Tag: finance

Much has been said about the Fed’s attempt to stimulate inflation (instead of just the stock market) by injecting a record $2.5 trillion in reserves into the US banking system since the collapse of Lehman (the same goes for the ECB, BOE, BOJ, etc). Even more has been said about why this money has not been able to make its way into the broader economy, and instead of forcing inflation – at least as calculated by the BLS’ CPI calculation – to rise above 2% has, by monetizing a record amount of US debt issuance, merely succeeded in pushing capital markets to unseen risk levels as every single dollar of reserves has instead ended up as assets (and excess deposits as a matched liability) on bank balance sheets.

Much less has been said that of the roughly $2 trillion increase in US bank assets, $2.5 trillion of this has come from the Fed’s reserve injections as absent the Fed, US banks have delevered by just under half a trillion dollars in the past 5 years. Because after all, all QE really is, is an attempt to inject money into a deleveraging system and to offset the resulting deflationary effects. Naturally, the Fed would be delighted if instead of banks being addicted to its zero-cost liquidity, they would instead obtain the capital in the old-fashioned way: through private loans. However, since there is essentially no risk when chasing yield and return and allocating reserves to various markets (see JPM CIO and our prior explanation on this topic), whereas there is substantial risk of loss in issuing loans to consumers in an economy that is in a depressionary state when one peels away the propaganda and the curtain of the stock market, banks will always pick the former option when deciding how to allocated the Fed’s reserves, even if merely as initial margin on marginable securities.

However, what virtually nothing has been said about, is how China stacks up to the US banking system when one looks at the growth of total Chinese bank assets since the collapse of Lehman.

The answer, shown on the chart below, is nothing short of stunning.

 

Here is just the change in the past five years:

You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China! Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!

Here is how Diapason’s Sean Corrigan observed this epic imbalance in liquidity creation:

Total Chinese banking assets currently stand at some CNY147 trillion, around 2 ½ times GDP. As such, they have doubled in the past four years of increasingly misplaced investment and frantic real estate speculation, adding the equivalent of 140% of average GDP – or, in dollars, $12.5 trillion – to the books. For comparison, over the same period, US banks have added just less than $700 billion, 4.4% of average GDP, 18 times less than their Chinese counterparts – and this in a period when the predominant trend has been for the latter to do whatever it takes to keep commitments off their balance sheets and lurking in the ‘shadows’!

 

Indeed, the increase in Chinese bank assets during that breakneck quadrennium is equal to no less than seven-eighths of the total outstanding assets of all FDIC-insured institutions! It also compares to 30% of Eurozone bank assets.

Truly epic flow numbers, and just as unsustainable in the longer-run.

But what does this mean for the bigger picture? Well, a few things.

For a start, prepare for many more headlines like these: “Chinese buying up California housing“, “Hot Money’s Hurried Exit from China“, “Following the herd of foreign money into US real estate markets” and many more like it. Because while the world focuses and frets about the Fed’s great reflation experiment (which is set to become bigger not smaller), China has been quietly injecting nearly three times in liquidity into its own economy as the Fed and the Bank of Japan combined!

To be sure, due to China’s still firm control over the exchange of renminbi into USD, the capital flight out of China has not been as dramatic as it would be in a freely CNY-convertible world, although in recent months many stories have emerged showing that enterprising locals from the mainland have found effective ways to circumvent the PBOC’s capital controls. And all it would take is for less than 10% of China’s new credit creation to “escape” aboard from the Chinese banking system, the bulk of which is quasi nationalized and thus any distinction between prive and public loan creation is immaterial, for the liquidity effect to be as large as one entire year of QE. Needless to say, the more effectively China becomes at depositing all this newly created liquidity, the faster prices of US real estate, the US stock market, and US goods and services in general will rise (something the Fed would be delighted with).

