Brickbat: Punching Back

Consignment sale
operator Rhea Lana Riner has sued the U.S. Department of Labor for
hurting her business. Riner uses volunteers to staff her
consignment sales. In return, the volunteers, mostly retirees and
stay-at-home moms, get the chance to shop
early
 at the sales. But the Labor Department says Riner is
violating federal law by not paying the volunteers minimum wage. It
told those volunteers they can sue for back wages. None have done
so, but Riner contends the threat of lawsuits has harmed her
business. 

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via IFTTT

Chinese Stocks Tumble On Contagion Concerns From First Shadow-Banking Default

While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC's liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of "troubled shadow banking products" had assumed that 'someone' would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the "Credit Equals Gold #1 Collective Trust Product", due to mature Jan 31st with $492 million outstanding. The anxiet from contagion concerns ofg the first shadow-banking default has driven the Shanghai Composite back near 2,000 for the first time since July – and to its narrowest spread to the S&P 500 in almost 8 years.

 

The Shanghai Composite is tumbling… to six month lows (and back near 2,000 for the firs time since July)…

 

and its closest (nominally) to the S&P 500 in almost 8 years…

 

As we previously noted,

…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).

 

Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.

 

Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.

 

So the PBOC's efforts are merely exacerbating the situation for the worst companies… for example… Zhenfu Energy…

 

As Reuters reports,

Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.

 

ICBC's shares have fallen this week amid speculation that the bank would be forced to help repay investors in a 3 billion yuan ($496.20 million) high-yield investment product issued by China Credit Trust Co Ltd but marketed through ICBC branches. The product is due to mature on Jan. 31.

 

"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product)," an ICBC spokesman told Reuters by phone on Tuesday.

 

The trust product, called "2010 China Credit / Credit Equals Gold #1 Collective Trust Product", used the funds it raised from wealthy investors in 2010 to make a loan to unlisted coal company Shanxi Zhenfu Energy Group Ltd.

 

But in May 2012, Zhenfu Energy's vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.

Which Barclays warns:

In our view, despite the trust issuer, distributor bank and local government perhaps trying to bail out the mining company, the regulators and central government could probably allow the trust product default to happen as:

  1. government appears fairly determined to reform the financial system and cut off the implicit guarantee of financial institutions;
  2. the State Council is reportedly streamlining regulation of shadow banking including trust business; and
  3. the default of trust products could have less social impact than the default of WMPs, bonds and other products sold to the general public or have problematic practices, such as asset-pool investments.

In our view, the default of trust products could trigger some short-term negative impacts on China’s financial sector and the reputation of financial institutions. However, we believe it is positive for the healthy development of financial system in the long run because the default could do the following:

  1. Be a step to reduce the implicit guarantee of financial institutions for investment products. Banks could shift their financial liabilities back to the investors.
  2. Increase the risk awareness of both investors and financial institutions, which could correct the pricing of investment products to more risk-oriented.

If the trust product goes into default, we believe it would be the first default to test the financial system.

Here is the product…

And the growth of such products has been enormous as we have explained in great detail previously…

 

As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), and now George Soros have explained. Simply put –

"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."

The "eerie resemblances" – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.


    



via Zero Hedge http://ift.tt/1j5oUHd Tyler Durden

“You Only Get To Miss Sales Expectations So Many Times”

With the Q4 earnings season beginning, ConvergEx’s Nick Colas reminds that the top of the income statement matters more than the bottom line if we expect further upside to domestic equities in 2014.  Revenue growth has been in short supply over the last four quarters, with the companies of the Dow only able to average a 0.6% top line growth rate over the last year.  If 2013 was all about multiple expansion in equity markets, then, Colas warns this will be the year when revenue growth must fulfill the promise of a U.S. stock market so near all-time highs. Analysts have been perennial over-optimists on revenues every month since early 2012. Maybe they finally have it right, but that is purely a matter of faith at this point; their track record on this count is not good.

