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What we’re reading: Volkswagen, interest rates, and the Pope
<p>From a sticky situation for the Fed to “real news” on Pope Francis, here are some great reads for you this weekend:</p> <p>Financial conditions and a catch-22 for the Fed. Gavin Davies, much like Mohamed El-Erian, is always a great read – even when you don’t agree with him. Here’s his latest take on the Fed. Financial Times (paywall)</p> <p>This is the best time to borrow money. In all of history. Apparently, interest rates are at their lowest level since Napoleon, Genghis Khan, even Hammurabi. And it might stay that way for awhile. Washington Post</p> <p>Just how guilty is Volkswagen? Here’s Tyler Cowen’s take on it. Marginal Revolution</p> <p>“Bankers are the best paid victims. We should hug them, not be angry.” Joris Luyendijk spent four years investigating whether or not bankers were nothing but greedy, psychopathic financial terrorists. Here’s what he found. The Standard</p> <p>Pope Francis reverses position on capitalism after seeing wide variety of American Oreos. The Onion in classic form, ‘nuff said. The Onion<br /> Photo: Marketa</p>
Weekend Scan: US GDP growth beats estimates; Consumer sentiment rips higher
<p>Good morning everyone. J-Yell’s recent speech did a lot of good for the European markets. The FTSE closed 2.5% higher, the DAX climbed 2.8%, while the CAC, aided by an upbeat consumer confidence index reading, surged 3.1%. The U.S. didn’t do as well though; while the Dow spiked 0.7%, a huge selloff in biotech and healthcare shares dragged the S&amp;P 500 and the Nasdaq down 0.1% and 1% respectively. Nevertheless, the world’s largest economy still had a lot of good news to chew on:</p> <p>U.S. GDP growth beats estimates. America’s final Q2 GDP growth rate was revised higher to 3.9% - beating analysts’ expectations of 3.7% rise and besting the previous quarter’s 3.7% climb. New York Times</p> <p>U.S. consumer sentiment rips higher. The University of Michigan’s highly-watched consumer confidence index climbed to 87.2 in September, well above the 85.7 “flash” reading and even better than the expected 86.7 jump. It’s still below August’s 91.9 final reading though. Forex Live</p> <p>Pope Francis visits NYC. After visiting Washington, DC, Pope Francis is in New York, visiting the World Trade Center memorial, St. Patrick’s Cathedral, Central Park, and the U.N. Speaking to world leaders at the U.N., the pope voiced concerns about the state of the environment, as well as the “poorest of the poor” that suffer the most. New York Times (paywall)</p> <p>Porsche exec takes over VW. Matthias Müller, Porsche AG’s chief executive since 2010, has been confirmed as the new chief of the embattled German carmaker, Volkswagen. The VW vet is reportedly a straight-shooter, and interim VW chair Berthold Huber calls him “a person of great strategic, entrepreneurial and social competence.” Financial Times (paywall)</p> <p>John Boehner to retire. The Republican Speaker of the House announced that he will retire at the end of October. During an emotional press conference, Boehner said he decided Friday morning to step down. Boehner said that after bringing the pope to the Capitol he had nothing left to accomplish. Boehner’s retirement comes in the wake of inner-party turmoil for the GOP, as the more conservative parts of the party haven’t been happy with Boehner. Politico</p> <p>Putin and Obama to meet in NYC. The embattled world leaders will discuss the tensions regarding Syria and Ukraine, while the leaders are in New York for the U.N. General Assembly. Wall Street Journal</p> <p>Sepp Blatter faces probe in Switzerland. The president of FIFA will be investigated by the Swiss attorney general’s office for corruption. The U.S. is also conducting an investigation of the soccer governing body. Wall Street Journal</p> <p>Blatter’s not the only soccer guy in trouble. Brazilian star Neymar has had almost $50 million in assets frozen by a Brazilian court due to allegations of tax evasion.</p>
Why the next recession is coming sooner than you think
<p>&nbsp;</p> <p> Societe Generale’s Albert Edwards believes that the United States could soon set negative interest rates for the first time.<br /> Edwards argued that the United States is currently in a worse economic position than Japan was prior to its lost decade.<br /> He presented data that China’s slumping GDP numbers are actually much worse than they look.</p> <p>A new report by Societe Generale analyst Albert Edwards has the financial world buzzing, and not in a good way.</p> <p>Edwards argued that the United States is much closer to its next recession than most investors believe. Additionally, the current near-zero interest rate environment has laid the groundwork for a negative Fed funds rate for the first time in history.<br /> The Zero Lower Bound<br /> Most investors operate under the assumption that zero is the lower bound for interest rates and that the current near-zero rates in the United States indicate that the economy is still near the low point in its current cycle.