However, while the Fed certainly welcome this breakneck credit creation in China, the reality is that the bulk of these “assets” are of increasingly lower quality and generate ever lass cash flows, something we covered recently in “Big Trouble In Massive China: “The Nation Might Face Credit Losses Of As Much As $3 Trillion.” It is also the reason why China attempted one, aborted, tapering in the summer of 2013, and why the entire third plenum was geared toward economic reform particularly focusing on the country’s unsustainable credit (and liquidity) creation machine.

The implications of the above are staggering. If the US stock, and especially bond, market nearly blew a gasket in the summer over tapering fears when just a $10-20 billion reduction in the amount of flow was being thrown about, and the Chinese interbank system almost froze when overnight repo rates exploded to 25% on even more vague speculation of a CNY1 trillion in PBOC tightening, then the world is now fully addicted to about $5 trillion in annual liquidity creation between just the US, Japan and China alone!

Throw in the ECB and BOE as many speculate will happen eventually, and it gets downright surreal.

But more importantly, as with all communicating vessels, global liquidity is now in a constant state of laminar flow – out of central banks: either unadulterated as in the US, Japan, Europe and the UK, or implicit, when Chinese government-backstopped banks create nearly $4 trillion in loans every year. If one issuer of liquidity “tapers”, others have to step in. Indeed, as we suggested a few weeks ago, any possibility of a Fed taper would likely involve incremental QE by the Bank of Japan, and vice versa.

However, the biggest workhorse behind the scenes, is neither: it is China. And if something happens to the great Chinese credit-creation dynamo, then we see no way that the rest of the world’s central banks will be able to step in with low-powered money creation, to offset the loss of China’s liquidity momentum.

Finally, when you lose out on that purchase of a home to a Chinese buyer who bid 50% over asking sight unseen, with no intentions to ever move in, you will finally know why this is happening.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZACrd_nbepc/story01.htm Tyler Durden

A renewed confidence in the administration must be carried forward. We can’t wait to hear how immigration reform will single-handedly fix the economy, joblessness, education, and healthcare… and if it’s not passed, the failure of all those things is due to the Republican’s unwillingness to negotiate… perhaps it is time for the Republicans to don their best Rouhani costumes?

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YjvokcVZrWo/story01.htm Tyler Durden

A renewed confidence in the administration must be carried forward. We can’t wait to hear how immigration reform will single-handedly fix the economy, joblessness, education, and healthcare… and if it’s not passed, the failure of all those things is due to the Republican’s unwillingness to negotiate… perhaps it is time for the Republicans to don their best Rouhani costumes?

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YjvokcVZrWo/story01.htm Tyler Durden

We are used to hedge fund managers blindly making up “facts” to hide the reality that nothing else matters (most definitely not fundamentals) except the Fed’s balance sheet (in order to defend his 2-and-20 sapping performance). So it is ironic that Pershing Square’s Bill Ackman has added to his previous 342-slide PowerPoint presentation with the following 61 pages of his reality in the hope that market technicals (i.e. the weight of activist longs and shrinking float) and momentum will give way to his view that ‘these’ Herbalife’s fundamentals will eventually win. Good luck with that…

 

Here are his 7 Hallmarks of a Pyramid Scheme and the full Herbalife’s “Robin Hood In Reverse” presentation is found here:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5AEN-oaluaU/story01.htm Tyler Durden

We are used to hedge fund managers blindly making up “facts” to hide the reality that nothing else matters (most definitely not fundamentals) except the Fed’s balance sheet (in order to defend his 2-and-20 sapping performance). So it is ironic that Pershing Square’s Bill Ackman has added to his previous 342-slide PowerPoint presentation with the following 61 pages of his reality in the hope that market technicals (i.e. the weight of activist longs and shrinking float) and momentum will give way to his view that ‘these’ Herbalife’s fundamentals will eventually win. Good luck with that…

 

Here are his 7 Hallmarks of a Pyramid Scheme and the full Herbalife’s “Robin Hood In Reverse” presentation is found here:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5AEN-oaluaU/story01.htm Tyler Durden

Glutathione is your body’s “master antioxidant”.

