Month: August 2016

Authored by SG Value Investor via ValueWalk.com,

What is the Greater Fool Theory?

The Greater Fool Theory is when the price of a good is not determined by its intrinsic value, but rather by irrational beliefs and expectations of market participants. Essentially, it is about buying a good at a price then offloading it to the next fool at a higher price. This vicious cycle would continue till the point where market participants ‘wake up’ and realize that the good is no longer worth that value. The best example would probably be the tulip mania where the Dutch were trading houses and lands just for plots of tulips. As absurd as it may sound, back then even the most rational were engaged in such madness. With such irrational beliefs and expectations of the market, it would ultimately result in a ‘bubble’.

You only find out who is swimming naked when the tide goes out

– Warren Buffett

What does it mean for investors?

Companies with solid earnings and fundamentals trading at higher valuations are justifiable. However, not all companies that are trading at such high valuations have the same fundamentals backing it. Companies belonging to the latter category can be further divided into three sub-categories.

Firstly, it would be those that lack the fundamentals and earnings. These companies are constantly raising additional capital from the market, where management attempts to keep the sinking boat afloat. Companies that fall under such a scenario are trading at high valuations due to investors buying the turnaround story. If  successful, one can expect huge capital gains. On the flip side, one could lose everything too.

 

Secondly, it would be those that are experiencing a huge growth in earnings due to reasons such as having tapped into an emerging market like China or India. Such companies would definitely have the earnings and fundamentals to support a higher PERs and EV/EBITDAthan normal. However, the crux is what is normal? Where do we draw the line? Given how each individual investor has a different definition of fairly valued, it would just be a case of buy high, sell higher. Many a times, the run up in valuations would no longer be in tandem to the growth of the company, commonly known as a ‘false dawn’.

 

Lastly, it would be a scenario where the company reported great news. Investors would begin forming lofty expectations. Years ago in Singapore, there was this craze over companies having managed to enter the Myanmar market. The key here would be ‘having managed’. Whether it would truly translate to tangible benefits for the company is still an unknown. When the news reported that two of NeraTel’s clients managed to enter the Myanmar market, many investors started forming expectations that NeraTel would be able to benefit from this. The share price shot up by approximately 31.7% within a few days but came back down subsequently. Hence, as the old saying goes, ‘The greater the expectations, the greater the disappointment’.

Conclusion

With investing, there is no shortcut. Do your due diligence for every stock, and do not base your buy/sell call on someone else’s advice. When it comes to processing news, analyse it rationally and do not let your imagination get ahead itself. Last but not least, be objective. There are many great companies out there. However, we have to constantly question ourselves if the valuations are justified or whether it is a case of a buy high, sell higher, otherwise known as the Greater Fool Theory.

*  *  *

So to clarify, you are here…

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With over $13 trillion in global bond yields trading in negative territory as a result of central banks’ negative rates policies, leading bank profits to tumble and forcing savers in both Japan and now Germany to pull their money out banks and put into safe deposit boxes in their homes, there is little doubt that NIRP has been a failure: even such establishment financial outlets as the WSJ admit as much. Which is why when listening to today’s Stanley Fischer interview on Bloomberg TV with Tom Keene, one particular section caught our attention, namely the Fed Vice Chairman’s atetmpt to justify negative rates and how, despite all the evidence to the contrary, “negative rates seem to work in today’s world.”

We found the following exchange fascinating:

KEENE: What did you learn about negative rates in the crucible of the markets? What have you learned in the last number of months?

 

FISCHER: Well, we’ve learned that the central banks which are implementing them — there were four or five of them — basically think they’re quite successful and are staying with their approach, possibly with the exception of Japan. They’re thinking it through and they have said they’ll come back to try and make negative rates work better. So we’re in a world where they seem to work. I think one of the most interesting developments I’ve seen in theory is a paper that says, yes, they work up to a certain point and then they become counterproductive.

