Tag: finance

A key challenge for most investors is meeting return bogies, but as Citi notes in the following 6 slides, generating a 10% return in this low-yield environment is still possible (aside from riding short-squeezes in #N/A P/E stocks) as long as you have the intestinal fortitude for the kind of leverage required…

 

How to Earn 10% in a Low Yield Environment?

Although less acute than early in the year, a key challenge for at least some investors is meeting return bogies.

How Much Leverage is Needed to Earn 10%?

We looked at how much financial leverage is needed to earn 10% for select assets. Required leverage is certainly higher than the historical norm, but variations across the markets are extraordinary.

How Risky are Levered Positions?

With respect to what could happen to levered positions in a tail scenario (defined as the single worst monthly performance during the post-Lehman period), we find that the most resilient assets tend to be cash corporates.

We also looked at the likelihood of each asset generating a negative outcome, and again cash corporates tend to fair well.

We also looked at the chance of beating a 10% return bogey (post-Lehman era), and once cash corporates look fairly attractive.

And the Winner Is…

For various risk metrics we rank each asset relative to the overall group (from 1 to 13, with 1 being the best). Using the average score for our overall ranking, we find that corporates are compelling.

So there it is, levered loans is the most 'efficient' way to gain 10% on a risky/levered basis – oh aside from the fact that The Fed, just yesterday,. announced it plans to introduce new loan underwriting standards for just that business…

 

Source: Citi

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

As the status quo crumbles, the state responds in the only way it knows: expand control and become increasingly authoritarian.

The Grand Narrative of the 21st century is the legitimization of the authoritarian state. The authoritarian state comes in many ideological flavors, but retains the commonalities of central control. It may label the system it controls communist, socialist or capitalist, but these distinctions are semantic: the authoritarian state controls the system, by one means or another.

Regardless of which version of the 9/11 story you believe or disbelieve, the reality is the same: the U.S. is engaged in an Orwellian global war without end, a war that doesn't just justify monitoring every communication on the planet but actively requires monitoring every communication on the the planet.

The Federal Reserve has extended its control of the U.S. economy, transforming it into a wealth-skimming machine for the top 1/10th of 1% with access to the Fed's credit creation. The Fed claims independence from the U.S. government, but this is also merely semantics: the Fed and U.S. Treasury are simply two facets of the authoritarian state.

We see the same narrative playing out around the world. In socialist France, the central state is extending its control over what little of the economy is still quasi-private; in nominally communist China, any weakening of the economy that can't be papered over with bogus statistics is soon followed by nationalist propaganda hyping one red-button issue or another (Senkaku Islands, etc.) to distract the populace from the increasingly fragile "recovery" in China's asset-bubble-dependent economy.

As the status quo crumbles, the state responds in the only way it knows: expand control and become increasingly authoritarian. This is of course a key dynamic in why things are falling apart: increasing central control only further distorts the mechanisms in the economy that seek equilibrium by self-correcting means.

Why is the authoritarian state illegitimate? Among the many reasons, we can start with three: the authoritarian state is the enemy, always and in all places, of individual liberty and free expression/the free press, and the authoritarian state is intrinsically a failed state, for the mechanisms of centralization and authoritarian control are ontologically destabilizing, regardless of the ideological flavor of the system the state controls.

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Things would sure be a lot easier for NSA boss Keith Alexander if we had a dictatorship. Alexander said:

I think it’s wrong that that newspaper reporters have all these documents, the 50,000—whatever they have and are selling them and giving them out as if these—you know it just doesn’t make sense.

We ought to come up with a way of stopping it. I don’t know how to do that. That’s more of the courts and the policymakers but, from my perspective, it’s wrong to allow this to go on ….

(The quote starts at 21:06. But it’s worth watching this failed propaganda attempt from the beginning, to see the bizarre mix of bold-faced lies, pseudo-sincerity and New Age music.)

There’s a little thing called the “Constitution” … but Alexander doesn’t believe in it.

If you don’t count this as a veiled threat, please read this and this.

BONUS:

Proof that NSA Spying Is Not Very Focused On Terrorism

Prominent Liberal Unearths Evidence of New World Order

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3KRtbFdoxO0/story01.htm George Washington

While no longer actively engaged in politcs, one of Ron Paul’s crowning achievements while in Congress, was to bring some much needed sunlight to the balance sheet, the activities, and secret bailouts of the Fed, and according to some, was being responsible for the “transaprency, openness, and forward guidance” approach to monetary policy. The paradox here, as the whole Taper – Non Taper shocking episode provied, is that the Fed itself is now caught in a reflexive Catch 22, and no longer can “renormalize” and extricate itself from its policy through “guidance” without in the process destroying everything it has achieved during the prior period of central planniing.