Every cell of your body contains glutathione. And glutathione makes any other antioxidant which you ingest more effective.

Low glutathione levels are associated with serious diseases such as cancer, Aids and diabetes.

As we age, our glutathione levels decline. Indeed, low glutathione levels may be associated with aging quickly:

Glutathione is also central to many other basic mechanisms in our body, such as immune response, blood transport and protein synthesis:

Numerous studies have shown that glutathione can help protect cells against radiation damage, including studies published in the following journals:

• Proceedings of the National Academy of Sciences; and here and here

• International Journal of Radiation Biology

• Official Journal of the Radiation Research Society

• Cellular and Molecular Neurobiology

• The Biological Bulletin

• Methods and Findings in Experimental and Clinical Pharmacology

• Photochemistry and Photobiology

• The journal Nutrients

This is not entirely surprising, given that it’s well-documented that all antioxidants help to protect against damage from radiation.   Specifically, one of the main ways in which low-level ionizing radiation damages our bodies is by the creation of free radicals. (This 2-minute BBC video shows how damaging free radicals can be to your health.)

Columbia University explains the damaging effects of low-level radiation through free radical creation:

Some radiation experts argue that the creation of a lot of free radical creation is the most dangerous mechanism of low level ionizing radiation:

During exposure to low-level doses (LLD) of ionizing radiation (IR), the most of harmful effects are produced indirectly, through radiolysis of water and formation of reactive oxygen species (ROS). The antioxidant enzymes – superoxide dismutase (SOD): manganese SOD (MnSOD) and copper-zinc SOD (CuZnSOD), as well as glutathione (GSH), are the most important intracellular antioxidants in the metabolism of ROS. Overproduction of ROS challenges antioxidant enzymes.

We’ve previously told you how to get past the hype to find the foods that are highest in antioxidants.

But glutathione – as the “master antioxidant”, which is in every cell of your body – is probably the most important one to focus on.

Dr. Jimmy Gutman – a practicing physician, former Undergraduate Director and Residency Training Director of Emergency Medicine at McGill University in Montreal, Quebec, who has served on the Board of Directors of the Canadian Association of Emergency Physicians – claims:

Raising glutathione levels protects cells from damage from the most dangerous of free radicals, the hydroxyl-radical, is released when ionizing radiation hits us.

Note also that exposure to radiation depletes glutathione in your body.   You basically use up glutathione neutralizing the free radicals created by radiation. So it is important to keep your glutathione levels up when you are exposed to radiation.

How Can We Boost Glutathione Levels?

Despite the hype from the supplement industry, glutathione supplements don’t do anything.  Specifically, our stomach acid destroys glutathione … so you’ll be throwing money away if you buy supplemenets.

But you can eat foods that are high in the precursors to glutathione … and your body will use them to make more glutathione.

Specifically, 3 amino acides – cysteine, glycine and glutamate – are the precursors to glutathione production.

Protein-rich foods tends to be high in all 3. But heating or pasteurizing them destroys many of the glutathione-producing pro
perties.

For example, raw eggs and raw meat are high in cysteine, but cooking destroys the cysteine.   Most industrially-raised meat is of poor quality, and large-scale egg producers have been riddled with salmonella and other problems in recent years.

If you raise your own animals for meat or egg-laying hens, then you’ll know they’re safe.  Otherwise, it may be a little risky eating raw eggs or meat.

Raw milk is apparently very high in glutathione precursors.   But the USDA says that raw milk can be dangerous … and the police may go to some length to shut down raw milk producers.

Raw cruciferous vegetables (brocolli, cauliflower, brussel sprouts, cabbage, cress, and bok choy) are also a good source of cysteine.  But you would have to eat a lot of them … which would cause stomach distress in many people.

So what’s the answer?

Exercise boosts glutatione (and see this).  Lack of sleep can deplete glutathione.  So exercise and get enough rest.

