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James Grant: The next thing might be helicopter money
Capital Markets
<p>James Grant, Wall Street expert and editor of the investment journal «Grant’s Interest Rate Observer», warns of ever more extreme central bank policies and bets on the comeback of gold.</p> <p>The global financial markets are under severe stress. The postponed interest rate hike in the United States, the fast cool down of the Chinese economy and the crash in the commodity complex are causing a great amount of unease among investors. Fear is growing that the world slips into recession. «Central bank policy is intended to paper over the cracks in the systems. Seven years after the outbreak of the financial crisis we’re paying for this with a lack of growth», says James Grant. The sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» draws worrisome parallels between the command based central planning of the Chinese economy and the economic policies in the West. He also doubts that Fed Chair Janet Yellen is the right fit for the top job at the world’s most powerful central bank. Looking for protection he points to gold and shares of gold miners</p> <p>Jim, since the fall of Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) seven years have passed now. In what kind of world are investors living in today?</p> <p>James Grant: It seems longer ago, doesn’t it? Certain things have not changed. The first of those permanent things is the nature of human beings who operate in markets and their tendency to buy high and sell low. That is just as it was the day before Lehman failed and it’s just as it will be forever. What’s new and different is the larger than life presence of government in our markets, both with respect to regulation and with respect to the management and the production and the manipulation of money.</p> <p>Are you referring to super low interest rates?</p> <p>James Grant: There is nothing so terribly new about very low interest rates. In the 19th century interest rates fell for most of the area from the end of the Napoleonic wars in 1815 to the turn of the 20th century. But something new under the sun might be very well the hyperactivity of our central banks.</p> <p>But without their interventions we might be even worse off today.</p> <p>James Grant: We are living in the age of magical thinking. Governments through central banks have muscled down money market interest rates to zero and in some cases below zero. Not content with that, they have implemented what economists chose to call «the portfolio balance channel». That’s a very fancy phrase meaning higher stock prices in the interest of rising aggregate demand. That was the theory of the Bernanke Fed and it certainly was the theory of the Chinese communists who sponsored the fly away levitation of the Shanghai A-shares. So the world over – and this goes for Europe as well – central bankers have taken it upon themselves to sponsor great bull markets in the hopes of making people spend more because they will feel richer. That was the theory. But they neglected to think through the full consequences of these policies.</p> <p>The slowdown in China is putting the financial markets under a lot of stress. How bad is the situation?</p> <p>James Grant: If I were a member of the ruling elite of the Chinese communist party I would say to myself: «Wait a second, we were just doing what the capitalist West </p>
Boaz Weinstein sued by Canadian pension fund
Hedge Funds
<p>Boaz Weinstein, the derivatives wunderkind known for such hits as making partner at Deutsche Bank at 27, losing $1.8 billion shortly after, and harpooning the London Whale, is currently accused of cheating one his largest investors.</p> <p>According to the WSJ, the Canadian Public Sector Pension Investment Board – which asked Weinstein’s Saba Capital for its money back – is suing the hedge fund for allegedly marking down “the value of its portfolio right before paying out the redemption request, and then marked the value back up shortly after the money was cashed out.”</p> <p>The lawsuit is massive blow for Saba. After reaching $5 billion in assets post-London Whale, the fund saw its assets shrink to $1.6 billion over the next few years – $500 million of which, belongs to the pension fund.</p> <p>For his part, Weinstein said that the whole thing is “utter nonsense,” adding that the accusations were “completely false,” and that he takes these allegations “very seriously.”</p> <p>With people itching to nail another hedge fund, this should be interesting to watch unfold. Stay tuned.<br /> Photo:</p>
Artcurial gears up for its inaugural HK auction
Lifestyle, 4:01