 

Via ConvergEx’s Nick Colas,

The Ford Mustang turns 50 in just a few months, but this storied Baby Boomer icon of a car almost never made it into production.  In the early 1960s Henry Ford II, grandson of the Ford Motor Company founder, had just watched the Edsel become the most celebrated flop in automotive history.  It was overpriced, overhyped, launched with poor quality, and suffered from questionable styling – especially its “Toilet seat” grill.  Worse of all, it bore the name of Ford’s own father and “Hank the Deuce” wanted no part of another high profile vehicle launch.  The only thing that kept the Mustang program on track at Ford in 1962-1964 was Lee Iacocca’s constant promotion of the car.  He convinced Henry Ford II that the car was the right product for younger buyers and would use largely off-the-shelf components to keep costs low.

In a recent – and rare – interview with Jay Leno (quoted in the 1/6/2104 edition of Automotive News), Iacocca talked about this now-fabled American sports car and revealed a provocative nugget of information.  Here is what he said, prefaced with a little background:

The basic story is well-known in automotive circles: the original Mustang’s base price was an affordable $2,400 out the door of the dealership and over the first 2.5 years of production Ford sold +1.1 million units.

 

What Iacocca revealed to Leno about these early cars tells us something new about how profitable they were: customers ordered $1,000 of options, on average.

 

The contribution profit margin for a passenger car of the day was about 30%, but options typically carried a 60-70% margin.  Using Iacocca’s anecdote, that made the average profit per unit about $1,370.

 

In the 1966 model year, Ford sold 607,000 Mustangs and – using the profit analysis above – made about $830 million pretax.  That translated into $5.8 billion in 2013 dollars, using the Bureau of Labor Statistics’ CPI Inflation Calculator.

 

Analysts estimate that Ford made $10.8 billion in EBITDA in 2013, which means that the Mustang’s inflation-adjusted profits from 1967 are the equivalent of more than 50% of the company’s earnings power today.  Not bad for a car that almost got canceled.

That’s the power of marginal revenues, both from new products and higher incremental profit margins, and how they can create explosive earnings growth for the company that is smart/lucky enough to have them.  It is also a story which has been in short supply since the initial economic snapback from the Financial Crisis.   Every month for the last few years we’ve tracked both analysts’ expectations and actual revenue growth for the 30 companies of the Dow Jones Industrial Average, and here is a summary of our latest findings:

The just-completed year of 2013 may have been an excellent one for equities, but it was the worst year for corporate revenue growth since the Great Recession.  Assuming that analysts have dialed-in their expectations correctly for Q4, the average year-on-year sales growth for the Dow companies was a paltry 0.6% last year.  Double digit growth did occur – back in 2010 – but that was admittedly against the easy comps of 2009.  Since then, even the mega-names of the Dow – generally well run companies – have had real trouble growing their top lines.

 

Analysts may have set the Q4 2013 low enough so that we might get some upside surprises as earnings season progresses over the next few weeks.  Back in March 2013, the Street thought that the Dow companies could grow revenues by 4-5%. As the year progressed a sluggish global economy poured cold water on those hopes.  Estimates now run 1.5% for the Dow companies, and 1.6% for the non-financial names in the Average.

 

According to their currently published revenue estimates, brokerage analysts expect revenue growth to accelerate from here.  For Q1 2013, that 1.5% Q4 comp becomes 2.5%.  Then, in Q2 2014, that grows to 3.0%.  How about Q3?  Yep, more growth, to a 4.2% comp to last year.

 

 

At the same time, you might look for a salt mine to accompany these estimates, for our tracking of past analyst modeling shows they are prone to excessive optimism.  The now-unimpressive Q4 comp to last year of 1.5% began its life a year ago as a 3.4% expectation.  It peaked in March as a very brave 4.6% expectation.  From there, it slowly crept back into its shell and shrank to its current size.  Which is to say very small indeed.

