by ilene - July 27th, 2016 3:56 pm
Courtesy of James Kwak, Baseline Scenario
Apparently, both parties have platform planks calling for the reinstatement of the Glass-Steagall Act of 1933, the law that separated investment banking from commercial banking until it was finally repealed in 1999 (after being watered down by the Federal Reserve beginning in the late 1980s). Bringing back Glass-Steagall in some form would force megabanks like JPMorgan Chase, Citigroup, and Bank of America to split up; it would also force Goldman Sachs to get rid of the retail banking operations it started in a bid to get access to cheap deposits.
In his article discussing this possibility, Andrew Ross Sorkin of the Times slips in this:
“Whether reinstating the law is good idea or not, the short-term implications are decidedly negative: It would most likely mean a loss of jobs as part of a slowdown in lending from the biggest banks.”
I looked down to the next paragraph for the explanation, but he had already moved on to another unsubstantiated claim (that the U.S. banking industry would be at a competitive disadvantage). So, I thought, maybe it’s so obvious that Glass-Steagall would reduce lending that Sorkin didn’t think it was worth explaining. I thought about that for a while. I couldn’t see it.
In fact, basic intuitions about finance indicate that Glass-Steagall should have no effect on lending whatsoever. Banks should loan money to borrowers who are good risks: that is, those who pay an interest rate that more than compensates for the risk of default. (I’m simplifying a bit, but the details aren’t relevant.) Common sense tells you that whether the bank doing the lending is affiliated with an investment bank shouldn’t make a difference.
To dig a little deeper, banks should be making loans whose expected returns exceed the appropriate cost of capital. So, maybe Sorkin thinks that grafting an investment bank onto a commercial bank will lower its cost of capital. I can’t think of any obvious reason why this should be the case. Even if it does, however, we do NOT want the commercial bank to now start making more loans than it did before it was affiliated with the investment bank. Capital markets are supposed to direct funds to households…
by stjeanluc - July 27th, 2016 1:08 pm
Looks like we are down to about 10 companies for our consumer goods:
Just like banks, airlines and cable companies!
Explore the full-size version of the above graphic in all its glory.
If today’s infographic looks familiar, that’s because it originates from a well-circulated report that Oxfam International puts together to show consolidation in the mass consumer goods industry.
We are sharing it because we believe it is important for you to be aware of who is supplying the different brands and goods served on your dinner table.
by Market Shadows - July 27th, 2016 12:10 pm
Financial Markets and Economy
It’s virtually certain that at the end of their two-day meeting on Wednesday, Fed officials will leave interest rates exactly where they are—at near-record-low levels.
Commodities will probably rebound next year as demand strengthens, according to the World Bank, adding its voice to those including Citigroup Inc. who’ve forecast that 2017 may be a better year for raw-material prices.
Bull market in U.S. stocks ‘has a long way to go’ (Market Watch)
In the midst of winter’s gloom, when U.S. stocks looked like they had nowhere to go but down, even some bullish market gurus began to doubt that the nearly seven-year-old bull market could continue.
If Big Oil was a two-engine airplane, you could say it’s been flying on a single engine since energy prices crashed in 2014. Now, the second motor is sputtering.
Eight years after the subprime crisis, news of a startup bringing institutional real-estate exposure to individual investors may be met with some skepticism.
For the second day in a row, an auction of U.S. Treasury notes drew the feeblest demand in years, before central-bank decisions this week that may spark volatility in financial markets.
by Market Shadows - July 27th, 2016 1:58 am
Financial Markets and Economy
Stand by for the Federal Reserve to do nothing.
The Fed Is Manipulating Markets… (Value Walk)
“Yellen has distorted true price discov… yada-yada-yada”
How long can doves at the Federal Reserve stand their ground?
Oil Dips on Oversupply Worries; U.S. Crude Hits April Lows (Fox Business)
Oil prices dipped on Tuesday, with U.S. crude hitting three-month lows, as oversupply concerns weighed on the petroleum complex ahead of data likely to show unseasonably high gasoline stocks despite the peak U.S. summer driving period.
Renewed oil weakness sparks demand fears (Reuters)
U.S. oil prices topped $50 a barrel in June, boosting optimism a two-year price rout might end. Six weeks later, the long hoped for recovery has yet to take hold.
Oil prices have tumbled to a three-month low as surging supply once again exposes the chronic global glut and threatens to perpetuate the energy slump for another year.
Unemployment Is Low in Key Swing States (Wall Street Journal)
Republican presidential nominee Donald Trump has premised his campaign on the idea that the American economy is broken and jobs are hard to find. That could be a tough sell in key swing states where the unemployment rate is noticeably lower now than the national average.
What Japan's Economy Needs (Bloomberg View)
Spare a thought for Haruhiko
by ilene - July 27th, 2016 1:18 am
Courtesy of Cullen Roche, Pragmatic Capitalism
If you’ve read my paper Understanding Modern Portfolio Construction you know that I like to think of all financial instruments as if they’re bonds. This is helpful for multiple reasons:
- It helps provide a realistic timeframe for holding certain instruments.
