Tag: finance

When a socialist addressed the world’s biggest gathering of billionaires and corporate titans, he had a simple, if predictable message: share the wealth.

Emmanuel Macron, France’s 40-year-old president and considered by many Angela Merkel’s successor as the new face of Europe, made his debut speech at the annual meeting of the World Economic Forum in Davos in front of a star-studded crowded, even by Davos’s standards, which included King Felipe of Spain, Christine Lagarde and Total CEO Patrick Pouyanne among those in the audience. Macron told them “it’s time for a new framework to rein in the excesses of global capitalism”: invest, share and protect.

But mostly share.

“This framework should be based on cooperation and multilateralism,” Macron said quoted by Bloomberg. “This new framework is the unique way to protect our interests in the long run.”

And yet, despite the superficial aura of the wealth redistribution narrative and speech, which was addressed as much to his audience in France as in Davos, the message had a hollow ring as France Macron’s growing critics have already dubbed him “president of the rich” amid his push to cut back some protections for workers and lower taxes.

Taking a not so veiled swipe at Trump’s tax cuts and trade policy, and speaking in a mix of French and English “like Canada’s Justin Trudeau, with whom he shares both political views and style” Macron called on executives and officials to avoid a “race to the bottom” on taxes and trade standards, and instead to focus on the common good, social cohesion, health, education, climate and the fight against inequalities.

Channeling the ghost of Karl Marx, Macron said there is a “crisis of capitalism” and warned that “the spoils are not being shared fairly.“

Which is ironic because the only reason behind Europe’s record wealth gap is the same reason French banks – such as Rothschild where Macron worked previously – have evaded insolvency and liquidation: the ECB’s backstops and asset price reflation. Surely a banker like Macron would be aware of this.

So instead of addressing the root cause of everything that is wrong in Europe and the world, Macron decided to do what every other politician so skillfully does: deflect.

Instead, he repeated his plea to giant tech companies Google Inc., Facebook Inc., Apple Inc and Amazon.com Inc. “to pay a fair share” of taxes as they displace traditional industries as the biggest sources of revenue in the global economy. He said their tax optimization strategies are hurting ordinary people and undermining governments.

“I want these changes, but they must pay their taxes,” he said.

Well, it’s politicians like you, monsieur, that made tax avoidance strategies legal around the globe, so perhaps instead of begging companies to do something they have spent money to lobby against by purchasing other politicians fair and square, the first matter at hand is to change the laws. Ah, but as everyone knows, implementing unpopular rules is something that promptly truncates political careers, which is why it is much safer to keep on begging…

* * *

For now Macron doesn’t have to beg too much: unlike his socialist predecssor Hollande who was so unpopular he didn’t even bother running for another term, Macron’s approval rating has stabilized around 50% after taking a dive during the fall as he emerged from the honeymoon period that followed his surprise election victory in May.

The president also used his speech to repeat the mantra of his first months in office: “France is back”, the French equivalent of “MAGA.”

“France is back at the core of Europe,” he said. “Because we will never have any French success without success in Europe.”

“France is back.”- @EmmanuelMacron #wef18 pic.twitter.com/7cbtUAwGtf

— World Economic Forum (@wef) January 24, 2018

As Bloomberg writes, “the slogan, posted on his Twitter account again on Wednesday, is meant as another appeal to those wondering where to place their factories, money or talents.”

While Macron avoided a direct mention of Trump’s trade policies, his appeal to investors emphasized Europe’s commitment to the multilateral system and political stability and he called on leaders to rethink the rules of the global economy.

It was unclear just what rules he has in mind for a Europe which wants to bridge the gaping QE-enabled divide yet is just as eager to avoid another financial crisis the moment Mario Draghi’s micromanagement of Europe’s capital markets and $1 trillion in non-performing loans ends.

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Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Comparing current equity valuations to prior valuation peaks such as those of 2008, 1999 or any other period is commonplace, but remains an essential way of assessing current market prospects and potential risks. Currently, seven of the eight traditional valuation techniques shown by Goldman Sachs below are in the upper strata of recent history.

