The tit-for-tat sabre-rattling and rhetoric continues to build ahead of this weekend's planned referendum in Ukraine's Crimea region. This morning has seen 3 new threads beginning with Ukraine's "live-fire" exercises involving T-64B tanks. This was then followed by warnings from Russia of "consequences" of "unconditionally indulging radical elements" in Ukraine calling US financial aid "illegal" which was swiftly responded to by the State Department exclaiming it "unacceptable" that Russian forces take matters into their own hands and "do not create the right environment for diplomacy." Not positive...
Ukraine did its own sabre-rattling:
- *T-64B TANKS INVOLVED IN EXERCISE, LIVE-FIRE TRAINING: MINISTRY
The Russians are not happy
Russia says planned US financial aid to Ukraine is illegal
Russia's Foreign Ministry said on Tuesday that planned U.S. financial aid to Ukraine is illegal and outside American legal norms since it would be funding an illegitimate regime.
"By all criteria, issuing funding to an illegitimate regime that seized power by force is unlawful and goes beyond the framework of the American legal system," the ministry said in a statement.
The statement echoed assertions made earlier in the day by ousted Ukrainian president Viktor Yanukovich. The ministry also warned Washington about the consequences of "unconditionally indulging radical elements" in Ukraine.
And Kerry has his own perspective:
U.S. STATE DEPARTMENT SAYS RUSSIAN RESPONSES TO U.S. QUESTIONS ON UKRAINE DO NOT CREATE RIGHT ENVIRONMENT FOR DIPLOMACY
Kerry told Lavrov it is unacceptable that Russian forces and irregulars continue to take matters into their own hands in Ukraine
Of course, this remains a constant distraction from the fact that Russian boots are on the ground in Crimea and the US (and the West) are stuck with how to "off-ramp" the escalating Russian threats without sanctions that would blow-back on to their own economies.
And then Merkel chipped in...
- *MERKEL SAYS RUSSIA IS ANNEXING CRIMEA, PARTY OFFICIAL SAYS
"The more information we get, the more we're inclined to conclude that it was not a terrorist incident," says the Interpol Secretary General Ronald Noble according to CNN, as details of the 2 Iranians at the center of the "stolen passport" uncertainty are identified. As CNN reports, Noble gave their names and ages as Pouri Nourmohammadi, 18, and Delavar Syed Mohammad Reza, 29 and added "they are not likely to be members of a terrorist group." Of course, the more dismal unknown is that of the entire plane and its passengers and crew which remain missing without a trace.
The two passengers in question entered Malaysia using valid Iranian passports, Noble said at a news conference. But they used stolen Austrian and Italian passports to board the missing Malaysian plane, he said.
Noble gave their names and ages as Pouri Nourmohammadi, 18, and Delavar Syed Mohammad Reza, 29.
Further, there's no evidence to suggest either was connected to any terrorist organizations, according to Malaysian investigators.
"We have been checking his background. We have also checked him with other police organizations of his profile, and we believe that he is not likely to be a member of any terrorist group," Khalid said.
CNN obtained an iReport photo of the two men with two of their friends, believed to have been taken Saturday before the plane disappeared. In it, they are posing with the two others, whose faces CNN has blurred to protect their identities.
Of course the biggest factor is now what happened to Flight 370? CNN sees 4 scenarios:
1. Scenario: Mechanical failure?
Fact: The absence of a debris field suggests the possibility that pilots were forced to ditch the plane and it landed on water without breaking up, finally sinking to the ocean floor.
Analysis: But if that were the case, then why no emergency signal? These planes are able to perform a "miracle on the Hudson" maneuver. They have the ability to glide more than 100 miles and belly land on the water with both engines out, says former 777 pilot Keith Wolzinger, now a civil aviation consultant with The Spectrum Group. During the time it would take for a plane to glide 100 miles, it seems likely that pilots would be able able to send an SOS.
Fact: The missing plane had suffered a clipped wing tip in the past, but Boeing repaired it, and the jet was safe to fly, said Malaysia Airlines CEO Ahmad Jauhari Yahya on Sunday.
Analysis: "Anytime there's been previous damage to an airplane, even though it's been repaired, and repaired within standards ... it kind of sends a warning flag," says Wolzinger. Experts agree the Boeing 777 is one of the world's most reliable aircraft. During its development it was subject to some of the most rigorous testing in commercial aviation history. "I've been talking with colleagues," Wolzinger says. "We're all baffled by this." The 777 boasts some of the most powerful and well-tested engines in the world, he says. "The reliability of airliner engines in general is impeccable these days," he says. "This is a safe plane."
2. Scenario: Pilot error
Fact: So far, there are no known indications that pilot error contributed to the aircraft going missing.
Analysis: Some aviation experts have compared Flight 370 to the crash of Air France Flight 447 in 2009. All 228 passengers and crew died when the plane went down in a storm in the Atlantic en route from Brazil to Paris. After an expensive, nearly two-year search across the deep ocean floor, the twin-engine Airbus A330's wreckage was finally found and the voice and data recorders recovered. A French investigation blamed flight crew for failing to understand "they were in a stall situation and therefore never undertook any recovery maneuvers." But unlike Flight 447, weather was reported as good along Flight 370's scheduled route and didn't appear to present a threat.
Asiana Airlines Flight 217 -- a Boeing 777 -- fell short during a runway approach last July at San Francisco International Airport. Three people were killed and more than 180 others hurt. National Transportation Safety Board investigators have focused on pilot reliance on automated flight systems as a possible contributor to the crash, but a final report has not yet been released.
3. Scenario: Bomb? Or 'dry run'?
Fact: Two stolen passports have been linked to people who held tickets for the flight.
Analysis: This points to the possibility that someone on a terrorism watch list may have boarded the plane and blown it up. However, the stolen passports don't necessarily mean the plane was an actual target. It's possible, says former U.S. Department of Transportation Inspector General Mary Schiavo, that terrorists may have been performing a "dry run" for a future attack. Or, Schiavo said, "it could be just criminal business as usual," because "there are lots of stolen passports" used by travelers around the world.
Fact: So far, no debris field of plane wreckage has been linked to the 777, which would indicate a bomb blast.
Analysis: When Robert Francis, former vice chairman of the U.S. National Transportation Safety Board, heard about the missing plane, his immediate thought was: "For some reason the aircraft blew up and there was no signal, there was nothing." The fact that the plane disappeared from radar without warning indicated to Francis "there was something unprecedented that hasn't happened before."
What about satellite technology? Is it possible that data from orbiting satellites might show a flash or infrared heat signature from an explosion? Very unlikely, says satellite expert Brian Weeden, who spent years tracking space junk in orbit for the U.S. Air Force. Dozens of government and private satellites orbit the earth, looking down from distances from 300 kilometers to 1,500 kilometers (185 to 930 miles). It's a long shot that one of them coincidentally floated over at the exact right time and location to capture a flash from an explosion.
However, there's an "off chance," Weeden says, that a super secret U.S. government satellite orbiting 22,000 miles in space might have grabbed evidence. These satellites are in geosynchronous orbit. As a group, they can observe virtually the entire globe. "We know that their mission is to detect ballistic missile launches via heat," says Weeden, now a technical adviser for Secure World Foundation. "We don't know if they're sensitive enough to track something like a bomb blast, even if that's what happened."
Then there's another unanswerable question: Would the government hesitate to release such an image for fear of revealing the satellite system's ultraclassified capability?
4. Scenario: Hijacking?
Fact: Before it disappeared, radar data indicated the plane may have turned around to head back to Kuala Lumpur. Is that a clue that a hijacker had ordered the plane to change course?
Analysis: So far, there have been no reports that the flight crew sent any signals that a hijacking had occurred.
While the world is terrified about what China - where corporate bond defaults are now permitted - may be about to unleash on the world, most are all too happy to remain in a state of delightful ignorance. We decided to take a peek behind the scenes.
Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named "Magic" (no comment) is set to default on a CNY196 million Trust.
The default may or may not happen, as there is always a high likelihood it will simply be bailed out as has happened frequently in the past, but regardless of the final outcome, here is what is really going on behind the scenes. From Bank of America:
31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust
Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.
Potential outcome: The developer and the trust company may share the repayment.
Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.
Please re-read that first part again:
CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.
So, "Magic" not only sold the collateral... but also mortgaged it to a few other lenders: lenders who count its as a perfectly performing asset when in reality they have zero claims to it. Did they steal that straight from the MF Global instruction manual?
Now add this:
"The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer."
... and multiply by a few thousand for all the other shadow (and not so shadow) players who have engaged in precisely this kind of gross abuse of underlying collateral, which also happens to be the main reason why China can magically create trillions in debt out of thin air with zero collateral constraints, each and every year, no questions asked.
Well, the time to ask a question or two has finally arrived.
Bank Of England Restructures After FX Probe But Not Responsible "For Hunting For Rigging Of Markets"
"We can't come out of this with a shadow of doubt about the integrity of the Bank of England," Governor Mark Carney told MPs this morning on the heels of the report, as we noted here, that found no collusion by the bank to manipulate FX rates. A senior BoE employee was told of "attempts to move the market" but "did not convey to [Monetary Policy Committee member Paul Fisher] that markets were being rigged," and therefore was suspended. While many have called this "as bad as Libor" the BoE remains adamant of its lack of involvement but is still restructuring itself - adding that "it isn't our job to go out hunting for rigging of markets." Nope, just to ignore it, we presume. MPs were not impressed.
The Bank of England will restructure following claims that some of its officials knew about alleged foreign exchange rate fixing.
Governor Mark Carney told MPs on the Treasury Committee that it would create a new deputy governor position with responsibility for markets and banking.
But he said it had no warning of the alleged manipulation before October.
The Bank currently has three deputy governors, with responsibility for monetary policy, financial stability and prudential regulation.
The Treasury Committee hearing was aimed at finding out what Bank officials knew of the alleged foreign exchange rate fixing claims.
Mr Carney said it had no information that anyone from the Bank condoned, facilitated or took part in market manipulation.
"We can't come out of this with a shadow of doubt about the integrity of the Bank of England," he added.
The bank said there was no evidence its staff had colluded to rig the market.
The minutes of meetings from 2006 were published last Wednesday following a Freedom of Information request.
They show that a senior member of the Bank of England's staff was told of "attempts to move the market" at a meeting with senior foreign exchange dealers from some of the world's largest banks.
Traders are alleged to have communicated with each other to agree the rate of exchange for foreign currency deals.
It is thought some traders may have used online chat rooms to set a benchmark for currency trades.
Andrea Leadsom said that the minutes should have set off alarm bells.
However, Monetary Policy Committee member Paul Fisher, also appearing in front of the committee, said those minutes "did not convey to me that markets were being rigged".
"It isn't our job to go out hunting for rigging of markets," he adds.
But, as Bloomberg notes, this is far from over...
Uk Treasury Committee Chairman Tyrie Says Early Signs From Boe Response To Fx Rigging Allegations Are Not Encouraging
DAILY PRICE REPORT
Today’s AM fix was USD 1,348.00, EUR 973.57 and GBP 810.44 per ounce.
Yesterday’s AM fix was USD 1,334.25, EUR 961.55 and GBP 800.87 per ounce.
Gold rose $0.7 or 0.05% yesterday, to $1,339.90/oz. Silver dropped $0.08 or 0.38% to $20.81/oz.
Gold in US Dollars - 1 Year (Bloomberg)
Gold rose in all currencies again today and headed towards a four month high in dollar terms as the standoff between Russia and Ukraine led to demand for gold as a haven. Silver surged 1.4%, platinum added 0.3% to $1,481.60/oz and palladium rose 0.3% to $777.80/oz.
Resistance is between $1,350 and $1,360 and above that at and $1,435 per ounce.
The U.S. and Europe are continuing to threaten Russia, the world’s biggest energy producer and miner of palladium, with economic sanctions for sending troops into Ukraine’s Crimea region. Ukraine’s new prime minister prepared to meet President Obama and western nations threatened further repercussions if Russia failed to defuse tensions.
In South Africa, more than 70,000 members of the Association of Mineworkers and Construction Union have been on strike since January. South Africa is the largest producer of platinum and second biggest for palladium after Russia.
Speculation that terrorism may have contributed to the missing plane in Malaysia may also be leading to a safe haven bid. Fingers are being pointed at Iran which could lead to renewed geopolitical tension between Iran and some western nations.
Bitcoin Exchange 'Faced 150,000 Hack Attacks Every Second’
Mt. Gox’s lawyers confirmed yesterday that 750,000 Bitcoins belonging to the firm’s customers had gone “missing”, along with around 100,000 units that the company owned.
Bitcoin exchange Mt. Gox faced massive hacker offensives last month. It is alleged that it came under some 150,000 DDoS attacks per second for several days ahead of its spectacular failure.
The Tokyo based exchange, which filed for bankruptcy protection at the end of February, admitted that it has lost half a billion dollars in the digital currency. It has come under serious cyber attacks in particular since around February 7, the Yomiuri Shimbun reported.
While Mt. Gox faced hacker attempts to steal Bitcoins, the exchange also confronted massive distributed denial of service (DDoS) attacks, crippling its technology and systems, the Japanese newspaper said without naming its sources.
Under DDoS attacks, hackers hijack multiple computers to send a flood of data to the target, crippling computer systems. The attacks on Mt. Gox lasted for several days, the newspaper said.
Unlike physical gold bullion, Bitcoin is generated by complex chains of interactions among a huge network of computers around the planet. This creates advantages and disadvantages.
Bitcoin has huge dependency on systems and technology. In this, there is a resemblance with the modern digital banking system as the world is pushed towards a cashless society. Were hack attacks launched on banks, investment providers or exchanges, many of whom are now wholly dependent on website technology and user interfaces, and investors would be exposed and could incur losses.
Technological risk and systemic risk are another important reason to own physical gold coins and bars in segregated and allocated accounts. Having the ability to pick up a phone, fax or email and take delivery of bullion is also important.
Mark Karpeles, chief executive of Mt. Gox, apologised for the collapse at a news conference earlier this month, blaming a “weakness in our system”, but predicted that the market will grow.
Our modern financial system and its dependence on technology is far more vulnerable than is realised.
The 7 Key Bullion Storage Must Haves
A diversification into precious metals remains prudent and will again protect investors, both retail and institutional, pensions owners and savers, over the medium and long term. However, this is only the case if bullion owned is physical bullion coins and bars.
It's all about the fun-durr-mentals... but, just in case you don't believe that, this morning's angst over copper financing and China credit concerns has sparked notable carry unwinds (USDJPY below 103 and AUDJPY 93) and therefore US equities are tumbling (tick for tick). This morning's volatility in stocks was considerable around the open suggesting a lot of uncertainty and nervousness.
The latest JOLTS numbers are out, and while most economists look at the simple headline Job Openings number, which printed at a disappointing 3.974MM, below the expected 4.015MM, and a drop from the unrevised 3.990MM last month (conveniently revised lower to 3.914MM to make the sequential change appear as an increase), as well as down from the 4.126MM in November, far more interesting data can be found in the Hires and Separations data series. As we have shown before, when it comes to the "recovery" in the job market, there is no greater myth than "employers are finally looking to hire at past economic peak levels." Because while the monthly job increase may have stabilized in the mid-100k range, the actual hiring is nowhere near close to where it should be based on historic patterns.
The chart below shows that while there has traditionally been near 100% correlation between the 1 year cumulative change in payrolls, and the monthly amount of job hires, in the New Normal this is anything but true.
The simple explanation: the only reason why it "seems" things have gotten back to normal, is not because there is hiring, but because companies have put a freeze on terminations, and with quality jobs few and far between, workers still refuse to leave existing jobs voluntarily, further confirmed by the Quits print which just dropped to 2.375MM, the lowest since October as confidence in finding a better paying job has rapidly evaporated. Perhaps the snow is to blame for that too?
Finally, confirming just how bad the job situation has gotten recently, here is the JOLTS chart of net turnover, i.e., hires less separations which is the functional equivalent of the NFP's monthly job gains print, which according to JOLTS in January printed at the lowest level since August 2012.
Wait for it... wait for it... "Snow."