Numerous scientific studies show that “undenatured whey protein” raises glutathione levels.  See this, this, this, this, this, and this.  (Whey protein is derived from milk or cheese, and “undenatured” just means that it is heated enough to kill bacteria … but not high enough to destroy the glutathione precursors.) You can buy it at most health food stores.

If you are a vegan – eating neither meat or dairy products – then you may want to make sure you get enough brown rice protein (because it’s high in the glutathione precursor cysteine).

Supplements available in health food stores – such as Alpha lipoic acid (and here), N-acetylcysteine, S-adenosyl-L-methionine, and the herb milk thistle (and see this) – have also been shown to boost glutathione levels.

For more information on glutathione from physicians – including additional tips for boosting glutathione levels – see this, this and this.

Postscript: Many companies are trying to sell various glutathione boosters. Some work, some don’t … and some do more harm than good. We don’t endorse any specific product.

Read this for more information on how to protect yourself from radiation.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sBntFNffqHA/story01.htm George Washington

Submitted by Tim Price via Sovereign Man blog,

“In investing, what is comfortable is rarely profitable.” — Robert Arnott

Valuations still matter.

Assuming that one is ‘investing’ as opposed to ‘speculating’, initial valuation (i.e. the price you pay for the investment) remains the single most important characteristic of whatever one elects to buy.

And at the risk of sounding like a broken record, “initial valuation” in the US stock market is at a level consistent with very disappointing subsequent returns, if the history of the last 130 years is any guide.

Without fail, every time the US market has traded on a cyclically-adjusted P/E (CAPE) ratio of 24 or higher over the past 130 years, it has been followed by a roughly 20 year bear market.

The evidence for the prosecution is clear, especially for the peak years 1901, 1929, 1966 and 2000. And 2013? The CAPE ratio is more than 25 today.

But there is the stock market, and then there are individual stocks. We have no interest in the former, but plenty of interest in the opportunity set of the latter.

We’re just not that interested in the US market, given general valuation concerns, and the malign role of Fed policy in distorting the prices of everything. As purists and unashamed value investors, we have plenty of other fish to fry.

Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades.

The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years’ time.

The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms.

Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. The stand-out area is obvious: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people.

In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that.

But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it.

Asian personal consumption between 2007 and 2012 – while the West was suffering from a little localised financial crisis – grew by 5% to 10% per annum. Industries likely to benefit from sustained growth in domestic consumption include food and beverages, clothes, cars, and insurance.

But the index composition of Asian equity index benchmarks leaves much to be desired.

Of the 10 largest companies in the MSCI Asia ex-Japan index, three are low margin exporters in Korea and Taiwan, one is a low margin Chinese telecoms business, three are state-run Chinese banks, one is an inefficient Chinese oil and gas producer, and one is an expensive Chinese internet business.

That doesn’t leave much for value investors to go on.

Asian equity funds more generally, tending to be index-trackers, are heavy in Chinese stocks of indeterminate value and clunky ‘old Asia’ exporters with far too much research coverage.

Or one can ignore index composition (‘yesterday’s winners’) entirely and focus instead on ‘best in breed’ businesses throughout the region on an unconstrained basis– especially those with favorable returns on equity, strong balance sheets, and low valuations.

As Greg Fisher of Adepa Asset Management wrote, amid a world of worries, “keeping the discipline of holding lowly valued, under-owned and unleveraged companies is likely to continue to protect our capital and earn us both income and capital appreciation over the longer term.”

Or to put it more plainly, and in the words of Warren Buffett, “price is what you pay; value is what you get.”

US stocks may be expensive, but you can get better economic fundamentals and cheaper valuations selectively throughout Asia.

And as insurance against the sort of disorderly currency moves that seem to be almost inevitable courtesy of so many central banks behaving badly, we still maintain you can’t do better over the medium term than gold.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/gJqCaZfs9j8/story01.htm Tyler Durden

Monopolistic supply? Thriving wealth-effect-driven demand?

