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That was not a crash
Capital Markets
<p>Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&amp;P 500 of about 0.5% in the next 10 years. On a broad range of historically reliable valuation measures (see Ockham’s Razor and the Market Cycle) the May peak in the S&amp;P 500 reached valuations averaging about 114% above run-of-the-mill historical norms – more than double the valuation levels that have historically been associated with the 10% average expected market returns that investors have enjoyed over the long-term. At present, those measures have retreated to about 92% above historical norms.<br /> Keep in mind that low interest rates don’t raise the estimated 10-year expected return on stocks from the current 0.5% level. Low interest rates only make the low expected return on stocks somewhat more “acceptable” because the alternatives are similarly dismal. The Federal Reserve’s policies of zero interest rates and quantitative easing have done nothing but to encourage yield-seeking speculation, bringing valuations to extreme levels, and leaving prospective future investment returns equally depressed.<br /> Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explainwhy current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns.<br /> The chart below shows the relationship between the most reliable valuation measure we identify (MarketCap/GVA) versus actual subsequent S&amp;P 500 total returns over the following decade. The current level of valuations is associated with a likely range of 10-year returns between about -3% and +4%, with an average expectation of 0.5% annually.</p> <p>The following chart shows the same data from a time-series perspective. Try the identical analysis with other popular valuation indicators and you’ll see why we rely on MarketCap/GVA and similar variants such as price/revenue, market cap/GDP and our margin-adjusted version of the Shiller P/E. We see all kinds of valuation metrics trotted out by analysts as if they’re meaningful. It’s only when investors examine the historical data (or live through the consequences of failing to do so) that they realize how little relationship many popular valuation metrics have with actual subsequent market returns. For our part, we insist on evidence. It makes us much less fun to hang around with at parties if the conversation turns toward the markets.</p> <p>Market conditions will change. Look at every market cycle in history, and you’ll see that prospective market returns have always approached 9-10% or more in every market cycle – even when interest rates were similar to current levels (prior to the mid-1960’s). The best opportunity to boost investment exposure is at points in the market cycle where a ma</p>
Nerves of steel: City bosses abseil Lloyd’s building for charity
Lifestyle, 4:01
<p>&nbsp;</p> <p>Lord Mayor Alderman Alan Yarrow led a group of 85 abseilers down the 289ft tall building façade of one of the City’s most iconic buildings to support the annual Lord Mayor’s Appeal, Finbuzz reports.</p> <p>The aim was to raise a total of £100k for a number of charities including Mencap and Scope. Charity events will continue to be held in 2015, so check out the Lord Mayor’s Appeal event calendar.</p> <p>For most participants, including Lawson Muncaster, founder and managing director of City A.M., it was their first time ever abseiling.</p> <p>. @CityAM sends founder over the edge (of the Lloyd's Building - for charity)<br /> — City A.M. (@CityAM) September 4, 2015<br /> No special preparation or shoes were needed, however a team of professional climbers was ready to help on the roof. Still many abseilers stalled for several minutes before stepping over the edge. Some humorously confessed that they should not have watched abseiling YouTube videos the day before.</p> <p>Despite the nerves, the Master Carman of the year Lieutenant Colonel Paul Holder RLC, who donned a Superman costume, said he never felt so confident and relaxed.</p> <p>“It is quite a lot of adrenaline, I really enjoyed it, and for a good cause,” commented Ben Fuller, Head of the Investment Trust Team at Winterflood Securities.</p> <p> The Master C</p>
Three Nomura RMBS traders indicted on charges of conspiracy, fraud
Capital Markets