 

KEENE: Precisely. Yes, that’s a critical point. I mean we have within the interviews of Bloomberg Surveillance that Francine Lacqua and I have had Olivier Blanchard calls them an outright scam. Granted, he’s not a public official anymore, I understand that. There is a raging debate about the efficacy of negative interest rates for central banks, for governments, and again for banking itself. What about the efficacy of negative rates for savers and the people of these different nations?

To which, Fischer’s answer was frankly shocking:

FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that and we have to make trade-offs in economics all the time and the idea is the lower the interest rate the better it is for investors.

And there you have it: ignore the economy, it’s all about “decent equity prices” and whatever is “better for investors.” We point this bizarre justification for the central banks’ latest failure, just in case there was still any confusion why they keep pushing the same failed policies day after day: it’s all about keeping stocks artificially inflated.

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Submitted by Chris Hamilton via Econimica blog,

Once upon a time, banks were about lending money and banks business model depended upon the spread or difference of borrowing short and lending long.  The greater the differential in the spread of short term and long term lending, the greater the profit.  So, it should be noteworthy when the spread begins shrinking.  At present, spreads have fallen 65-75% from 2011 peaks…and are rapidly gaining speed to the downside.  The chart below shows the spreads based on the 30yr and 10yr Treasury's minus the 2yr.

Given the recent Fed Funds rate hike only accelerated the spread collapse; if the Federal Reserve does not change course and re-implement QE in short order, the rate inversion and subsequent economic dislocation is just a matter of time.  So, what is the Fed talking about regarding raising rates & what game is the Fed playing?  QE was never a cure but simply a means to extend and pretend just a bit longer.  Could it be the pretending and extending have hit some sort of limit and the Fed fears the next Fed administered "cure" may kill the patient?

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Yesterday, the White House announced that the US had met President Obama’s goal of admitting 10,000 Syrian refugees into the country; it did so ahead of schedule. 

One year ago Obama had sought a sixfold increase in the number of Syrian refugees provided safe haven in the United States. After a slow start, the administration was able to hit the goal about a month early and just a few weeks before Obama convenes a summit on refugees during the 71st session of the United Nations General Assembly. He would have been hard-pressed to make the case for other countries to do more with the U.S. failing to reach a goal that amounts to about 2% of the 480,000 Syrian refugees in need of resettlement. Millions more Syrians have fled to neighboring states such as Jordan, Turkey and Lebanon and to countries in Europe since the civil war broke out in 2011.

Over 1 million Syrian refugees made their way to Germany, where the resultant social shock, and surge in violent terrorist attacks, have led to a plunge in Angela Merkel’s approval rating. That, however, has not deterred the US from seeking to admit thousands of refugees.

“On behalf of the president and his administration, I extend the warmest of welcomes to each and every one of our Syrian arrivals, as well as the many other refugees resettled this year from all over the world,” National Security Adviser Susan Rice said in a statement. More from the statement:

Less than a year ago, in response to an historic global refugee crisis, involving millions of Syrians in flight from violence and conflict, President Obama directed his Administration to increase the number of Syrian refugees provided safe haven in the United States.  While refugee admissions are only a small part of our broader humanitarian efforts in Syria and the region, the President understood the important message this decision would send, not just to the Syrian people but to the broader international community. As such, he set a goal of admitting 10,000 Syrian refugees this fiscal year. Millions have been displaced by the violence in the region, but this decision still represented a six-fold increase from the prior year, and was a meaningful step that we hope to build upon.

 

Today, I am pleased to announce that we will meet this goal more than a month ahead of schedule.  Our 10,000th Syrian refugee will arrive this afternoon.  On behalf of the President and his Administration, I extend the warmest of welcomes to each and every one of our Syrian arrivals, as well as the many other refugees resettled this year from all over the world.  We will admit at least 85,000 refugees in total this year, including vulnerable individuals and families from Burma, Democratic Republic of the Congo, El Salvador, Iraq, Somalia, Ukraine, and many other countries.