The graph above, courtesy Goldman Sachs, is from August 2017. Since that time it is highly likely that all of those valuation levels have risen further.

In Second to None, published March 1, 2017, we opined that simply assessing valuation techniques, as shown above, is a great starting place for investors to gauge the present status of valuations. We added that it is equally important to normalize different periods of time to make their valuations comparable based on the level of economic growth which directly supports corporate profits. The result of our analysis shows that the current level of Cyclically Adjusted Price to Earnings (CAPE) is well above the levels of every other market peak, including 1999 and 1929. Essentially, investors are willing to pay more for each unit of economic growth today than at any time in modern history.

In this article, we update the data to reflect the current GDP adjusted CAPE and take it a step further to include the cyclical nature of corporate profit margins. When both adjustments are factored in, we gain a unique perspective that demonstrates the extent to which today’s valuations are, quite literally, off the charts.

GDP Trends

While the economy cycles from recession to growth and back, the long term economic growth trend, or secular GDP, has trended lower for the better part of the last 30 years. The graphs below show the cyclical short-term nature of economic growth (left) as well as the longer term trend (right).

Data Courtesy: St. Louis Federal Reserve (FRED)

There are a number of reasons for the long-term, downward growth trend about which we have written extensively. In a nutshell, the following are the three largest factors accounting for the deteriorating trend in growth:

• Debt – The amount of federal, corporate and individual debt has consistently risen at a pace faster than economic growth. As such, many debtors are unable to borrow further to keep spending. Others are hampered by interest payments which crowd out spending. The Federal Reserve has used extraordinary policies to force interest rates to historic lows to counter the debt burden, but their actions have only bought time and incentivized even more debt. The debt problem, which we call the Lowest Common Denominator, has only worsened.
• Demographics – Over the last 30 years, baby boomers provided a driving force for economic growth. As this outsized generation nears retirement, they will spend less and, in many instances, become a burden on the taxpayers that support them through social security and other entitlements. Additionally, slowing population growth and tightened restrictions on immigration are reducing the number of workers and consumers that can contribute to economic growth.
• Productivity – Partially as a result of years of poor economic, fiscal and monetary policy that dis-incentivized long-term investment in favor of consumption, the rate of productivity growth, the lifeline of economic growth is nearing zero.

It is primarily these three reasons and their longer-term projections that make us nearly certain that secular economic growth will continue to weaken in the years ahead. That does not mean there will not be periods of stronger growth. However, given that few of our nation’s leaders truly understand what drives sustainable economic growth and even fewer have the courage required to reverse the trends, we see little reason to expect change.

Given our assumption that long-term economic trends are likely to persist, we believe it is necessary to use economic growth to normalize current equity valuations to compare them to prior periods.  The following graph is an updated version of the one shown in Second to None.  It plots CAPE divided by the trailing ten-year growth rate of nominal GDP.

Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller

Note that the graph above and all of the graphs normalizing CAPE in this article, unlike the one presented in Second to None, are scaled by multiples of the average on the y-axis instead of the calculated number. The rationale being that the purpose of the analysis is not to provide a concrete numerical data point, but a comparative measure that allows one to relate valuations over many different economic environments. As an example the current reading is 2.86, meaning market valuations using this measure are 2.86 times higher than the average since 1956.

The two potential arguments against this type of analysis are likely from those that disagree with our longer-term growth forecast or those that agree with us but believe that we should exclude data from the financial crisis of 2008 as it was far from the norm.

For those that think economic growth will be better than the trend of the last thirty years, you should be aware that a ten-year growth rate of 8.21% is required to bring the adjusted valuation to its long-term mean. Such a ten-year growth rate has not been witnessed since 1987 and is nearly 2% greater than the average over the last 70 years.

For those that think excluding 2008 is appropriate, we calculated a seven-year CAPE divided by seven-year growth. While the current level using this time frame is not as egregious, it is two times that of the average over the last 70 years and only slightly lower than the peak established in the year 2000.  We remind those in this camp that the current economic expansion has lasted 103 months, almost twice the average since 1945. The longest expansion during this period was 120 months. No one knows when a correction will come, but we are clearly in the later stages of the cycle unless one assumes that the laws of mean reversion have been permanently suspended for both valuations and economic cycles.