<p>Three former Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604) RMBS traders have been indicted in a Connecticut federal court for swindling millions of dollars from customers while making millions themselves.</p> <p>The 10-count indictment, returned on September 3 and unsealed on Tuesday, alleges that Ross Shapiro, Michael Gramins and Tyler Peters committed conspiracy and fraud offenses while supervising the Residential Mortgage Backed Securities Desk at Nomura Securities International in New York.</p> <p>“The indictment alleges that, for several years, these three defendants handsomely profited by repeatedly lying to Nomura’s customers in violation of federal law,” said U.S. Attorney Deirdre M. Daly in a statement. “ The victims of this alleged conspiracy include numerous funds, retirement plan providers and taxpayer-provided bailout funds that helped our nation to recover from the 2008 financial crisis. Our investigation into corrupt practices in the RMBS and other financial markets continues.”</p> <p>Shapiro was the managing director who oversaw all of Nomura’s trading in RMBS, Gramins was the executive director at the RMBS desk and oversaw trading of bonds comprised of sub-prime and option ARM loans, and Peters was the senior-most vice president of the RMBS desk and focused on Nomura’s trading of bonds composed of prime and alt-A loans.<br /> Nomura RMBS Traders accused of manipulating the bond market<br /> The three are accused of orchestrating a scheme of fraud and deceit to manipulate the bond market in their own favor, resulting in losses that were passed on to investors. They allegedly inflated purchase prices at which Nomura could buy a RMBS bond to induce customers to pay higher prices and deflated prices at which Nomura could sell.</p> <p>They are also said to have trained their subordinates to lie to customers. In one instance, one of trader told a salesperson that he had “lied” about a bond price and “marked up by 2 pts,” to which the salesperson responded “haha sick ... well played.”</p> <p>The three, former Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) employees, face one count of conspiracy, two counts of securities fraud, and seven counts of wire fraud each. The conspiracy count carries with it a maximum term of imprisonment of five years, and the securities and wire fraud have a maximum sentence of 20 years on each count.<br /> “When investment professionals put profits before prudence and the law, it creates a dangerous environment for investors and threatens the integrity of our financial markets,” said Steven Perez, Special Agent in Charge of the Federal Housing Finance Agency Office of Inspector General, in a statement.</p> <p>The SEC also announced on Tuesday related civil fraud charges against Shapiro, Gramins and Peters.</p> <p>According to the commission’s complaint, the three generated at least $5 million in additional revenue from Nomura, and the lies and omissions by the subordinates they trained and coached generated at least $2 </p>
Daily Scan: Abenomics pulls Japan from the brink, Asia rallies
Capital Markets
<p>The prospect of more stimulus in Japan helped drive a 7.7% surge  on the Nikkei today, dragging it back from a seven-month low. The rebound came after Prime Minister Shinzo Abe told a Bank of America-Merill Lynch conference in Tokyo today that he pledged to cut corporate tax rates by a least 3.3% next year, AP reports.</p> <p>The rest of Asia was a field of green by the end of trading. With the Shanghai stock market closing 2.3%, bringing it a full 10% higher than its late August low, indicating the selloff has already hit its trough.</p> <p>The global surge is now set to continue in Europe, with the pan-European FTSEurofirst 300 index up more than 2%in early trade. This is how the other Asian markets performed:</p> <p> Hang Seng: +4.10%<br /> Jakarta Comp: +0.69%<br /> KLSE Comp: +1.02%<br /> Straits Times: +1.48%<br /> Seoul Comp: +2.96</p> <p>Here is what else you need to know:</p> <p>World Bank chief economist warns Fed to delay rate rise. Chief economist Kaushik Basu has warned the US Federal Reserve that it risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Financial Times (paywall)</p> <p>Southeast Asian reserves shrinking rapidly. The lowering of the yuan's reference rate and expectations of a U.S. interest rate hike has spurred sell-offs of South Asian currencies.  