</p> <p>However, Edwards pointed out that, in reality, while below-zero rates may be unprecedented in the United States, they are certainly not unprecedented globally.</p> <p>In fact, Sweden currently has a -0.35 percent policy rate in place. Even with interest rates at zero, Sweden had been unable to stimulate any significant inflation since the end of 2012, so it reduced rates to -0.25 percent in early 2015 and further to -0.35 percent this summer.</p> <p>Edwards believes that Sweden’s measures demonstrate that the zero rate bound is not a true limit on rates. “If -0.35 percent is possible, why not -3.5 percent or less?” he asked in his report.</p> <p>Read more at Benzinga, here.<br /> Photo: ¿Es realmente necesario?</p>
Chart of the week: Chinese construction & land acquisition falling
<p>Over the last 10 years, the Chinese economy was drugged into growth through excessive amounts of investment. At its peak, capital expenditure made up 48% of GDP, an unprecedented level, and in my view, represented a massive misallocation of capital. Slowing levels of investment (mostly construction) have driven declines in related areas, including commodities, machinery and cement production.</p> <p>While housing sales in Tier 1 cities like Beijing and Shanghai have grown in the last few months, and prices there are up, they represent only about 12% of the Chinese housing market. They don’t reflect the overall construction pace in the economy, which is moribund. There is still excess housing inventory, lackluster pricing and slowing sales throughout the vast majority of the economy.</p> <p>The Chinese economy has not stabilized; it is still slowing and the latest round of rate cuts and liquidity injections by the People’s Bank of China (PBoC) will have only a marginal impact. Working through that misallocation and deleveraging the debt will be a multi-year task.</p> <p>These themes are explored further in a new paper, “China: Have We Reached Bottom Yet?”</p> <p>MALR013918</p> <p>This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles &amp; Company, L.P. This information is subject to change at any time without notice.</p> <p>© Loomis Sayles</p> <p>This story originally appeared in Advisor Perspectives.<br /> Photo: kris krüg</p>
Daily Scan: Stocks post mixed day; Boehner retires amid GOP turmoil
<p>&nbsp;</p> <p>Updated throughout the day</p> <p>September 25</p> <p>U.S. stocks slid late Friday after posing early gains. The Dow ended up gaining 0.7%, but the S&amp;P 500 lost 0.1% and the Nasdaq fell 1%. Oil was up, reaching above $45/barrel before the weekend. Asia saw choppy trade over persistent fears of an economic slowdown in China, but a more upbeat market sentiment prevailed in Europe where investors reacted positively to greater clarity on US monetary policy. The Hong Kong markets will be closed Monday for the holiday.</p> <p>Here is what else you  need to know:</p> <p>Pope Francis visits NYC. After visiting Washington, DC, Pope Francis is in New York, visiting the World Trade Center memorial, St. Patrick's Cathedral, Central Park, and the U.N. Speaking to world leaders at the U.N., the pope voiced concerns about the state of the environment, as well as the "poorest of the poor" that suffer the most. New York Times (paywall)</p> <p>John Boehner to retire. The Republican Speaker of the House announced that he will retire at the end of October. During an emotional press conference, Boehner said he decided Friday morning to step down. Boehner said that after bringing the pope to the Capitol he had nothing left to accomplish. Boehner's retirement comes in the wake of inner-party turmoil for the GOP, as the more conservative parts of the party haven't been happy with Boehner. Politico</p> <p>Sepp Blatter faces probe in Switzerland. The president of FIFA will be investigated by the Swiss attorney general's office for corruption. The U.S. is also conducting an investigation of the soccer governing body. Wall Street Journal</p> <p>Blatter's not the only soccer guy in trouble. Brazilian star Neymar has had almost $50 million in assets frozen by a Brazilian court due to allegations of tax evasion. Bleacher Report</p> <p>JP Morgan still knows how to make money. Its metals storage and commodity businesses posted a loss last year but that doesn’t mean JP Morgan doesn’t know how to make money out of it. Filings show that just before it sold loss-making commodities unit, Jamie Dimon’s port in the storm managed to grab a one-time $150 million dividend. Reuters</p> <p>Yellen receives medical attention. After struggling to finish the last few lines on her speech on inflation, Federal Reserve Chair Janet Yellen was seen by the medical staff at UMass Amherst for possible dehydration. She’s feeling much better now though, and appears ready to let rates rock. Reuters</p> <p>GOP to opt against Planned Parenthood shutdown. House GOP leaders have summoned their divided conference for a make-or-break discussion on how to fight taxpayer funding of Planned Parenthood without having the battle lead to a government shutdown next week. </p>
