Month: March 2017

Authored by Simon Black and Tim Price via SovereignMan

It was just over two years ago that “The Grilled Cheese Truck, Inc.” began trading in the US stock market under ticker symbol GRLD.

GRLD was exactly what it sounds like– a truck that sells grilled cheese sandwiches.

Yet despite a history of heavy losses, the stock market valued the company at an extraordinary $107 million.

Skeptical investors would have been sharp to call that the peak of the market.

Yet the irrational exuberance continued.

Earlier this year, Snap Inc., a profitless mobile app which offers its shareholders ZERO voting rights, went public with a $28 billion valuation.

That too seemed like the peak of the market’s insanity. But that turned out to be a premature feeling as well.

Now we see none other than Iron Mike Tyson shilling for a Vanuatu/Latvian brokerage firm, enticing small investors with offers of 400x leverage.

It seems all we are lacking at this point is a Fortune magazine cover with a “DOW 100,000” headline.

Maybe it is the peak. Or perhaps the gains will continue.

Fortunately our job isn’t to make precise predictions; it is to assess risk and avoid taking any which (a) is unnecessary, and (b) fails to offer returns that vastly compensate for the probability of loss.

We have pointed out before that the US stock market’s average Price / Earnings ratio is at highs typically not seen except prior to spectacular declines.

See the chart below, which shows the “Cyclically Adjusted” Price-to-Earnings ratio, or CAPE, at 29. The long-term average is 17.

 

Since 1880, the CAPE has only been at this level twice before– the first time prior to the Great Depression, and the second time prior to the dot-com crash.

To us, the prospect of gaining an additional 10%… or even 30% in US stocks pales in comparison to the prospect of losses from a major correction.

As Alhambra Investment Partners point out, investment analysts were forecasting back in October that US companies in the S&P 500 would generate $29 in earnings for the 4th quarter of 2016.

As the Q4 earnings reports started rolling in last month, the estimate dropped to $26.37.

Since that time, with now almost all companies now having reported, the current figure is $24.15 – a decline of 8.4% in just four weeks.

That’s bad news for passive “index” investors who are, by default, exposed to every single one of the companies in the S&P 500– most particularly the expensive ones.

Most people don’t realize this, but the S&P 500 does not equally weigh its 500 constituent companies.

In fact, the price of the #1 weighted stock (Apple) influences the S&P 500 index over 240x more than the least weighted stock (Autonation).

In general, more expensive stocks count more than inexpensive stocks.

So if you buy a traditional index fund, you are allocating the majority of your capital to popular companies, and very little capital to overlooked gems that are inexpensive and undervalued.

This is the opposite of what value-oriented investors should be doing.

As Ian Lance of RWC Partners points out,

“Passive [index] investors in 2000 were allocating large chunks of their money to bubble stocks like Cisco, Sun and Yahoo, and also to accounting frauds like Enron and Worldcom which were on their way to zero.”

We have little experience gambling, but we’re pretty sure that you can’t prosper by betting on every number at the roulette table.

That’s essentially what index investing is. And, like casino games, the market is rigged against individual investors.

You’re already fighting an uphill battle against high-frequency traders and dishonest bankers. Overpaying for expensive, popular assets doesn’t help.

Never forget that the world is a big place.

And if your stock market is irrationally overvalued, you have the freedom to allocate your time, effort, and capital to more attractive, undervalued investments elsewhere.

via http://ift.tt/2og5laD Tyler Durden

Authored by Don Quijones, Spain & Mexico, editor at Wolf Street

Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.

But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”

If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.

Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.

Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry.

There are other major Italian banks with Texas Ratios well in excess of 100%. They include:

• Banco Popolare (the offspring of a merger of Banco Popolare di Verona e Novara and Banca Popolare Italiana in 2017 and then a subsequent merger with Banca Popolare di Milano on 1 January 2017): €120 billion in assets; TR: 217%.
• UBI Banca: €117 billion in assets; TR: 117%
• Banca Nazionale del Lavoro: €77 billion in assets; TR: 113%
• Banco Popolare Dell’ Emilia Romagna: €61 billion in assets; TR: 140%
• Banca Carige: €30 billion in assets; TR: 165%
• Unipol Banca: €11 billion in assets; TR: 380%

In sum, almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%.

But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

To stay on the right side of the solvency threshold, Unicredit has already had to raise €13 billion of new capital this year and last week it took advantage of the ECB’s latest splurge of charitable lending (formally known as TLTRO II) to borrow €24 billion of free money. But as long as the financial health of the banks all around it continues to deteriorate, staying upright is going to be a tough order.