From July to August, Malaysia and Indonesia saw the steepest drops in their currency reserves. Nikkei<br /> Bangkok shrine attack suspect 'gave device to bomber'. Thai police say a key suspect in the Bangkok shrine bombing has confessed to giving a bag containing a device to the man who carried out the attack that killed 20 people at the Erawan Shrine on August 17. BBC<br /> China leader firms up plans for US state visit. President Xi Jinping will head to the US for a lengthy and elaborate state visit later this month. Hopes of any breakthrough are low for the president's trip, which begins in Seattle and ends at the United Nations in New York. SCMP (Paywall) </p> <p>Australia to take in 12,000 Syrians. Amid growing pressure to do more to help those displaced by violence in the Middle East, Prime Minister Tony Abbott announced that Australia would accept 12,000 Syrians from persecuted minorities on top of the 13,750 overall intake of confirmed refugees for 2015. BBC</p> <p>Queen becomes UK's longest reigning monarch. Queen Elizabeth II is to become Britain's longest-reigning monarch today when she passes the record set by her great-great-grandmother Queen Victoria: 63 years and seven months. BBC</p> <p>Netflix to launched in Hong Kong, Singapore next year. US streaming service said on Wednesday it will launch the new Asia services in early 2016 as part of a larger global expansion. Netflix, which recently launched in Japan, will also roll out coverage to South Korea and Taiwan. SCMP (pay</p>
[Book Review] Misbehaving: The Making of Behavioral Economics
Lifestyle, 4:01
<p>Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans?predictable, error-prone individuals. Misbehaving: The Making of Behavioral Economics is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth?and change the way we think about economics, ourselves, and our world.</p> <p>Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments.</p> <p>Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber.</p> <p>Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving: The Making of Behavioral Economics is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining.</p> <p>This article was published by ValueWalk. </p> <p>&nbsp;</p>
Video: America has more opportunities today than 60 years ago, says Ken Langone
Lifestyle, 4:01
<p>"America owns the world for the next, at least, 25 years," says Ken Langone, co-founder of Home Depot, on Wall Street Week. There are more opportunities for young people today than there were 60 years ago, Langone says. Langone, a proud Republican, says he supports New Jersey Governor Chris Christie for president in 2016, but will back whomever gets the Republican nomination. The Republicans "need to have definition," he says, saying many candidates such as Sen. Mark Rubio are inexperienced and running for the wrong reasons.</p> <p>&nbsp;</p>
Does Morgan Stanley add value for investors?
Asset Management
<p>&nbsp;</p> <p>&nbsp;</p> <p>In an April 21, 2015 column, New York Times reporter Nathaniel Popper observed that, over the last few years, a growing line of mutual funds created by the likes of Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have attracted billions of dollars from investors looking to earn a good return.</p> <p>Popper noted that in the latest 10-year period, Morningstar data showed that only 38% of Morgan Stanley’s mutual funds outperformed their analyst-assigned benchmarks. Thus, while the fees these funds have generated are among the few consistent bright spots of growth on Wall Street, there is still a question for investors: Have these banks’ actively managed mutual funds actually been good investment choices?</p> <p>Today, I’ll provide further insights into that question as I continue my series evaluating the performance of the market’s foremost actively managed fund families with an in-depth look at Morgan Stanley Investment Management.</p> <p>According to Morningstar, as of April 30, 2015, Morgan Stanley had over $34 billion in assets under management in mutual funds. The firm’s website states: “Morgan Stanley Investment Management strives to provide outstanding long-term investment performance and best-in-class service to a diverse client base, which includes governments, institutions, corporations and individuals worldwide. Our global structure leverages the breadth, depth and access of the Morgan Stanley franchise to provide our clients a comprehensive suite of investment management solutions.”