Posted in Newsclips, Samples

Venezuela is Alone in its Troubles

  • Financial Times – IMF crunches the numbers for possible Venezuela rescue
    Move could require $30bn a year or more in international help

    The IMF has had no official relationship with Venezuela since Caracas cut off relations in 2007 and has not conducted an on-the-ground review in 13 years. Officials insist no rescue is imminent and publicly say they are simply conducting normal surveillance, stressing that they have had no meaningful contact with the government other than occasional low-level responses to requests for data. But in recent months IMF staff have quietly crunched numbers for a potential bailout that, were it to happen, could be bigger financially and more politically complex than its much-criticised involvement in Greece. “The market needs to be properly prepared for this,” said a senior IMF official. “This is going to be Argentina meets Greece in terms of complexity,” added Douglas Rediker, a former US representative at the IMF.

  • Comment

    Venezuela’s situation is dire and the story above will raise eyebrows with the potential aid numbers. But Venezuela is a lonely blemish on the emerging market landscape. 

    The map below shows average total returns for emerging market sovereigns in the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index. Venezuela is the only sovereign with total return losses on average this year. 



    The next charts help illustrate how dramatically Venezuela has fallen behind its peers. With 2017 total returns now -10% on average, Venezuela trails the next worst emerging market sovereign by over 12%. 

    The chart on the right shows total return versus duration for each sovereign issue in the index. Venezuelan issues are highlighted in orange. There are only a handful of non-Venezuelan issues with losses on the year. Venezuela accounts for all issues with losses exceeding 5%. 



    As we noted back in December:

    Gustavo Diaz, an employee of Home Depot in Alabama, does more than anyone else to set the price of everything from rice to aspirin to cars in his native Venezuela, influencing the inflation rate and swaying millions of dollars of daily currency transactions via his website.  

    On, Mr Diaz and his two partners provide an unofficial, but widely used, benchmark exchange rate. This exchange rate is posted every day on his website and on his Twitter account which is followed by over 3 million people.

    As the chart below shows, the black market puts the exchange rate at 31,109 bolivars to buy $1, down 96% in the last year. The official exchange rate remains at 10 bolivars to buy $1.



    The collapse of Venezuela has taken place as its emerging markets peers are seeing the best economic growth since 2010. With nearby Caribbean nations likely to need billions in hurricane-related aid, Venezuela will be hard-pressed to raise the sums mentioned in the story below. Venezuela managed to sink despite a rising tide of emerging market performance, This uniquely poor performance further weakens Venezuela’s position as it hopes to find support from the international community. 

Posted in Newsclips, Samples

Earnings Get Going This Week

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Through Friday only 32 S&P 500 companies reported Q3 2017 results. This week well over 100 will report. The blended chart below shows 468 median estimates and 32 actual results.


The next chart shows revenue growth rates.

Posted in Newsclips, Samples

Inflation Watch – Hurricanes Skew Data Once Again

  • The New York Times – Gasoline Buoys U.S. Consumer Prices, Underlying Inflation Tame
    U.S. consumer prices recorded their biggest increase in eight months in September as gasoline prices soared in the wake of hurricane-related production disruptions at oil refineries in the Gulf Coast area, but underlying inflation remained muted…

    Gasoline prices surged 13.1 percent last month, accounting for 75 percent of the rise in the CPI. The increase in gasoline prices was the largest since June 2009 and followed a 6.3 percent advance in August. The Labor Department said Harvey was reported to have impacted refinery capacity in the Gulf Coast and was likely a factor in last month’s increase in gasoline prices. Outside gasoline, price pressures were benign. Excluding the volatile food and energy components, consumer prices gained 0.1 percent in September as the increase in rental accommodation slowed and the cost of new motor vehicles and medical care declined.

  • Comment

    In past weeks we have talked about the hurricanes’ effect on jobs data, GDP nowcasts, and even looked at market behavior after past major hurricanes. This week’s iteration of hurricane-skewed data comes in the form of gasoline CPI.

    As the chart below shows, gasoline CPI was up 13.08% in the month of September. This marks the third highest monthly increase in gasoline CPI on record, trailing only September 2005 (Hurricane Katrina) and June 2009. As the story above points out, gasoline prices accounted for 75% of the rise in CPI in September.