Margins are Cyclical

Corporate profit margins, or the difference between sales and net profits, are considered one of the most cyclical fundamental measures that exist. The reason is that, when margins are high in certain industries, new entrants are lured to those industries by the higher margins. Conversely, when margins are low, companies exit those industries and those remaining companies can increase margins. The graph below shows the cyclical nature of corporate margins since 1948.

Data Courtesy: St. Louis Federal Reserve (FRED)

When margins are higher or lower than average, it makes sense to assume they will revert to the mean over time. Therefore, the rationale and logic for normalizing CAPE based on current margins and its historical tendency, provides a valuation level, as shown below, that is comparable to other periods.

Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller

Note that in the first graph showing historical margins that margins over the last 70 years appear to have broken the cyclical pattern and have stayed well above the average for an extended period. Many stock promoters believe this is a reflection of a “new normal” and cheer such a feat. They may be correct, but you might also want to consider that if margins have risen to a new level and are not cyclical anymore, the age-old incentives that drive business decisions in a free market economy no longer exist.  If that is the case, we may also want to consider that capitalism may be broken. If capitalism is in fact eroding, do you really want to pay a high premium for stocks? To help answer that question, we suggest a quick review of the gross economic inefficiencies of those nations where capitalism is not employed.

Comparative CAPE

We believe that durable longer-term economic trends and profit margins should be used to normalize CAPE and again make it comparable to prior periods. The graph below presents CAPE adjusted for both.

Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller

The graph above highlights that valuations using this measure dwarf any prior valuation peak since at least the 1950’s. At over 350% above the mean, stock investors are currently paying significantly more for a unit of economic growth than at any time in the last 70 years. To extend the analysis, we estimated the adjusted CAPE level of 1929, as shown on the graph, and come to the same conclusion.

Summary

Most astute investors know that stock valuations are at or near historical highs. Even these investors, however, may be unaware that today’s valuations, when adjusted for the level of economic growth and heightened profit margins, defy comparison with any prior period since the Great Depression. The simple fact is that investors are paying over three times the average and almost twice as much as the prior peak for a dollar of economic growth. Furthermore, it is happening at a time when we are clearly late in the economic cycle and the outlook for growth, even if one is optimistic, is well below that required to justify such a level.  

Fundamental valuations are a great means of understanding the potential value or lack thereof in a market or individual stock. However, it is a poor short-term trading tool. There is no doubt that, in time, valuations will revert to the norm. This can occur via sharp earnings increases or slower earnings growth accompanied by years of price stagnation. It can also transpire, as it has in the past, with a sharp drawdown in equity prices. Regardless of how you think this resolves itself, we hope this valuation technique provides another helpful tool for assessing the proper risk and reward tradeoff offered by markets currently.

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The Trump administration’s battle with so-called sanctuary cities escalated Wednesday when the Department of Justice, under the guidance of Attorney General Jeff Sessions, asked for records from 20 cities and countries, including the country’s three largest, as well as California, Illinois and Oregon.

The documents would reveal whether law enforcement agencies in these jurisdictions are illegally withholding information from US immigration authorities in violation of federal law, Reuters reported. Most sanctuary cities have passed local laws meant to stop municipal law enforcement from sharing an arrestee’s immigration status with ICE.

“If these jurisdictions fail to respond to our request, fail to respond completely or fail to respond in a timely manner, we will exercise our lawful authorities and issue subpoenas for the information,” said a senior Justice Department official, briefing reporters on condition of anonymity.

Trump’s battle with sanctuary cities has been raging for nearly his entire tenure in office, beginning just days after his inauguration when he signed an executive order to bar federal funding to cities that failed to cooperate with immigration authorities. This order was swiftly blocked by a federal appeals court, like so many of Trump’s other immigration-related policies. As a candidate, Trump promised to deport all of the roughly 11 million undocumented immigrants living in the US.

New York, Los Angeles and Chicago are each being targeted, as are Denver, San Francisco, the Washington state county that includes Seattle, Louisville, Sacramento, Albany, West Palm Beach and others, according to Reuters.