</p> <p>Does Morgan Stanley deliver on what they strive for? Have its funds been adding value for investors, or was the firm the real beneficiary?</p> <p>Active versus passive</p> <p>As is my practice, I’ll compare the performance of Morgan Stanley’s actively managed equity funds to similar fund offerings from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)</p> <p>To keep the list to a manageable number of funds, and to make sure I examine long-term results through full economic cycles, the period covered will be the 15 years from April 2000 through March 2015. I’ll use the lowest-cost shares when more than one class of fund is available for the full period. In cases where Morgan Stanley has more than one fund in an asset class, I’ll use the average return of its funds in the comparison. The table below shows the performance of 13 of Morgan Stanley’s mutual funds covering seven asset classes – five domestic funds and eight international funds.</p> <p>April 2000 - March 2015</p> <p>Fund<br /> Symbol<br /> Annualized Return (%)<br /> Expense Ratio (%)</p> <p>U.S. Large Growth</p> <p>Morgan Stanley Multi-Cap Growth<br /> CPODX<br /> 0.2<br /> 0.92</p> <p>Morgan Stanley Institutional Opportunity<br /> MGELX<br /> 3.0<br /> 1.67</p> <p>Morgan Stanley Institutional Growth<br /> MSEGX<br /> 4.0<br /> 0.96</p> <p>Consulting Group Large Cap Growth<br /> TLGUX<br /> 1.9<br /> 0.67</p> <p>Morgan Stanley Average</p> <p>2.3<br /> 1.06</p> <p>Vanguard Growth Index</p>
Daily Scan: US stocks gain after holiday weekend; Kentucky clerk out of jail
Capital Markets
<p>U.S. stocks rallied after the Labor Day weekend, following gains in Europe and China. The Dow gained 2.4% at close, up from 1.6% midday. The Nasdaq gained 2.7%, and and the S&amp;P 500 was up 2.5%. The Stoxx Europe 600 closed with a 1.2% gain. Oil was down nearly 1%, closing at $45.66/barrel. In the U.S., the Fed's research department reported that the Labor Market Conditions Index rose to 2.1. It's not an official data point, but word is that Fed Chair Janet Yellen keeps on eye on the release, which gives more color to the jobs market. The message: Job formation is looking good.</p> <p>Here is what else to need to know...</p> <p>Kentucky clerk is out of jail. Kim Davis has been released from custody for her refusal to issue marriage licences following the legalization of same sex marriage in June. Davis' lawyers say she'll continue to block marriage licenses for gay couples when she's back at work. Talking Points Memo</p> <p>Baltimore proposes $6.4 million to settle suit from Freddie Gray's death. Gray was died of a spinal injury while in police custody in April. The city leaders will vote on the settlement this week. CNN</p> <p>Macy's to close underperforming stores. The department store operator will shut 35-40 stories in early 2016. The company operates 770 stores total. Reuters</p> <p>Obama backed with 41 votes for Iran deal. President Barack Obama has secured enough support in the Senate to reject the motion to disapprove of the U.S. nuclear deal with Iran. Democratic Sens. Gary Peters, Ron Wyden, and Richard Blumenthal make 41 votes behind Obama. Politico</p> <p>Williams sisters to face off in U.S. Open quarterfinals. Serena and older sister Venus are hitting the court tonight as Serena tries to nab another Grand Slam title, and the lower-ranked Venus attempts to cut her off. Talk about sibling rivalry. New York Post</p> <p>Tiny hedge fund buying 10s of billions in Treasurys.  Element Capital has only $6 billion in assets but has been the biggest buying of government notes and bonds for the past 10 months. Run by math brainiac Jeffrey Talpins, the government wants to know just what he is up to. Wall Street Journal (paywall)</p> <p>San Francisco Fed prez sees rate hike this year. John Williams has been an optimist all year -- but he is not sounding a note of caution on the strong dollar and rout in the oil markets. Sounds like September is a defnite maybe for rate lift-off.  MarketWatch</p> <p>Mining giant cuts debt by $10b, issues $2.5b stock. Glencore has announced plans t</p>
Is China leading the global banking revolution ?