Rice said the summit in New York City will highlight the contributions the U.S. and other nations have made to help refugees. She said the U.S. has committed to working with the international community to increase funding for humanitarian assistance and double the number of refugees afforded the opportunity to resettle.

As AP admits, the increase in Syrian refugees also comes at a time of heightened national security concerns following extremist attacks in the U.S. and abroad. The Obama administration has said that refugees fleeing war and persecution are the most scrutinized of all immigrants who come into the United States. The process typically takes 12 months to 18 months and includes in-person interviews and a review of biographical and biometric information.

With many Americans curious where these refugees will land, a map we first posted last September shows a wide dispersion. More details can be found in a document from the Refugee Processing Center.

According to NBC, the top destination for Syrian refugees arriving in the U.S. is the state of Michigan. More than a 10th of the 10,000 Syrians admitted this fiscal year at the urging of the Obama administration are headed there, according to State Department figures.

Most of the 1,036 new arrivals are likely to settle in and around Detroit, which has long been a magnet for Arab immigrants. This despite the fact that Michigan’s Republican Gov. Rick Snyder suspended efforts last November to bring more long-suffering Syrians to his state after the deadly terrorist attacks in Paris.

Snyder spokeswoman Anna Heaton told NBC News the governor “never suspended refugee resettlement” and is not opposed to more Syrian refugees settling in Michigan. “The governor suspended efforts to bring in additional refugees above and beyond the amount Michigan normally receives,” Heaton said in an email. “This increase in Syrian refugee resettlement is not surprising as our state continues to be a welcoming home for refugees who go on to contribute to our economic comeback and Michigan’s overall quality of life.”

Close on Michigan’s heels is California, which has taken in 1,030 Syrians between Oct. 1 of last year and Aug. 29, the federal figures show. Arizona and Texas, two red states led by Republican governors who have flat-out said they don’t want Syrian refugees because they supposedly pose a security risk, are next on the list having taken in 766 and 735 people, respectively, the figures show.

Those states were followed by Pennsylvania (600), Illinois (569), Florida (542) and New York (538), the figures show.

However, as Breitbart noted overnight, there is a possibility that thousands of the Syrian refugees may end up doing something else entirely: noting that in a previously little-noticed video from February at the Clinton Global Initiative, former President Bill Clinton suggested that the U.S. use Syrian refugees to rebuild Detroit. Since the decision what to do with the Syrian refugees will ultimately be made by America’s next president, who may well be Hillary Clinton, this is significant.

“The truth is that the big loser in this over the long run is going to be Syria. This is an enormous opportunity for Americans,” Bill Clinton said about the Syrian migrant crisis.

Detroit has 10,000 empty, structurally sound houses—10,000. And lot of jobs to be had repairing those houses. Detroit just came out of bankruptcy and the mayor’s trying to do an innovative sort of urban homesteading program there. But it just gives you an example of what could be done. And I think any of us who have ever had any personal experience with either Syrian Americans or Syrian refugees think it’s a pretty good deal.

As Julia Hahn notes, it is unclear from the video why Clinton seems to think it would be better to fill these Detroit jobs with imported foreign migrants rather than unemployed Americans already living there, who could perhaps benefit from good-paying jobs.

We may soon find out: Hillary Clinton has called for a 550 percent expansion to the importation of Syrian refugees. Based on the minimum figures she has put forth thus far, a President Hillary Clinton could potentially import a population of refugees (620,000) that nearly equals the population of Detroit (677,116).

Here a quick note: in the US, 91.4% of recent refugees from the Middle East are on food stamps, and 68.3% are on cash welfare, according to data from the Office of Refugee Resettlement in the Department of Health and Human Services.

This may be something else for the American public to consider in the 69 days remaining ahead of the presidential election.

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Oil prices enjoyed a bump last week, thanks in part to a weakened dollar and some geopolitical tensions in the Persian Gulf. But a large factor in the recent rally has been the return of a possible OPEC production freeze, a subject that was last tossed around before the organization’s much-publicized, and ultimately unproductive, meeting in Doha last April. The likelihood of a freeze sent markets up on Thursday, though some less-than-confident comments from the Saudi oil minister sent them dropping back on Friday.

