014 - 07:24

by Robert Seawright, Above the Market

The financial crisis (circa 2008-2009) brought out discussions about “lost decades” in the investment markets, 10-year periods that suffered negative equity returns. It even prodded PIMCO to argue that the investment universe had fundamentally changed, that an “old normal” had been overtaken by a “new normal” characterized by persistently slow economic growth, high unemployment, significant geopolitical tension with social inequality and strife, high government debt and, of course, lower expected returns in the equity markets.

A Journal of Financial Perspectives paper from last summer considers how unusual it really is for equity markets actually to “lose a decade.” As it turns out, lost decades of this sort are not the exceptional episodes that only very rarely interrupt normal steady economic growth and progress that so many seem to think.

In the paper, Brandeis economist Blake LeBaron finds that the likelihood of a lost decade — as assessed by the historical data for U.S. markets via a diversified portfolio — is actually around 7 percent (in other words, about 1 in 14). Adjusting for inflation (using real rather than nominal return data) makes the probability significantly higher (more like 12 percent, nearly 1 in 8). The chart below (from the paper) shows the calculated return (nominal in yellow, real in dashed) for ten-year periods over the past 200+ years, and shows six periods in which the real return dips into negative numbers.

 Blake LeBaron

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So a “lost decade” actually happens fairly frequently. As LeBaron summarizes:

The simple message here is that stock markets are volatile. Even in the long-run volatility is still important. These results emphasize that 10-year periods where an equity portfolio loses value in either real or nominal terms should be an event on which investors put some weight when making their investment decisions.

The key practical take-away is that those within 5-10 years of retirement (in either direction) who are taking or planning to take retirement income from an investment portfolio should consider hedging their portfolios so as to avoid sequence risk. Losses close to retirement have a dramatically disproportionate impact on retirement income portfolios. As so often happens, the risks are greater than we tend to appreciate.

 

 

Copyright © Above the Market

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Categories: blogroll

Intuitive Surgical Shares Pounded On Dissapointing Report, Concerning Comments In Conference Call

Benzinga - Wed, 04/23/2014 - 07:23

Intuitive Surgical (NASDAQ: ISRG) shares ...

Categories: blogroll, Pre Market

Plug Power Secondary Offering Concerns the Street; Drags Other Fuel Cell Names Down

Benzinga - Wed, 04/23/2014 - 07:20

Ever the volatile trading vehicle, Plug Power (NASDAQ: ...

Categories: blogroll, Pre Market

Why Indexes are Capitalization-Weighted

Advisor Analyst - Wed, 04/23/2014 - 07:20

by David Merkel, Aleph Blog

Are index funds that are capitalization-weighted the best funds to invest in?  No.  So why do we talk about index funds so much?  Because they represent the average dollar in the market.  In principle, everyone could invest in a comprehensive index fund, and there would be no effects on the market.

But indexes can be enhanced.  Tilt your investments to:

  • Avoid the biggest firms, their growth opportunities are limited.
  • Buy cheap stocks, they out-earn growthier stocks, and have fewer disappointments
  • Buy quality stocks, again, fewer disappointments.
  • Buy stocks that have been running, they tend to do well in the future.
  • Buy stocks with conservative accounting, they tend to outperform.

But the moment you do that, you are an active manager, because not everyone can do what you are doing.  Also, each of the anomalies I have indirectly referenced can occasionally be overvalued.  As an example, the biggest stocks presently look cheap compared to smaller stocks.

Trying to create “smart beta” is interesting, but let’s just call it enhanced indexing.  And if too many people try to do enhanced indexing, guess what?  Those stocks will become overvalued, and will eventually sag, badly.

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There is no magic bullet in investing.  There is the work of evaluating valuations versus future prospects, and that is a challenging task.

If you want average performance, which is better than most get, buy a broad index fund with low fees and hold it.  If you want better performance, tilt your portfolio to reflect factors that usually outperform.  If you want still better performance, ask what factors are overvalued, and remove them from your portfolio.

As for me, I am happy buying safe and cheap stocks and holding them for three years or so.  I’m happy with my picks, and so I adjust my portfolio in small ways quarterly.  No need to over-trade.  I just keep following my strategy.

 

Copyright © Aleph Blog

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SunPower Moving To The Upside On Analyst Ratings And Deal With Google

Benzinga - Wed, 04/23/2014 - 07:19

SunPower (NASDAQ: SPWR) has shown a strong rally over the past few sessions, starting on ...

Categories: blogroll, Pre Market

Still Believe in Efficient Markets? Explain This…

Advisor Analyst - Wed, 04/23/2014 - 07:18

by Pension Partners

Each year, thousands of new undergraduate and MBA students are indoctrinated with the virtues of the almighty Efficient Market Hypothesis (EMH). Despite an abundance of evidence disproving the central tenets of the theory, the orthodoxy remains in place. In the academic world, the desire to explain market movements in one convenient theory seems to trump empirical data and common sense.

