The Fed Model and Profit Margins

Last week in Institutional Investor article I’ve shared some important but quite boring topics that include the Fed Model, the price-to-earnings ratio, and profit margins. I imagine for most civilians (people who don’t do investing for a living) reading about these topics is as exciting as watching a live debate between two paleontologists about how the size of tyrannosaurus’ front teeth relates to the length of spinosaurus’ tail. (I have no idea what I just wrote.)

I will have you know, however, that the Fed Model is extremely important, because I vividly remember how low interest rates and the Fed Model were used as propaganda tool in the late ’90s to justify the stock market’s “this time is different” sky-high valuafed-change-interest-rate-1tion. Low interest rates have been pushing investors into riskier assets and have thus resulted in higher valuations, but just as you would expect a finite boost of energy from 5-Hour Energy drink, low interest rates will not bring permanently higher valuations in stocks.

I see an army of experts on business TV – and non-experts in day-to-day dealings – justify holding otherwise overvalued stocks by comparing their yields of 2% or 3% to the yields of bonds. Stocks and bonds are competing assets, so a low yield in bonds in the short term (a key distinction) will drive higher P/Es (lower earnings yields) in stocks. But today, rather than a race to the top we have a race to the bottom. As bonds yields rise (or not – if they don’t it means we’re in deflation, which is even worse) stock valuations will return to their rightful place – lower. Of course there is a caveat: they may go a lot higher before they do that. But that’s investing for you.

I have written the topic of profit margins half to death; I even penned a scribble for Barron’s, discussing them back in 2008. All you have to do is look at the historical charts (see this chart) – profits always mean-revert. Mean reversion of profits is so banal it should be taught in finance classes just as Newton’s law of gravitation is taught in physics. Earnings have never grown at a faster rate than GDP (sales of the economy) for a substantial period of time. This time is not different. I’d buy an argument that the long-term mean of profit margins may have shifted upwards over the last two decades as we have become more of a service and less of a manufacturing economy. So instead of being at 8% – or maybe it should be closer to 9% – we are in the mid-teens.

Vitaliy N. Katsenelson, CFA, is CIO at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).


    



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Who Will Play Steve Cohen In Martin Scorsese’s Upcoming Wall Street Tragicomedy?

One look at the chart below from the NYT, and a pattern emerges.

However, we are not sure which is the correct pattern:

  1. Either SAC, or whatever it will be called soon, has some truly impressive hiring hurdles and an even more impressive background check company , or
  2. Slowly but surely the investigation around Steve Cohen – just as we first suggested in November 2010 when nobody dared to mention in print that the invincible “information arbitrageur” was merely a two-bit insider trading hack who used “expert networks” and got lucky for so long he had an “economic war chest of scale” and an army of lawyers- is closing.

If 2, our question is who will play Stevie in the inevitable upcoming (Oscar-nominated) Martin Scorsese tragicomedy about the excesses of the 3 and 50 hedge fund bubble.


    



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Who Will Play Steve Cohen In Martin Scorsese's Upcoming Wall Street Tragicomedy?

One look at the chart below from the NYT, and a pattern emerges.

However, we are not sure which is the correct pattern:

  1. Either SAC, or whatever it will be called soon, has some truly impressive hiring hurdles and an even more impressive background check company , or
  2. Slowly but surely the investigation around Steve Cohen – just as we first suggested in November 2010 when nobody dared to mention in print that the invincible “information arbitrageur” was merely a two-bit insider trading hack who used “expert networks” and got lucky for so long he had an “economic war chest of scale” and an army of lawyers- is closing.

If 2, our question is who will play Stevie in the inevitable upcoming (Oscar-nominated) Martin Scorsese tragicomedy about the excesses of the 3 and 50 hedge fund bubble.


    



via Zero Hedge http://ift.tt/1o1pNE6 Tyler Durden

Sochi-Bound Hijacked Plane Forced To Land In Istanbul

Turkey scrambled an F-16 fighter jet following a bomb-threat aboard a Ukraine-outbound plane. A passenger, among 110 on the plane, made a bomb threat and demanded the plane be diverted to Sochi. The plane eventually landed in Istanbul – after crew calmed down the man who had reportedly been drinking. This threat follows the US’ warning of “toothpaste” bombs.

Via Reuters,

Turkey scrambled an F-16 fighter jet to accompany a passenger plane arriving in Istanbul from Ukraine on Friday after a bomb threat was made by a passenger demanding to go to the Winter Olympics venue of Sochi, Turkish officials said.

 

Television footage showed the Pegasus Airlines flight from the Ukrainian city of Kharkov arriving in Istanbul’s Sabiha Gokcen airport.