And we noted previously, the short squeeze ammo has been eviscerated in oil, disabling (for now) the 'freeze' headline risk…

Whether a freeze occurs or not is likely to be the trending gossip among speculators for the next month, at a time when such talk is exerting greater-than-average pull on the crude price, but as OilPrice.com's Gregory Brew notes, a question worth asking is whether a freeze is even possible, given the state of OPEC and the increasingly divergent interests of its fourteen members.

This new attempt at a production freeze comes as Saudi Arabia, OPEC’s largest producer and de facto leader, reaches a new production record of 10.67 million barrels, more than 400,000 more than when the last freeze was discussed, while its oil revenues continue to plummet. OPEC profits have fallen 55 percent since 2014, according to the EIA. Ecuador, Kuwait and other Gulf producers want the price to recover past $50 a barrel. If a production freeze is on the cards, it will be discussed in late September during an informal meeting of the OPEC states at the International Energy Forum in Algeria.

Iraq and Iran, OPEC’s number two and three producers, respectively, have offered tacit acceptance of a production freeze, with important caveats.

In the case of Iran, a freeze will not interfere with the country’s long campaign to re-capture market share, as oil minister Bijan Zanganeh made quite clear in a recent statement. The question of where, exactly, Iran’s production will reach before a freeze is open for debate. The widely-cited figure is Iran’s pre-sanctions production level of 4 million barrels, and the Iranian government has claimed that it will consider a freeze once production reaches this level.

If the current trend holds, Iran will reach 4 million barrels by September, in time for the Algeria meeting. Increasing production past 4 million will require new investment, which Iran is preparing to court with new contracts, and which it desperately needs in order to repair its infrastructure and expand beyond its aging fields.

But will Iran (or Zanganeh) be satisfied with 4 million? Iran’s all-time high of 6.3 million barrels per day was reached in the 1970s. It’s possible that Zanganeh will insist that Iranian production increase to its historic maximum, just as Saudi Arabia has allowed its production to sky-rocket. It may give tacit approval to a freeze, in order to bring prices up, but it’s unlikely to adhere to it in any practical sense.

In other words, Iran will agree to a production freeze…as long as it doesn’t have to participate.

Iraq, meanwhile, has been pushing as hard as it can to increase production in advance of any possible freeze. It has asked the international companies currently present in Iraq to increase investment and bring up production, which has already reached 4.78 million barrels per day. But companies are only willing to invest if they can be sure of compensation from the Iraqi state, which failed to deliver last year and had to instruct companies to bring down their level of investment.

Other OPEC members, including Nigeria and Venezuela, are facing nothing less than an economic Armageddon and are desperate for an increase in price. Nigeria however has seen its production decline to a 30-year low due to violence in the Niger Delta. Venezuela is less likely to make waves, as its economy has been hit harder than any other OPEC member by the current crisis, so any recovery in price would be worthwhile. But Nigeria probably won’t agree to freeze at current levels: like Iran, Iraq and Saudi Arabia, its leaders will want to pump more before bringing production to a halt.

So, if there is a freeze, where will production be “frozen,” exactly? Since April, Iran and Saudi Arabia together are pumping 1 million barrels more than they were the last time a freeze was contemplated. David Hufton, of the PVM Group in London, has noted that a 34 million barrel a day freeze “is not the same as one at 33 million barrels,” and that given current market conditions it could take a year for the price to stabilize at such a level.

This comes as the EIA estimates lower demand for oil in 2017, surging activity in wind and solar power, and increased interest in electric, AI-guided automobiles. Taken with the ongoing geopolitical factors tugging at OPEC’s frayed sense of coherence, including divisions among Middle Eastern states over the war in Syria and the ongoing Tehran-Riyadh rivalry, the state of oil production in OPEC’s many members makes a freeze agreement in late September look increasingly unlikely and, ultimately, impossible. What is possible, however, is that continued talk of a freeze will continue to exert influence over the market, which has see-sawed between bearish and bullish for weeks now.