In relation to the stock market, a number of market anomalies have been uncovered over the years. In the Fundamental discipline, these include the value effect, the small firm effect, and the neglected firm effect. Technical anomalies include the momentum effect, calendar effect, and the low-volatility effect.  Our own contribution to the field of market anomalies focuses on the predictive power of the Utilities sector. As it turns out, the walk down Wall Street is not so random after all.

I first learned of the EMH in my college years in the late 1990’s. The theory never sat well with me. How could the stock market be efficient in any “form,” I wondered, with a bubble of epic proportions building before our very eyes?

My skepticism in the theory would only grow over the years, as I subsequently witnessed the tech stock crash, the housing bubble and its eventual collapse, and another stock market crash in 2008-2009.

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What I came to learn through these events is that market participants have anything but “rational expectations” about the future, a key requirement of the EMH. To the contrary, their expectations are often quite irrational, leading to overreaction in the financial markets and the creation of inefficiencies.

Why are market participants irrational? Very simply because they are human and flawed. We all possess certain inherent cognitive biases such as overconfidence and overreaction (among others) that lead to errors in the way we process and act upon information.

In today’s market, finding such irrational behavior is not difficult. There are a number of candidates to choose from but in my view there is no better example than the buyers/holders of the PIMCO High Income Fund (PHK). For the uninitiated, PHK is a closed-end bond fund managed by PIMCO (Bill Gross) with assets in excess of $1.5 billion.

Where the story gets interesting is in observing the fund’s net-asset-value (NAV), or the value of all fund assets (less liabilities) divided by the number of shares outstanding. In an open-end mutual fund, the NAV is the price upon which all share purchases and redemptions are calculated. However, in a closed-end fund such as PHK, shares are bought and sold at market prices as determined by buyers and sellers. While market prices in closed-end funds often track the fund’s NAV, they can diverge and at times substantially so.

We are seeing that quite clearly today in the PIMCO High Income Fund. The market price of the Fund is currently $12.58, a 53% premium above the fund’s NAV of $8.23.

PHK4

Surely this must be a recent phenomenon, you say,  as no market participant would hold a fund trading at such a high premium for very long. But that would be an incorrect assumption as indicated by the chart below, which shows that PHK has been trading at a persistently lofty premium over the past five years. If this isn’t the most blatant evidence of the inefficiency of markets, I don’t know what is.

PHK2

What could be the behavioral justification for someone wanting to purchase a fund at such a lofty premium?

While we can only speculate on the motivations of buyers, I would assume that the Bernanke/Yellen zero-interest rate policy (ZIRP) is a primary contributor. Investors have been starved for yield for so long (over five years now) that they are doing many irrational things, including purchasing funds at ridiculous premiums in a desperate chase for yield.

FOMC

The average retail investor, of course, knows nothing about premiums or discounts. What they do know is that they want a monthly distribution, and the bigger that distribution is, the better. The PIMCO High Income Fund certainly fits that bill, sporting an NAV distribution yield of 17.7% and a market price yield of 11.6%. With interest rates at all-time lows, these yields are eye-opening to say the least.

For comparison purposes, the distribution yields on the total bond market (BND), investment-grade (LQD), and high yield (HYG) ETFs are 2.2%, 3.4% and 5.6% respectively. To more than triple the yield of a high yield bond ETF is a proposition most investors simply cannot resist. It is so enticing, in fact, that they are willing to pay $1.53 for each $1.00 of assets in the fund.

If you’re wondering how the fund manages to pay out such a lofty distribution while yields on almost every class of bonds are near all-time lows, you’re not alone. I was asking the same question the first time I came across the fund. After doing some digging, we find that the average coupon of bonds in the PHK portfolio is only 6.8%, and the 17.7% distribution is achieved through a combination of leverage, derivatives, and a return of capital.

The average retail investor, of course, neither has the capacity nor the desire to understand these intricacies. They see a 17% “yield” and Bill Gross as the fund manager and cannot buy PHK fast enough. As the old saying goes, a “fool and his money are soon departed.”

But I digress. The point here is that the market is not efficient; not in weak form, semi-strong form, and certainly not in strong form. If it were, PHK would not be trading at an unfathomable premium for so many years. In fact, if the EMH were correct, it would not be trading at a premium at all. After all, the premium information is readily available and no “rational” investor would buy a fund trading at such a high premium. Also, in the instant the fund deviated from its NAV arbitrageurs would step in and short the fund while buying the underlying assets until the gap was closed.

Again, this hasn’t happened precisely because investors are not rational and many are likely expecting PHK to deliver them a 17% risk-free return. Rather than lament this fact, though, we should embrace it. It is this very irrationality among the masses that creates short-term opportunities in markets for the few that can keep their wits about them, especially in times of “crisis.” We saw this most recently at the end of 2013 when closed-end municipal bond funds were trading at enormous discounts to their NAVs due to investors overreacting to events in Detroit and Puerto Rico and the fear of rising interest rates.