 

“A Pegasus Airlines plane flying from Kharkov to Sabiha Gokcen landed at Sabiha Gokcen safely after receiving a bomb threat while in the air,” the Turkish civil aviation authority said in a statement.

 

People are still inside but the pilot called security and gave them a signal that they can enter the plane. There is a translator – a Turkish man near the Ukrainian to calm him down,” an airport official said.

The passenger was believed to have drunk alcohol and was calmed down by the crew and persuaded to let the plane, a Boeing 737-800, land in Istanbul at 6:02 pm (1602 GMT), according to Dogan news agency.

An official from Turkey’s transport ministry said there were 110 passengers on board and confirmed that a bomb threat had been made but said the plane had landed safely.


    



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Turkish Lira Dumps After S&P Warns, Cuts Turkish Outlook

Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:

  • *TURKEY’S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
  • *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY

Furthermore, the ratings agency raising questions over the Central Bank:

  • *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
  • *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
  • *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.

EM Un-fixed.

 


    



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Turkish Lira Dumps After S&P Warns, Cuts Turkish Outlook

Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:

  • *TURKEY’S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
  • *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY

Furthermore, the ratings agency raising questions over the Central Bank:

  • *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
  • *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
  • *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.

EM Un-fixed.

 


    



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When Conventional Success Is No Longer Possible, Degrowth And The Black Market Beckon

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"Phantom economies tend to give rise to gray and black markets in proportion to the deviance of the phantom economy from reality."

College graduates around the world are discovering that getting a university diploma no longer guarantees the conventional success story of a secure job and a life of ever-rising consumption. Doing all the things that the Status Quo said would lead to success no longer yields success, for the simple reason that the Status Quo is failing on a structural/systemic level.

The system is rigged to protect the Status Quo mafia from competition. As noted in The Mafia State of Mind (February 6, 2014), the Status Quo is a set of overlapping monopolies/extortion rackets. The system needs a trickle of new technocrats and apparatchiks to manage the rackets, but there is no place for the tens of millions of college graduates who are flooding into the job market every year around the world.

New conventional enterprises face essentially impossible barriers: sky-high rents, absurdly lengthy and costly permitting processes, onerous fees and reporting requirements, and a host of other barriers reputedly imposed to "protect the public" but whose real purpose is to eliminate small-enterprise competition to corporate dominance.

Which organizations have the cash flow, financing, legal expertise and political influence to meet all the requirements and pay the insanely overpriced leases? Global corporations and the state–two sides of the same kleptocratic coin.

The high costs of launching and operating a legitimate Status Quo business serves two other primary purposes: maintaining high returns on capital for crony-capitalist financiers and funding the state's enormous cadre of functionaries at above-market-rate salaries, benefits and pensions. Recall that median personal income in the U.S. is about $40,000 for full-time workers, and compensation above $82,500 annually puts one in thetop 10% of all wage earners.
 

The California Public Policy Center has just posted its own searchable site of state and local employee wages and pension benefits,TransparentCalifornia.com. Some of the results were rather revealing – and should be shocking to taxpayers: There are 31,527 retired public workers in the "$100,000 pension club" and 582 who are receiving pensions of at least $200,000 a year. Including wages and benefits, there are 227,059 state and local workers earning total compensation of at least $100,000 a year.

Some may argue that these large figures apply to a relatively small portion of public employees, and that the average public employee receives modest compensation. However, a CPPC analysis revealed that even average compensation is startlingly high. Average compensation for full-time state employees was $93,851 for public safety employees and $68,282 for all other employees. Adding benefits boosted these totals to $129,388 and $90,402, respectively. The figures for city and county employees were even higher.
Source: Public sector's growing $100K club

Two forces are disrupting this cozy interlocking mafia of financiers, corporate cartels and state functionaries: the End of (Middle-Class) Work and the rise of the peer-to-peer, self-organizing business models such as AirBnB, car-sharing, ride-sharing, farmers markets, etc.

Russ in Redding: The Human Face of The End of Work (September 2, 2011)

America's Social Recession: Five Years and Counting (August 28, 2013)

The Ten Best Employers To Work For (Peak Employment) (March 28, 2013)

The Python That Ate Your Job (December 11, 2013)

The high costs of legitimate business (needed to keep rentier/financial profits and state functionary pay/pensions high) are effectively destroying middle-class jobs and pay scales: the only organization that can afford to pay high salaries and benefits, regardless of costs or the business climate, is the state.

Even the financial sector and global corporations can only pay middle-class salaries for technocrats and managers in what are effectively quasi-state agencies (sickcare, workers compensation insurance, the defense industry, etc.)

So what are the tens of millions of college graduates supposed to do for a livelihood if there are only a few slots open in the moated mafias of financiers, corporate cartels and the state? To answer, let's start with this obvious statement: that which cannot be paid will not be paid.