Some cities, including Philadelphia, didn’t make the list because of pending litigation.

Last March, Attorney General Jeff Sessions made a surprise appearance at then-White House Press Secretary Sean Spicer’s press briefing to announce that the DOJ would take steps to require sanctuary cities to comply with federal immigration laws, or see federal public-safety grants withheld. The DO would even try to claw back past DOJ awards, Sessions said. But the agency was quickly blocked by a flurry of lawsuits by Chicago, San Francisco and Philadelphia.

The judge overseeing the Chicago case issued a nationwide injunction barring the DOJ from withholding what is known as Byrne JAG grant money on the constitutional grounds. These funds are typically used to help local police improve crime-fighting techniques, buy equipment and assist crime victims. The DOJ is appealing this ruling.

According to Reuters, supporters of the sanctuary movement say enlisting local law enforcement officers’ support in rounding up immigrants for deportation undermines trust in local police.

Some cities have said they will honor requests by immigration authorities when accompanied by a criminal warrant.

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Capping the rising tide of pervasive sex-abuse scandals unleashed by the recent takedown of Harvey Weinstein, moments ago the former USA Gymnastics and Michigan State University sports doctor Larry Nassar was sentenced to between 40 and 175 years in prison for the sexual assault of dozens of girls.

The sentencing on seven charges of criminal sexual conduct in Ingham County, Michigan followed seven days of testimony from more than 150 current and former gymnasts who said Nassar molested them while professing to treat them for injuries.

“I just signed your death warrant” said Judge Rosemarie Aquilina after issuing the verdict and added that it was “honor and privilege” to sentence him Nassar.

“Your crime, all of your crimes, the depth of them, have cut into the core of this community and many communities,” Aquilina said during the sentencing.

“You did this for your pleasure,” she said after reading a letter by Nassar submitted to the court. “You still think that somehow you are right, that you are a doctor … I wouldn’t send my dogs to you, sir.”

“You do not deserve to walk outside of a prison ever,” she said.

Aquilina then addressed the gymnasts present, telling them, “You are no longer victims, you are survivors.”

Nassar, 54, pleaded guilty in November to seven counts of first-degree sex assault. He was already serving a 60-year sentence for child pornography convictions, and is still awaiting sentencing on three charges of criminal sexual conduct in Eaton County, Mich.

Speaking before the sentencing, Nassar addressed his victims who confronted him over the past week: “There are no words that can describe depth and breadth of how sorry I am,” he said. “I will carry your words with me for the rest of my days.” 

Larry Nasser just addressed the court — and his victims. Here’s what he said. https://t.co/49ElDNNCiY

— Meg Wagner (@megwagner) January 24, 2018

However, the judge dismissed his remarks as insincere and read out a letter in which he claimed he was compelled and “manipulated” into pleading guilty. The courtroom audibly gasped as she read his letter aloud. She offered Nasser to change his plea, which he declined.
* * *

Prosecutor Angela Povilaitis said Wednesday that Nassar is “possibly the most prolific serial child sex abuser in history.”

“To each survivor, thank you,” she said. “Thank you for coming forward, for trusting us, for doing what is so hard and difficult. What is obvious is that a strong group of determined women can in fact change the world, and will.”
Among the victims who spoke at the sentencing were Olympic gymnasts Aly Raisman and McKayla Maroney. Gymnasts Gabby Douglas and Simone Biles also accused Nassar of sexual assault.

Three members of USA Gymnastics’ top leadership stepped down earlier this week over the scandal, and the organization said earlier this month that it would move training facilities from Karolyi Ranch, where Nassar abused the girls.

The NCAA has also opened an investigation into Michigan State University’s handling of sexual abuse claims against Nassar. He was a doctor at the university from 1997-2016.

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Yesterday, the Washington Post reported that Special Counsel Robert Mueller III is hoping to question President Donald Trump during the coming weeks about his decisions to oust national security adviser Michael Flynn and FBI Director James Comey – the latest sign that the prosecutor’s investigation into Russia-Trump “collusion” has pivoted to focusing on obstruction of justice.