This is where things get complicated. In order to qualify for public assistance, banks must be solvent. Presumably, that would automatically disqualify any bank with a Texas Ratio of over 150%, which includes MPS, Banco Popolare, Popolare di Vicenza, Veneto Banca, Banca Carige and Unipol Banca. The bailout must also comply with current EU regulations including the Bank Recovery and Resolution Directive of Jan 1, 2016, which specifically mandates that before public funds are injected into a bank, shareholders and creditors must be bailed in for a minimum amount of 8% of total liabilities, as famously happened in the rescue of Cyprus’ banking system in 2013.

The Italian government knows that this approach could end up wiping out retail investors (otherwise known as voters) who were missold, in many cases fraudulently, subordinated bonds by cash-hungry banks in the wake of the last crisis, in turn wiping out the government’s votes. To avoid such an outcome, the government has proposed compensating those retail bondholders with public funds, just as the Spanish government did with the holders of preferente bonds. Which, of course, is in direct contravention of EU laws.

So far, the European Commission has stayed silent on the issue, presumably in the hope that the resolution of Italy’s financial sector can be held off until at least after the French elections in late April, if not the German elections in September. Then, if those elections go Brussels’ way, a continent-wide taxpayer funded bailout of banks’ NPLs can be unleashed, as already requested by ECB Vice President Vitor Constancio and European Banking Authority President Andrea Enria.

With no guarantee that Italy’s NPL-infested banks can hold out that long, it’s a dangerous waiting-and-hoping game. In the meantime, shhhhhhhh… By Don Quijones.

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Submitted via Priceonomics

A quick spin through LinkedIn reveals that the quality of peoples’ profile photos is rather uneven. Some photos appear to be from highly professional photoshoots while others are grainy pictures captured from old cell phones.

Is there any pattern in the data around professional networking photos? What professions have the highest quality photos? Do people that are fresh on the job market tend to have better headshots? Are certain countries more likely to have better professional networking photos then others?

We decided to analyze the data from Priceonomics customer Snappr, which has a Photo Analyzer tool for LinkedIn photos. The tool uses an algorithm to analyze portraits for things like expression (e.g. smile and jawline), composition (e.g. zoom and background), and photo quality (e.g. saturation and sharpness). These attributes are graded individually and incorporated into an overall photo quality score. The database contains tens of thousands of Photo Analyzer results and anonymized information from the LinkedIn profiles they’re attached to. We analyzed that database to identify the groups with the best-scoring photos. 

According to our data, lawyers have the best professional photos on LinkedIn, Chile is the country with the highest quality pictures, and people who recently joined a company are much more likely to have a nice photo than someone with a long tenure.

Do some countries take better photos than others? We first grouped our sample based on nationality, filtered our list to countries that contributed at least 50 scores, and ranked them based on average overall photo score.

 

According to our Photo Analyzer, Chileans take the best profile pictures. A look at their individual attribute scores revealed that they earned the top spot by taking photos that were technically strong, with great saturation and brightness and neutral backgrounds.

Developed, politically stable nations make up the bulk of this ranking, but developing countries like Brazil and India show up too, demonstrating how accessible decent photography equipment is these days.

 

This ranking doesn’t bear a strong resemblance to rankings of physical attractiveness by country, but that makes sense: our analyzer calculates scores based only on features the subject has some control over.

We next asked whether photo quality varies with industry. We thought photos might be stronger for employees in people-oriented fields like sales and human resources, or among aesthetically-oriented creatives. We grouped our sample based on industry, calculated the average overall photo score for each group, and rank the top and bottom 10 below.

 

Workers with high-paying prestige positions in law, consulting, and investment banking take the best photos, according to our Photo Analyzer. They are joined, perhaps not surprisingly, by workers in broadcast media and people-oriented staffing and recruiting industries.

What is surprising is the ‘worst’ ranking, as photographers find themselves with the lowest average photo quality score. It’s important to remember that Photo Analyzer is an algorithm and perhaps professional photographers take creative liberties that don’t jibe with the science of what makes a good professional photo according to an algorithm.

Photographers are joined in this ranking by other creatives – architects, fashion designers, and media producers – as well as professionals in behind-the-scenes industries like information services, machinery, and computer networking.