 

The contours of this year’s quarterly revenue growth expectations are following those of the current quarter.  They coming out swinging in the early rounds, only to be pummeled back into their corner by the brutish form of a global economy barely able to get out of its own way.  For the first quarter of 2014, analysts were printing a 4.5% expected comp in May 2013.  As mentioned, that has shrunk to 2.5% in less than a year.  And that 3.0% growth rate in analyst models for Q2?  It was a much more impressive +4% comp in October.

 

Interestingly, the Street has not yet cut its full-year revenue expectations for 2014.  These still remain at 3.8%, close to where they started life in late 2012.  If you want to know how an analyst can cut their quarterly numbers every month but keep their annual expectations the same, I don’t have an answer for you.

 

To paraphrase a Ford marketing message (although not directly from the Mustang), revenue growth has to be “Job 1” for stock markets and the companies they track in 2014.  Last year’s market, with its above-average gains, didn’t come for free.  If investors want to see further advances – or at least the maintenance of current levels – then revenue growth and its attendant improvements in profits must be part of the picture this year.  It is easy to pick on analysts for their wayward estimates.  Truth be told, it is actually kind of fun.  But inside those numbers sit a fidgety truth: you only get to miss sales expectations so many times before investors grow inpatient.  Equity investing may be an optimist’s game, but it is not supposed to be a sucker’s bet.  This year must deliver on the promise laid out in last year’ stellar investment results, and it must do so both at the bottom AND at the top of the income statement.   


    



via Zero Hedge http://ift.tt/1me3OsF Tyler Durden

"You Only Get To Miss Sales Expectations So Many Times"

With the Q4 earnings season beginning, ConvergEx’s Nick Colas reminds that the top of the income statement matters more than the bottom line if we expect further upside to domestic equities in 2014.  Revenue growth has been in short supply over the last four quarters, with the companies of the Dow only able to average a 0.6% top line growth rate over the last year.  If 2013 was all about multiple expansion in equity markets, then, Colas warns this will be the year when revenue growth must fulfill the promise of a U.S. stock market so near all-time highs. Analysts have been perennial over-optimists on revenues every month since early 2012. Maybe they finally have it right, but that is purely a matter of faith at this point; their track record on this count is not good.

 

Via ConvergEx’s Nick Colas,

The Ford Mustang turns 50 in just a few months, but this storied Baby Boomer icon of a car almost never made it into production.  In the early 1960s Henry Ford II, grandson of the Ford Motor Company founder, had just watched the Edsel become the most celebrated flop in automotive history.  It was overpriced, overhyped, launched with poor quality, and suffered from questionable styling – especially its “Toilet seat” grill.  Worse of all, it bore the name of Ford’s own father and “Hank the Deuce” wanted no part of another high profile vehicle launch.  The only thing that kept the Mustang program on track at Ford in 1962-1964 was Lee Iacocca’s constant promotion of the car.  He convinced Henry Ford II that the car was the right product for younger buyers and would use largely off-the-shelf components to keep costs low.

In a recent – and rare – interview with Jay Leno (quoted in the 1/6/2104 edition of Automotive News), Iacocca talked about this now-fabled American sports car and revealed a provocative nugget of information.  Here is what he said, prefaced with a little background:

The basic story is well-known in automotive circles: the original Mustang’s base price was an affordable $2,400 out the door of the dealership and over the first 2.5 years of production Ford sold +1.1 million units.

 

What Iacocca revealed to Leno about these early cars tells us something new about how profitable they were: customers ordered $1,000 of options, on average.

 

The contribution profit margin for a passenger car of the day was about 30%, but options typically carried a 60-70% margin.  Using Iacocca’s anecdote, that made the average profit per unit about $1,370.

 

In the 1966 model year, Ford sold 607,000 Mustangs and – using the profit analysis above – made about $830 million pretax.  That translated into $5.8 billion in 2013 dollars, using the Bureau of Labor Statistics’ CPI Inflation Calculator.