<p>The spread of digital banking has been vast and rapid in China but also largely ignored outside the country, as the biggest players focus first on the domestic market.</p> <p>This year we have seen two big tech giants - Alibaba and Tencent - launch into the banking space. First was WeBank, an offshoot of Tencent’s payments service QQ and its messaging app WeChat; this was followed by MYBank, formed out of Allibaba’s AliPay and ANT Financial.  </p> <p>With a lack of equivalent maneuvers by Western tech giants - who are just getting into payments - it begs the question: is China leading the way on financial innovation? This the question asked by Chris Skinner in his Financial Services Club Blog. </p> <p>Rivals Alibaba and Tencent have already been in the finance space for at least two years. Both launched payments services bundled in with their chat rooms and messaging apps. </p> <p>Tencent in particular enjoyed a massive uptick in the adoption of its payments service last year when it allowed users to send money to family and friends on Chinese new years in the form of virtual red envelopes - $64 million was transacted. Alibaba then upped to ante by giving away $96 million in lucky money gifts.</p> <p>This latest foray by both into the banking sector comes by dint of China’s regulators offering private companies the opportunity to apply for banking licences last year. The two banks differ from incumbents by focusing on micro-lending, due to restriction from regulators.</p> <p>This way China has opened up the banking sector to the private markets without threatening the state-owned banking sector. There will no doubt be issues down the road, particularly if they look to eventually target overseas users. But for now, it shows China’s tech giants are already some way down the road, while their Western counterparts are still putting their boots on.<br /> Photo: Tauno Tohk</p>
No Such Thing As Yuan Time…
Capital Markets
<p>No Such Thing As Yuan Time...<br /> It's now been about 10 months since I last wrote about the Chinese Renminbi (CNY). At the time, I was bearish and expecting a decline in the CNY (which has since happened).</p> <p>Now here's the thing about devaluations: when the structural forces say that a controlled currency should devalue - it usually does. It's rare to see a "one and done," especially when the currency is only allowed to devalue by a few percent - as it did in August.</p> <p>To review why the Yuan should go lower;<br /> -With the decline in commodity prices, China no longer needs a strong currency to pay for the importation of raw commodities, which removes the only real reason to have a strong currency</p> <p>-China is an export economy and the currencies of many of its trading partners have declined dramatically. Looking at a list of major world currencies, they all have declined by 10% to 30% against the dollar in the past year. The CNY is the only notable outlier as it is only down 2.5% during this time<br /> That's some serious loss of competitive strength. Will China allow it to continue?<br /> -The Chinese economy is clearly slowing following a massive misallocation of capital complete with a huge credit bubble which is now unwinding</p> <p> -The Chinese need to stimulate their economy and the easiest way to do that is to have a much weaker currency<br /> When a government chooses to fight against devaluation, the timing of the trade is made more difficult—however the first baby-devaluation shows that the direction is no longer towards a stronger CNY. History has repeatedly shown that once a currency changes direction, it usually goes much further than just a few percent. With China going through nearly 3% of its foreign reserves in August alone, clearly we’re entering a crescendo where the reserves will shrink faster and faster as locals realize that a larger devaluation is coming.<br /> It's starting to get expensive to defend the CNY<br /> For me, following a bit of a pull-back over the past two weeks, it now seems like “game time” for the CNY. While the timing of a much larger move is unsure, it is clear that the direction has changed and the next move is likely to be a much larger and sustained devaluation. Additionally, I’m quite bearish on the world economy and this trade seems like one of the best risk rewards out there to play a slowdown in China and hence the global economy. You can play through cash currency or OTC options where volatility still prices cheaply. This trade definitely feels like shorting the Japanese Yen a few years ago and we now appear to be at the inflection point where things start to accelerate rapidly.</p> <p>Put it this way--if the CNY was approximately fairly valued, the Chinese wouldn’t have spent almost US $100 billion in August to defend their currency from further depreciation... (to be continued)</p> <p>Disclosure: I’m short Chinese Yuan Renminbi</p> <p>This story originally appeared in ValueWalk.<br /> Photo: </p>