Copper futures prices are plunging once again, back under $3.00 back at the lowest levels since July 2010. The last 3 days have seen prices drop over 7.5% as China credit contagion concerns surge and letters-of-credit from last summer's cash-for-copper financing deals roll-off and businesses need the cash. The vicious circle of tumbling collateral values (copper and Iron ore) is exacerbating the tightening financial conditions in China as banks hoard liquidity, unwilling to lend to the over-capacity industries that the government has deemed unworthy. Rumors today of further defaults triggered this latest drop, and as we noted previously, there are a lot more to come.
Copper futures intraday are collapsing...
Which takes it back to July 2010 levels...
and LME Copper (where much of the L/C cash-for-copper deals were held) is also in freefall.
Rumors today of another Chinese corporate default, the second in a row are adding fuelt to the fire. Via BusinessWeek,
Baoding Tianwei Baobian Electric Co. (600550)’s bonds and stock were suspended from trading today after the Chinese electrical equipment maker said it reported losses for a second year running.
The company, which also makes solar panels and is based in the northeast province of Hebei, reported a net loss of 5.23 billion yuan ($852 million) in 2013 versus a 1.55 billion yuan earnings deficit a year ago, according to a statement to the Shanghai stock exchange yesterday. The exchange, in line with its rules, will decide in seven trading days whether to continue the trading halt on Tianwei Baobian Electric’s bonds until its losses are reversed.
Investor scrutiny of China’s onshore bond market is mounting after Shanghai Chaori Solar Energy Science & Technology Co. last week became the first company to default. Chaori Solar’s failure to pay has stoked speculation more companies may miss debt deadlines also.
Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.
And don't look at what's coming down the shadow banking default pipelines, as we showed before. via BofA's David Cui
12 potential defaults reported by the media
Table 1 summarizes the information on the 12 major potential defaults in the trust industry that have been reported by the media. Most of them are coal mine related and heavily concentrated in one area, Shanxi Province. So far it seems to us that most of them may get extended upon the due date. The only exception over the next few months appears to be a product issued by China Credit Trust for a lead and zinc miner in Sichuan, Nonggeshan. Even without any major default over the next few months, the process of debt restructuring can be messy and weigh heavily on market sentiment.
19 Feb 2014, Rmb109mn borrowed by Liansheng & arranged by Jilin Trust
- Details: This Rmb109mn tranche is part of a six-tranche trust product worth a total of Rmb973mn arranged by Jilin Trust for Liansheng, a Shanxi coal miner. The other five tranches have matured since 2H 2013 and remain overdue.
- Potential outcome: Repayment may be extended.
- Reason: Liansheng is undergoing a debt restructuring coordinated by the Shanxi provincial government. 1) The provincial government plans to help out involved financial institutions to ensure the region’s access to ongoing financing. According to people close to the situation, the implicit guarantee practice will most likely continue with the Liansheng’s case. 2) Trust companies may have to follow banks to help the miner out. Banks have agreed to extend their mid/long term loans by three years. Top 3 banks have total debts of Rmb10.6bn to Liansheng; top 3 trust lenders, Rmb3.7bn.
(Shanghai Securities News, 2/11; Economic Information, 2/13)
21 Feb 2014, Rmb500mn borrowed by Liansheng & arranged by Shanxi Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the Jilin Trust case.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
07 Mar 2014, Rmb664mn borrowed by Liansheng & arranged by Changan Trust
- Details: Other than the Rmb664mn product to mature on Mar 7, Changan Trust arranged another two products for Liansheng, totaling Rmb536mn which matured in Nov 2013. Both products remain overdue.
- Potential outcome: repayment may be extended.
- Reason: Same as the other Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust
- Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.
- Potential outcome: The developer and the trust company may share the repayment.
- Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.
(Source: Financial Planning Weekly, 3/6/2013; Guangzhou Daily, 4/6/2013, Boxun, 5/10/2013)
14 May 2014, Rmb1.5bn borrowed by Liansheng & arranged by China Jiangxi International Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the other three Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
30 May 2014, Rmb140mn borrowed by Nonggeshan & arranged by China Credit Trust
- Details: invested in a lead and zinc mine in Sichuan.
- Potential outcome: Likely to default.
- Reasons: 1) Compared to coal mines of Zhenfu and Liansheng, the lead and zinc mine is a much less attractive asset: it is located in the mountains over 5,000 meters in altitude, inaccessible for 6 months of the year due to weather conditions, with low lead/zinc content; 2) According to an unnamed regulator, the central government is comfortable with trust defaults in the range of Rmb100-200mn.
(Source: 21st Century Business Herald, 31/7/2012; Caiing, 1/27)
25 Jul 2014, Rmb1.3bn borrowed by Xinbeifang & arranged by China Credit Trust
- Details: Xinbeifang is another Shanxi coal miner.
- Potential outcome: repayment may be extended.
- Reason: Xinbeifang is negotiating with an SOE to sell some of its coal mine assets.
(Source: China Securities Journal, 1/15)
27 Jul 2014, Rmb319mn borrowed by Hongsheng & arranged by Huarong Trust
- Details: Hongsheng is a Shanxi coal miner. Huarong sold another trust product for it which will mature in 4 September 2014, worth Rmb63mn.
- Potential outcome: repayment may be extended.
- Reason: Hongsheng may have assets to secure more financing. It issued these two trust products to replace another trust product that matured in Q3 2012. The owner also issued other trust products using his personal property assets as collateral and raised Rmb1.2bn.
(21st Century Business Herald, 20/12/2013)
7 Sept 2014: Rmb400mn borrowed by Zengdai & arranged by CCB Trust
- Details: 1) The proceeds of the product were invested in financial markets. 2) Its 1st tranche, worth Rmb400mn, matured in Mar 2013 with a 38% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the product to Sept 2014. 3) Its 2nd tranche, worth Rmb359mn, matured in June 2013 with a 31% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the 2nd tranche to Dec 2014.
- Potential outcome: The trust company and the investment company may share the losses.
- Reasons: 1) The investment company refused to repay investors in full at the original due date so the trust company may have to chip in; 2) By Jan 2014, the 1st tranche reported a narrower loss of 24%, and the 2nd tranche, also a narrower loss of 13%; 3) Zengdai may pay on behalf of its investment company for reputation’s sake.
(Source: Securities Daily, 9/7/2013; CCB Trust)
20 Nov 2014, Rmb600mn borrowed by Liansheng & arranged by China Jiangxi Int'l Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the other Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
23 Dec2014: Rmb1.1bn borrowed by Xiaoyi Dewei & arranged by China Resources Trust
- Details: Xiaoyi Dewei is a Shanxi coal miner. The trust product originally matured in Dec 2013 but repayment was extended to Dec 2014.
- Potential outcome: Likely to default.
- Reason: Both the miner and the trust company refused to repay investors in full at the original due date. There has been no reporting on asset sales by Xiaoyi Dewei.
(Source: Financial Planning Weekly, 11 Nov 2013)
15 Jan 2015, Rmb1.2bn borrowed by Hongsheng’s owner & arranged by Minmetals Trust
- Details: the collateral is the Shanxi coal miner’s personal property assets.
- Potential outcome: May be replaced by a new trust product.
- Reason: Same as the July 2014 Rmb319mn trust product issued by Huarong Trust.
(21st Century Business Herald, 20/12/2013)
2Q/3Q 2014 – the next peak maturing period for collective trusts
We consider the trust market the most vulnerable part of the major financing channels for companies, i.e. loan, corporate bond and trust. The quality of the borrowers in the trust market tends to among the lowest. Within the trust market, collective trust products, i.e. those sold to more than one investor, tend to be risker than single trust products, i.e. those sold to a single investor. This is because investors in single trust products tend to be more substantial in resources, thus most likely more sophisticated in their risk control.
The Wind database lists close to 12,000 collective trust products, worth Rmb1.34tr, which cover roughly half of the collective trust market (Rmb2.72tr as of the end of 2013). It has reasonably good quality data series on the issuing dates and amounts raised. However, data on maturing dates are sporadic. We estimate that the average duration of the trust products is around 2 years. Based on this assumption and the issuing dates, we have mapped out a rough maturing profile of the collective trust market. As we can see from Chart 1, 2Q and 3Q this year will be the next peak maturing period for this market.