 

Analysts estimate that Ford made $10.8 billion in EBITDA in 2013, which means that the Mustang’s inflation-adjusted profits from 1967 are the equivalent of more than 50% of the company’s earnings power today.  Not bad for a car that almost got canceled.

That’s the power of marginal revenues, both from new products and higher incremental profit margins, and how they can create explosive earnings growth for the company that is smart/lucky enough to have them.  It is also a story which has been in short supply since the initial economic snapback from the Financial Crisis.   Every month for the last few years we’ve tracked both analysts’ expectations and actual revenue growth for the 30 companies of the Dow Jones Industrial Average, and here is a summary of our latest findings:

The just-completed year of 2013 may have been an excellent one for equities, but it was the worst year for corporate revenue growth since the Great Recession.  Assuming that analysts have dialed-in their expectations correctly for Q4, the average year-on-year sales growth for the Dow companies was a paltry 0.6% last year.  Double digit growth did occur – back in 2010 – but that was admittedly against the easy comps of 2009.  Since then, even the mega-names of the Dow – generally well run companies – have had real trouble growing their top lines.

 

Analysts may have set the Q4 2013 low enough so that we might get some upside surprises as earnings season progresses over the next few weeks.  Back in March 2013, the Street thought that the Dow companies could grow revenues by 4-5%. As the year progressed a sluggish global economy poured cold water on those hopes.  Estimates now run 1.5% for the Dow companies, and 1.6% for the non-financial names in the Average.

 

According to their currently published revenue estimates, brokerage analysts expect revenue growth to accelerate from here.  For Q1 2013, that 1.5% Q4 comp becomes 2.5%.  Then, in Q2 2014, that grows to 3.0%.  How about Q3?  Yep, more growth, to a 4.2% comp to last year.

 

 

At the same time, you might look for a salt mine to accompany these estimates, for our tracking of past analyst modeling shows they are prone to excessive optimism.  The now-unimpressive Q4 comp to last year of 1.5% began its life a year ago as a 3.4% expectation.  It peaked in March as a very brave 4.6% expectation.  From there, it slowly crept back into its shell and shrank to its current size.  Which is to say very small indeed.

 

The contours of this year’s quarterly revenue growth expectations are following those of the current quarter.  They coming out swinging in the early rounds, only to be pummeled back into their corner by the brutish form of a global economy barely able to get out of its own way.  For the first quarter of 2014, analysts were printing a 4.5% expected comp in May 2013.  As mentioned, that has shrunk to 2.5% in less than a year.  And that 3.0% growth rate in analyst models for Q2?  It was a much more impressive +4% comp in October.

 

Interestingly, the Street has not yet cut its full-year revenue expectations for 2014.  These still remain at 3.8%, close to where they started life in late 2012.  If you want to know how an analyst can cut their quarterly numbers every month but keep their annual expectations the same, I don’t have an answer for you.

 

To paraphrase a Ford marketing message (although not directly from the Mustang), revenue growth has to be “Job 1” for stock markets and the companies they track in 2014.  Last year’s market, with its above-average gains, didn’t come for free.  If investors want to see further advances – or at least the maintenance of current levels – then revenue growth and its attendant improvements in profits must be part of the picture this year.  It is easy to pick on analysts for their wayward estimates.  Truth be told, it is actually kind of fun.  But inside those numbers sit a fidgety truth: you only get to miss sales expectations so many times before investors grow inpatient.  Equity investing may be an optimist’s game, but it is not supposed to be a sucker’s bet
.  This year must deliver on the promise laid out in last year’ stellar investment results, and it must do so both at the bottom AND at the top of the income statement.   


    



via Zero Hedge http://ift.tt/1me3OsF Tyler Durden

Weapons Inspectors: Syrian Chemical Weapons Fired from REBEL-HELD Territory

The head of the UN weapons inspectors said that the American case for Syrian government firing chemical weapons was weak, because the rockets can only go 2 miles … but government-held territory is much further away.