    For those who wish to dig deeper into this month’s inflation releases, the interactive visualization below offers charts on CPI, PPI, PCE, global inflation and inflation expectations. The time frames, subindices and annualization periods can all be changed for a customized view.
Posted in Newsclips, Samples

The Race For Fed Chair

  • The Financial Times – Trump faces choice between upheaval and continuity at the Fed

    Donald Trump must choose between embracing continuity or propelling the world’s most important central bank into a potentially market-jarring change of direction when he decides on the next Federal Reserve chair. The Fed’s future leadership was one of the uncertainties lurking behind a largely benign global economic backdrop during meetings of central bankers and finance ministers in Washington over the weekend. Two of the candidates to be the chair of the Fed from February, governor Jay Powell and incumbent Janet Yellen, would be likely to continue following a monetary policy strategy that has been laid out with meticulous detail over recent years. By contrast, John Taylor and Kevin Warsh, both outside candidates and Stanford academics, are vocal critics of that approach…Some economists caution against exaggerating the prospects of a radical change. It is, for example, by no means inevitable that Mr Warsh would pursue aggressive rate increases. If he continues to embrace the idea that Mr Trump’s reforms will lift the longer-term trajectory of the economy without igniting inflation, it might justify a relatively easy stance on monetary policy. Roberto Perli of Cornerstone Macro points out that there is a “strong consensus” within the broader Fed system behind a gradual series of rate increases towards a low terminal rate, and he suspects that whoever takes over as Fed chair will not be able to suddenly overturn it.


Jay Powell continues to lead the betting market, which we believe is an aggregation of consensus opinion. However, note that he has not closed above 50% in any meaningful way. No one else has either in the last three months.

This suggests that while Powell is leading, nobody has established themselves as a clear favorite.

Posted in Newsclips, Samples

The Fed Continues To Promise Gradual Rate Hikes

  • The Wall Street Journal – Yellen Says Gradual Rate Increases Should Help Sustain Economy’s Growth
    Fed chairwoman says labor-market strength should lead to higher inflation next year

    Federal Reserve Chairwoman Janet Yellen kept the door open to another increase in short-term interest rates this year, but sounded a note of caution on still weak inflation in the U.S. and abroad. The “ongoing strength of the economy will warrant gradual increases” in short-term interest rates, the Fed chairwoman said, although she didn’t specify when the next rate increase would come. Gradual increases in the benchmark federal-funds rate “are likely to be appropriate over the next few years to sustain the economic expansion,” Ms. Yellen said Sunday at a Group of 30 banking seminar in Washington. Fed officials are nonetheless watching price pressures closely, Ms. Yellen said, as the “biggest surprise in the U.S. economy this year has been inflation.” … Ms. Yellen on Sunday said Fed officials “will be paying close attention to the inflation data in the months ahead.” … “My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year,” Ms. Yellen said, adding that “most of my colleagues on the [interest-rate-setting Federal Open Market Committee] agree.”


September’s Summary of Economic Projections (SEP) showed the Fed expects four rate hikes through the end of 2018. The chart below shows the market’s total number of hikes expected for all of 2017 (green) and all of 2017 and 2018 combined (orange). Remember that two hikes have already occurred (March and June), so the market is expecting two more rate hikes through the end of 2018 (the four shown in orange less the two already completed this year). Clearly these two opinions are at odds. 

The market still thinks the Fed will hike more gradually than the SEP suggests and are not buying Yellen’s “guess” that inflation will rebound.

Also, note that Yellen and the data-dependent Fed has been reduced to “guessing” about inflation because they have given up on their traditional models and forecasts and seem to be hoping that inflation will rebound.

Posted in Newsclips, Samples

Balance Sheet Reduction Begins

  • Bloomberg Business – The Long-Awaited Fed Balance Sheet Taper Begins Today With Mortgages

    Today’s the Big Day for investors in U.S. mortgage-backed securities. After months of debate and conjecture about what’s become known as the Federal Reserve’s balance-sheet taper, the New York branch will announce at 3 p.m. its purchase schedule for a $4 billion per month roll off in the central bank’s holdings.  The amount allowed to roll off will rise to $8 billion a month in January, to $12 billion a month in April and then ramp up in stages until it reaches a maximum of $20 billion in October 2018. 

  • Comment

    The chart below shows the size of the Federal Reserve’s balance sheet and an estimate of its future path in gray. The estimate is derived from the Fed’s stated path combined with realized major economic and inflation releases. In other words, this is the expected path for the balance sheet assuming the Federal Reserve remains truly data-dependent.

Posted in Newsclips, Samples

Wall Street Losing To ETFs?