"In the future, no matter how the situation is resolved in Crimea, we need a much stronger Ukraine," warned Pavlo Rizanenko, a member of the Ukrainian parliament, adding that "If you have nuclear weapons people don't invade you." It would seem tough for the West (and their START Treaty) to get behind a nation that, as USA Today reports, believes it may have to arm itself with nuclear weapons to enforce a security pact to reverse the Moscow-based takeover of Crimea. "We gave up nuclear weapons," (inherited from the Soviet Union) because of the 1991 agreement that The United States, Great Britain and Russia would "assure Ukraine's territorial integrity" but Rizanenko told his government today, "now there's a strong sentiment in Ukraine that we made a big mistake."
The United States, Great Britain and Russia agreed in a pact "to assure Ukraine's territorial integrity" in return for Ukraine giving up a nuclear arsenal it inherited from the Soviet Union after declaring independence in 1991, said Pavlo Rizanenko, a member of the Ukrainian parliament.
"We gave up nuclear weapons because of this agreement," said Rizanenko, a member of the Udar Party headed by Vitali Klitschko, a candidate for president. "Now there's a strong sentiment in Ukraine that we made a big mistake."
Rizanenko and others in Ukraine say the pact it made with the United States under President Bill Clinton was supposed to prevent such Russian invasions.
The pact was made after the Soviet Union dissolved in 1991 and became Russia, leaving the newly independent nation of Ukraine as the world's third largest nuclear weapons power.
To reassure the Ukrainians, the United States and leaders of the United Kingdom and Russia signed in 1994 the "Budapest Memorandum on Security Assurances" in which the signatories promised that none of them would threaten or use force to alter the territorial integrity or political independence of Ukraine.
They specifically pledged not to militarily occupy Ukraine. Although the pact was made binding according to international law, it said nothing that requires a nation to act against another that invades Ukraine.
The memorandum requires only that the signatories would "consult in the event a situation arises which raises a question concerning these commitments." Ukraine gave up thousands of nuclear warheads in return for the promise.
The U.S. and U.K. have said that the agreement remains binding and that they expect it to be treated "with utmost seriousness, and expect Russia to, as well."
"Everyone had this sentiment that for good or bad the United States would be the world police" and make sure that international order is maintained, Rizanenko said of the Budapest pact.
"Now that function is being abandoned by President Obama and because of that Russia invaded Crimea," he said.
"In the future, no matter how the situation is resolved in Crimea, we need a much stronger Ukraine," he said. "If you have nuclear weapons people don't invade you."
It would appear this is yet another line or "cost" that Obama will have to weigh but the rhetoric doesn't get much more aggressive than that...
Last week showed traders that neither bulls nor bears are in control.
"US retail as we have known it for hundreds of years is in sharp decline," warns Bloomberg Brief's Rich Yamarone, adding that "market participants should take note of the fallout in a sputtering US economy." The retail apocalypse, as we discussed here, is dominated by mass layoffs, weak traffic, and poor wage growth and, as Yamarone highlights, it's not hard to see why...
The 13-week moving average pace of retail spending shown by the ICSC-Goldman Sachs Retail Chain Store Index is below that which traditionally signals a slowdown.
Of course this most recent dive will all be blamed on the weather but another look at the chart shows the trend was well in place long before this winter and will continue well into the future unless something changes. As Yamorone goes to note, this has significant implications - as the shift from bricks-and-mortar to online echoes up through the retail infrastructure of America...
That a lot of the cash not being spent on the high street will show up in online sales is scant consolation for operators of existing infrastructure. There are ripple effects for the towns that surround it, and awful consequences for retail associates and their families.
The need for retail employees is essentially limited to clothing and footwear stores since apparel and shoes are not standard items with varying sizes, colors, and fabrics. For the more ubiquitous items like electronics or sporting goods, the need for a dedicated store or staff is diminished. During February, the number of employees at electronics and appliance stores fell by 12,000 to 503,700, while sporting goods, hobby, book and music stores furloughed 8,600 workers.
Ordering online means reduced foot traffic at malls. The year-over-year change in the ShopperTrak’s month-to-day Retail Traffic Index contracted by 5.2 percent in February – a weak trend that has been lingering for the last 12 months.
Finally, while many high-ranking "economists" of the sell-side varietal would prefer to shove any and all negatives under the capret proclaiming them merely weather events - for instance here is Deutsche's Joe Lavorgna's tweet cloud from the last 40 days (h/t @Not_Jim_Cramer):
Yamorone has more ominous words by way of conclusion...
Economically speaking however, the bottom line remains fewer jobs, the ultimate determinant of income and spending. The broader decline of bricks and mortar retail, have to be factored into any serious forecasting of the direction of the U.S. economy.
by Todd Wenning, Clear Eyes Investing
“The prime purpose of a business corporation is to pay dividends to its owners. A successful company is one which can pay dividends regularly and presumably increase the rate as time goes on”. – Security Analysis, Graham and Dodd
To defenders of the efficient market hypothesis and “rational” markets, dividend-focused strategies can seem to be irrational and an anomaly. Some behavioral economists even chalk dividend strategies up to investor biases such as loss aversion, regret avoidance, and an inability to delay gratification.
Two articles (here and here) by the BAM Alliance’s Larry Swedroe from this week summarize these criticisms quite nicely and are worth reading. (If anything, it’s important to challenge your beliefs now and then by seeking contrary opinions.)
Yet somehow dividend investing works and has worked over generations and across markets, as investment adviser Tweedy, Browne shows in its papers “The High Dividend Yield Return Advantage” and “What Has Worked in Investing“. I’ve also personally seen it work for many individual investors and in my own portfolio.
Haters gonna hate
In his 2012 letter to shareholders, Warren Buffett made a compelling case as to why Berkshire Hathaway doesn’t pay a dividend. Dividend critics often point to Buffett’s comments as support for their argument.
What these critics miss, however, is that Buffett was only referring to why his particular company doesn’t pay dividends. Berkshire doesn’t pay dividends, Buffett reasons, because he thinks he can manage the capital better than shareholders — and most would agree with him.
Buffett certainly doesn’t mind receiving dividends from his portfolio holdings, with most of his largest holdings (Coca-Cola, Exxon, Sanofi, etc.) paying very ample dividends each year. That’s because he takes the dividends and reinvests them where he sees the best opportunities.
The fact is that few management teams allocate capital as effectively as Buffett does. As such, they should only have capital they need to reinvest in value-enhancing projects. All extra cash should be returned to shareholders. In addition, by having a certain amount of earnings earmarked for dividends each year, management teams need to focus on investing the remaining capital in an efficient manner.
Indeed, a 2003 article in the Financial Analysts Journal by Arnott and Asness even found a counterintuitive-but-positive relationship between earnings growth and dividend payout ratios:
The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low….Our evidence contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster future earnings growth. Rather, it is consistent with anecdotal tales about managers signaling their earnings expectations through dividends or engaging, at times, in inefficient empire building.
By investing in firms that pay out a meaningful portion of earnings each year as dividends, then, investors are reducing the risk that management will mis-allocate the capital toward empire-building or value-destructive acquisitions and buybacks.
As Benjamin Graham noted in Security Analysis, “a dollar is worth more to the stockholder if paid him in dividends than when carried to surplus [by the company].” I’d much rather have some of the firm’s earnings in my pocket each year than leave it all in the company’s coffers. If that money is going to be subsequently misspent, I’d rather it be my own fault than someone else’s.
Show me the money
Further, when you invest in a firm that doesn’t pay dividends, the only cash flows you can see are the ones the company’s accountants says it has. Problem is you can’t actually touch any of that cash. Dividends, however, need to be paid in cash and can’t be faked. At least for very long.
Firms that are able to consistently generate enough cash to commit to a dividend and are confident enough to raise their payout each year are probably doing something right. A progressive dividend policy also shows a company’s shareholders that it views them as partners in its prosperity.
Finally, it may be irrational by traditional finance standards, but focusing on the income return naturally shifts attention away from the short-term price volatility that often causes investors to trade too frequently — and usually at precisely the wrong time. If focusing on dividends helps investors bear through difficult markets when they would have made emotional trading decisions and racked up high transaction costs in the process, well, I don’t see much wrong with that.
