Month: August 2016

One day after Stanley Fischer provided a bizarre justification for why “negative rates seem to work”, saying that “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”, this morning in his latest monthly investment oulook, Bill Gross takes not only Fischer but the entire Fed to town, and piggybacking on the words of Kevin Warsh, says that “I and others however, have for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield.”

He then directly attacks Yellen’s hypocricy, accusing her of not only creating the income inequality she is supposedly fighting against, but also of deferring “long-term pain for the benefit of short-term gain and the hopes that your ancient model renormalizes the economy over the next few years. It likely will not. Japan is the petri dish example for the past 15 years. Other developed market economies since Lehman/2009 are experiencing a similar fungus.”

And yet, for now the system hasn’t toppled which brings us to Gross’ tongue in cheek conclusion, which pokes fun of broken watches like himself…

“The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes”

… but nonetheless urges readers to assume that the time of that “other” minute is about to come: “this watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies. Sooner rather than later, Yellen’s smooth shot from the fairway will find the deep rough.“

* * *

His full September investment outlook below:

How I Found My Golf Game but Lost My Wife to a Titleist

So what part of the title do you want to hear first? Well, I’m just funnin’ you on the latter, but finding your golf game at 72? Well, that’s serious business and nothing to joke about. My golf game – if it ever existed – left me sometime around the time I was 17 and was never found again, until recently when recent long summer days promoted “practice, man, practice”. That’s the way you get to Carnegie Hall and also the way to get rid of a banana slice that has plagued me for all of my adult years until now. Actually, my athletic wife, Sue, has proved that you don’t need to practice in order to be perfect on the golf course. 25 years ago, she aced the 14th hole at the Vintage Club in Palm Springs, a surprisingly difficult shot of 154 yards that has produced the only hole-in-one in the Gross family. Unfortunately, she hit the hole with an ugly chartreuse ball that sits atop her hole-in-one trophy at home. Ugly is the only word to describe it, but it was the ball that went in, so there it rests in semi-perpetuity. Still, even Sue, who cares much less about golf than I do, treats it as a symbolic arrow towards future triumphs on the course. I know, because every time we play a par 3, she reaches into her bag for a spankin’ new white Titleist, tees it up just so, and swings for another magical shot that will surely top the first – if only because of the color of the ball. She left me in the chartreuse dust long ago and will probably do the same in the future with a white ball. Practice can’t buy you a hole-in-one.

Speaking of practice, and mastering a game, Fed Chairwoman Janet Yellen has been at it a long time, as have her predecessors and contemporaries in other central banks. All have mastered the art of market manipulation and no – that’s not an unkind accusation – it’s one in fact that Ms. Yellen and other central bankers would plead guilty to over a cocktail at Jackson Hole or any other get together of Ph.D. economists who have lost their way. With Yellen, there is no right or left hand – no “on the one hand but then on the other” – there are only decades of old orthodoxy that follows the tarnished golden rule of lowering interest rates to elevate asset prices, which in turn could (should) trickle down to the real economy. It was fascinating then to read a lone Fed wolf in wolf’s clothing a week ago on The Wall Street Journal’s op-ed page. Ex-Fed District President Kevin Warsh headlined a think piece titled, “The Federal Reserve Needs New Thinking”. Now despite recent peekaboo ideas advanced by San Francisco Fed President John Williams suggesting a 3% inflation target and a focus on nominal, instead of real GDP growth (using the same old monetary weapons however), Warsh took the Fed and (by proxy) other central banks to task, suggesting that a “numeric change in the inflation target isn’t real reform”. “It serves”, he wrote, “as subterfuge to distract from monetary, regulatory and fiscal errors”. Warsh questioned the Fed’s sincerity in speaking to income inequality while refusing to acknowledge that their polices have unfairly increased asset inequality.

He questioned its mantra of data-dependence and its refusal to acknowledge the Yellen/Bernanke/Greenspan “put” in financial markets. He questioned their ability to maintain that “put” while at the same time subordinating inflation targeting and output-gap modeling to it. All three cannot be done at once, he claims, and one day a Piper will be paid, “perhaps even the Fed’s independence” he cautions, as the public is growing increasingly suspicious of this unelected group of bankers – central as they are.