  • Bloomberg – Old Wall Street Is Losing the Battle Beneath the Surface of ETFs

    A hidden war is taking place within your exchange-traded fund, and some of the biggest names on Wall Street are losing out. Banks like Goldman Sachs Group Inc. have surrendered a once-lucrative type of market making amid an onslaught of regulation that’s wiped out profit margins. Nimbler firms — so-called high-frequency traders — have picked up the slack…Over the last few years, high-speed traders have moved from quietly trading ETFs in the shadows, to overseeing much of the market. On NYSE Arca, which hosts the majority of U.S. ETFs, 83 percent of funds have appointed an electronic firm to the key role of lead market maker, instead of a bank or conventional broker-dealer.

  • The Financial Times – John Authers: How passive investors morphed into the bad guys
    Index-matching funds must prepare to answer questions about their impact on market

    Markets are suffering from a serious case of passive aggression. Or at least that is what many now believe. Passive investing, in which funds merely match an index and make no active attempt to choose stocks or other securities, has transformed markets over the past 25 years. In the US, more than a third of stock funds’ assets are passive, while index funds dominate flows of new money into the market. Passive investing can be done more cheaply than active investing, which requires spending on research and salaries. This gives it an advantage. And as institutions have come to dominate trading in markets, so the markets’ judgments grow more efficient. That makes traditional “active” management ever harder — few stocks are so obviously mispriced that investors can confidently expect them to beat the index. As more and more investors work this out, so passive investing has boomed.


The chart below shows the preference investors have in domestic equities:

  • The orange line shows the cumulative flows into ETFs that invest in domestic equities (passive investments).
  • The blue line shows the cumulative cash flow (net purchases plus net exchanges within fund families) into open-ended mutual funds that invest in domestic equities (active managers).
  • The black line is the combination of the two.  

We have argued that active equity fund managers must be experiencing nothing short of an existential crisis. Why do they exist and what purpose do they serve?


The next chart shows the fixed income version of the measures above. Active managers’ outlook is not as dire in fixed income, but they are on the same road as domestic equity managers. Passive managers (orange line) and active managers (blue line) are more or less splitting the inflows into fixed income funds.

Posted in Newsclips, Samples

Consumer Confidence Still The World’s Most Useless Economic Indicator


The horizontal blue line above shows the 13-year high in consumer confidence. Stocks are also at a hew high. As the bottom panel shows, the correlation between the two is very high.

As we explained last year:

Respondents don’t really know how to answer such abstract questions as business and employment conditions, so they describe what they think is the ultimate economic indicator, the stock market’s recent movements. While spikes in gas prices or other economic events (i.e., 9/11, “The Great Recession”) will supersede this method at times, most of the time the stock market is used to formulate answers to the above questions. Given the stock market’s rise since 2009, it should not be a surprise that consumer confidence is up over the same period.

Since we do not need an indicator to highlight recent stock market performance, the Consumer Confidence Index becomes rather useless as an economic indicator. If it measures nothing more than recent stock market performance, economists should not be puzzled by the lack of a relationship between something like retail sales and consumer confidence.

So why is consumer confidence at a 13-year high? It may be as simple as the stock market being at an all-time high.

Posted in Newsclips, Samples

Robots Are Taking Over The Markets

  • Barron’s – Black Monday 2.0: The Next Machine-Driven Meltdown
    In the rise of computer-driven trading, some hear echoes of the stock market’s 1987 crash. Beware the feedback loop.
    Quantitative investors understood early on that betting on stocks based on their characteristics—and not the underlying business fundamentals of a particular company—was a good way to outperform the market. So good, in fact, that many fundamental, or “active,” money managers now use quantitative tools to help construct their portfolios and ensure that they don’t place unintended bets. Nomura Instinet quantitative strategist Joseph Mezrich says that 70% of an active manager’s performance can be explained by quantitative factors. “Factors drive a lot of the returns,” Mezrich says. “Over time, this has dawned on people.”  Has it ever. One result has been the rise of indexing and exchange-traded funds. The ability to buy an index fund based on the Standard & Poor’s 500—effectively a bet that large companies will outperform small ones—made the need for traditional fundamental research and stock-picking unnecessary. Since then, indexes and ETFs have been created to reflect just about any factor imaginable—low volatility and momentum among them. Some funds even combine multiple factors in a quest for better performance.