Don’t get me wrong, total return (capital gains plus income growth) should be the primary long-term objective, but if you can consistently identify quality firms that can grow their payouts each year and buy them at a good-to-fair price, the capital gains should take care of themselves.
You won’t find this in any finance textbooks, but dividend investing works precisely because it encourages investors to think like investors — that is, focus on buying good companies (poorly-run companies can’t sustain high dividend growth for very long) at good-to-fair prices and hold them patiently.
Sure, you could do the same with a strategy that doesn’t include dividend-paying stocks and sell partial stakes to generate “dividends” as needed. That’s much easier said than done, of course, as it requires nerves of steel and a high level of trust that the companies are allocating your capital better than you can.
Dividend investors may indeed be irrational, but I’m content being the irrational guy patiently letting my dividends roll in from well-run companies that I bought at a good price.
What do you think? Please let me know in the comments section below.
Good reads this week
- Paul Scott’s daily UK small cap report (I highly recommend this – and it’s free) – Paul Scott via Stockopedia
- An interview with behavioral investing expert Michael Mauboussin – Motley Fool
- Tim Cook doesn’t care about “Bloody IRR” – Aswath Damodaran
- Millennials and the new death of equities – A Wealth of Common Sense
- Charlie Munger on governance – 1 Raindrop
Quote of the week
A man is rich in proportion to the things he can afford to let alone. – Thoreau
Stay patient, stay focused.
@toddwenning on Twitter
(long BRK.B, KO)
Copyright © Clear Eyes Investing
by Adam Butler, GestaltU
We’ve been spending a lot of time recently discussing the quality of investment modeling, and the reliability of back-tests. Specifically, we covered multiple discovery and degrees of freedom as two compelling reasons for out-of-sample performance decay. Both of these sources of decay relate to the model itself.
Multiple discovery suggests that the most valuable, achievable advances in a field are often being examined simultaneously – yet independently – by many people at the same time. It stands to reason that on these occasions, leaps in logic can often occur at the same time by independent parties. And even in the cases where an individual makes the leap, it doesn’t take long for intelligent, competing parties to use reverse engineering to “catch up.”
Degrees of freedom relates to the counterintuitive notion that the more independent variables a model has – that is, the more complicated it is in terms of the number of independent ‘moving parts’ - the less reliable a back-test generally is. This is because more independent variables create a larger number of potential model states, each of which needs to meet its own standard of statistical significance. A model that integrates a great many variables seems like it would be robust; to the contrary, it is likely to be highly fragile.
Today, we endeavor to broaden the topic of degrees of freedom by adding a layer that is all-too-often ignored: your (our) behavior. As quantitative investors and researchers, we generally don’t like to work in “squishier” areas of social science. As trusted financial advisors, however, we know that when we sit across from clients, they often need more than just an evidence-based approach to investing. Often, they need encouragement, nurturing and coaching.
People use facts as factors in decision making, but they take action on emotion. We engineer investment strategies that not only work in silico, but that also work in practice with real clients whose behaviours and actions are never completely removed from their emotional state. In other words, the rules based approaches we apply in practice need to be compatible with the much less predictable black box inside your (and our) skull.
In the world of statistics, there are classifications for different types of variables. We spend a great deal of time on this blog talking about “system variables.” These are the rules which guide our research and investing. They relate to how we examine and stress test models to achieve statistically significant results and how we ultimately make investment decisions. These variables are procedural, and they are eminently controllable.
We’ve spent less time on this blog – at least recently – discussing “context variables.” These variables relate to the investor specifically, and to their cognitive and behavioral responses to a given set of circumstances. For example, each investor has a slightly different reaction to gains and losses of different magnitudes. These are sometimes called “estimator variables” but we think “context variables” is a more intuitive term.
If the difference is unclear, imagine that you are brought in to a police station for the purposes of providing eyewitness testimony. The police will have a procedure that they put you through. Will you look at a lineup of real people? Will you look at pictures? If you do look at pictures, will they be sequential? In sets of 6? While you’re doing all of this, will an officer be looking over your shoulder? What gender, race and age will the officer be relative to the witness? Or relative to the suspect?
All of the variables in this process are “system variables” because they are under the direct control of the person managing the system. It’s a choice to do an eyewitness identification using one procedure versus another.
Now imagine your specific mental state while sitting in the police station. How might your mental and emotional status change depending on the nature of the crime? What if there was a weapon involved – would you focus on the weapon or the assailant? How confident would you be in your identification if the crime happened an hour ago versus a day ago versus a week ago? In your neighbourhood vs. a neighbourhood far from your home? Are you more or less likely to select a picture reflective of your own race or sex? Are people with tattoos miscreants or creative types?
All of these are “context variables” because they relate to you and the context surrounding your individual decision making process, in this case your ability to provide accurate eyewitness testimony.
To be clear, there is a relationship between system variables and context variables; they are not completely independent of each other. For example, optimizing system variables by implementing procedures that decrease anxiety and decrease the amount of time between the crime and the identification can help stabilize otherwise volatile context variables, leading to more accurate eyewitness testimony.
Investing operates in much the same way. We constantly endeavor to explore new investment methods, integrating ideas where appropriate and putting into production system variables that show strong statistical significance. And we know that if we are successful, we will likely have a muting effect on otherwise volatile context variables. In plain English, if we design a system that delivers stability and growth, we know our clients are likely to make more rational financial decisions and generally show higher levels of commitment to their long-term investment plan.
Unfortunately, this won’t always be the case, which brings us back to performance decay. Every year, DALBAR releases their updated Quantitative Analysis of Investor Behavior (QAIB). Predictably, it shows that the average investor does significantly worse than a simple buy-and-hold investor. Much of this performance gap is attributed to behavioral deficiencies (aka context variables); a great many investors trapped by cycles of fear and greed buy high and sell low.
One issue that isn’t addressed by the QAIB is the notion that there exists a connection between system and context variables. If you are investing in the S&P 500 where 6-month price volatility since 2000 has had zen-like lows near 7% and mania-inducing highs above 58%, it seems almost natural that your responses would follow a predictable downward spiral of doing the exact wrong thing at the exact wrong time. In other words, the investment system isn’t completely blameless in the examination of emotionally flawed investing.
Volatile investment results induce volatile emotional responses, almost always to the investor’s detriment. 1987 notwithstanding, “buy and hold” was relatively easy to do from 1982-2000; it’s been an emotional roller coaster ever since.
We have a motto in our office: “We’d rather lose 50% of our clients near the peak of a runaway bull market, than 50% of our clients’ assets during the inevitable bear markets.” If most Advisors are honest with themselves, they will admit that their advice leads to precisely the opposite outcome. To wit, an Advisor advocating “Strategic Asset Allocation” – or a “buy and hold” philosophy - with a large equity component is definitionally acting in a way that is inconsistent with our philosophy. That’s because this type of portfolio can expect a 30% – 50% loss in value about once every 7 years. This Advisor will collect most of his clients near the end of a long bull market when his near-term performance has necessarily been strong. Soon after these clients will endure a major loss. This is a nearly universal cycle in wealth management.
…hence, why our motto stands out.
In our Adaptive Asset Allocation method, we’ve endeavored to deliver impressive results while focusing intensely on risk controls. Because of this, we know that there will be times when our model underperforms whatever stock index is in the headlines. We know that sometimes this underperformance will endure for extended periods of time. Further, we know we will almost certainly lose some clients near the end of this bull run. It’s happened before, and it will happen again.
But the difference is that we find it impossible to look our clients in the face when the stock market is down 50% and say that we succeeded by only losing 45%. That’s in our DNA. And it’s why we encourage investors to analyze the performance of any Advisor under consideration over an entire market cycle, which includes both bull and bear markets. In doing so, we also believe that we’re helping our clients “short circuit” the vicious cycle that the QAIB annually revisits.
After all, should we judge sports teams only on how they perform in the first half of the game? Or does the back half matter?
It’s true that we don’t spend as much time on this blog as our colleagues might discussing behavioral finance. Now you know why: the best way we know to limit the adverse effects of such behaviors is to provide our clients with a return profile that doesn’t compel them to make bad choices under duress.