 

As we noted previously,

Medallions – essentially the right to operate a for-hail taxi in New York City – now trade for as much as $1.3 million, an all-time record.   

 

Part of this dynamic is fixed supply – there are just 13,336 medallions available for a city of 8.3 million people.  There is also a macroeconomic point, with a stronger NYC economy for those inhabitants who can afford the service.  The more surprising observation, however, is that new technology in the form of in-car credit card machines and more recently smartphone hailing apps both materially increase the value of owning a medallion.  In a world where every technology is deemed “Disruptive”, here’s a case where the status quo has actually reaped much of the reward.

 

Via ConvergEx's Nick Colas,

Here’s a news flash for everyone who thinks Elon Musk Is the preeminent automotive visionary of our generation: New York City was running electric taxicabs in the 1890s, a decade before Henry Ford’s Model T ever turned a wheel on America’s roads.  A financial crisis in 1907 put a predictable dent in consumer demand for NYC cars-for-hire, and the rise of the internal combustion engine in the 1910s and 1920s eventually did away with the battery-powered cab in Gotham.  By the 1930s the city actually had a glut of taxis, by some accounts as many as 30,000 plying the streets for fares in a Depression-era New York.

To clean up the oversupply of increasingly poorly maintained cabs with drivers desperate to make ends meet in a lousy economy, Mayor Fiorello La Guardia signed something called the Haas Act, which limited the number of taxis to 16,900.  Over the years this cap dwindled to 11,787, even as the city’s population grew.  The basic rules behind this permit, called a “Medallion”, remain largely unchanged from La Guardia’s day, and include:

• The license to own and operate a taxicab.
• The ownership of the medallion may be sold or pledged as collateral for a loan.
• The exclusive right to accept street hails.
• Fares regulated and authorized by the NYC Taxi and Limousine Commission.
• Owners of medallions must be US citizens or permanent residents
• Independent medallion owners must operate their cab 210 nine-hour shifts a year
• Corporate owners must operate their cabs 24/7
• Inspections of the vehicle occur every 4 months
• Medallions sales are subject to a 5% transfer tax

As the number of medallions available is controlled by this process – there are only 13,336 on the streets today – they are quite valuable.  Since both individual and corporate owners can sell their medallions at will, there is a ready market for these licenses.  We’ve included several charts and tables with historical price information immediately after this note, but here are the highlights:

 

 

Owning a medallion has been a winning trade that even the NY hedge fund managers who likely take several cab trips a day would covet.  At the beginning of the Financial Crisis in January 2007, an “Individual” medallion went for $414,000 and a “Corporate” version for $522,000.  Now, the numbers are $1.05 million (July 2013 “Individual”) and $1.32 million (last trade for a “Corporate” medallion, May 2013).  That is an average return of 153% over the last six and a half years. 

 

The longer term track record for medallions is equally impressive – they went for just $140,000 or so in 1993 – but teasing out the actual reasons for these eye-popping returns takes some work.  Remember that the pricing economics of taxi cab operation – and therefore the value of owning a medallion – is controlled by regulation.  You can only charge so much per mile and for wait time.

 

We went back to 1948 to see if these statutory fares explained the increasing value of a medallion.  In that year, for example, a typical cab ride of 1.5 miles with 5 minutes of waiting time at lights would cost $0.63 and the cost of a medallion was $2,500.   It would therefore have taken the average medallion owner about 4,000 trips to pay for his license.  Fast forward to 1964, and this number rose to almost 30,000 trips because fare increases did not keep pace with medallion inflation.

 

 

The good news for the medallion owner of the 1960s-1990s was that this 30,000 trip breakeven declined to about 15,000 during the difficult period of the 1970s in the city and did not breach the 30,000 mark again until 1997.  Fare increases, in other words, offset the ever rising costs of a medallion.  Gas prices also play a role in taxi cab profitability, of course, but it is worth noting (and is clear from our data) that medallion prices did not decline as oil prices rose from 1973 to the present day.