Posted in Newsclips, Samples

Dimon Can’t Stop Talking About Bitcoin


  • The Wall Street Journal – Why James Dimon and Larry Fink Aren’t Buying Bitcoin
    Two of the top executives on Wall Street criticized the digital currency bitcoin Friday, with J.P. Morgan Chase & Co. Chief Executive James Dimon giving a lengthy rant on the topic. He was joined briefly by Laurence Fink, chief executive of Blackrock Inc.
  • The Financial Times – Dimon and Fink unite on need to ‘crush’ bitcoin
    Wall Street power duo hit out at virtual currency as being only valuable to criminals

    Governments around the world will “crush” bitcoin before long, according to two of the most powerful men on Wall Street, who argue that the only real value in the fast-rising virtual currency is as a tool for criminals and money launderers. At a conference in Washington on Friday afternoon, Jamie Dimon, the chairman and chief executive of JPMorgan Chase, noted recent moves to curb the circulation of bitcoin in China and an initiative in Japan to launch an electronic currency pegged to the yen. These were signs of authorities getting a proper grip on virtual currencies, he said, because “they like to know where the money is, who has it, and what you’re doing with it”.

  • – Jamie Dimon Said He Wouldn’t Talk About Bitcoin Anymore. That Lasted One Day

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Big Money Managers, Fully Invested Bears?

  • Barron’s – Barron’s Big Money Poll: Managers Cling to Bullish Views
    Top money managers in our exclusive survey remain solidly optimistic. Their views on tax reform, sectors, the dollar, and Trump’s tweets.

    As the bull market charges through its ninth year, the feats keep on coming. The Standard & Poor’s 500 index has closed at a record high 44 times in 2017, while the Nasdaq Composite has notched 57 records of its own. But with each step higher, the inevitable fall feels a little more dangerous. And so, the anxiety mounts: What happens next? Barron’s has been posing that question, and many others, to top money managers and financial advisors for more than 20 years in our semi-annual Big Money Poll. This year’s survey drew responses from 140 managers across the country, including those at billion-dollar pension plans and smaller concerns. The latest results land at a time when investors have an extra reason to think about risk: Thursday marks the 30th anniversary of the worst one-day selloff in stock market history. On Oct. 19, 1987, the Dow Jones Industrial Average plummeted 23%.


The chart above shows that only 4% of big money managers think the stock market is undervalued. This is at least a 10-year low in this survey. Conversely, 37% think stocks are overvalued, a percentage that was only surpassed once in the past 10 years (Q1 2017).

Yet given this outlook, 61% of big money managers are bullish and only 12% are bearish (left pie chart below).

In other words, big money managers are fully invested bears. When they are not willing to invest based on their convictions, this is how markets get to unsustainable levels.

This analysis does not suggest when such trends will reverse, but it does say the market is composed of fully invested bears that will not act on their convictions.

Posted in Newsclips, Samples

More On Fully Invested Bears

  • Barron’s – Who Says This Stock Market Is Overpriced?
    The market is now near its all-time highs. Yet, says Nobel laureate Robert Shiller, that doesn’t mean a turnaround is in the cards.
    As the 30th anniversary of the 1987 stock market crash neared, Robert Shiller, the Nobel laureate and Yale University economist, mused on why today’s seemingly overpriced market continues to sleepwalk higher. The cyclically adjusted price/earnings, or CAPE, ratio that he and John Campbell devised in the 1980s is at its highest level ever, with two exceptions: shortly before the 1929 crash, which set the Great Depression in motion, and shortly before the dot-com bust. (The CAPE, which is based on average inflation-adjusted earnings over the trailing 10 years, stands at 31, versus 32.5 in 1929 and 44 in late ’99.) Investors’ behavior today, Shiller says, is shaped by a number of narratives that keep them in the market, including fears that robots will displace jobs and hopes that the Trump administration will stoke the economy.
  • Comment

    When Shiller was asked about his CAPE ratio near historic highs (highlighted above), he said:

    Today, people have heard it said enough times that the market is unambiguously overpriced. The CAPE ratio is now at 31. The 10-year forecast based on CAPE is positive, but not a whole lot above zero. We’re in a different social environment. The narrative today is Donald Trump. It is a pro-business narrative, which I infer from his books, such as Trump: How to Get Rich. People aren’t in the frame of mind that we should worry about a crash.

    In other words, “this time is different” and one must remain a fully invested bear.