Naturally, these funds are among the best performing asset classes in 2014 as the discount to NAV has been closed and fears have subsided. A non-random walk indeed.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

 

 

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A Look at Some Breadth Divergences

Advisor Analyst - Wed, 04/23/2014 - 07:15

by The Short Side of Long

Chart 1: Nasdaq broke down after fewer & fewer stocks made new highs

Nasdaq Highs & Lows

Source: Short Side of Long

The recent NYSE 52 Week New Highs & Lows data continues to show bearish divergence discussed last month. However, some of the market participants do not like following NYSE breadth data as it hold a large number of non-company issues. Therefore, from time to time I will also focus on Nasdaq stock exchange data, as seen in the chart above.

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During the recent rally into October 2013 Nasdaq posted 388 new highs. As the tech heavy index moved even higher into December 2013, number of new highs failed to expand with the readings falling to 326. Finally, as the index peaked in price around March of this year, it coincided with yet an even lower reading of 273 new highs. As the chart clearly shows, Nasdaq’s exponential rise was not going to be sustainable without a continuous expansion of new highs. Now that the correction has started, it is important to watch readings of new lows.

Chart 2: Bearish breadth divergence isn’t only seen in 52 week highs

Bearish Breadth Divergence

Source: index indicators (edited by Short Side of Long)

Similar to last month, I would like to point out that bearish divergence patterns aren’t just seen in the 52 week new high readings. The chart above makes an observation that despite S&P 500′s continuous rise towards record highs, there are variety of indicators warning us that the current rally isn’t sustainable in the long run. These include percentage of stocks at 50 day new highs, 100 day new highs, number of stocks with RSI at 70 (overbought) and finally the percentage of stocks trading above 100 day moving average.

Interestingly, majority of these divergences started around May 2013, just as interest rates began to rise. In other words, rising interest rates are putting pressure on the economy and various companies. As more companies enter downtrends, the market itself could eventually turn down too.

Chart 3: AD Line shows market has not been oversold since September

NYSE Advance Decline Line

Source: Short Side of Long

Refocusing our attention back to NYSE breadth readings, the chart above looks at advances vs declines averaged together with up vs down volume numbers. With recent readings right around neutral territory and market still in an uptrend, we have no major clues right now.

It is worth noting that this indicator has done a great job signalling lows during the recent bull market and other previous uptrends. As we can see from Chart 3, whenever AD / UD line became oversold, market was right at or close to an intermediate bottom. On the other hand, overbought readings aren’t as useful during uptrends, but become more relevant during downtrends and bear markets as seen during 2007-09 period.

Finally, the investor favourite – cumulative NYSE Advance Decline Line – still continues to rise towards new highs. Various technical analysts would claim this is a bullish omen and predicts further gains in the current overly aged bull market.

Chart 4: According to stocks above 200 MA, market is still overbought…

S&P Stocks Trading Above 200 MA

Source: Short Side of Long

Percentage of stocks trading above various moving averages has not changed much since the last report. Most importantly, the chart above shows that percentage of stocks above 200 day moving average still sits in overbought territory, as it has done so since late 2012. The question is, how long can the index stay overbought before a mean reversion? Let me remind you that the last time we saw oversold conditions were around November 2011.

The breadth strength is coming from the Industrials, Health Care and Utilities sectors where 95.5%, 89.2% and 92.3% of components are above their 200 day MAs respectively. On the other hand, weak sectors are currently cyclicals like Discretionary and Technology with 55.7% and 72.5% of stocks above 200 MA respectively.

Finally, Gold Miners remain in the depths of a bear market with only 15.4% of the sector components above their respective 200 MAs. This sector has been extremely oversold for a long time now and has experienced three annual losses in the row.

Chart 5: Gold miners continue to be the weakest sector in the S&P 500

Sector Breadth

Source: Short Side of Long

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The Long-End of the Yield Curve Flattens

Advisor Analyst - Wed, 04/23/2014 - 07:10

by , Crossing Wall Street

Here’s a look at the yield spread between the 5- and 30-year Treasuries. The gap between the two recently narrowed to 177 basis points which is a 4.5-year low.

image1399

What’s happening is that the back end of the yield curve is starting to flatten. Bear in mind that it’s still quite steep. It’s merely not as steep as it used to be.

What does this flatter back end mean? It’s hard to say but I suspect there are two opposing forces at work. At one end, investors are realizing that the U.S. fiscal situation isn’t as dire as once believed. The CBO recently had the “good” news that this year’s deficit will be under half a trillion dollars (yay?). That’s huge but not as huge as it used to be. Also, yields in the middle part of the yield curve are starting to reflect the belief that interest rates will rise next year, and in 2016.

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Here’s a look at the yield curve from five months ago and from yesterday. You can see where the red line is both higher and lower than the blue.

image1400

Historically, the best indicator for the economy has been the spread between the 2- and 10-year Treasuries. That’s still quite wide.

 

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