Goldman Sachs' startups to watch
<p>Goldman Sachs is edging its way into the hearts and minds of startups looking for funding and support, particularly the unicorns. The investment firm examined some of the up-and-coming firms for a list of the top 10 startups to watch, reports Business Insider.</p> <p> Appear Here- $9.4 million, London- finds pop-up shop storefronts to rent, much like booking a hotel room.<br /> EquipmentShare- $2.2 million, Missouri- allows contractors to rent and lend construction equipment.<br /> Getaround- $43 million, California- lets you rent your car in advance or on demand.<br /> Mast Mobile- $5.4 million, New York- combines your business and personal mobiles into one device.<br /> Narrative Science- $32.4 million, Illinois- automates simple reports and journalistic stories.<br /> Nutmeg- $37.3 million, London- customized financial portfolios to replace traditional advisors.<br /> Plated- $56.4 million, New York- food delivery services that provides the exact ingredients and recipes needed to cook.<br /> TradeBlock- $2.8 million, New York- bitcoin data provider.<br /> Vestorly- $2 million, New York- automated content marketing for businesses and leveraged use of online connections.<br /> Yhat- $2.6 million, New York- tool to make big data implementation more efficient.</p> <p>Photo: George Redgrave</p>
JPMorgan’s Kolanovic slams HFT, says it stepped back during crisis
Hedge Funds
<p>High Frequency Trading (HFT) is the opposite of human liquidity providers in a trading pit and HFT is in large part responsible for the August 24 market crash, J.P.Morgan’s Global Head of Quantitative and Derivatives Research, Marko Kolanovic, said in a research note dated September 24.<br /> J.P.Morgan's Marko Kolanovic weighs in on the controversial topic of human vs robotic led markets<br /> Commenting on “Derivatives Gamma, HFT Liquidity and Market Dislocations,” Kolanovic drew significant distinctions between how human market makers managed liquidity during crashes and the disappearing influence of HFT during market crisis.</p> <p>“HFT is fully engaged in stable market regimes but tend to dial down or completely step away during periods of high volatility or large market dislocations,” he wrote, touching on a hot topic, one that has been actively debated.</p> <p>August stock market sell-off was a “Flash Crash” similar to October 2015 “Flash Crash”<br /> Kolanovic casually terms the August 24 event a “Flash Crash,” one he compares to the October 15, 2014 bond market “Flash Crash.” He observes that on each of the 3 days prior to the crash, end of the day momentum becoming increasingly larger and starting earlier in the day. “A rates crash happened around the same time on the morning of Oct 15th and was also equivalent to a ~8 standard deviation move based on trailing 1M volatility,” then he compares it to the most recent market value adjustment. “Similar to the S&amp;P 500 on August 24th, the crash largely reverted in a ~30 minute period, and there was also an end of the day rebalance impact.”</p> <p>While some have said the performance drivers between the market sell-offs are different, Kolanovic cuts off such debate using clear if somewhat aggressive verbiage. “The striking similarity between the two events is not a coincidence,” he declares, “they were both driven by hedging of short gamma (convex) positions.” Citing Risk magazine and Joint Staff Report (The U.S. Treasury Market on October 15th, 2014), Kolanovic points to a large short gamma exposure in the Treasury market that emerged as certain US asset managers exited bond option selling programs. He says that hedging in a low liquidity environment was “a significant driver of price action.”</p> <p>“Good to see others are recognizing August 24 for what it is: a devastating real flash crash,” HFT critic and president of Nanex, Eric Hunsader, said. “Contrast that to some HFT firms crowing about having their best trading day ever - sure wasn't from providing liquidity or catching knives.”</p> <p>Kolanovic: Reasons HFT stands aside during crisis<br /> Kol</p>
Twitter reacts to Boehner resignation