All the infrastructure of consumption depends on tens of millions of college graduates making enough money to pay high taxes, service their student loans, buy homes, autos, particle-board furniture, electronic gadgets, dozens of pairs of shoes, etc. etc. etc. If they can't make enough money to buy and own all that stuff, then they won't be buying and owning all that stuff.

And if they can't earn a living within the Status Quo mafia, they will do so outside the mafia in the gray and black markets.

This destruction of consumption is supposed to be a disaster, but it's only a disaster for the moated mafias of financiers, corporate cartels and the state that depend on tens of millions of workers voluntarily becoming debt serfs and tax donkeys. If young workers cannot make their student loan payments, those loans become worthless. As the old saying has it, You can't get blood from a stone.(Alternatively: You can't get blood from a turnip.)

If young workers can't make enough to buy autos, homes, etc., the market for those goods and services implodes. And if all the financial/debt churn generated by consumption goes away, so do the fees and taxes the state depends on to pay its armies of functionaries.

Rather than a disaster, this wholesale loss of middle-class incomes and aspirations is enormously liberating. Instead of the yoke of debt-based ownership, young people are finding sharing to be better than owning: one shared car can provide transport for 10 people. Ten people no longer need to own 10 cars to get around.

One way to grasp how deeply the mafia state of mind has taken hold is to ask: how many middlemen have to be paid to produce/buy a good or service? In Greece, liberation starts by eliminating the middleman, which of course includes the voraciously corrupt state: After Crisis, Greeks Work to Promote ‘Social’ Economy.

The state is naturally in full freakout mode, as self-organizing sharing/no-middleman enterprises are outside the debt-serf/tax donkey system that funds the state. In response, the state is frantically trying to impose the same fee structure that has crushed conventional small businesses on the sharing/no-middleman organizations.

The problem for the state is that its success in imposing exorbitant fees and taxes will simply drive low-income people scratching out a minimal living in the gray market to other networks that do not even have a corporate structure to tax. To wit: "The more you tighten your grip, the more systems will slip through your fingers."

If making a living in the gray market becomes untenable, then people will be forced into the black market, which is whatever trade can be done outside the reach of the state. As noted previously, that which cannot be paid will not be paid.

As correspondent Peter D. recently observed: "Phantom economies tend to give rise to gray and black markets in proportion to the deviance of the phantom economy from reality." If we believe that phantom economies of moated fiefdoms, mafias and cartels are "reality," then the rise of liberating degrowth networks is distressing and confusing.

But if we look past the propaganda and see the debt-serf/tax donkey system for what it really is, a predatory system of oppression and exploitation, then we can see how degrowth, de-consumption, de-debt, etc. is liberating.

TEDx Tokyo: The "De" Generation (8 minutes) (de-ownership, de-materialism, de-corporatism)

Degrowth, Anti-Consumerism and Peak Consumption (May 9, 2013)


    



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Bitcoin vs. Apple: Videos of Users Destroying Their iPhones Proliferate on YouTube

Apple unleashed a well deserved firestorm in the Bitcoin community with its decision to suddenly ban the extremely popular Blockchain app. This app was the last remaining user friendly way to facilitate Bitcoin transactions on iPhones and it had been downloaded 120,000 times. Apple has remained completely silent on its reasons for removing the app, further infuriating the BTC community. Apple hasn’t done a single decent thing since Steve Jobs died.

The reaction to this has been nothing short of hilarious. As Wired reports:

Apple banned the popular Blockchain wallet yesterday, and the protest started very early this morning when, on the popular discussion site reddit, someone named “round-peg” promised to hand out Nexus 5 phones to people who posted videos of themselves smashing working iPhones — one phone for every 100 up-votes on the site. The post was quickly up-voted to the front of reddit, and then removed, apparently for violating reddit’s policy, which prohibits reddit vote manipulation.

Some of these videos are priceless. My personal favorite is the guy who destroys his iPhone with a sniper rifle. Nice shot brother!

Destroying an iPhone with a Rifle 


Destroying an iPhone with a Machete


Destroying an iPhone with a Steel Pipe


Ever wonder how a gigantic company with huge share destroys itself? You’re watching it in real time.

In Liberty,
Michael Krieger

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Bitcoin vs. Apple: Videos of Users Destroying Their iPhones Proliferate on YouTube originally appeared on A Lightning War for Liberty on February 7, 2014.

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Bitcoin Crashes 25% As Mt.Gox Halts Withdrawals

Mt.Gox, the largest exchange for the online digital currency, was forced to halt withdrawals (but not trading) this morning. Due to an increase in withdrawal requests the exchange’s systems had technical problems and in order “to understand the issue thoroughly, the system must be in static state,” they reported. The exchange said it would resolve the problem as soon as possible and “apologize[d] for the sudden short notice.” Interestingly this seemed to rapidly remove Mt.Gox’s modest premium to the other exchanges and bring them all back inline around $700 as the price recovered.