 

Taxi medallion economics have seen a breakout since the early 2000s, as evidenced by our breakeven analysis based on current fare schedules.  It now takes almost 83,000 “Typical” 1.5 mile trips for an “Individual” medallion owner to break even, up from 42,700 in 2004.  For the corporate owner, those numbers rise to 115,600 – up from 48,600 nine years ago.

Now, if you’ve ever had the chance to meet a medallion owner, you know that these are very tough people when it comes to making money.  They know their numbers cold and aren’t shy about expressing their point of view.  In short, they make the typical Wall Streeter look like slightly pouty 8 year old.   Add to this fact the realization that NYC plans to auction off 2,000 new medallions this year AND introduce a new cheap ($1,500) livery license for the outer boroughs and northern Manhattan, and the fundamentals look pretty bewildering.

Here are a few thoughts on the “Mystery of the Million Dollar Medallion”:

 

 

Pricing for a cab ride may be regulated, but nothing says New Yorkers have to take the trip.  One interpretation of the breakout in medallion prices is that New York’s affluent classes have had their own step-up in income and/or wealth and are more often taking cabs than even in the 1990s.  A wrinkle on this explanation would be that as more of
Manhattan and parts of Brooklyn go through gentrification, the total population of potential cab customers increases.  This further helps keep the 13,336 medallions busy through the day.  A survey from the mid 2000s showed that most cab rides occurred during the morning commute and were generally to midtown Manhattan from the Upper East and West Side.  As the areas where affluent New Yorker live and work expand, so does their usage of yellow cabs.

 

The increase in medallion prices to nose-bleed levels is, therefore, a sign that the New York economy is extremely strong at least among the top 20% of the population by income.  Remember that if 14,000 wealthy New Yorkers all stuck their hands up at the same time on their corner, over 500 of them would have to grab a MetroCard to get to work.  And the city has 8.3 million total inhabitants.

 

The introduction of in-car credit card processing has been a boon to cab drivers tips.  According to one analysis done in 2009, cash-only tips used to run 10% of the fare.  Since the credit card options for driver tips only offer choices of 20% or more, the introduction of these machines over the last few years has meant higher per-trip revenues for the driver.  And since part of the value of a medallion is essentially the right to collect these tips, it makes sense that drivers would pay medallion owners more over time.

 

Perhaps the most interesting wild card for the value of a NYC taxi medallion is the burgeoning technology of smartphone taxi applications like Hailo, Uber, Lyft and others.  These do pretty much what you’d expect – find you a nearby cab based with information from your geolocated phone.  This could easily improve cab utilization in New York quite dramatically, justifying higher medallion prices.  The first usage data from such apps has just come out in the past few weeks, and the results are lukewarm at best.  It is, however, early days. 

What I find most interesting about this exercise is the fact that technology – credit cards and smartphone apps – has served to enhance the value of established status quo rather than its customary role of “Disruptor”.  To understand why, remember who owns the right to issue a medallion: the New York City government.  The current plans to issue 2,000 more medallions could net the still cash-strapped city something like $2 billion over the next few years.  And they control the laws about who can – and can’t – pick up a fare in New York.  Think they are going to let a “Disruptive technology” alter their existing and highly lucrative model?

If so, I have a bridge in Brooklyn I would like to sell you.  All we need to do is find a taxi to take us there. 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WTAKNA0xHGs/story01.htm Tyler Durden

Monopolistic supply? Thriving wealth-effect-driven demand?

 

As we noted previously,

Medallions – essentially the right to operate a for-hail taxi in New York City – now trade for as much as $1.3 million, an all-time record.   

 

Part of this dynamic is fixed supply – there are just 13,336 medallions available for a city of 8.3 million people.  There is also a macroeconomic point, with a stronger NYC economy for those inhabitants who can afford the service.  The more surprising observation, however, is that new technology in the form of in-car credit card machines and more recently smartphone hailing apps both materially increase the value of owning a medallion.  In a world where every technology is deemed “Disruptive”, here’s a case where the status quo has actually reaped much of the reward.