<p>Republican Speak of the House John Boehner announced Friday that he will be retiring at the end of October.</p> <p>My heart is full with gratitude for my family, colleagues &amp; the people of Ohio’s 8th District http://t.co/uylVed86h2 pic.twitter.com/mc5acb9dGs<br /> — Speaker John Boehner (@SpeakerBoehner) September 25, 2015<br /> Boehner has butted heads with President Barack Obama throughout his two terms, but Boehner has also found himself at odds with the more conservative parts of his own GOP. Some are saying the far-right pushed Boehner out. </p> <p>Rep. Pete King: Boehner's resignation is "a victory for the crazies" http://t.co/ZLZfYQTNWJ pic.twitter.com/6RjN5azLeb — Talking Points Memo (@TPM) September 25, 2015</p> <p>Rubio to Value Voters: "Just a few mins ago, Speaker Boehner announced he will be resigning." HUGE ovation. Many standing. — Steve Peoples (@sppeoples) September 25, 2015</p> <p>Schumer praises Boehner while Rubio says it was time for him to go. Gives you a sense of his position — Sam Stein (@samsteinhp) September 25, 2015</p> <p>Reactions to the resignation have been mixed. In a press conference, Obama said Boehner was a "good man" and a patriot. </p> <p>I was right. Pope just knocked him out. http://t.co/uqkZXnQHOe — Downtown Josh Brown (@ReformedBroker) September 25, 2015</p> <p>&nbsp;</p> <p>John Boehner's Legacy Is That He Doesn't Really Have One. http://t.co/dKdYyRIteR — David Corn (@DavidCornDC) September 25, 2015</p> <p>I really hope Boehner becomes a TV host instead of a lobbyist. I'd watch his show.</p> <p>— Josh Barro (@jbarro) September 25, 2015<br /> Either way, Americans will surely miss those crystal blue eyes on their television screens.</p> <p>Typical American Family, shown here, reacts to the Boehner resignation pic.twitter.com/fhAn8smmxV — Rudolf E. Havenstein (@RudyHavenstein) September 25, 2015</p>
Are investors better off with small hedge funds in times of crisis?
Hedge Funds
<p>Several years ago, AllAboutAlpha.com -- an online strategic information service for the asset management and hedge fund industries -- set out to answer a key question; do smaller Hedge Funds outperform larger peers?</p> <p>The study was confined to long/short equity hedge funds only and looked at the returns of nearly 3,000 funds over a ten year period. Funds were divided into two size groups, those that managed $50 million to $500 million (small) and those that managed more (large).</p> <p>AllAboutAlpha's study found that the group of small hedge funds outperformed their larger peers by an average of by 254 bps per annum over five years and 220 bps per annum over ten years.</p> <p>What's more, virtually all of the outperformance was due to alpha, not beta and the dispersion of returns among smaller funds was greater than those of larger firms. You can see the study in full here.</p> <p>AllAboutAlpha's return figures also showed that the outperformance of the small hedge fund group was more pronounced during preceding and following the financial crisis, especially during 2009.<br /> Small hedge funds produce the best returns<br /> Are investors better off with small hedge funds in times of crisis? This is the question Andrew Clare, Dirk Nitzsche and Nick Motson, from the Centre for Asset Management Research, The Sir John Cass Business School, City University, London, UK set out to answer in a research paper published earlier this year.</p> <p>The paper, aptly titled, "Are investors better off with small hedge funds in times of crisis?" looked at the relationship between hedge fund performance and size. This paper claims to be the most comprehensive study to date of the relationship between hedge fund performance and size. The data sample used spans the period from January 1994 to 2014 and encompasses two major financial market crises.<br /> "The results in this panel confirm...there is a negative relationship between hedge fund size and performance...the relationship does change from year to year, but that in all but three of the twenty years the relationship has been negative. More interestingly, three periods arguably stand out in particular: 1999 to 2000, 2003 to 2004 and 2008 to 2010. The Fama-MacBeth t-statistics for both of these periods show that the relationship was highly statistically significant. These periods were marked by financial market crisis. Other things equal, these results suggest, perhaps surprisingly, that investors would have been better off with small rather than big hedge funds over these crisis periods."<br /> This article was originally published by </p>
These ETFs have technology problems
<p>If someone an investor trusts were to tell that investor that over the past six months shares of Petrobras S.A. (NYSE: PBR) and PetroChina Co. (NYSE: PTR) were each down more than 31 percent, adding to the equation that shares of Ecopetrol SA (NYSE: EC) are off 43.3 percent and that the exchange traded fund that only holds Chinese banks is lower by 13.3 percent, the takeaway would logically be that this is another brutal year for state-owned emerging markets companies.</p> <p>That is what the aforementioned oil companies and most Chinese banks are. The problem is these companies still sport mammoth market capitalizations, meaning they play pivotal roles in charting the courses for well-known emerging markets ETFs such as the Vanguard FTSE Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets ETF(NYSE: EEM). VWO and EEM, the two largest emerging markets ETF by assets, are down an average of 16.9 percent over the past six months.</p> <p>Read the full story at Benzinga. <br /> Photo: Will Clayton</p>