Similarly, McClatchy reported yesterday:

A team of security and arms experts, meeting this week in Washington to discuss the matter, has concluded that the range of the rocket that delivered sarin in the largest attack that night was too short for the device to have been fired from the Syrian government positions where the Obama administration insists they originated.

 

***

 

The authors of a report released Wednesday said that their study of the rocket’s design, its likely payload and its possible trajectories show that it would have been impossible for the rocket to have been fired from inside areas controlled by the government of Syrian President Bashar Assad.

Map of Damascus

Modified Grad missile

In the report, titled “Possible Implications of Faulty U.S. Technical Intelligence,” Richard Lloyd, a former United Nations weapons inspector, and Theodore Postol, a professor of science, technology and national security policy at the Massachusetts Institute of Technology, argue that the question about the rocket’s range indicates a major weakness in the case for military action initially pressed by Obama administration officials.

 

***

 

To emphasize their point, the authors used a map produced by the White House that showed which areas were under government and rebel control on Aug. 21 and where the chemical weapons attack occurred. Drawing circles around Zamalka to show the range from which the rocket could have come, the authors conclude that all of the likely launching points were in rebel-held areas or areas that were in dispute. The area securely in government hands was miles from the possible launch zones.

 

In an interview, Postol said that a basic analysis of the weapon – some also have described as a looking like a push pop, a fat cylinder filled with sarin atop a thin stick that holds the engine – would have shown that it wasn’t capable of flying the 6 miles from the center of the Syrian government-controlled part of Damascus to the point of impact in the suburbs, or even the 3.6 miles from the edges of government-controlled ground.

 

He questioned whether U.S. intelligence officials had actually analyzed the improbability of a rocket with such a non-aerodynamic design traveling so far before Secretary of State John Kerry declared on Sept. 3 that “we are certain that none of the opposition has the weapons or capacity to effect a strike of this scale – particularly from the heart of regime territory.”

 

“I honestly have no idea what happened,” Postol said. “My view when I started this process was that it couldn’t be anything but the Syrian government behind the attack. But now I’m not sure of anything. The administration narrative was not even close to reality. Our intelligence cannot possibly be correct.”

 

Lloyd, who has spent the past half-year studying the weapons and capabilities in the Syrian conflict, disputed the assumption that the rebels are less capable of making rockets than the Syrian military.

 

The Syrian rebels most definitely have the ability to make these weapons,” he said. “I think they might have more ability than the Syrian government.” [He's right.]

 

***

 

They said that Kerry’s insistence that U.S. satellite images had shown the impact points of the chemical weapons was unlikely to be true. The charges that detonate chemical weapons are generally so small, they said, that their detonations would not be visible in a satellite image.

 

The report also raised questions whether the Obama administration misused intelligence information in a way similar to the administration of President George W. Bush in the run-up to the 2003 invasion of Iraq.  [Correct, indeed.] Then, U.S. officials insisted that Iraqi dictator Saddam Hussein had an active program to develop weapons of mass destruction. Subsequent inspections turned up no such program or weapons.

 

“What, exactly, are we spending all this money on intelligence for?” Postol asked.

 

***

Even the New York Times – one of the main advocates for the claims that the rockets came from a Syrian government base – has quietly dropped the claim.

But the U.S. is still taking the position that the only acceptable outcome for the coming Syria negotiations is for Assad to be replaced by the US-backed transitional government.

As with Iraq, the “facts” are being fixed around the policy.