Still, despite Ron Paul’s unsung accomplishments there is much more to be done to expose just how actively the NY Fed’s trading desk participates in the fixing of the S&P500’s closing price day after day. For that, he will need the help of his son, Rand. Which is why as the Sunshine State News reports, “Sen. Rand Paul, R-Ky., is ramping up his opposition to President Barack Obama’s nomination of Janet Yellen to chair the Federal Reserve. Paul is teaming up with the Campaign for Liberty, chaired by his father former U.S. Rep. Ron Paul, R-Texas, to stand in opposition to Yellen and push legislation taking aim at the Fed.”

On Thursday, the Campaign for Liberty announced a video on the subject featuring Sen. Paul and John Tate, the president of the group.

 

“The Senate fight over Barack Obama’s Fed chair nominee is just around the corner,” Norm Singleton, the vice president of policy for the Campaign for Liberty, wrote supporters on Thursday. “And Senator Rand Paul has vowed to block the nomination until Harry Reid brings ‘Audit the Fed’ to the floor for a vote. This will be the fight of our lives — but this is our moment!

Will Paul and Paul succeed in getting some traction in the Democrat governed senate: the same Democrats who loathed the Fed when it was only in the news over how many trillions in bank bailouts it provided, but love it now that it is best known for monetizing the US deficit and funding various insolvent welfare programs? We doubt it, but we wish the luck.

Sadly, it is now far too late to change strategy and direction, and/or focus on anything besides salvage. Which is why it is perhaps best if Yellen et al are allowed unobstructed access to everything they want to engage in: print $100 billion a month? Fine, do it. Print $1 trillion? $1 quadrillion? Go for it!

If anything, encouraging America’s monetary politburo to hit their Weimar endgoal, is now in everyone’s best interest. Frankly, the reset can’t come fast enough.

Full clip

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Having fired a shot across Carl iCahn’s bow yesterday, PIMCO’s Bill Gross has a new target – once again talking his book…

Gross: By the way, I should spend more TIME like Bill Gates too — we all should. He and Melinda are great paragons.

— PIMCO (@PIMCO) October 25, 2013

Perhaps more Americans should spend more time that way… instead of watching every tick in AMZN and dreaming of retirement…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EJU5yR2bHDw/story01.htm Tyler Durden

Having fired a shot across Carl iCahn’s bow yesterday, PIMCO’s Bill Gross has a new target – once again talking his book…

Gross: By the way, I should spend more TIME like Bill Gates too — we all should. He and Melinda are great paragons.

— PIMCO (@PIMCO) October 25, 2013

Perhaps more Americans should spend more time that way… instead of watching every tick in AMZN and dreaming of retirement…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EJU5yR2bHDw/story01.htm Tyler Durden

Following record UMich misses, Gallup's economic confidence collapse, the slump in the conference board's measure of confidence, and Bloomberg's index of consumer comfort signaling major concerns among rich and poor in this country (in spite of record highs in stocks), today's Consumer Confidence data from UMich continues to confirm a problem for all those 'hoping' for moar multiple expansion. Falling for the 3rd month in a row, and missing expectations for the 2nd month in a row, this is the lowest confidence print in 2013. Perhaps even more worrisome for the 'hope and change' crowd is that the 12-month economic outlook has collapsed to its lowest since Nov 2011. It would seem that all that free money flooding our 'markets' has reached peak efficacy in terms of confidence inspiration, and as Citi notes, when this cycle has played out in the past, equity market corrections are often quick to follow…

 

As we have noted previously – this move in confidence is key…

But, it's all about confidence… investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable… And simply put, the current levels of Consumer Sentiment need to almost double for the US equity market tp approach historical multiple valuation levels…

 

 

 

and the cycle appears to be shifting…

Via Citi,

Is consumer confidence set to turn?

Consumer Confidence is once again following a dynamic where we see it move higher for 4 years and 4 months before beginning to collapse

• Moves higher from 1996-2000 with a smaller dip halfway through in October 1998
• Moves higher from 2003-2007 with a smaller dip hallway through in October 2005
• Moves higher and so far tops out in June 2013. Also sees a small dip halfway through in October 2011.

 

Higher yields do not help confidence…

 

A sharp rise in mortgage rates has a negative feedback loop to consumer confidence. For those families and individuals that were now looking/able to enter the housing market, the recent spike in rates acts as a headwind.

 

In addition to the economic backdrop, there is plenty of tail risk as we head into the end of the year. Oil prices have been rising since the summer began (and in reality since the Summer of 2012), partially due to geopolitical risks which are very much “top of mind.” A bigger spike due to a supply shock would choke the economic recovery.(In our view)

In the US, the appointment of a new Fed Chairman and the upcoming budget/debt ceiling debates are likely to bring added volatility. Tapering itself can also induce concern as the “Bernanke put” is being removed from markets.

In Europe, many of the structural problems related to the single currency union have not actually been addressed and the peripheral countries could still create turmoil going forward (see Fixed Income section focusing on Italy in particular for more on this). There has also been little concern with both the German elections and the German Court decision on the constitutionality of the OMT program. A surprise in either of these could be cause for concern.