    • MarketWatch – It would take an ‘immaculate conception’ to create bear market in stocks right now: analyst
      There is a ‘remarkable level of bullish “agreement” across the U.S. stock market’: Leuthold’s Ramsey

      How strong is the uptrend in the U.S. stock market? So strong that, according to one analyst, it would take divine intervention to stop it. “From a purely technical point of view, if a bear market is born this month it would have to be considered the result of some sort of ‘immaculate conception,’” wrote Doug Ramsey, chief investment officer of the Leuthold Group. Avoiding such a drop would actually mean a break with a loose historical trend where Wall Street suffers “a nasty second-half setback during each of the last 13 years ending in ‘7,’” he wrote in a report. “We think it’s likely stocks will close 2017 at higher levels; therefore any intervening ’Unlucky Sevens’ pattern weakness would need to materialize fairly quickly.” The “curse of the seventh year” refers to how, in recent decades, Octobers in years ending with seven (1987, 1997, and 2007) have been negative for markets. The pre-financial crisis bull market ended this month 10 years ago, while the Dow dropped more than 12% over October 1997. “Black Monday,” which still stands as the biggest single-day percentage decline on record, occurred in October 1987.

    • The Financial Times – Are hints of euphoria starting to haunt this stock market rally?
      Investors shed their post-crisis skepticism and learn to love the record-breaking run

      Euphoria is said to be the terminal stage of ageing bull markets. Although there are few signs of uncritical ebullience, investors are finally shedding some of their post-crisis scepticism — raising questions on just how much further markets can continue their record-breaking runs. President Donald Trump has been happy to flaunt the S&P 500’s return of nearly 16 percent this year. Indeed, the total return version of the flagship US equity index has now enjoyed 11 consecutive positive months, smashing past the last record run in 1995, and few would bet against the US stock market making it a 12-month streak of gains. But the 2017 rally is a global phenomenon, with Europe, Japan and the developing world also notching up a series of long and strong runs, buoyed by evidence of synchronised global economic growth and one attracting hefty inflows.


Posted in Newsclips, Samples

Focusing On Clearinghouses During The Next Crisis

  • The Financial Times – ‘Economic hate crimes’ will dog next US bailout
    Clearinghouses will take centre stage in a future financial crisis, writes John Dizard
    Dodd-Frank and other reforms have made the outright failure of large banks much less likely. In a future crisis, clearinghouses are more likely to be the centre of financial stress. Some counterparties may have difficulty coming up with ready cash or collateral such as Treasury securities. The latter are likely to be in shorter supply. Anyway, there will be very low prices, then a Fed “bailout”, or, at the very worst, the hasty, no-Congressional-action-required takeover of a clearinghouse by the US government. Then a lot of securities prices would bounce back, and some people would make money. But who would get the political profit? The leftwing policy tribe wants the system to keep working, but will demand their pound of intrusive regulatory intervention. Democratic party politicians will campaign for more control over credit and capital allocation.

Posted in Newsclips, Samples

Aramco May Not Move Forward With IPO

  • The Financial Times – Saudi Aramco considers shelving international IPO
    Oil company could turn to private share placement as doubts grow about going public

    Saudi Aramco is considering shelving plans for an international listing in favour of a private share sale to the world’s biggest sovereign wealth funds and institutional investors. Talks about a private sale to foreign governments including China and other investors have gathered pace in recent weeks, according to five people familiar with the initial public offering preparations, amid growing concerns about the feasibility of an international listing. The Saudi state oil company has struggled to select a suitable international venue for its shares, as New York and London have vied for what has been billed as the largest ever flotation.

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Has The EU Hit Its QE Limit?

  • Bloomberg – Some ECB Members Identify 2.5 Trillion-Euro QE Limit

    Some European Central Bank policy makers see room for little more than 200 billion euros ($235 billion) of purchases under the institution’s bond-buying program next year, according to central-bank officials familiar with the matter. The ECB is likely to run out of available debt under current rules at just over 2.5 trillion euros, the officials said, asking not to be named as the matter is private. With purchases set to reach 2.28 trillion euros by the end of 2017, talks are focused on how to spread the additional capacity, they said. Such a limit is at the lower end of volumes under discussion, setting the Governing Council up for a potentially difficult policy meeting on Oct. 26 as some members fret about ending quantitative easing while inflation remains weak. The ECB currently buys 60 billion euros a month of debt, and Bloomberg reported on Friday that it’s considering cutting that by at least half from January, extending it to September with a proviso to do more if needed. The council hasn’t officially discussed how to extend the program, and the Executive Board has yet to make its proposal. An ECB spokesman declined to comment.