    



via Zero Hedge http://ift.tt/1i3nAH6 George Washington

Why The Game Is Not Over Yet For Gold

2013 was a brutal year for precious metals investors. Santiago Capital's Brent Johnson begins his excellent presentation "#$1%!k##!!***#$$" with a mea culpa for the worst year in a dozen even as Santiago topped the list of precious metals funds. But crucially, Brent points out, "it is only half-time" in this fight and "if gold investors will stick with the fundamentals – which is very hard to do sometimes – the second half could be very rewarding." Simply put, he notes, the only reason the level of water in our economic bucket has increased slightly is not because the holes are fixed… but because we are pumping dollars in quicker than they are leaking out. "Excess Reserves are a ticking time bomb," Johnson adds, and the second half of this monetary game will be very different from the first.

Part 1 – "The First Half Of This Monetary Game"

Fund performance, Mea Culpa…

 

What the Fed has done so far, holes in our economic bucket…"the only reason the level of water in our economic bucket has increased slightly is not because the holes are fixed… but because we are pumping dollars in quicker than they are leaking out"

money printing, the housing 'recovery', and stocks vs the real economy… "if you spend $8 trillion and can't throw a good party, you should be thrown in jail"

Part 2 – "How The Second Half Will Play Out"

 

Where has all the QE money gone? Why inflation has remained tame… "excess reseves are a ticking time bomb"

 

Fed reassuranes are bullshit. How reverse repo will work and how the second half of non-expanding monetary base will be a problem. Simply put, if the Fed cannot get monetary velocty to pick back up then they will not be able to continue tapering… and velocity increasing is inflationary.

They can't rase rates as they are now in extreme forward guidance mode that they will keep interest rates low for an extraordinary period of time…

This will end badly – its a matter of "if" not "when"… but as Johnson goes on, there are still challenges (e.g. India) but selling gold now is concentrating assets not diversifying them… and we are going to win in the end.


    



via Zero Hedge http://ift.tt/1j5ahDv Tyler Durden

Howard Marks' Views On When Markets Will Be Efficient (Hint: Never)

While the topic of Howard Marks’ latest letter is the role of luck in everything from the life one leads to investing, the part we found particularly engaging was his discussion of (in)efficient markets, and why according to him inefficient markets are to be cherished, especially if one knows in advance just how rigged the game is and the skill of the other players.  Here is the key excerpt.

Let me say up front that I have always considered the reasoning behind the efficient market hypothesis absolutely sound and compelling, and it has greatly influenced my thinking.

 

In well-followed markets, thousands of people are looking for superior investments and trying to avoid inferior ones. If they find information indicating something’s a bargain, they buy it, driving up the price and eliminating the potential for an excess return. Likewise, if they find an overpriced asset, they sell it or short it, driving down the price and lifting its prospective return. I think it makes perfect sense to expect intelligent market participants to drive out mispricings.

 

The efficient market hypothesis is compelling . . . as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, “In theory there is no difference between theory and practice, but in practice there is.”) The answer lies in the fact that no hypothesis is any better than the assumptions on which it’s premised.

 

I believe many markets are quite efficient. Everyone is aware of them, basically understands them, and is willing to invest in them. And in general everyone gets the same information at the same time (in fact, it’s one of the SEC’s missions to make sure that’s the case). I had markets like that in mind in 1978 when, on going into portfolio management, my rule was, “I’ll do anything but spend the rest of my life choosing between Merck and Lilly.”

 

But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can’t or don’t want to participate. Some market participants may have better information than others . . . legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

* * *

 

The Current State of Market Efficiency

 

Let’s compare the current environment for efficiency with that of the past.

 

  • Data on all forms of investing is freely available in vast quantities.
  • Every investor has extensive computing power. In contrast, there were essentially no PCs or even four-function calculators before 1970, and no laptops before 1980.
  • “Hedge fund,” “alternative investing,”
    “distressed debt,” “high yield bond,” “private equity,” “mortgage backed security” and “emerging market” are all household words today. Thirty years ago they were non-existent, little known or poorly understood. Today, as I say about the impact of the browsers on our mobile phones, “everyone knows everything.”
  • Nowadays few people make moral judgments about investments. There aren’t many instances of investors turning down an investment just because it’s controversial or unseemly. In contrast, most will do anything to make a buck.
  • There are about 8,000 hedge funds in the world, many of which have wide-open charters and pride themselves on being infinitely flexible.