Emerging Markets are still not out of the woods yet as growth has been weak relative to expectations and countries with current account deficits are beginning to feel pressure in their FX and Bond markets. This is an issue we believe is only starting to develop which we will continue to expand on at later dates.(We have also looked at this in our EM FX section this week)

Overall, the weak economic backdrop, poor housing recovery and potential for tail risk events over the next few months suggest that we have topped out in Consumer Confidence, a warning sign for equity markets.

 

The relationship between Consumer Confidence is clear, and IF June did mark the high and Confidence continues to decline, then we would expect to see that translate to weakness in the equity markets. The removal of the “Bernanke put” only adds to this concern.

A major turn has taken place in equity markets on average four months after Consumer Confidence turns, which would point to a decline beginning around September-October. As we have previously expressed, we remain of the bias that a correction in equity markets on the order of 20%+ is likely this year/ into 2014 and the current dynamics support such a move.

Should we see a decline of that magnitude, it is almost certain that yields would move lower in a rush to safe assets.

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Submitted by John Rubino of The Dollar Collapse blog,

The US equity markets are back in record territory, at least in nominal terms.

The last two times they spiked this way, the following year was pretty brutal. See the next chart, which tracks the S&P 500 and margin debt, the amount of money investors are borrowing against their shares of stock to buy more stock. The chart seems to show that when investors are optimistic enough to use leverage to invest in already-risky stocks, then the good times have pretty much run their course and something nasty is imminent. If recent history is our guide, it is now time to either take some money off the table or short the hell out of the big indexes – or whatever else you like to do when the market looks overbought.

But this conclusion is only valid if we’re in the same stage of the credit bubble as during those two previous sentiment peaks. In 2000 and 2007, to take just one measure of financial stability, the federal government’s debt was $6 trillion and $8 trillion, respectively, versus $17 trillion today. Plenty of other leverage metrics are also way up, indicating that the US is much further down the path of currency debasement than it was just a few years ago. So the question becomes: at what point does a quantitative difference become qualitative? When does the phase change occur? The next chart shows why this question is more than academic. In the early stages of Zimbabwe’s epic hyperinflation its stock market rose from 2,000 to over 40,000 in one year. Presumably a lot of indicators similar to margin debt were by then pointing to a blow-off top and screaming “sell” to students of history.

 

 

Then the market proceeded to run up to 4,000,000. What happened? The country ran its printing press flat-out and inflated away its currency, so the price of pretty much every tangible asset, when measured in Zimbabwean dollars, went parabolic. Since equities represent part ownership of companies, and most non-financial companies own tangible assets, their value went up as well. Not enough to increase in real terms (versus gold, for instance) but enough to make shorting that market a really bad idea.

So are we 2007 America or 2006 Zimbabwe? A lot is riding on the answer.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5idBs8UmrW8/story01.htm Tyler Durden

As the 'diplomatic' debacle continues to rage between the US and Europe (most loudly France and Germany) over the Obama administration's ongoing eavesdropping on its allies' cell phones, Reuters reports that (state-backed) Deutsche Telekom is calling for German comms companies to cooperate to shield local internet traffic from foreign intelligence services. "It is internationally without precedent that the internet traffic of a developed country bypasses the servers of another country," notes one academic, warning that if more countries wall themselves off, it could lead to a troubling "Balkanisation" of the Internet, crippling the openness and efficiency that have made the web a source of economic growth. Despite Obama's denials, the situation is not fading away, and Germany and France continue to demand a "no spying" agreement.

 

Via Reuters,

As a diplomatic row rages between the United States and Europe over spying accusations, state-backed Deutsche Telekom wants German communications companies to cooperate to shield local internet traffic from foreign intelligence services.

 

…

 

More fundamentally, the initiative runs counter to how the Internet works today – global traffic is passed from network to network under free or paid-for agreements with no thought for national borders.

 

If more countries wall themselves off, it could lead to a troubling "Balkanisation" of the Internet, crippling the openness and efficiency that have made the web a source of economic growth, said Dan Kaminsky, a U.S. security researcher.

 

Controls over internet traffic are more commonly seen in countries such as China and Iran where governments seek to limit the content their people can access by erecting firewalls and blocking Facebook and Twitter.

 

"It is internationally without precedent that the internet traffic of a developed country bypasses the servers of another country," said Torsten Gerpott, a professor of business and telecoms at the University of Duisburg-Essen.

 

"The push of Deutsche Telekom is laudable, but it's also a public relations move."

 

…

 

Government snooping is a sensitive subject in Germany, which has among the strictest privacy laws in the world, since it dredges up memories of eavesdropping by the Stasi secret police in the former East Germany, where Merkel grew up.

 

The issue dominated discussions at a European summit on Thursday, prompting Merkel to demand that the U.S. strike a "no-spying" agreement with Berlin and Paris by the end of the year.

 

…

 

Brazil's President Dilma Rousseff, angered by reports that the U.S. spied on her and other Brazilians, is pushing legislation that would force Google, Facebook and other internet companies to store locally gathered or user-generated data inside the country.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6ia7M3CZSss/story01.htm Tyler Durden