<p>Paris-based auction house Artcurial is gearing up for its first ever sale in Hong Kong, and apparently, they’re doing it with a bang.</p> <p>Among the items to auctioned off in the From Paris to Hong Kong sale are Picasso’s Buste de femme (HK$20-30 million), Pierre Auguste Renoir’s a portrait of Edmond Renoir Junior (HK$8-12 million), a golden cup from the collection of Count Nicolas Demidov (HK$700,000 to 1,000,000), and a fantastically maintained 1961 300SL Roadster (HK$10-15 million).</p> <p>For the ladies, a selection of “exceptional” exotic-skinned Hermès bags are also set to be auctioned, including “a black porosus crocodile” bag that boasts “red goatskin lining” (HK$250,000-300,000).</p> <p>The sale not only represents the French firm’s incredible growth, but also Hong Kong’s (and Asia’s) ascendancy as an important hub for the art market.</p> <p>Speaking to the SCMP, Artcurial director Isabelle Bresset had this to say:<br /> “The number of Asian clients has been doubling each year since we started Asian art sales in 2011. We need to get used to this new client base and we have to be there to understand our Asian clients better.”<br /> The sale starts on October 5 and previews will be held from the 2nd to the 5th at Spink, Hong Kong.<br /> Photo: German Medeot</p>
Daily Scan: Chinese shares retrace losses; European stocks go down
Capital Markets
<p>Updated throughout the day</p> <p>September 28</p> <p>Good evening everyone. China’s nasty industrial production numbers weighed heavy on Japanese and Singaporean stocks today but China itself seems to have missed the memo. A rally in tech shares led the Shanghai Composite to close 0.27% higher for the day while Shenzhen managed to surge a whopping 2.4%. Here’s how the rest fared:</p> <p> Nikkei 225: -1.32%<br /> Topix: -1.04%<br /> Straits Times Index: -1.45%</p> <p>Things aren’t much better in Europe, in fact, it might actually be worse thanks to the political risk surrounding Catalonia’s recent elections. The FTSE 100 is currently down 0.95%, the DAX down 1.04%, and the CAC down 1.20%. Here’s what else you need to know:</p> <p>Spain's Catalonia a step closer to independence. Catalonia’s independence movement won a historic but incomplete election victory on Sunday night, securing a majority of seats in the regional parliament but falling short of winning an outright majority of the vote. The poll was seen as a test of the region’s desire to break with Spain and set up an independent republic. Financial Times (paywall)</p> <p>Russia wants 'co-ordination' against IS. Russian President Vladimir Putin has called for a regional "co-ordinating structure" against Islamic State (IS). Mr. Putin reiterated his support for Syrian President Bashar al-Assad, who Western countries and the Syrian opposition have said must go. BBC</p> <p>China’s industrial profits slumped at its fastest rate in 47 months. Rising costs and slumping prices led China's industrial profits to sink 8.8% last month from the year before. The spectacular fall has raised more than a few eyebrows over the health of the Chinese economy.</p> <p>Chinese margin trading sinks to 9-month low. It wasn’t all bad news; margin lending in the world’s second largest economy fell to $910 million last week – a 62% decline from its peak back in June. Financial Times (paywall)</p> <p>Xi pledges $2 billion in aid. In what has been seen as effort to boost China’s standing around the world, China’s President Xi Jinping has pledged $2 billion for a development fund aimed at helping the world’s poorest countries attack poverty. SCMP (paywall)</p> <p>Richard Rainwater passes away. Rainwater, who helped the Bass brothers multiply their fortune 100-fold, passed away at his home in Fort Worth Texas due to a rare brain disease. He was 71 years old. Wall Street Journal</p> <p>Xi: “no basis” for long-term yuan devaluation. Speaking to U.S. President Barack Obama, Chinese President Xi Jinping said that “there is no basis for the renminbi to have devaluation in the long run,” adding that “at present, the exchange rate between renminbi and US dollars is moving toward stability.” SCMP (paywall)</p> <p>Iraq agrees to share ISIS intel with Russia, Syria, and Iran. The agreement – announced Sunday – apparently caught the White House off guard. Iraq argues that the agreement was necessary however, given that thousands of ISIS volunteers come from </p>
Weekend Scan: Pope confronts sex abuse; US GDP beats estimates
Capital Markets
<p>Good evening,</p> <p>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. Don't forget- the Hong Kong markets are closed Monday.</p> <p>Nevertheless, the world’s largest economy still had a lot of good news to chew on:</p> <p>Pope meets with sex abuse victims. During his U.S. visit, Pope Francis met with adults that were abused by clergy as children. The victims haven't been happy with the Catholic Church's response to the abuse, but for the first time, the pope described the abuse as rape. Reuters</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>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>
Harvard sees market froth, looks to non-correlated strategies
Asset Management