Copyright © GestaltU
The post The Black Box: Eyewitness Testimony and Investment Models appeared first on GestaltU, March 7, 2014.
by Sober Look
Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent years.
1. Increasingly asset managers are bought by other asset managers in strategic acquisitions (and to a lesser degree by financial sponsors).
2. Banks have stopped acquiring asset management businesses. In fact what the chart doesn’t tell us is that banks have been actively selling their asset management businesses (especially in alternatives such as private equity) mostly to established asset management firms (which is where the trend in item #1 above comes from). Here are some high profile examples:
- Blackstone buys secondary private equity fund called Strategic Partners from Credit Suisse (see press release).
- Grosvenor (fund of hedge funds) buys private equity fund of funds named Customized Fund Investment Group (CFIG) from Credit Suisse (see story).
- Aberdeen Asset Management buys Scottish Widows fund from Lloyds Bank (see story).
- SunTrust sells RidgeWorth asset management business to Federated Investors (see story).
- Credit Suisse blows out its mezzanine fund business called DLJ Investment Partners to Portfolio Advisors (see story).
- Deutsche Bank to sell its asset management business (see story) – likely to Guggenheim Partners.
- JPMorgan is still trying to sell its private equity business (see story), although the price tag has been a bit too rich for potential buyers (see story).
Why are banks selling these businesses? The obvious answer of course is the looming Volcker Rule. But these funds invest clients’ money – why would it impact banks’ balance sheets? The answer has to do with alternatives investors’ requirement that banks that manage money put some serious “skin in the game”. A typical general partner (fund manager) may put in say 1-3% into a fund it manages. A bank however is required to coinvest a much larger percentage with its investors. That’s because investors worry that banks will stuff deals which are difficult to sell into their funds, focusing on lucrative investment banking deal fee income at the expense of performance. But the Volcker Rule only permits banks to commit up to 3% to their funds, making the business of managing funds untenable. That, combined with banks’ relatively high cost structure and in some cases capital constraints (particularly for European banks), is driving them to shed asset management businesses.
Copyright © SoberLook.com
Moments ago, a hearing started in which the ongoing investigation of the George Washington bridge closure will focus on the role of Bridget Anne Kelly, Christe's former deputy chief of staff. The state legislative committee investigating the matter seeks to retrieve subpoenaed documents from Bridget Anne Kelly, and Bill Stepien, his former campaign manager. Just like in the case of IRS commissioner Lois Lerner, so Kelly is expected to plead the fifth. Watch the hearing below.
As reported earlier by Bloomberg:
A New Jersey judge is set to hear arguments today over whether two former aides to Governor Chris Christie must comply with subpoenas by lawmakers seeking documents related to the George Washington Bridge traffic jams.
Bridget Anne Kelly and William Stepien asserted their constitutional right to silence, saying that producing documents would harm them in a criminal investigation by U.S. prosecutors. Kelly’s e-mail saying “Time for some traffic problems in Fort Lee” came almost a month before Christie allies directed the shutdown of access lanes to the bridge from Sept. 9 to Sept. 12.
A legislative committee investigating the lane closings has urged a judge in Trenton, New Jersey, to rule that the Fifth Amendment doesn’t protect Kelly and Stepien from having to produce documents. Superior Court Judge Mary Jacobson will decide whether they must hand over documents that could shed light on who ordered the tie-ups and why -- questions that may imperil Christie’s possible White House bid in 2016.
And courtesy of NJ.com, here is a deeper look at they key players in this morning's hearing in Trenton:
BRIDGET ANNE KELLY
Former deputy chief of staff to Gov. Chris Christie
Kelly was a longtime staffer to state Assemblyman David Russo (R-Bergen) before Christie hired her in 2010 as director of legislative relations. In April, Kelly, 41, was promoted to Christie's deputy chief of staff for legislative and intergovernmental affairs, dealing with officials at all levels of government, faith-based and community groups and trade associations. But Christie fired her on Jan. 9 after emails surfaced showing she apparently had advance knowledge of the lane closures at the George Washington bridge. In a now-infamous email she sent weeks before the closures, Kelly said: "Time for some traffic problems in Fort Lee."
Bridget Anne Kelly's attorney
Described as having the style of "a professional fighter" who throws "questions like punches," Critchley has represented clients as diverse as failed presidential candidate John Edwards' mistress Rielle Hunter, the Archdiocese of Newark, and former Essex County Executive James Treffinger. He is perhaps best known for leading the defense team for 20 reputed members of the Lucchese crime family acquitted of racketeering charges in 1988. He represented Ridgefield Mayor Anthony Suarez, acquitted of bribery charges in the 2009 FBI sting that netted 46 politicians and rabbis. His pro bono work included a $5 million settlement from the state for a foster child abused by his family.
Christie's former campaign manager
Stepien was one of Christie's closest aides, the political ace who ran both of his campaigns for governor and a behind-the-scenes enforcer who kept Republican troops in line in every county and township. He cut his teeth working with Michael DuHaime, Christie's top strategist, on Giuliani's presidential campaign and other races. Stepien also worked closely with Bridget Anne Kelly; Christie fired Kelly and cut ties with Stepien as the bridge scandal began to unfold.
Bill Stepien's attorney
A prominent criminal defense lawyer, Marino's name often shows up in New Jersey's biggest legal battles. He defended a Goldman Sachs programmer from West Orange accused of stealing the bank's software code. He defended a West Windsor businessman accused of stealing $13 million in tax dollars and worker compensation premiums. He has represented cities and contractors fighting over millions of dollars.
Democratic state Assemblyman from Middlesex County, co-chair of the New Jersey Legislative Select Committee on Investigation
Wisniewski, 51, served as Democratic state chairman from 2010-13, during which he honed his skills as the party's main attack dog against Christie. Wisniewski also led Democrats' successful effort to redraw the legislative district map, putting in place districts that have helped Democrats retain their majority in both houses of the Legislature. Since 2002, Wisniewski has chaired the Assembly's influential transportation committee, which put him in place to help lead the investigation into the bridge controversy.
Democratic state Senator from Bergen County
Weinberg, 79, is a 22-year veteran of the New Jersey Legislature. In 2009, then-Gov. Jon Corzine selected her as his running mate in his unsuccessful re-election bid against Christie. Weinberg, whose district includes Fort Lee, was among the first lawmakers to question why the lanes were closed, filing a public records request seeking information and documents related to the issue in November. She is now co-chair of the joint legislative committee investigating the scandal.
Attorney for the joint legislative committee
Schar gained prominence for being the federal prosecutor who led the corruption case against former Illinois Gov. Rod Blagojevich, who was found guilty of multiple corruption charges in June 2011 — including those related to his attempt to essentially sell the Illinois U.S. Senate seat that had been vacated by President Obama. Schar is now a partner at the law firm Jenner & Block LLP and co-chairs the firm's "white collar defense and investigations practice." He was hired in January as special counsel to the state legislative committee investigating the bridge controversy.
Superior Court judge
Jacobson, a 60-year-old Bayonne native, was appointed to a Superior Court justice in 2001 by then-Gov. Christie Whitman. She gained national attention last September when she ruled that New Jersey must allow same-sex marriages in the wake of the U.S. Supreme Court's decision to overturn the Defense of Marriage Act.
by Cam Hui, Humble Student of the Markets
Five years after the market bottom in 2009 (also see my cautiously bullish Phoenix rising? post on February 24, 2009), the SPX rallied to new all-time highs last week. Last year, this index decisively staged an upside breakout from a trading range that stretches back to the NASDAQ top in 2000.
Here’s a key long-term market question. Is it time for the secular bear camp to throw in the towel and call this stock market a new secular bull?
The technical evidence is certainly there, but my inner fundamental investor remains conflicted because valuations are elevated. Doug Ramsey of Leuthold Weeden Capital Management recently penned an article on this very topic showing his (and my) certainty. First of all, Ramsey wrote that some analysts consider the 666 low on the SPX to be low enough for a secular bear low compared to market history:
A handful of analysts have contended the March 2009 low was not secular in nature—although their ranks thinned considerably in 2013. They claim the 2000-09 decline was simply too short to sufficiently purge the excesses built up during history’s most powerful secular bull. They have a point: The four previous secular bears lasted from 12 to 17 years even though all four commenced from far less inflated valuations than those recorded at the 2000 peak.
