by Market Shadows - July 28th, 2016 12:20 am
Financial Markets and Economy
Federal Reserve policy makers took a step toward raising interest rates later this year but stopped short of signaling that the move could come as soon as September.
A New Normal for the U.S. Economy: Slow and Steady (Bloomberg View)
For the first time since 2009, all sectors of the economy are chugging along at normal rates: The housing industry pulled out of its nosedive, the government sector ended its downturn, and as of this quarter, the industrial recession is over. Policy makers face a new challenge, building on an economy in which no major sector is in contraction. But first, the U.S. deserves some recognition for the feat it just accomplished.
Why Uncertainty Isn’t the Real Threat for Markets (Wall Street Journal)
If there is one thing the world seems to be producing in abundance, it is uncertainty. It is said that markets hate uncertainty, but resolution might be the real problem.
The FTSE 250 stock market —a bellwether for the British economy that is more UK-focused than the bigger FTSE 100 — has erased pretty much all of the losses suffered since the Brexit vote.
Asia stocks edge up, dollar sags after Fed meeting (Business Insider)
Asian stocks edged up early on Thursday after the Federal Reserve provided a positive assessment of the world's largest economy and lifted risk sentiment.
The yen strengthened against all except one of its 16 major peers as traders awaited Fridays Bank of Japan decision on how much it will boost monetary easing to spur growth.
Who Bought U.S. Stocks After 2008? (Morningstar)
In an article entitled "The Fallacy behind Investor versus Fund Returns (and why DALBAR is dead wrong)," investment researcher
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the Glass-Steagall Act of 1933, the law that separated investment banking from commercial banking until it was finally repealed in 1999 (after being watered down by the Federal Reserve beginning in the late 1980s).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…