We associate some of the professions on the ‘best’ list with large firms that grant their employees access to a broad network, and that led us to wonder whether network size is correlated with photo quality. We grouped our sample based on the user’s number of LinkedIn connections and charted the average overall photo score for each group.

 

The more connected you are, the better your LinkedIn photo is likely to be. This doesn’t necessarily mean upgrading your photo will net you more friends, though. It’s likely that individuals with access to a wide network also have access to top-notch photography services. If they work at a large enough company, their employer may even arrange a headshot for them.

This ranking suggested that people with more seniority – who have been around longer to develop a wider network – might also have better profile photos, as determined by our Photo Analyzer. We explored this possibility by grouping our sample based on how long users had been in their current position and charted the average overall photo score for each group.

 

People with more seniority in their current positions actually have worse photos, on average, than newer employees. This makes some sense – technology has advanced since these veterans had reason to update their profile pictures. By the same token, recent hires will have been job-hunting recently, and had an incentive to invest in a high-quality photo.

Keep in mind, our Photo Analyzer is a technical tool, not the final word on photographic artistry. Your portrait may very well deserve a space at the Met, but if it doesn’t follow the rule of thirds, have a neutral background, or showcase your dazzling smile, it won’t receive a high score. Research has shown that these attributes inspire positive impressions in viewers, and our Analyzer is designed to measure them.

But limitations aside, what did we find? We saw that professionals in law and management tend to have better photos than workers in creative or behind-the-scenes roles. Network size is positively correlated with photo quality, whereas length of tenure with present employer is correlated negatively.

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

Trump’s proposed border wall has been described by many of the left as everything from “xenophobic” to just plain “racist” and pretty much everything in between.  That said, perhaps “equal opportunity employer” would be more accurate in light of a new analysis from the Wall Street Journal that took a look at who has submitted bids to help construct the wall so far…in a little dose of irony for the left, hispanic-owned businesses currently lead the charge with 32 bids.

More than 200 companies have expressed interest in submitting plans to help design and build a wall along the U.S. border with Mexico, as the Trump administration seeks to fulfill a key campaign promise despite significant obstacles.

 

The companies, whose names were published on a federal contracting website, vary widely in size and capability—from construction giants like Kiewit Corp. to smaller, family-owned businesses.

 

Among those interested at this early stage are more than three dozen businesses owned by minorities, a Wall Street Journal analysis shows. Roughly 13% of the companies expected to submit proposals for the wall, for example, are owned by Hispanics.

 

One such immigrant-owned business bidding on the border wall is run by Mario Burgos whose father immigrated to the U.S. from Ecuador.

Mario Burgos,  the son of an immigrant, owns an Albuquerque, N.M., construction logistics company and plans to submit a proposal. He said he viewed the project as more geared toward border security than immigration, and a surefire way to boost employment in job-strapped New Mexico.

 

“I am not against immigrants by any stretch of the imagination,” said Mr. Burgos, whose father came to the U.S. from Ecuador. “There isn’t a country in the world that doesn’t have borders and doesn’t want to enforce them.”

 

Mr. Burgos noted that his company, Burgos Group LLC, which holds various defense contracts with federal agencies, has handled projects in southern New Mexico near the border and was familiar with operating in remote, rugged locations.

Meanwhile the owner of Helix Steel said he’s not worried about the potential political fallout, saying “if fighting for American jobs is wrong, I’ll take that risk.”

Other interested businesses have niche specialties, like Leesburg, Va.-based Helix Steel. Chief Executive Chris Doran said Helix’s products, which make concrete more resistant to blasts and other stresses, would suit what he called a “massive opportunity.”

 

Mr. Doran, whose company has about 50 employees, said he wasn’t concerned with fallout from participating in the project. “All I can say is I’m fighting for American jobs, and if fighting for American jobs is wrong, I’ll take that risk,” he said.

Of course, as we noted last week, just as Trump sent out RFP’s for his impenetrable, yet “aesthetically pleasing”, 30-foot border wall, Mexico’s government warned Mexican companies that it would not be in their best “interests” to participate in the project even though there will be no explicit legal restrictions or sanctions to stop them if they tried.  Per Reuters:

“We’re not going to have laws to restrict (companies), but I believe considering your reputation it would undoubtedly be in your interest to not participate in the construction of the wall,” said Mexican Economy Minister Ildefonso Guajardo.

 

“There won’t be a law with sanctions, but Mexicans and Mexican consumers will know how to value those companies that are loyal to our national identity and those that are not,” Guajardo added.