Similarly, the remaining secular bears argue that U.S. stock market valuations never sank to levels befitting a true secular buying point. That’s debatable. At the intraday low of March 6, 2009 (the infamous “666”), the SP 500 traded at just 10.1x our 5-yr. Normalized EPS estimate—only half a point above the median P/E of 9.6x seen at the last four secular bear market lows. Close enough for government work, in our view. On the other hand, the SP 500 dividend yield at that historic low amounted to just half the median of 6.7% seen at the prior four lows.
He went on to qualify those valuations on the basis of the low interest rate regime:
We expect that the March 2009 levels reached by essentially all of our key U.S. valuation measures will prove to be lasting secular lows. In the context of zero interest rates and (at the time) zero inflation, it was probably unreasonable to expect valuations to match those seen in conjunction with the double-digit interest rates and inflation at the 1982 low.
Ramsey expressed his concerns about current valuation levels:
Our concern is not with the troughs of 2009, but where those valuations stand a mere five years into the supposed secular upswing. Even the P/E on forward EPS—though not a serious valuation tool—has returned to its late 2007 highs, and those measures with actual predictive ability don’t look any better.
All six of the accompanying valuation ratios are strongly (and negatively) correlated with subsequent 10-year stock returns, and the least extreme among them (the SP 500 12-Mo. Trailing P/E) still stands higher than about three-quarters of its history—with those earnings lifted by margins higher than 100% of their history. Three measures (Price/Cash Flow, Price-to-Book, and Price/Dividend) have moved into their ninth historical decile, and the SP Industrials Price/Sales ratio is now on a path into late-1990s bubble territory.
Whither corporate margins?
I feel Ramsey’s pain. Secular bulls don’t tend to launch themselves with valuations at elevated levels like these. Consider, for example, the market cap to GDP metric as a proxy for the Price to Sales ratio. This metric remains elevated and has surpassed its pre-Lehman Crisis highs:
There have been a number of warnings on this so-called favorite valuation metric of Warren Buffett. As an example, Forbes wrote about these concerns in a recent article:
The ratio today is 115.1% of the $16 trillion GDP. In the year 2000, just before the market cracked in the dot-com bubble, the market capitalization was 183% times the GDP, according to a chart published recently.
And in 2007, just as the housing credit bubble was bursting, the ratio was 135% times the GDP. These are all times when the stock market looks overvalued.
Then, the buying point for stocks was reached in March 2009 when the ratio of market cap to GDP was only 73%. The numbers were somewhat different in 1929 when the market cap already was in decline and amounted to 81% of GDP, but fell precipitously to 25% of a ruinous GDP in 1933.
By comparison, in the bear market of 1975 the ratio of stock valuation to GDP was 75%, definitely a buy signal if you were Berkshire Hathaway. Even a better opportunity was 2009 when the ratio of stock valuation to the economy fell to 50%. It was shooting ducks in a barrel and Buffett said so publicly several times.
Much of the secular bull and bear debate based on the market cap to GDP ratio revolves around why corporate net margins are so high. Recall that P/E = P/(Sales X Net Margin). For a full discussion see my previous post He who solves this puzzle shall be King.
Jesse Felder (via Business Insider) highlighted a warning that Warren Buffett made about corporate margins in 1999:
“In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.”
Here is a difficult question for those in the secular bear camp. Buffett made those comments in 1999. Why has he said nothing since then about corporate margins? His silence on this issue has been deafening.
New secular bull = New stock market bubble?
Here is a difficult question for those in the secular bull camp. What’s the upside from here? Ramsey of Leuthold Weeden Capital Management projects limited upside under a secular bull scenario, even assuming that everything goes right:
If the current cyclical bull unfolds into a secular one that is perfectly average in duration and magnitude (a very tall achievement, in our book), the annualized total return over the next ten years will still be a bit below the long-term average return of 10%. Frankly, we don’t find this all that compelling, considering all that must go according to plan for the market to achieve it (i.e. sustained EPS growth at a healthy 6% and an inflated terminal P/E multiple).
He added some of these gains depends on assuming the resumption of a stock market bubble:
Based on the relative positions of these time-tested measures, secular bulls seem to be implicitly betting on the reflation of a multi-generational stock bubble less than 15 years after it popped. The pathology of “busted bubbles”—which we’ve detailed at length in the past—doesn’t support that bet.
A cyclical bull, a secular ????
When he puts it all together, my inner investor thinks that, if we are indeed seeing a new secular bull market, the extraordinary measures undertaken by global central banks in the wake of the Lehman Crisis has front-end loaded many of the gains to be realized in this bull. There is, however, a silver lining to this outlook.
In the meantime, we are in the midst of a global cyclical bull, so enjoy it. I can point to the many positives highlighted by Jeff Miller in his latest weekly commentary, such as improving eurozone PMIs, the ISM beat last week, improving employment, etc.
From a technical standpoint, continued strength in breadth indicators such as the Advance-Decline Line has confirmed last week’s new high in US equities (see my commentary on breadth analysis in What bad breadth?):
Eurozone equities remain in an uptrend:
Commodities are rallying, though the leadership is somewhat unusual as it has been led by the agricultural commodities and gold (for further discussion see What fundamentals drove the equity rally?):
These are all signs of a cyclical global bull and the question of whether it’s a secular bull can wait another day. So don’t worry, be happy.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.
Copyright © Humble Student of the Markets
We are sure the great and good of the economic world will explain away this data with one word - "weather" but the 1.9% drop in Wholesale Sales is the largest in 5 years and aside from the financial crisis is the worst since 1993! This is also the biggest miss on record. Inventories rose more than expected (+0.6% vs +0.4% expectations) which could be a problem as the inventories/sales ratio surges to its highest in 11 months. Unsurprisingly, Autos saw the largest inventory build (+6.8% YoY).
Wholesale Sales plunge...
With auto inventory at all time record highs and growing at the fastest pace in 15 months
by George Washington, Washington’s Blog
The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.
Has all that money gone to stimulate the economy?
Central banks have been engaged in the the “greatest backdoor bailout of all time.”
And yet – as Bloomberg notes – everyone else gets austerity:
Concerned that high debt loads would cause international investors to avoid their markets, many nations resorted to austerity measures of reduced spending and increased taxes, reining in their economies in the process as they tried to restore the fiscal order they abandoned to fight the worldwide recession.
In essence, the elite financial players are manipulating the game so that they get the stimulus … and the little guy gets the austerity.
Indeed, the IMF is recommending “financial repression” of the average person, to plug the giant debt holes created by the bank bailouts.
And – whether or not you like Keynesian stimulus (most ZH readers don’t!) – you should know that governments never really engaged in meaningful stimulus.
But didn’t we have to do this to save the economy after Lehman crashed?
Nope … top economists say we should instead of done what Iceland did: let the big banks go bust, and use resources instead to help the people.
Proof can be found in the fact that throwing money at the big banks has led to a “jobless recovery” – a permanent destruction of jobs – which is a redistribution of wealth from the little guy to the big boys. (And see this.)
Postscript: In 2010, economics professor and former Senior Economist for the President’s Council of Economic Advisers Laurence Kotlikoff said that – when unfunded liabilities are taken into account – the fiscal gap for the U.S. alone exceeds $200 trillion:
Based on the CBO’s [Congressional Budget Office's] data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt.
As of a couple of months ago, Kotlikoff put the figure at $205 trillion.
Copyright © Washington’s Blog
... And it is Point72.
Of course, those who are aware of the physical address of the firm that single handedly made and destroyed "expert networks" (and assured a daily bug sweep at every hedge fund office in New York), or better yet, have visited the firm's sprawling trading floor located at 72 Cummings Point, will know that the name is merely a derivative of the actual address.
In settling upon Point72 Asset Management as the name for the firm’s flagship operation, Mr. Cohen appeared to find inspiration in the address for SAC’s roughly 98,900 square-foot office at 72 Cummings Point Road. The new name, which the firm announced on Tuesday in a letter to employees, should end speculation that Mr. Cohen might seek to relocate to a less spacious building, if his new firm got much smaller than its current 850 employee work force.