<p>&nbsp;</p> <p>Harvard University seeks strong noncorrelated investing talent as Stephen Blyth, the university endowment’s statistically minded chief executive, looks at the market environment and sees "froth." When making evaluations, perhaps the Harvard Management Company executive might want to consider statistically valid alternative investment criteria to diversify a portfolio to defend against a steep market decline.</p> <p>Harvard Endowment: With Private Equity and IPO valuations high, market appears frothy<br /> The problem, as Blyth sees it, is the market has become “frothy,” a sometimes imprecise description for a market environment that generally speaks to a high level of both market optimism and stock valuations. To make this determination the manager of the world’s largest university endowment at $37.6 billion looks to soaring private equity valuations and then a unique variable that has a limited data set.</p> <p>With IPO valuations in excess of $1 billion dotting the landscape for the first time, this is a breakout pattern that logically correlates to the loose “market froth” definition. But the $1 billion mark being the first test it is difficult to statistically determine that that exact level is the trigger point. However, a relative value analysis with 2001 might be interpretatively instructive when validating the concept.<br /> Harvard Endowment beats benchmarks but is concerned about market environment<br /> After returning 5.8 percent in the year ending June 30, getting hit by half a year of sluggish equity price appreciation and underperforming Hedge Funds who delivered just 0.1 percent, Blyth wants to reinvigorate a stale equity-based portfolio. This might be particularly the case as the Yale University endowment grew by 11.5 percent over the year ending June 30th. While both endowments beat the S&amp;P 500 during the period, which was up just 4.55 percent, and Blyth beat his returns target of five percent above inflation, the focus isn’t so much on competition with other endowments but understanding the market environmental challenges that could be on the horizon.</p> <p>"We are being particularly discriminating about underwriting and return assumptions given current valuations,” Blyth wrote in the report, an issue he might want to visit before the Fed starts raising rates and a government shutdown is placed in the hands of new leadership in the House.<br /> Blyth in process of overhauling investment approach, looks for long / short talent<br /> Blyth is in the process of overhauling Harvard’s approach to investing, eschewing traditional approaches for an alternative that performs well during both periods of equity market strength and weakness. In other words, the British-born fund manager has an eye for noncorrelated investing talent. "In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market," he said.</p> <p>In taking this journey into noncorrelated investing, Blyth might consider some alternative benchmarks for performance evaluation, some of which are not available in textbooks, others which h</p>
Your back-to-school reading list from Goldman Sachs
Lifestyle, 4:01
<p>Summer's over. It's time for back to school reading.</p> <p>Over the next two weeks, Goldman Sachs is assigning reading from their global leaders. Here's the first round of books to bury yourself in this fall:</p> <p> "Man's Search for Meaning" by Viktor E. Frankly, recommended by Bunty Bohra, CEO of Goldman Sachs India, Bengaluru<br /> "My Beloved World" by Sonia Sotomayor, recommended by Edith Cooper, human capital management in New York<br /> "Why Information Grows: The Evolution of Order, from Atoms to Economies" by Cesar Hidalgo, recommended by R. Martin Chavez, Chief Information Officer in New York<br /> "Wolf Hall" by Hilary Mantel, recommended by Pablo Salame, Securities in New York<br /> "How to Stop Worrying and Start Living" by Dale Carnegie and Dorothy Carnegie, recommended by Masanori Mochida, President and Representative Director of Goldman Sachs Japan<br /> "Alexander Hamilton" by Ron Chernow, recommended by Stephen Scherr, finance division in New York<br /> "Revival" by Stephen King, recommended by Susie Scher, investment banking division in New York<br /> "Dead Wake" by Erik Larson, recommended by Gregg Lemkau, investment banking division in New York<br /> "Moonrise" by Ben Bova, recommended by Joanne Hannaford, technology division in London<br /> "Against the Gods: The Remarkable Story of Risk" by Peter L. Bernstein, recommended by David Lang, head of Salt Lake City Office<br /> "Zero to One: Notes on Startups, or How to Build the Future" by Peter Thiel, recommended by Darren Cohen, securities division in New York<br /> "The Wright Brothers" by David McCullough, recommended by Sheila Patel, investment management division in Singapore</p> <p>Photo:  Ginny<br /> &nbsp;</p>
Sigmund Freud the portfolio manager
Lifestyle, 4:01