 

His comments echo those of Mexico’s foreign minister Luis Videgaray, who said on Friday that Mexican companies that see a business opportunity in the wall should “check their conscience” first.

Seems like the list of ‘racist’ companies in this country is growing very quickly.

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Authored by Ryan McMaken via Mises Institute,

Los Angeles, home to one of the least affordable housing markets in North America, is now proposing to expand rent control to “fix” its housing problem. 

As with all price control schemes, rent control will serve only to make housing affordable to a small sliver of the population while rendering housing more inaccessible to most. 

Specifically, city activists hope that a new bill in the state legislature, AB1506, will allow local governments, Los Angeles included, to expand the number of units covered by rent control laws while also restricting the extent to which landlords can raise rents.

Unintended Consequences

Currently, partial rent control is already in place in Los Angeles and landlords there are limited in how much they can raise rents on current residents. However, according to LA Weekly, landlords are free to raise rents to market levels for a unit once that unit turns over to new residents. 

This creates a situation of perverse incentives that do a disservice to both renters and landlords. Under normal circumstances, landlords want to minimize turnover among renters because it is costly to advertise and fill units, and it’s costly to prepare units for new renters. (Turnover is also costly and inconvenient for renters.) 

By limiting rent growth for ongoing renters, however, this creates an incentive for landlords to break leases with residents — even residents who the landlords may like — just so the landlords can increase rents for new incoming renters in order to cover their costs of building maintenance and improvements. The only upside to this current regime is that at least this partial loophole still allows for some profit to be made, and thus allows for owners to produce and improve housing some of the time. 

But, if this loophole is closed, as the “affordable housing” activists hope to do, we can look forward to even fewer housing units being built, current units falling into disrepair, and even less availability of housing for residents.

Why Entrepreneurs Bring Products to Market

The reason fewer units will be built under a regime of harsher rent control, is because entrepreneurs (i.e., producers) only bring goods and services to market if they can be produced at a cost below the market price. 

Contrary to the myth perpetuated by many anti-capitalists, market prices — in this case, rents — are not determined by the cost of producing a good or service. Nor are prices determined by the whims of producers based on how greedy they are or how much profit they’d like to make. 

In fact, producers are at the mercy of the renters who — in the absence of price controls — determine the price level at which entrepreneurs must produce housing before they can expect to make any profit. 

However, when governments dictate that rent levels must be below what would have been market prices — and also below the level at which new units can be produced and maintained — then producers of housing will look elsewhere. 

Henry Hazlitt explains many of the distortions and bizarre incentives that emerge from price control measures: 

“The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as often happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This actually happened in France after World War II, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their families grow or their existing accommodations deteriorate.”

Thus, 

“Rent control … encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space.”

 

Not surprisingly, when we look into the current rent-control regime in Los Angeles, we find that newer housing is exempt, just as Hazlitt might have predicted. Unfortunately, housing activists now seek to eliminate even this exemption, and once these expanded rent controls are imposed, those on the outside won’t be able to bid for space in either new or old housing.

Newcomers will be locked out of all rent-controlled units — on which the current residents hold a death grip — and they can’t bid on the units that were never built because rent control made new housing production unprofitable. Thus, as rent control expands, the universe of available units shrinks smaller and smaller. Renters might flee to single-family rental homes where rent increases might still be allowed, or they might have to move to neighboring jurisdictions that might not have rent controls in place. 

In both cases, the effect is to reduce affordability and choice. By pushing new renters toward single-family homes this makes single-family homes relatively more profitable than multifamily dwellings, thus reducing density, and robbing both owners and renters of the benefits of economies of scale that come with higher-density housing. Also, those renters who would prefer the amenities of multifamily communities are prevented from accessing them. Meanwhile, by forcing multi-family production into neighboring jurisdictions, this increases commute times for renters while forcing them into areas they would have preferred not to live in the first place. 

But, then again, for many local governments — and the residents who support them — fewer multifamily units, lower densities, and fewer residents in general, are all to the good. After all, local government routinely prohibit developers from developing more housing through zoning laws, regulation of new construction, parking requirements, and limitations on density. 

And these local ordinances, of course, are the real cause of Los Angeles’s housing crisis. Housing isn’t expensive in Los Angeles because landlords are greedy monsters who try to exploit their residents. Housing is expensive because a large number of renters are competing for a relatively small number of housing units. 