With Mueller’s probe increasingly focusing on Flynn, who has agreed to testify in exchange for leniency after being indicted for allegedly lying to the FBI, NBC published a bombshell report Wednesday about the meeting that set this whole saga into motion: Flynn’s initial meeting with the FBI, which took place exactly one year ago today, on Jan. 24, 2017.

According to NBC, the meeting took place after an employee from the office of Deputy Director Andrew McCabe contacted a scheduler for Flynn to set up a time for Flynn to meet with the FBI. The scheduler put the meeting on Flynn’s calendar without asking why the bureau wanted to meet with their boss.

When the agents showed up later that day, Flynn met with them without informing the White House of the National Security Council, or even his own personal lawyer. Apparently, Flynn was unaware that the meeting pertained to his conduct involving agents of the Russian government.

A brief phone call from the office of Andrew McCabe, the deputy FBI director, to a scheduler for Flynn on Jan. 24 set the interview in motion, according to people familiar with the matter. The scheduler was told the FBI wanted to speak with Flynn later that day, these people said, and the meeting was placed on Flynn’s schedule. The scheduler didn’t ask the reason for the meeting, and the FBI didn’t volunteer it, one person familiar with the matter said.

Later that day, two FBI agents arrived at the White House to speak with Flynn. A lawyer for the National Security Council typically would be informed of such a meeting and be present for it, one person familiar with the procedures said. But that didn’t happen in this instance, and Flynn didn’t include his own personal lawyer, two people said. He met with the two federal agents alone, according to these people.

“No one knew that any of this was happening,” said another senior White House official who was there at the time.

“Apparently it was not clear to Flynn that this was about his personal conduct,” another White House official said. “So he didn’t think of bringing his own lawyer.”

White House Counsel Don McGahn III was the first White House official to learn about Flynn’s meeting, when he was informed by acting Attorney General Sally Yates. Yates also reportedly told McGahn that Flynn had lied to Vice President Mike Pence and therefore might be vulnerable to blackmail from the Russians. Yates has been interviewed in Mueller’s probe.

Yet, McGahn did not later ask Flynn if he lied to the FBI, one person familiar with the matter said.

McGahn quickly briefed Trump, Bannon and White House chief of staff Reince Priebus, who left the White House last summer. Still, it would be weeks before Flynn was fired on Feb. 13.

However, it would be months before McGahn realized that Flynn might’ve lied to the FBI, when Mueller’s team requested a trove of documents from Flynn’s tenure at the White House.

By the end of 2017, Mueller’s team had spoken with Director of National Intelligence Dan Coats; Mike Rogers, the director of the National Security Agency; former FBI Director James Comey; and numerous members of Trump’s campaign and White House inner circle. Steve Bannon is expected to meet with Mueller’s team by the end of the month. McGahn has also sat for two days of interviews with Mueller’s team.

One person familiar with the matter described Pompeo, Coats and Rogers as “peripheral witnesses” to the Comey firing. Attorney General Jeff Sessions, who played a key role in Comey’s departure and was a top adviser on the Trump campaign, was interviewed by Mueller last week as the special counsel’s team inches closer to possibly questioning the president himself.

Notably, Trump has taken aim at McCabe lately, accusing the deputy of political bias, while also maintaining that this phenomenon is widespread throughout the bureau.

Interestingly, one of the two agents who interviewed Flynn was Peter Strzok, who was fired by Mueller last summer and is now the object of Republican ire, after Congress received batches of text messages between Strzok and his mistress, FBI Lawyer Lisa Page, expressing their opposition to Trump. At one point, Page texted Strzok about an “insurance policy” to prevent Trump from becoming president.

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Weak-Dollar outflows? Trade Wars? Or Pension-fund outflows? Take your pick, but stocks are getting slammed…

The weakness seemed to start around Wilbur Ross’ comments on China’s “Direct Threat” but has extended as Pension flow concerns rise…

 

A lot of the stock drop was catch-down to bond/dollar reality…

 

Of course the NYSE breaking did not help…

 

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While nowhere near as impressive as yesterday’s 2Y auction, today’s sale of $34 billion in 5Y Notes was good, if toward average. 5-year note auction went off without any difficulties with metrics that were generally close to average.