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In the latest stabbing by a “mentally sick” assailant in Europe, moments ago a female police officer was seriously injured after a man attacked her with a knife at a police station in Toulouse, France, local media reported. The suspect tried to grab the officer’s weapon and when the attempt failed, he took a knife and stabbed her in the throat.

The police officer, whose condition is unknown, was taken to hospital with multiple injuries.

Agression au couteau dans le commissariat de Toulouse, on n’en sait pas plus #Toulouse http://pic.twitter.com/YCeaJJ0nKs

— Pierre Adrian (@PierreA31) August 30, 2016

The attack took place in the Rempart Saint-Etienne prefecture of Toulouse. The assailant, 31, had a psychiatric disorder and attacked the officer because she “represented France,” La Depeche du Midi news outlet reported, adding that the attacker was of Algerian origin.

The Frenc La Depeche du Midi has posted a video from the scene of the attack.

@ladepeche31 VITE TROUBLE PSYCHIATRIQUE VITE

— DragonTyramis (@Tyramis89) August 30, 2016

France has been on high alert following a series of ISIS-linked attacks since January 2015. The largest loss of life came in November 2015 when at least 130 people were killed in Paris. Following that attack, France introduced a state of emergency, which is ongoing. Last week, France announced it would deploy 3,000 troops to local schools after the education minister admitted that the “threat is real“

#Toulouse http://pic.twitter.com/gpRi3w1E6S

— alexpirine (@alexpirine) August 30, 2016

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The hghest current expectations confidence since August 2007 has sparked a moment of turmoil in the markets as USD strength sends stocks and oil reeling. Gold is down modestly and Treasuries are bid with the long-end outperforming (as the yield curve flattens to yet another cycle low)…

Oil’s high beta drop (as the USD jumps) drags stocks lower…

The USD has been rising all night but the confidence pront seems to have triggered a reaction in stocks and bonds and crude…

Charts: Bloomberg

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While carefully navigating the waters of what a reasonable man would presume as guilt over pay-to-play cronyism at the highest levels of government, it appears that The New York Times is gravely concerned at what The Clinton Foundation's trail of tumult could do to the messianic reign of Hillary Clinton.

As a result, this morning its editorial board joined the chorus of mostly right of center voices, calling on Hillary Clinton to ban all foreign donations to her family's charity in a editorial published Friday.

The call comes after a string of reports noting that the Clinton Foundation had begun to accept foreign donations after banning them for the four years Clinton served as secretary of state. The foundation has since defended donations from countries like Saudi Arabia, the United Arab Emirates and Oman as philanthropy, not influence peddling, but Democrats and Republicans have questioned the practice.

"All of which underlines the need for Hillary Rodham Clinton, in her all but certified role as a Democratic presidential candidate, to reinstate the foundation's ban against foreign contributors, who might have matters of concern to bring before a future Clinton administration," the editorial board wrote. "This was a restriction Mrs. Clinton worked out with the Obama administration to allay concerns of potential conflict of interest when she became secretary of state in 2009."

"Should Secretary Clinton decide to run for office," the unsigned statement read, "we will continue to ensure the foundation's policies and practices regarding support from international partners are appropriate, just as we did when she served as secretary of state."

The New York Times board, however, suggests the move should be made now, not once Clinton announces. 

"Restoring the restrictions on foreign donors would be a good way to make this point as Mrs. Clinton's widely expected campaign moves forward," they write.

Full editorial below:

'The Editorial Board' explains "Cutting Ties to The Clinton Foundation"

Does the new batch of previously undisclosed State Department emails prove that big-money donors to the Bill, Hillary & Chelsea Clinton Foundation got special favors from Mrs. Clinton while she was secretary of state?

 

Not so far, but that the question arises yet again points to a need for major changes at the foundation now, before the November election.