And why are there so few housing units? Because the local governments usually drive up the cost of housing. As this report from UC Berkeley concluded: 

“In California, local governments have substantial control over the quantity and type of housing that can be built. Through the local zoning code, cities decide how much housing can theoretically be built, whether it can be built by right or requires significant public review, whether the developer needs to perform a costly environmental review, fees that a developer must pay, parking and retail required on site, and the design of the building, among other regulations. And these factors can be significant – a 2002 study by economists from Harvard and the University of Pennsylvania found strict zoning controls to be the most likely cause of high housing costs in California.”

Contrary to what housing activists seem to think, declaring that rents shall be lower will not magically make more housing appear. Put simply, the problem of too little housing — assuming demand remains the same — can be solved with only one strategy: producing more housing. 

Rent control certainly won’t solve that problem, and if housing advocates need to find a reason why so little housing is being built, they likely will need to look no further than the city council.

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

Authored by Daniel Lang via SHTFplan.com,

It’s often the case that new technologies arrive on the scene faster than our society and its legal code can keep up. Sometimes this can be a good thing. For instance, 3D printing allows people to print out unregulated gun parts, thus allowing gun owners to circumvent the onerous laws of our government, which has struggled to come up with new laws to restrict the technology.

When technology advances at a breakneck pace however, it can also be quite dangerous for our liberties. This is especially true in regards to privacy. If a new technology makes it easy for the government to track us, you can bet that the government is going to take its sweet time updating the legal code in a way that will protect us from surveillance.

That certainly seems to be the case with facial recognition software. During a recent Congressional Oversight Committee hearing, members of both political parties sounded the alarm on the FBI’s use of the technology, and read the written testimony of Electronic Frontier Foundation senior staff attorney Jennifer Lynch:

Lynch detailed the stunning scope of the FBI’s photo collection. In addition to collecting criminal and civil mug shots, the agency currently has “memorandums of understanding” with 16 states that mean every driver’s license photo from those states is accessible to the agency—without the drivers’ consent. The FBI also has access to photos from the U.S. State Department’s passport and visa records.

 

Lynch argued that “Americans should not be forced to submit to criminal face recognition searches merely because they want to drive a car. They shouldn’t have to worry their data will be misused by unethical government officials with unchecked access to face recognition databases. And they shouldn’t have to fear that their every move will be tracked if face recognition is linked to the networks of surveillance cameras that blanket many cities.”

 

“But without meaningful legal protections, this is where we may be headed,” Lynch stated. “Without laws in place, it could be relatively easy for the government and private companies to amass databases of images of all Americans and use those databases to identify and track people in real time as they move from place to place throughout their daily lives.”

 

All told, law enforcement agencies around the country have access to 400 million photos in facial recognition databases, which are connected to roughly 50% of American adults. Most of these people have never committed a crime, and obviously haven’t given any consent to this.

At first glance it may sound harmless to be in one of these databases. Movies and TV shows make it sound like this technology can help law enforcement swiftly and precisely nab suspects. So what do you have to fear if you haven’t committed a crime? It turns out that in real life, facial recognition is far from perfect.

Internal FBI documents obtained in a Freedom of Information Act lawsuit by the nonprofit Electronic Privacy Information Center indicate that the FBI’s own database, called the Next Generation Identification Interstate Photo System, or NGI-IPS, had an acceptable margin of error of 20 percent — that is, a 1-in-5 chance of “recognizing” the wrong person.

 

And research published in the October 2015 issue of the scientific journal PLOS ONE by researchers at the universities of Sydney and New South Wales in Australia found that the humans who interpret such data build in an extra error margin approaching 30 percent.

If we ever allow our government to roll out facial recognition cameras on a wider scale, lots of innocent people are going to be hurt. Whether by mistake or by malice, it will become shockingly easy for law enforcement to identify ordinary people as criminals. The surveillance control grid will not only be inescapable, it will be unwieldy and rife with abuse.

It’s often said that you should never trade freedom for safety. In this case, we wouldn’t receive any kind of safety.

via http://ift.tt/2oF5XmE Tyler Durden

Submitted by Nick Colas of Convergex

Is Public Equity A Broken Concept

David Einhorn’s proposal to GM that it split its stock into dividend and capital appreciation shares got us thinking about the bedrock principles of public equity ownership.  Other catalysts for this examination: recent IPO SNAP’s lack of shareholder voting rights, the reluctance of venture capitalists to list their “Unicorns”, and the dearth of IPOs generally.  The critical question here is “Does the traditional one-size-fits-all model of publicly-held equity still work in a world that increasingly values customization?”  Further, will other social and economic trends force a change in this structure, such as aging demographics in the US population and the investment-heavy nature of major technological developments like autonomous cars, workplace automation, and artificial intelligence?  Bottom line: “public equity” needs to be a fluid concept that responds to the changing needs of both providers and users of capital.