- It helps put the various risks of those instruments in the right perspective.
The thing about bonds is that they pay a specific coupon. So, a 10 year T-Bond paying 2.5% will pay you 2.5% for the next 10 years. If you have a 10 year time horizon then you can virtually guarantee that you’ll get 2.5% per year plus your principal upon maturity. That creates a really clean linear relationship between the time of issuance and maturity. In other words, if you buy the bond today and wake up in 10 years it will look like the bond exposed you to zero permanent loss risk over that time period. I apply the same sort of thinking to the stock market in my paper by calculating a 25 year duration. The stock market, is a lot like a super long maturity bond paying 8-10% per year.¹
Of course, that’s not how bonds (or most other financial instruments) work. They do expose you to the risk of permanent loss in the short-term. And the big problem with low yielding bonds is that they expose you to a lot of potential interest rate risk which creates a lot of short-term risk. If you’re uncertain about your time horizon or you’re worried about generating a positive real return then holding that 10 year bond for 10 years might feel really uncomfortable. This is why I say that the current low yield environment has turned every bond investor into a trader. You’d have to be nuts to buy a long maturity bond and actually hold it to maturity when the risk of a negative real return looks high.
What I most like about thinking of everything like a bond is applying the concept of price compression. You might remember a post I wrote back in 2014 describing the price compression in Biotech stocks. Biotech stocks are akin to a super…
by ilene - July 27th, 2016 1:02 am
Courtesy of Michael Batnick, The Irrelevant Investor
Fifty-seven thousand, five hundred and twelve. That’s the number of global funds launched between January 2005 and 2013. Just to be clear, that is not the number of funds in existence over that period, it’s the number of brand new funds. This mind blowing number comes from an excellent new Morningstar study, The Rise and Fall of New Funds: Why some funds succeed and others don’t.
How is it possible that the market can support so many new funds? Here’s how: “Ah, this thing I purchased three months ago isn’t working, let’s try this instead.” Unfortunately, too many people behave as if the grass is greener on the other side of the field. This nugget from their study is really eye-popping, emphasis mine:
Globally, we find that new funds account for the preponderance of new asset flows. In 2015, global fund flows reached approximately $516.4 billion across the three asset classes in our study--equity, fixed income, and allocation. Of the total, new funds with less than 12 months of track record accounted for $379 billion, or 73% of all flows.
It’s no wonder why active management, from hedge funds to mutual funds, are having such a hard time. The size of the alpha pie never changes, but with more than 57,000 new entrants in just over an eight year period, the slices keep getting smaller. Below is a visual I created to show this.
With better technology, easier access to information, lower expenses, and more options than ever, it has never been a better time for the retail investor. However, because of the overwhelming options available today, paradoxically it’s becoming harder, not easier for investors to achieve average results. Here is Morningstar again, emphasis mine:
Second, the good news for investors is that their preferences have generally paid off in better outcomes. Funds that exhibit the types of traits listed above are generally the better cohorts of funds from the investor’s perspective. The main exception to this comes from investor preference for style tilts, which is directly contrary to their best interests. If portfolios have been disclosed, the investing populace tends to place a premium on funds that buy popular,
by ilene - July 26th, 2016 7:25 pm
Courtesy of Joshua Brown, The Reformed Broker
Stifel this morning (emphasis mine):
Conclusion: Today, we adopt a Bearish outlook for Restaurants as we confidently believe that, at a minimum, the simultaneous -150bps to -200bps deceleration of Restaurant industry comps across all categories during 2Q16 (of +0.7%A vs. 3Q14-1Q16’s +2.4%A) within our most recent Stifel Sales Survey reflects the start of a US Restaurant Recession – which, may also represent a harbinger to a US recession in early 2017; and, if so, Restaurants have historically led the market lower during the 3-to-6-month periods prior to the start of the prior three US recessions(Restaurants -23% vs. S&P 500’s -10%). The catalyst for the current weak pre-recessionary restaurant spending trend is likely multi-faceted (US Politics; Terrorism; Social Unrest; Global Geo-Politics; Economic Uncertainty) but, if history is a guide, we warn investors that restaurant industry sales tend to be the “Canary that Lays the Recessionary Egg” (i.e. the current -2% cut-back in dining out sales is a possible harbinger of a -2%-plus cut-back in the US consumers’ entire spending basket within 3-to-9 months (which accounts for ~70% of the US Economy).
…and their chart:
Specifically, in the 3-to-6-month periods prior to the start of the prior three US recessions, Restaurants have declined an average of -23% vs. the S&P 500’s -10%. To note, most of us are unaware that a recession has begun until several months after economists go back and pick a start-date (See Figure 6).
Josh here – is a sample size of three definitive enough to call a recession in advance? What happens if restaurant comps start improving / accelerating out of nowhere? Isn’t it possible that, like so many other data points, the reality on the ground of ZIRP, NIRP, globalization and demography could lead to the economy defying yet another historic trope that no longer applies?
Turn Bearish on Restaurants; Adopt a US Restaurant Recession Outlook
Stifel – July 26th, 2016