 

Via ConvergEx's Nick Colas,

Here’s a news flash for everyone who thinks Elon Musk Is the preeminent automotive visionary of our generation: New York City was running electric taxicabs in the 1890s, a decade before Henry Ford’s Model T ever turned a wheel on America’s roads.  A financial crisis in 1907 put a predictable dent in consumer demand for NYC cars-for-hire, and the rise of the internal combustion engine in the 1910s and 1920s eventually did away with the battery-powered cab in Gotham.  By the 1930s the city actually had a glut of taxis, by some accounts as many as 30,000 plying the streets for fares in a Depression-era New York.

To clean up the oversupply of increasingly poorly maintained cabs with drivers desperate to make ends meet in a lousy economy, Mayor Fiorello La Guardia signed something called the Haas Act, which limited the number of taxis to 16,900.  Over the years this cap dwindled to 11,787, even as the city’s population grew.  The basic rules behind this permit, called a “Medallion”, remain largely unchanged from La Guardia’s day, and include:

• The license to own and operate a taxicab.
• The ownership of the medallion may be sold or pledged as collateral for a loan.
• The exclusive right to accept street hails.
• Fares regulated and authorized by the NYC Taxi and Limousine Commission.
• Owners of medallions must be US citizens or permanent residents
• Independent medallion owners must operate their cab 210 nine-hour shifts a year
• Corporate owners must operate their cabs 24/7
• Inspections of the vehicle occur every 4 months
• Medallions sales are subject to a 5% transfer tax

As the number of medallions available is controlled by this process – there are only 13,336 on the streets today – they are quite valuable.  Since both individual and corporate owners can sell their medallions at will, there is a ready market for these licenses.  We’ve included several charts and tables with historical price information immediately after this note, but here are the highlights:

 

 

Owning a medallion has been a winning trade that even the NY hedge fund managers who likely take several cab trips a day would covet.  At the beginning of the Financial Crisis in January 2007, an “Individual” medallion went for $414,000 and a “Corporate” version for $522,000.  Now, the numbers are $1.05 million (July 2013 “Individual”) and $1.32 million (last trade for a “Corporate” medallion, May 2013).  That is an average return of 153% over the last six and a half years. 

 

The longer term track record for medallions is equally impressive – they went for just $140,000 or so in 1993 – but teasing out the actual reasons for these eye-popping returns takes some work.  Remember that the pricing economics of taxi cab operation – and therefore the value of owning a medallion – is controlled by regulation.  You can only charge so much per mile and for wait time.

 

We went back to 1948 to see if these statutory fares explained the increasing value of a medallion.  In that year, for example, a typical cab ride of 1.5 miles with 5 minutes of waiting time at lights would cost $0.63 and the cost of a medallion was $2,500.   It would therefore have taken the average medallion owner about 4,000 trips to pay for his license.  Fast forward to 1964, and this number rose to almost 30,000 trips because fare increases did not keep pace with medallion inflation.

 

 

The good news for the medallion owner of the 1960s-1990s was that this 30,000 trip breakeven declined to about 15,000 during the difficult period of the 1970s in the city and did not breach the 30,000 mark again until 1997.  Fare increases, in other words, offset the ever rising costs of a medallion.  Gas prices also play a role in taxi cab profitability, of course, but it is worth noting (and is clear from our data) that medallion prices did not decline as oil prices rose from 1973 to the present day.

 

Taxi medallion economics have seen a breakout since the early 2000s, as evidenced by our breakeven analysis based on current fare schedules.  It now takes almost 83,000 “Typical” 1.5 mile trips for an “Individual” medallion owner to break even, up from 42,700 in 2004.  For the corporate owner, those numbers rise to 115,600 – up from 48,600 nine years ago.