If it is true that we learn the most from our mistakes, then I would posit that we can glean a lot of useful information from analyzing troubled industries rather than just focusing on commercial “Winners”.  For example, I have studied the US auto industry for the last 25 years as both a sell side and buy side analyst, and more recently in the context of the macro work I do in these notes.  It has been an education that has served me very well, even if the group has historically presented limited long term investment potential.

Here is a summary of everything I know about this auto industry:

• Demand is economically sensitive and volatile in major markets like the US, Europe and Japan. Since it takes years to design a new vehicle and that process is expensive, automakers have high fixed costs.  This leads to significant variability in earnings over a typical economic cycle and the threat of bankruptcy in a bad downturn is real.  “Hot” product offerings can mitigate this pressure, but not reliably so.
• There is too much supply. The auto industry employs a lot of people both in final assembly and in the supply chain.  These tend to be good-paying jobs, which means governments are perennially throwing money at car companies to set up shop in their jurisdiction.  Moreover, those same governments don’t ever want to see a plant close.  This makes capacity very sticky, and in some places like Europe there are still too many auto plants.
• Those two factors make it very hard to earn a decent return on capital over a cycle. Boom times bring excellent free cash flow, but those earnings are later consumed by the lean years.  As a result of both industry structure (point #2) and company-specific earnings volatility (point #1), public equities in the sector tend to have very low normalized valuations.

I was therefore intrigued by investor David Einhorn’s proposal, made public today, to split GM’s stock into two pieces: a dividend paying equity and a capital appreciation “stub”.  To be clear, I have no idea if it would improve the company’s equity market valuation.  You can read a description here and see the slide deck from his firm, Greenlight Capital, as well: http://ift.tt/2nwkTGf

Einhorn’s proposal got me thinking about the nature of public equity capital.  His thesis is that GM’s equity does not have a clean and distinct ownership base.  Dividend-seeking investors are put off by the company’s share buyback program since it drains cash for purposes they don’t value, and capital appreciation-focused investors would prefer that GM just use all their cash generation to repurchase shares.  Split the stock and the conflict goes away, or so the idea goes.

Regardless of the merits of the idea for GM, Greenlight’s proposal raises a provocative macro question: “Is a one-size-fits-all equity structure really the best approach to both maximizing corporate value and giving shareholders the types of investments they desire?”  Once you pose the question that way, a raft of other capital market trends pop up:

• Voting rights. The vast majority of public stocks feature a “One share, one vote” structure of corporate governance. Shareholders can elect Boards, vote on major corporate actions like takeovers and mergers, and lobby for changes in management if they feel the business is being mismanaged.
• The recent high-profile SNAP IPO had an unusual feature, however: no voting rights at all.  While novel, this is the continuation of a trend among technology companies, which in many prominent cases have dual classes of stock with different voting rights.  The intention here is to limit public shareholders’ traditional rights in favor of management’s/core shareholders’ long term business plans and judgment.

• Dearth of IPOs. Look at a long term chart of the number of Initial Public Offerings in US markets, and you’ll see a significant decline in the number of new issues from the 1990s to now.  The good times were in the late 1990s, of course, when it was customary to see 30-80 IPOs per month.  Now, that number is more like 10-20.
• Venture capital’s reluctance to list “Unicorns”.   You might argue that capital markets are simply more selective now and the 1990s IPO cycle was an outlier.  But then why are so many truly revolutionary companies like Airbnb, Uber, Lyft, Palantir, and other “Unicorns” all still private?  These are transformational businesses, but the venture capitalists that fund them see no need to take them public. 

  Now, I am sure that Uber’s shareholders are happy just now that the company isn’t subject to the daily vagaries of the stock market, but on balance the absence of “UBER” as a symbol on the NYSE or the NASDAQ  is troublesome.

At its core, the social compact between public equity markets and society is simple: over time, any investor should have access to the equity of important enterprises created by that society.  If that isn’t happening by virtue of some misalignment of incentives, then those need to be fixed.  The alternative – that the winners stay private but the losers are public – is untenable.  Investors will choose to hoard cash and capital will slowly stop circulating to its best possible use.