Warsh is a mensch. He’s not smokin’ a Volcker-like cigar I suppose, but he has spoken his mind and risked the calumny of his contemporaries – even those at The Stanford University’s Hoover Institute, where he is a visiting Fellow. What he thinks they should do differently was not well delineated though. I and others however, have for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets – they are liabilities. Factor that, Ms. Yellen into your asset price objective. You and your contemporaries have flipped $11 trillion from the left side to the right side of the global balance sheet. In the process, you have deferred long-term pain for the benefit of short-term gain and the hopes that your ancient model renormalizes the economy over the next few years. It likely will not. Japan is the petri dish example for the past 15 years. Other developed market economies since Lehman/2009 are experiencing a similar fungus.

Investors should know that they are treading on thin ice. The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes. But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies. Sooner rather than later, Yellen’s smooth shot from the fairway will find the deep rough.

via http://ift.tt/2c8cBMS Tyler Durden

In a shocking move, South Africa's largest fixed income manager has halted all lending to state-owened entities on governance concerns.

• *FUTUREGROWTH SAYS IT CAN'T PLACE CLIENT MONEY AT RISK

As Bloomberg details,

Africa’s biggest private fixed-income money manager will stop lending money to six of South Africa’s largest state companies because it’s concerned about how they are being run, government infighting and threats to the independence of the finance ministry.

 

Futuregrowth Asset Management, which has about 170 billion rand ($11.7 billion) in assets, shelved plans to lend more than 1.8 billion rand to three state companies on Tuesday, Chief Investment Officer Andrew Canter said by phone from Cape Town on Wednesday, without giving more detail. The fund manager will only resume offering loans and rolling over existing debt once it has determined that what it sees as proper oversight and governance at the companies have been restored.

 

The companies are power utility Eskom Holdings SOC Ltd., rail and ports operator Transnet SOC Ltd., South African National Roads Agency SOC Ltd., the Land Bank of South Africa, the Industrial Development Corp. of South Africa and the Development Bank of Southern Africa. The decision won’t immediately affect lending to the government and other state bodies such as water boards and municipalities.

 

“We’ve observed recent reports that strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks and a seeming challenge to the National Treasury’s independence,” Canter said.

 

“Any material risk to the state-owned entities’ governance, budgeting and approval processes for spending or lending must impact on our forward-looking credit assessments. It is difficult to make reasoned and defensible decisions to continue providing state-owned companies with additional funding using clients’ money.”

Bonds of the major SOEs are tumbling as are South African bank stocks. And the Rand is heading down towards post-Brexit lows…

Fallout continues…

• ZAR falls 0.9% to 14.6327 per dollar by 2:45pm in Johannesburg, heading for weakest closing level since July 7.
• Yield on benchmark rand-denominated government bonds rise 2bps to 9.01 percent
• Yield on Eskom’s $1.25b of Eurobonds due Feb. 2025 rise 28bps to 7.15%, set for highest since July 7

via http://ift.tt/2c4nCjr Tyler Durden

The Veritaseum Introduction to Stock Valuation course has hit a homerun in walking novices investing through building an investment valuation model for althletic apparel companies, from scratch. The course compared the fundamentals of Adidas, Nike, Puma, etc. and found Adidas to be materially overvalued. This was a snapshot of the stocks at the launch of the education module.

This is a snapshot of the same set of comparables today, compared to the date of the course availability…

Yes, fundamentals still matter – even in a world of centrally planned market manipulation. A short position on this stock would have grossed nearly 10% in that short period of time. Those interested in taking the course and/or tweaking their own version of the model should click here to join. It was purposely priced at a mere $50 to eliminate any barriers to anyone interested in learning real world stock valuation. 