Now, if you’ve ever had the chance to meet a medallion owner, you know that these are very tough people when it comes to making money.  They know their numbers cold and aren’t shy about expressing their point of view.  In short, they make the typical Wall Streeter look like slightly pouty 8 year old.   Add to this fact the realization that NYC plans to auction off 2,000 new medallions this year AND introduce a new cheap ($1,500) livery license for the outer boroughs and northern Manhattan, and the fundamentals look pretty bewildering.

Here are a few thoughts on the “Mystery of the Million Dollar Medallion”:

 

 

Pricing for a cab ride may be regulated, but nothing says New Yorkers have to take the trip.  One interpretation of the breakout in medallion prices is that New York’s affluent classes have had their own step-up in income and/or wealth and are more often taking cabs than even in the 1990s.  A wrinkle on this explanation would be that as more of Manhattan and parts of Brooklyn go through gentrification, the total population of potential cab customers increases.  This further helps keep the 13,336 medallions busy through the day.  A survey from the mid 2000s showed that most cab rides occurred during the morning commute and were generally to midtown Manhattan from the Upper East and West Side.  As the areas where affluent New Yorker live and work expand, so does their usage of yellow cabs.

 

The increase in medallion prices to nose-bleed levels is, therefore, a sign that the New York economy is extremely strong at least among the top 20% of the population by income.  Remember that if 14,000 wealthy New Yorkers all stuck their hands up at the same time on their corner, over 500 of them would have to grab a MetroCard to get to work.  And the city has 8.3 million total inhabitants.

 

The introduction of in-car credit card processing has been a boon to cab drivers tips.  According to one analysis done in 2009, cash-only tips used to run 10% of the fare.  Since the credit card options for driver tips only offer choices of 20% or more, the introduction of these machines over the last few years has meant higher per-trip revenues for the driver.  And since part of the value of a medallion is essentially the right to collect these tips, it makes sense that drivers would pay medallion owners more over time.

 

Perhaps the most interesting wild card for the value of a NYC taxi medallion is the burgeoning technology of smartphone taxi applications like Hailo, Uber, Lyft and others.  These do pretty much what you’d expect – find you a nearby cab based with information from your geolocated phone.  This could easily improve cab utilization in New York quite dramatically, justifying higher medallion prices.  The first usage data from such apps has just come out in the past few weeks, and the results are lukewarm at best.  It is, however, early days. 

What I find most interesting about this exercise is the fact that technology – credit cards and smartphone apps – has served to enhance the value of established status quo rather than its customary role of “Disruptor”.  To understand why, remember who owns the right to issue a medallion: the New York City government.  The current plans to issue 2,000 more medallions could net the still cash-strapped city something like $2 billion over the next few years.  And they control the laws about who can – and can’t – pick up a fare in New York.  Think they are going to let a “Disruptive technology” alter their existing and highly lucrative model?

If so, I have a bridge in Brooklyn I would like to sell you.  All we need to do is find a taxi to take us there. 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WTAKNA0xHGs/story01.htm Tyler Durden

If one of the biggest concerns in early 2013 was the progressively declining Bids To Cover in US Treasury auctions, the past few months have seen a halt in this trend, while today’s auction of $32 billion in 2 Year paper marked a substantial return to the high-flying  BTC day of yore when the just completed 2 Year auction not only priced strongly through the 0.303% high yield, pricing at 0.300, but more importantly, at a 3.54 Bid to Cover, a jump from October’s 3.09, and the second highest since February excluding only April’s 3.63. Curiously, the drop in the overall Bid To Cover (as can be sen on the chart below) correlates closely to the drop off in Direct take downs in the first half of the year. This too has reversed in recent months with Directs getting 27.28%, Indirects holding 22.47% and Dealers left holding just over half, or 50.25%. Over the next few days it will be revealed if the same rising BTC trend is sustained in the other near-term vintages, the 5 and 7 year auctions also due out later week.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/H71sm14PUUs/story01.htm Tyler Durden