 

 

 

As Max Pelham noted (Coinwatch),

People will be leaving Mt. Gox either way, the trust isn’t already very high, and with this now people are going to trust them even less,”

 

I think Mt. Gox is going to lose relevance even more now, they’re not very forthcoming in their public relations, their technical problems and their withdrawal problems aren’t going away. Even if they fix it now, the withdrawal problem still remains with USD and Euro withdrawals.”

 

Source: Bitcoinwisdom


    



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Gold Surges 1.2% On Poor Jobs Numbers Prior To Being Beaten Lower …

Today’s AM fix was USD 1,260.00, EUR 928.72 and GBP 771.16 per ounce.          

Yesterday’s AM fix was USD 1,258.50, EUR 930.64 and GBP 772.42 per ounce.  


Gold fell $0.50 or 0.04% yesterday to $1,257.40/oz. Silver rose $0.09 or 0.45% to $19.94/oz.


Gold is marginally higher again today in all currencies and heading for a higher weekly close of 1.6% in dollars.

The poor jobs number today saw gold surge from a low of $1,256.55/oz to a high of $1,272/oz prior to being beaten lower back below $1,258/oz. This is the second incident of peculiar trading on the COMEX this week which is fueling manipulation suspicions. The bad jobs data saw treasuries climbed and stocks fall, prior to also reversing course.


Gold in U.S. Dollars, 5 Day – (Bloomberg)

Gold eked out slight gains yesterday after the ECB and BOE kept rates at 300 year lows. ECB President Mario Draghi made more dovish statements, saying that the ECB “will maintain an accommodative stance of monetary policy for as long as necessary” which was gold supportive. Draghi reiterated that the bank may take more accommodative action if money-market turbulence resumes.

Gold is 4.5% higher this year on safe haven demand due to concern that a slump in emerging markets would slow global economic growth affecting global financial markets. Almost $3 trillion has been erased from the value of equities worldwide so far this year.

Global markets are now dependent on the drug that is cheap money and any reduction in money printing and debt monetisation will likely lead to market turmoil and economic dislocations.



Silver in U.S. Dollars, 5 Day – (Bloomberg)

Silver posted the longest rally since August, extending a 2014 rebound of over 3% this year as turmoil in emerging markets and slowing economic growth reignited demand for haven assets.

Silver has rebounded 9.7% from a 34-month low on June 28 as physical demand increased. Sales of coins by the U.S. Mint almost quadrupled in January, while gold purchases surged 63%.


Gold traders, analysts are bullish on gold again for next week after global equities fell to nearly a 4 month low this week. The Bloomberg gold survey for next week showed that 17 were bullish, 14 were bearish and 2 were neutral.

Chinese store of wealth buyers return from a week long Lunar New Year holiday which should support physical demand. China became the world’s largest  gold buyer last year.

Perhaps more than any other financial market, the gold market is subject to a huge amount of opinion, much of it emotional, subjective and not based on facts. The empirical evidence seen in research, both academic and other independent research, is often ignored. As is the historical record and the experience of people throughout the world in recent years and throughout history.

Simplistic analysis and sound bites abound. It is important to focus on the data and the facts and today we have looked at the academic research pertaining to gold.

There is a significant and growing consensus amongst academics, independent researchers and asset allocation experts that gold is a hedging instrument and a safe haven asset. Thus, many financial professionals now believe that gold should form part of investment and savings portfolios for reasons of diversification and financial insurance

Indeed, there is now a large body of academic and independent research showing gold is a safe haven asset and showing gold’s importance in investment and pension portfolios. This allocation is in order to both enhance returns but more importantly reduce overall volatility.



Gold and S&P 500, 1999 To Today – (Bloomberg)

The importance of owning gold in a properly diversified portfolio has been shown in numerous academic papers. It has  been shown in independent research by the asset allocation specialists, Mercer Consulting and Ibbotson Associates. It has also been shown by consulting group, New Frontier Advisors and by leading international think tank, Chatham House.

Gold has protected people throughout history from  inflation and currency debasement. The historical record also shows how gold has protected people from stock and property market crashes, and from asset confiscation.

John Maynard Keynes is reported to have said, ‘When the facts change, I change my mind. What do you do, sir?’

The facts regarding gold have changed in recent years. Since the global financial crisis began in 2007, gold has outperformed most assets and again shown itself a safe haven. The data and research on gold over the long term is confirming this.

Our latest report, ‘Gold Is A Safe Haven Asset‘ looks at the academic and independent research in more detail.

Check out ‘Gold Is A Safe Haven’ Youtube intro video here


    



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