<p>Byron Wien, former investment strategist at Morgan Stanley (NYSE:MS) (MS) and current Vice Chairman at The Blackstone Group L.P. (NYSE:BX) Advisory Partners (BX), traveled to Austria 25 years ago and used Sigmund Freud’s success in psychoanalytical theory development as a framework to apply it to the investment management field.</p> <p>This is how Wien describes Freud’s triumphs in the field of psychology:</p> <p>“He accomplished much because he successfully anticipated the next step in his developing theories, and he did that by analyzing everything that had gone before carefully. This is the antithesis of the way portfolio managers approach their work.”</p> <p>Wien attempts to reconcile the historical shortcomings of investment managers by airing out his dirty mistakes for others to view.</p> <p>“I think most of us have developed patterns of mistake-making, which, if analyzed carefully, would lead to better performance in the future…In an effort to encourage investment professionals to determine their error patterns, I have gathered the data and analyzed my own follies, and I have decided to let at least some of my weaknesses hang out. Perhaps this will inspire you to collect the information on your own decisions over the past several years to see if there aren’t some errors that you could make less frequently in the future.”</p> <p>Here are the recurring investment mistakes Wien shares in his analysis:</p> <p>Selling Too Early: Wien argues that “profit-taking” alone is not reason enough to sell. Precious performance points can be lost, especially if trading activity is done for the sole purpose of looking busy.</p> <p>The Turnaround with the Heart of Gold: Sympathy for laggard groups and stocks is inherent in the contrarian bone that most humans use to root for the underdog. Wien highlights the typical underestimation investors attribute to turnaround situations – reality is usually a much more difficult path than hoped.<br /> Overstaying a Winner: Round-trip stocks – those positions that go for long price appreciation trips but return over time to the same stock price of the initial purchase – were common occurrences for Mr. Wien in the past. Wien blames complacency, neglect, and infatuation with new stock ideas for these overextended stays.<br /> Underestimating the Seriousness of a Problem: More often than not, the first bad quarter is rarely the last. Investors are quick to recall the rare instance of the quick snapback, even if odds would dictate there are more cockroaches lurking after an initial sighting. As Wien says, “If you’re going to stay around for things to really improve, you’d better have plenty of other good stocks and very tolerant clients.”</p> <p>It may have been 1986 when Byron Wien related the shortcomings in investing with Sigmund Freud’s process of psychoanalysis, but the analysis of common age-old mistakes made back then are just as relevant today, whether looking at a brain or a stock.</p> <p>&nbsp;</p> <p>Wade W. Slome, CFA, CFP®, Investing Caffeine<br /> DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MS, BX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be reli</p>
$1billion plus hedge funds show strongest average returns
Hedge Funds
<p>&nbsp;</p> <p>The latest research by Preqin into hedge fund performance finds that as of the end of August, large Hedge Funds – those with AUM of $1bn or more* – posted the greatest returns of any size category. They outperformed emerging, small and medium funds for the month (with -1.49% returns), as well as across the 12-month (+4.30%), 3-year annualized (+9.06%), and 5-year annualized (+8.52%) horizons. They also had the lowest 3-year volatility of any size class, of only 3.29%. Emerging hedge funds, those with AUM of less than $100mn, had the lowest returns across all horizons, as well as the highest volatility.</p> <p>Other Key Hedge Fund Performance Facts:</p> <p>Sharpe Ratios: The rolling 3-year Sharpe ratios for all size classes have been rising since mid-2014. As of the end of June, large funds had the highest ratio of 2.84. Strong performance in the past 12 months has seen their ratio overtake those of small and medium funds.</p> <p>Interquartile Range: While all fund sizes show a similar median performance, the interquartile range for emerging funds is 12.82%, compared to only 9.87% for large funds. The smaller number of large funds, as well as their lower volatility, mean that their performance is more concentrated around the median.</p> <p>Concentrated Capital: Although large hedge funds comprise only 9% of the total number of funds in the industry, they manage 82% of institutional investor capital committed to hedge funds. Small and emerging funds, which total 85% of hedge fund numbers, only contain 11% of capital commitments.<br /> Investor Thresholds: Of those investors that specify a minimum AUM requirement for hedge funds, only 22% will consider funds in the emerging bracket. These investors tend to be those with larger and more sophisticated hedge fund allocations. However, 52% of investors set their minimum AUM requirements in the small bracket, while 11% will only consider committing to large funds.