It’s hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with “statistical significance,” but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run.

 

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

* * *

In hindsight, considering just how lucrative the past several years of straight line higher movement in the S&P500 have been to some market participants – especially those E-Trade babies with virtually zero grasp of that fundamental non-common sense concept called valuation (see GMO’s letter earlier) –  one can therefore add one more distinction to Bernanke’s legacy: creating the world’s most inefficient marketplace.

For much more insight from the Oaktree chairman, read the full letter (pdf).


    



via Zero Hedge http://ift.tt/1dA3tye Tyler Durden

Howard Marks’ Views On When Markets Will Be Efficient (Hint: Never)

While the topic of Howard Marks’ latest letter is the role of luck in everything from the life one leads to investing, the part we found particularly engaging was his discussion of (in)efficient markets, and why according to him inefficient markets are to be cherished, especially if one knows in advance just how rigged the game is and the skill of the other players.  Here is the key excerpt.

Let me say up front that I have always considered the reasoning behind the efficient market hypothesis absolutely sound and compelling, and it has greatly influenced my thinking.

 

In well-followed markets, thousands of people are looking for superior investments and trying to avoid inferior ones. If they find information indicating something’s a bargain, they buy it, driving up the price and eliminating the potential for an excess return. Likewise, if they find an overpriced asset, they sell it or short it, driving down the price and lifting its prospective return. I think it makes perfect sense to expect intelligent market participants to drive out mispricings.

 

The efficient market hypothesis is compelling . . . as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, “In theory there is no difference between theory and practice, but in practice there is.”) The answer lies in the fact that no hypothesis is any better than the assumptions on which it’s premised.

 

I believe many markets are quite efficient. Everyone is aware of them, basically understands them, and is willing to invest in them. And in general everyone gets the same information at the same time (in fact, it’s one of the SEC’s missions to make sure that’s the case). I had markets like that in mind in 1978 when, on going into portfolio management, my rule was, “I’ll do anything but spend the rest of my life choosing between Merck and Lilly.”

 

But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can’t or don’t want to participate. Some market participants may have better information than others . . . legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

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The Current State of Market Efficiency

 

Let’s compare the current environment for efficiency with that of the past.

 

  • Data on all forms of investing is freely available in vast quantities.
  • Every investor has extensive computing power. In contrast, there were essentially no PCs or even four-function calculators before 1970, and no laptops before 1980.
  • “Hedge fund,” “alternative investing,”
    “distressed debt,” “high yield bond,” “private equity,” “mortgage backed security” and “emerging market” are all household words today. Thirty years ago they were non-existent, little known or poorly understood. Today, as I say about the impact of the browsers on our mobile phones, “everyone knows everything.”
  • Nowadays few people make moral judgments about investments. There aren’t many instances of investors turning down an investment just because it’s controversial or unseemly. In contrast, most will do anything to make a buck.
  • There are about 8,000 hedge funds in the world, many of which have wide-open charters and pride themselves on being infinitely flexible.

It’s hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with “statistical significance,” but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that’s an oxymoron. It’s like asking, “What is there that hasn’t been discovered yet?” The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there’s little that people don’t know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn’t touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I’m sure they’ll be back the next time investors turn tail and run.

 

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles.

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In hindsight, considering just how lucrative the past several years of straight line higher movement in the S&P500 have been to some market participants – especially those E-Trade babies with virtually zero grasp of that fundamental non-common sense concept called valuation (see GMO’s letter earlier) –  one can therefore add one more distinction to Bernanke’s legacy: creating the world’s most inefficient marketplace.

For much more insight from the Oaktree chairman, read the full letter (pdf).


    



via Zero Hedge http://ift.tt/1dA3tye Tyler Durden