Given the pace of innovation that seems to be on its way, this problem may only get worse.  If the futurists are correct, there are several societal sea changes just over the horizon, from artificial intelligence to workplace automation to driverless cars, all in various stages of development.  The home for that capital right now too often has a Sand Hill Road address rather than 11 Wall Street.

We’ve come a long way from what now seems like a pretty humble proposal regarding one car company, so let’s put on bow on all this.  A few summary points:

• For all the innovation on offer in American industry, the concept of public equity is perhaps overly reliant on an outdated concept where one equity security with proportional voting rights is the only flavor available. It is, at least, a topic worth discussing.
• Investors, in their role as consumers, are used to custom solutions in every facet of their life – so why not think about how to apportion the value of a company to fit their needs? Yes, equity and debt are the traditional solutions.  But why do you think Exchange Traded Funds are so popular?  In part it is because they target investor needs in creative ways.  Corporate boards and investment bankers might take a page from that book.
• Demographics and technology may force the issue. An aging US population might embrace novel approaches to accessing the corporate cash flows of public companies.  And if there is a new wave of innovation ready to drop on us, the only nature hedge might be to have access to the equity of those businesses.  Even if they don’t carry voting shares or other traditional features.

Now, one caveat: all of this needs sufficient regulation to curtail abuse.  The mortgage market of the early 2000s is the cautionary tale here, of course.  Changes to the notion of public equity need careful scrutiny to make sure disclosures are complete and structures are sound.

But in the end, “Equity” will need to evolve in the same way everything else does in a capitalist society – in a way that serves both investors and users of capital.

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China’s reflation story (on the back of a record amount of debt created last year) was put on display on Friday morning when both the Chinese manufacturing and non-manufacturing PMI rose more than expected, with the Manufacturing PMI rising to a level not seen since April 2012. According to the NBS, China’s Mfg PMI rose from 51.6 to 51.8 in March, the highest in almost five years, and above the 51.7 consensus estimate, while the non-manufacturing PMI also jumped, rising from 54.2 to 55.1, the highest in two years.

The National Bureau of Statistics reported that New Orders rose from 53.0 to 53.3 while new export orders rose to 51, the highest since early 2012. Broken by firm size, the state-measured PMI showed largest enterprises were the strongest at 53.3, followed by medium-sized companies, while small firms remained in contraction at 48.6. Perhaps the most notable internal metric was the employment index, which hit the 50 level for the first time since May 2012, marking the first time the manufacturing sector has not lost jobs in nearly 5 years.

As the chart below shows, the catalyst for the move higher has been the recent surge in producer prices, which have soared as much as 7% Y/Y on the back of soaring commodity prices; both have since peaked and it is expected that in the coming months, China’s inflationary pressures will subside especially given the recent efforst by Beijing to reign in out of control credit, especially shadow, issuance.

A subindex for construction activity rose in March for the first time since the start of the year, hitting 60.5. As a reminder, and as Deutsche Bank explained two weeks ago, the only thing that matters for both China, and the rest of the world, is making sure China’s housing bubble, as explained in “Why The Fate Of The World Economy Is In The Hands Of China’s Housing Bubble,” does not burst.

“The first quarter is off to a good start,” said Wang Qiufeng, an analyst at China Chengxin International Credit Rating in Beijing, quoted by Bloomberg. “The upbeat momentum may last through the first half of this year, as the government is pushing investment.”

“The fact that the real strength is with the non-manufacturing PMI suggests that there’s fundamentally a good story going on here,” said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “Manufacturing is where you’d expect to see the effects of stimulus showing up.”

So is China worried by the potential inflationary signals carried by today’s PMI prints? Oh yes, which is why the PBOC did not conduct a reverse repo liquidity injection for the sixth consecutive day, saying in a statement that the liquidity level if “relatively high” despite traditional month-end liquidity demands; as a result in the past 6 days, the PBOC has now drained some 320 billion yuan from the banking system.

In recent days this has led to a sharp move higher in various repo tenors, most notably the benchmark 7-Day repo, which on Thursday fell w bps to 2.81%, but has jumped sharply in the past week as interbank funding problems have emerged, leading to the biggest drop in months in the Shanghai composite index overnight. Keep an eye on the the repo market in Friday’s session for any acute liquidity shortages, especially since China’s onshore market is closed on Monday and Tuesday.