Conversations in our novice discussion group (Veritaseum University: Using Comparative Analysis to Value Apparel Stocks) and below will ensue as to how far Adidas has to drop before being realistically valued.

via http://ift.tt/2c4nlgk Reggie Middleton

The first half of 2015 saw Canada informally enter ‘recession’ with two quarters of negative GDP but then, everything bounced back and policy shifts were ‘proven’ effective. However, that dead-canadian-cat-bounce is over as Q2 2016 GDP growth just slumped 1.6% – double-dipping to the worst since Q2 2009. The problem with this plunge is that oil prices actually had their best quarter in 7 years as the economy tanked.

As Bloomberg reports, Canada’s economy suffered its biggest contraction since the 2009 recession as wildfires in Alberta crimped oil production.

Gross domestic product fell at a 1.6 percent annualized pace in the second quarter, Statistics Canada said Wednesday in Ottawa. Economists expected a 1.5 percent decline, according to the median estimate of a Bloomberg survey with 24 responses.

 

Exports of goods and services plunged at a 16.7 percent annualized pace, and Statistics Canada said that excluding the damage from the wildfires output edged up. Nevertheless, export declines ranged beyond the oil industry: automobiles and metals both fell while shipments of consumer goods posted the largest drop since 2003.

 

Wednesday’s figures showed a good handoff to the third quarter, with monthly output rising 0.6 percent for June, faster than the 0.4 percent that economists predicted. It was the fastest gain since July 2013 and reversed a similar decline for May.

 

The quarterly figures signaled the main forces in the economy this year are still at work: weak business investment and strong consumer spending. Business gross fixed capital formation fell 0.5 percent, the sixth straight decline, while consumer spending rose 2.2 percent.

 

Government spending also bolstered the economy with a 4.2 percent increase, with some of it linked to Alberta relief efforts.

So Q2 was a disaster but Q3 hope is strong.

Bank of Canada Governor Stephen Poloz predicted in July that GDP would fall at a 1 percent annualized pace in the second quarter and rebound to a 3.5 percent gain in the third. The GDP report is one of the final indicators before Poloz’s Sept. 7 interest-rate decision. Economists predict no change in the key rate, which has been at 0.5 percent since July 2015, while swaps trading shows some investors are betting on a cut later this year.

via http://ift.tt/2c4nJvp Tyler Durden

The general trend of weakenig ADP job growth continues in August with a 177k print (in line with expectations). Goods-related jobs dropped 6k but Service-related roles rose 183k, but notably construction jobs fell 2k. Notably, the last two months have seen payrolls notably above ADP data, which if it happens once again will likely trigger The Fed. However, most notably, over the past five months, the average ADP employment gain is 175K, which is the lowest since July 2013.

Initial Claims continues to diverge from other jobs data as ADP trends lower…

The last two months have seen payrolls notably above ADP data…

Payrolls for businesses with 49 or fewer employees increased by 63,000 jobs in August, down from 68,000 in July. Employment at companies with 50-499 employees increased by 44,000 jobs, down from last month’s 71,000. Employment at large companies – those with 500 or more employees – increased by 70,000, up from July’s 56,000. Companies with 500-999 employees added 25,000 and companies with more than 1,000 employees added 46,000 in August.

Goods-producing employment was down by 6,000 jobs in August, following July losses of 5,000. The construction industry lost 2,000 jobs, following July losses of 5,000 jobs. Meanwhile, manufacturing jobs were flat in August, after gaining 5,000 in the previous month.

Service-providing employment rose by 183,000 jobs in August, fewer than July’s 199,000 jobs. The ADP National Employment Report indicates that professional/business services contributed 53,000 jobs, down from July’s 70,000. Trade/transportation/utilities increased by 26,000 jobs in August, down from 31,000 jobs added the previous month. Financial activities added 15,000 jobs, up from last month’s gain of 13,000 jobs

Full Breakdown…

“Job growth in August was stable and consistent with levels from previous months as consumer conditions improve,” said Ahu Yildirmaz, vice president and head of the ADP Research Institute. “Continued strong growth in service-providing jobs is offset by weakness in goods-producing areas.”

Mark Zandi, chief economist of Moody’s Analytics, said, “The American job machine continues to hum along. Job creation remains strong, with most industries and companies of all sizes adding solidly to their payrolls. The U.S. economy will soon be at full employment.”

ADP Infographic…