“It reminds us of a sense of continuity: our headquarters has been at 72 Cummings Point Road for more than a decade, and we anticipate it will be our home for many years to come,” Tom Conheeney, SAC’s president, said in the letter. “Perhaps more important, the name emphasizes we point to a successful future.”
The new name will become official on April 7, just three days before Judge Laura Taylor Swain of Federal District Court in Lower Manhattan is scheduled to either approve or reject SAC’s guilty plea. Mr. Cohen is hoping the selection of the new name and Judge Swain’s acceptance of the firm’s plea will bring to a close an investigation into allegations of insider trading that has dogged SAC for nearly 10 years.
- SAC'S MULTIQUANT BUSINESS SAID TO OPERATE AS CUBIST SYSTEMATIC
Maybe they consulted the ghost of Pablo Picasso for that one. Then again, perhaps when it comes to address-based appelations, Cohen picked the only feasible option: after all going with the zip code of his trading desk adress may have been a little too reminiscent of a convict's inmate number: 06902. And that would hardly inspire confidence in the New and Improved Stevie A. Cohen.
by Lance Roberts of STA Wealth Management,
Imagine that you are speeding down one of those long and lonesome stretches of highway that seems to fall off the edge of the horizon. As the painted white lines become a blur, you notice a sign that says “Warning.” You look ahead for what seems to be miles of endless highway, but see nothing. You assume the sign must be old therefore you disregard it, slipping back into complacency.
A few miles down the road you see another sign that reads “Warning: Danger Ahead.” Yet, you see nothing in distance. Again, a few miles later you see another sign that reads “No, Really, There IS Danger Ahead.” Still, it is clear for miles ahead as the road disappears over the next hill.
You ponder whether you should slow down a bit just in case. However, you know that if you do it will make you late for your appointment. The road remains completely clear ahead, and there are no imminent sings of danger. So, you press ahead. As you crest the next hill there is a large pothole directly in your path. Given your current speed there is simply nothing that can be done to change the following course of events. With your car now totalled, you tell yourself that there was simply “no way to have seen that coming.”
It is interesting that, as humans, we fail to pay attention to the warnings signs as long as we see no immediate danger. Yet, when the inevitable occurs, we refuse to accept responsibility for the consequences.
I was recently discussing the market, current sentiment and other investing related issues with a money manager friend of mine in California. (Normally, I would include a credit for the following work but since he works for a major firm he asked me not to identify him directly.) However, in one of our many email exchanges he sent me the following note detailing the 10 typical warning signs of stock market exuberance.
(1) Expected strong OR acceleration of GDP and EPS (40% of 2013′s EPS increase occurred in the 4th quarter)
(2) Large number of IPOs of unprofitable AND speculative companies
(3) Parabolic move up in stock prices of hot industries (not just individual stocks)
(4) High valuations (many metrics are at near-record highs, a few at record highs)
(5) Fantastic high valuation of some large mergers (e.g., Facebook & WhatsApp)
Margin debt/gdp (March 2000: 2.7%, July 2007: 2.6%, Jan 2014: 2.6%)
Margin debt/market cap (March 2000: 1.8%, July 2007: 2.3%, Jan 2014: 2.0%)
(7) Household direct holdings of equities as % of total financial assets at 24%, second-highest level (data back to 1953, highest was 1998-2000)
(8) Highly bullish sentiment (down slightly from year-end peaks; still high or near record high, depending on the source)
(9) Unusually high ratio of selling to buying by corporate senior managers (the buy/sell ratio of senior corporate officers is now at the record post-1990 lows seen in Summer 2007 and Spring 2011)
(10) Stock prices rise following speculative press releases (e.g., Tesla will dominate battery business after they get partner who knows how to build batteries and they build a big factory. This also assumes that NO ONE else will enter into that business such as GM, Ford or GE.)
All are true today, and it is the third time in the last 15 years these factors have occurred simultaneously which is the most remarkable aspect of the situation.
The following evidence is presented to support the above claim.
Exhibit #1: Parabolic Price Movements
Exhibit #2: Valuation
Excerpt from a recent report by David J. Kostin, Chief US Equity Strategist for Goldman Sachs, 11 January 2014
“The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock:
(1) The P/E ratio;
(2) the current P/E expansion cycle;
(5) Free Cash Flow yield;
(6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of inflation; nominal 10-year Treasury yields; and real interest rates.
Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of Operating EPS and about 45% overvalued using As Reported earnings.
Reflecting on our recent client visits and conversations, the biggest surprise is how many investors expect the forward P/E multiple to expand to 17x or 18x. For some reason, many market participants believe the P/E multiple has a long-term average of 15x and therefore expansion to 17-18x seems reasonable. But the common perception is wrong. The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35- year periods has averaged 13.2x, 14.1x, and 13.0x, respectively. At 15.9x, the current aggregate forward P/E multiple is high by historical standards.
Most investors are surprised to learn that since 1976 the S&P 500 P/E multiple has only exceeded 17x during the 1997-2000 Tech Bubble and a brief four-month period in 2003-04. Other than those two episodes, the US stock market has never traded at a P/E of 17x or above.
A graph of the historical distribution of P/E ratios clearly highlights that outside of the Tech Bubble, the market has only rarely (5% of the time) traded at the current forward multiple of 16x.
The elevated market multiple is even more apparent when viewed on a median basis. At 16.8x, the current multiple is at the high end of its historical distribution.
The multiple expansion cycle provides another lens through which we view equity valuation. There have been nine multiple expansion cycles during the past 30 years. The P/E troughed at a median value of 10.5x and peaked at a median value of 15.0x, an increase of roughly 50%. The current expansion cycle began in September 2011 when the market traded at 10.6x forward EPS and it currently trades at 15.9x, an expansion of 50%. However, during most (7 of the 9) of the cycles the backdrop included falling bond yields and declining inflation. In contrast, bond yields are now increasing and inflation is low but expected to rise.
Incorporating inflation into our valuation analysis suggests S&P 500 is slightly overvalued. When real interest rates have been in the 1%-2% band, the P/E has averaged 15.0x. Nominal rates of 3%-4% have been associated with P/E multiples averaging 14.2x, nearly two points below today. As noted earlier, S&P 500 is overvalued on both an aggregate and median basis on many classic metrics, including EV/EBITDA, FCF, and P/B.”
Exhibit #3: Selling Of Company Stock By Senior Managers
Excerpt from a recent article by Mark Hulbert
“Prof. Seyhun – who is one of the leading experts on interpreting the behavior of corporate insiders – has found that when the transactions of the largest shareholders are stripped out, insiders do have impressive forecasting abilities. In the summer of 2007, for example, his adjusted insider sell-to-buy ratio was more bearish than at any time since 1990, which is how far back his analyses extended.
Ominously, that degree of bearish sentiment is where the insider ratio stands today, Prof. Seyhun said in an interview.
Note carefully that even if the insiders turn out to be right and the bull market is coming to an end, this doesn’t have to mean that the U.S. market averages are about to fall as much as they did in 2008 and early 2009. The one other time since that bear market when Prof. Seyhun’s adjusted sell-buy ratio sunk as low as it was in 2007 and is today, the market subsequently fell by ‘just’ 20%.
That other occasion was in early 2011. Stocks’ drop at that time did satisfy the unofficial definition of a bear market, and the insiders’ pessimism was vindicated.”
Exhibit #4: Investor’s Confidence
Exhibit #5: Ownership Of Stocks As % Total Financial Assets
The point my money managing friend wishes to make is simply that the “”warning signs” are all there. However, since the road ahead seems clear, it is human nature that we keep our foot pressed on the accelerator.
As the Federal Reserve extracts liquidity from the markets, the “Bernanke Put” is being removed which leaves the markets vulnerable to a “mean reverting event” at some point in the future. The mistake that many investors are currently making is believing that since it hasn’t happened yet, it won’t. This time is only “different” from the perspective of the “why” and “when” the next major event occurs.
Of course, despite the repeated warning signs, the next correction will leave investors devastated looking to point blame at everyone other than themselves. The question will simply be “why no one saw it coming?”