<br /> Fees &amp; Redemption Periods: Small and emerging funds have lower mean management and performance fees than large and medium funds. While emerging funds charge an average of 1.55% and 18.84% respectively, that number rises to 1.63% and 19.70% in large funds. The average redemption frequency for large funds is 104 days, more than twice the average of 51 days for emerging funds.</p> <p>“The release of the Preqin’s new fund size benchmarks allows hedge funds to be compared more accurately with their peers. While benchmarking funds by geography or strategy can provide insight into macro-trends in the industry, the performance of the smallest and largest funds within those categories can differ wildly. Large funds, those with $1bn or more in assets under management, have consistently generated outperformance in both the short and long term when compared to smaller sized hedge funds. Furthermore, these funds have posted superior average returns while also maintaining lower volatility and higher Sharpe ratios over multiple time horizons. However, the highest performing funds of smaller sizes can generate returns greater than their larger counterparts, which means that smaller hedge funds can still hold much appeal for investors. ” Amy Bensted – Head of Hedge Fund Products, Preqin</p> <p>* Preqin’s definition of fund size classifications is based on AUM of funds: Emerging, &lt;$100mn; Small, $100-499mn; Medium, $500-999mn; Larg</p>
Logical song: what to make of record buybacks
Capital Markets
<p>A common question I’ve been getting at client events lately is about stock buybacks and the effect they’re having on earnings-per-share (EPS); as well as what they say about the economy overall and investor/business psychology.<br /> First, the numbers<br /> Birinyi Associates does a monthly tracking of authorized and executed stock buybacks. There were $47 billion of buyback authorizations in August, a 15% increase year-over-year. Year-to-date buyback authorizations, at 146, have eclipsed full year totals from 2008 through 2012, and are up 40% year-over-year. Based on the data year-to-date, buybacks are at a run-rate to a record $897 billion of announced buybacks in 2015—this would be the largest of all-time, as you can see in the table below.</p> <p>Source: Birinyi Associates, Inc., as of August 31, 2015.</p> <p>*Executed figures are full-year. Authorized is year-to-date for all periods.</p> <p>Critics of stock buybacks argue they are manipulating EPS, and therefore stock prices; are depressing job growth; and/or are hurting the US economy overall. As per the first argument, it’s also the critics’ contention that companies buying back their own stock are sacrificing longer-term capital investments for the benefit of returning cash to shorter-term oriented hedge funds and other investors. I don’t happen to be one of those critics.</p> <p>Let’s distinguish what a stock buyback is—it’s the other side of the stock sales coin. Companies sell shares of equity to raise capital. They buy back shares of equity to retire capital. Those decisions are part of the process known as “capital allocation,” which is essential in a capitalistic economy in that it directs money to areas where it’s most productive.</p> <p>There are generally two primary reasons why companies buy back their own stock: 1) they believe their stock is undervalued and a cheaper place to deploy capital than other alternatives, like capital spending or mergers/acquisitions; 2) they have amassed more capital than their company can spend/invest profitably. Remember, over-capitalization can be just as problematic as under-capitalization. The effect of a buyback is to increase EPS, since the company’s future profits will be divided among fewer shares.<br /> Tie in to Fed policy<br /> Many argue that excess Fed liquidity, zero interest rate policy (ZIRP), and the ability of companies to leverage both, have led to a manipulation of earnings. But Strategas Research Partners looked at the growth rate of revenues and earnings on both a notional dollar and a per-share basis and found that share buybacks have had little to do with the rapid rebound in earnings. Operating EPS are up 119% since the market’s low in March 2009; while operating earnings in notional dollars are up an even greater 122%. It appears that lower interest expense and the ability of companies to restrain labor costs have had a much bigger impact on profits.</p> <p>Indeed, ZIRP has made it extremely cheap for companies to borrow money to buy back their shares; with several of the world’s most well-known investors recently warning about this—including BlackRock’s Larry Fink and GMO’s Jeremy Grantham. It’s arguably one of the distortions that has arisen from the still-emergency level of interest rates and accommodation—a can that was kicked down the road yet again last week when the Fed maintained ZIRP.<br /> Buybacks suggest weak investment?<br /> Stock buybacks don’t necessarily indicate weak investment, especially when capital is abundant, like today. According to Thomson Reuters, global companies have about $7</p>