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Authored by Eric Limer via Popular Mechanics

All your private online data—the websites you visit, the content of your chats and emails, your health info, and your location—just became suddenly less secure. Not because of hackers, but because Congress just blocked crucial privacy regulations. This will allow your internet service provider to collect all your data and sell that info to the highest bidder without asking you first. Welcome to a brave new world.

A pair of resolutions, which passed through the Senate and House with exclusively Republican votes, roll back rules proposed by the Democratic leadership of the Federal Communications Commission during the Obama administration which, though passed in October, had not yet gone into effect.

The rules—which will be completely dead following the expected signature of President Trump—would have required ISPs to get explicit opt-in approval from customers before selling the following “sensitive data”:

 

This doesn’t just mean that sharing that information without your explicit permission will be fine and dandy. Since the rules were rolled back through the Congressional Review Act, the FCC is also barred from creating any “substantially similar” rules down the line.

In theory, the information collected will be stored under some sort of ID separate from your actual name. But that’s a cold comfort considering the level of detail in this sort of information would make your identity a dead giveaway, and ISPs can hardly be trusted to keep your identifying information suitably safe from prying eyes. After all, they’ll be building dossiers any hacker would love to steal.

What to do? There are a few things you can do to try and keep your data safe, and while they aren’t necessarily easy or free, they’re worth it if you value your privacy.

Opt out with your ISP

Your ISP may not need your permission to sell your data, but you can still go to them and tell them not to do it. The catch, of course, is this requires you to be proactive, and there’s no real guarantee that this will protect you completely. Still, do it. Get on the phone or visit the website of your ISP and opt out of every ad-related thing—and into every privacy-related thing—you can find. The process can be a little arduous—often requiring the use of your ISP-given email address that you probably never use—and it may not take effect immediately either. All the better reason to do it now.

Time Warner/Spectrum customers can find their privacy dashboard here. Comcast customers can opt out of some targeted programs using these instructions. Verizon customers can find opt out options here. Remember, your phone company is technically an ISP too, so look up your options on that front as well.

Opting out is an important first step, but it is not enough to actually preserve your privacy. Your ISP is not necessarily giving you the opportunity to opt out of all its ad-targeting programs. As the policy counsel at the Open Technology Institute, Eric Null, told Gizmodo, it is “highly unlikely” the new FCC will go after ISPs that aren’t offering robust opportunities to opt-out.

Some smaller ISPs, which survive on small and satisfied customer bases as opposed to a large and captive audience, are more incentivized to protect your privacy with gusto. In fact, a whole host of small ISPs wrote a letter to Congress opposing this move. If you’re lucky enough to have the option of switching to one, now might be a good time.

Keep your data out of your ISP’s hands in the first place

Your ISP is uniquely suited to snoop on your information. Anything you put online has to pass through its hands. Email you send through Gmail, chats through Facebook Messenger—they all travel through your ISP before they reach the service that actually sends them on. But while it is impossible to cut your ISP out of this exchange entirely, you can hide the data as you are sending it.

Apps with end-to-end encryption can encrypt your private information on the phone or computer you’re using, ensuring that it is coded and protected through the entire delivery process. So while your ISP can see the data go by, they can’t make sense of it.

Secure chat apps like Signal will be crucial to keep your chats private not only from the government and hackers, but from your ISP. Just make sure these services have security measures that are open-source and trusted by experts who can help keep them honest. You can also encrypt data manually, using a standard like PGP, before you send it off into the web, but it can be an arduous process, because you have to ensure that the recipient has the means to decode that info and read it.

The most seamless solution is to pay for a Virtual Private Network—a VPN—which allows you to encrypt all the data that passes through your ISP. This means that while your ISP is still doing the work of hauling your data around, it can’t understand any of it. The downside to this is that VPNs (at least any VPNs you can trust) are not free. Most good ones will require a yearly subscription. Furthermore, you aren’t hiding your personal data from everyone, you are just entrusting it to the VPN instead of your ISP, so do your research and choose a VPN you trust not to sell you out. Fortunately, since VPNs exist exclusively to keep your data private, they are pretty incentivized to keep you happy.

The only one you can really trust to protect you is you.

The short and uncomfortable truth is this: Until more robust privacy protections are put in place, the burden of protecting your online data falls on you. Keep it in mind, do your research, and remember that your monopolized ISP has every reason in the world to sell you out and wring your data for every dime that it is worth. The only one you can really trust to protect you is you.

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