The high yield stopped at 2.434% a 0.4bps tail to the 2.430% When Issued, 20bps higher than last month’s 2.23%, and the highest since April 2010. The bid to cover of 2.48 was higher than December’s 2.36 if right on top of the 6 month average of 2.49%, with total bids of $89.4b for $39.0b in notes sold vs six previous auction average of $87.3b in bids for $36.6b in notes sold.

Similarly, the buyside takedown figures were in line with the average: there was a 65.0% Indirect takedown, well above December’s 58.4%, but in line with the 6 month average of 65.4%. Direct bidders took down 9.1%, just below the 6 month average 9.5%, leaving 26% to Direct bidders.

Overall, an unremarkable sale with nothing to write home about; perhaps the only notable feature is that in light of today’s broad selloff across the curve it could have been far worse.

 

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A day after his stock-only pay-package was announced, Elon Musk may be a little disappointed this morning as his shares are sliding following a WSJ report that California regulators and Trump administration officials met to discuss for the first time the prospect of controversial changes to vehicle-emissions rules.

The taxpayer-subsidized car-maker is under pressure today, not helped by headlines from The Wall Street Journal that adminstration officials took a significant step in complex negotiations aimed at preventing a legal battle over future environmental regulations on cars and trucks.

President Donald Trump  last year charged federal regulators with revisiting the regulations in response to increased purchases of heavier and less-efficient pickup trucks and sport-utility vehicles.

That move triggered concern at Ms. Nichols’ California Air Resources Board, which favors lofty emissions standards including higher sales of electric cars.

In a coffee shop near the White House, Trump administration officials broached whether California is open to easing future emissions and mileage goals, the people said, an approach state leaders have openly resisted for nearly a year. California officials were noncommittal, but agreed to continue discussions and exchange technical analyses ahead of an April deadline for the Environmental Protection Agency to decide whether regulations covering 2022-2025 should be revised.

The reaction was not violent but is clear…

Time for Elon to visit The White House again!!

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Traders are perplexed by today’s market action: not only did the S&P stage a dramatic intraday reversal from session highs, and all three indices are now red on the day, but so far the BTFD ETF flows are missing. What gives?

We may have an explanation courtesy of Credit Suisse, which writes in a trading note that U.S. pension funds that rebalance monthly – which is most of them – will have to sell more than $12 billion of U.S. stocks in the coming days to return to prior asset allocation levels given recent rally in the stock market – the S&P is up 6% YTD while bonds are down just shy of 1%.

As a result, CS calculates that funds are expected to sell a sizable $12BN in equities and buy roughly $24b in fixed income. The amount of selling, CS writes “would be the biggest in at least a year for a month that does not coincide with quarter-end.”

Bloomberg confirms as much writing that today is the trigger day for month-end rebalancing, and warns that today’s action may be a signal to expect pension rebalancing over the next week.

What about in the longer-term?

Over the weekend, JPMorgan’s Flows and Liquidity note revealed that “the average long-term sovereign yield level at which pension funds would start de-risking was 2.8% and the yield at which they would expect to be fully hedged was 3.7%. The 30y UST yield at 2.9% currently has already crossed the 2.8% level mentioned in this survey.”

Furthermore, JPM calculations suggest that this year’s 5% rise in equity prices alone could create up to $125bn of pending rebalancing flow by US defined pension plans.

We look for G4 pension funds and insurance companies overall to buy a lot more bonds than the $460bn bought last year, and for their bond buying to return to at least the 2016 pace of $640bn. In fact, we see upside risks to this projection assuming equity markets remain strong.

To JPM the news is bullish for the long-end of bond curves: “This pension fund rebalancing flow should support the long end of DM bond curves causing further flattening this year.“

 

As to what forced pension selling of stocks will mean for equities, we may find out in the next few days…

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After tagging its 50-DMA yesterday in an ‘odd’ plunge, Silver has screamed higher…

Pushing towards $17.50 on its best day since Nov 1st 2016.

As the dollar nosedives, gold and Bitcoin are also bid…

 

Gold continues its post-Fed-hike ramp…

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