 

Bill Clinton created the foundation in 2001 as a vehicle to fund his presidential library. He and his supporters have since raised more than $2 billion and pioneered initiatives ranging from fostering female-owned businesses in Haiti to lowering the cost of H.I.V./AIDS drugs in Africa. As the enterprise sprawled from water treatment to education to climate change, all three Clintons got involved, along with their network of longtime political advisers, former administration officials and business partners.

 

When Mrs. Clinton became secretary of state, the Obama administration tried to draw a line between the foundation, particularly its foreign-government sponsors, and her role. The new emails underscore that this effort was at best partly successful. “Pay-to-play” charges by Donald Trump have not been proved. But the emails and previous reporting suggest Mr. Trump has reason to say that while Mrs. Clinton was secretary, it was hard to tell where the foundation ended and the State Department began.

 

Mrs. Clinton became involved in State Department deals and negotiations that also involved foundation donors or board members. She prompted multiple investigations with an arrangement that allowed Huma Abedin, her deputy chief of staff at the State Department and now vice chairwoman of her campaign, to be paid simultaneously by the State Department, the foundation and Teneo, a consulting firm run by Doug Band, the former adviser to Mr. Clinton who helped create the foundation — and who sent emails to Ms. Abedin seeking favors for foundation donors.

 

The newly disclosed emails show that some foundation donors and friends, like Crown Prince Salman bin Hamad bin al-Khalifa of Bahrain, used foundation channels to seek access to Mrs. Clinton.

 

When Mrs. Clinton announced her candidacy, the foundation said it would stop taking contributions from foreign governments, except for contributions from Australia, Canada and a handful of European nations. Donna Shalala, the foundation president, says now that if Mrs. Clinton wins, the foundation will stop taking money from any foreign governments, corporations or citizens; American corporations and corporate foundations would also be barred. Contributions would be limited to American citizens, permanent residents and United States-based independent foundations.

 

Ms. Shalala and her team are examining the organization’s foreign and domestic programs to see which can be hived off and run independently, to avoid potential conflicts. They are consulting with foundation sponsors and partners to see which are equipped to manage various programs. The foundation may keep some domestic programs, such as one for early childhood education and another that addresses community health.

 

No decisions have been made about the fate or funding of the Clinton Health Access Initiative, a separate, affiliated nonprofit group known as CHAI that has Bill and Chelsea Clinton on its board. The initiative operates exclusively overseas, derives most of its budget from foreign sources and accounts for more than half of the foundation and its affiliates’ combined spending.

 

Mr. Clinton has said he will resign from the board of the foundation and the CHAI board if Mrs. Clinton wins the presidency. Simply closing the foundation, as even some Democrats recommend, could kill programs helping tens of thousands of people. While that’s unwarranted, the foundation could do much more to distance itself from the foreign and corporate money that risks tainting Mrs. Clinton’s campaign. Its plans to restrict its funding sources only after the election will likely dog Mrs. Clinton.

 

A wiser course would be to ban contributions from foreign and corporate entities now. If Mrs. Clinton wins, Bill and Chelsea Clinton should both end their operational involvement in the foundation and its affiliates for the duration of her presidency, relinquishing any control over spending, hiring and board appointments.

 

Mrs. Clinton has said she intends to give Mr. Clinton a role in her administration. Cutting his foundation ties would demonstrate that he is giving any role he would have in the administration the priority it deserves. It would also send a signal that Mrs. Clinton and her family have heard the concerns of critics and supporters and will end any further possibility for the foundation to become a conduit to the White House for powerful influence seekers.

 

The Clinton Foundation has become a symbol of the Clintons’ laudable ambitions, but also of their tangled alliances and operational opacity. If Mrs. Clinton wins, it could prove a target for her political adversaries. Achieving true distance from the foundation is not only necessary to ensure its effectiveness, it is an ethical imperative for Mrs. Clinton.

As we noted above, The New York Times board's demand that the move should be made now, not once Clinton announces… makes one wonder – what do they know about the rest of the emails that are coming?

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