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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>
NexAsia Week Ahead: Jobs report; China PMI coming up
Capital Markets
<p>Good morning everyone. With the Fed decision – and Yellen’s presser – out of the way, you’d almost think we’d get a breather from Fed speak this week. Wrong. All eyes shift to the Fed again as Bill Dudley, Stanley Fischer, Charles Evans, Lael Brainard, and Janet Yellen herself speak at various gatherings scheduled over the next few days. The week won’t all be about the Fed though, we’ve got big manufacturing data coming out of China and Japan, and the all-important jobs report is set to come out as well.</p> <p>Here’s what else you need to know:</p> <p>Monday:</p> <p>1:45 pm – Bank of Japan Governor Haruhiko Kuroda speaks</p> <p>4:00 pm – Italy September business confidence – Forecast: 102.8 from 102.5</p> <p>4:00 pm – Italy September consumer confidence – Forecast: 108.97 from 109</p> <p>7:45 pm – New York Fed President Bill Dudley speaks</p> <p>8:30 pm – U.S. August MoM personal income – Forecast: 0.31% from 0.4%</p> <p>10:00 pm – U.S. August MoM pending home sales – Forecast: 0.4% from 0.5%</p> <p>Tuesday:</p> <p>1:30 am – Chicago Fed President Charles Evans speaks</p> <p>5:00 am – San Francisco Fed President John Williams speaks</p> <p>1:30 pm – Reserve Bank of India interest rate decision – Forecast: 7% from 7.25%</p> <p>3:00 pm – Spain August YoY retail sales – Forecast: 2.97% from 4.01%</p> <p>8:00 pm – Germany September preliminary YoY inflation rate – Forecast: 0.1% from 0.2%</p> <p>10:00 pm – U.S. September CB consumer confidence</p> <p>Wednesday:</p> <p>7:50 am – Japan August preliminary MoM industrial production – Forecast: 0.1% from -0.8%</p> <p>7:50 am – Japan August YoY retail sales – Forecast: 0.53% from 1.6%</p> <p>8:00 am – New Zealand September ANZ business confidence</p> <p>9:30 am – Australia August MoM building permits – Forecast: 0.25% from 4.2%</p> <p>10:00 am – Singapore August bank lending</p> <p>1:00 pm – Japan August YoY housing starts – Forecast: 5% from 7.4%</p> <p>3:55 pm – Germany September unemployment change – Forecast: -5.4K from -6K</p> <p>3:55 pm – Germany September unemployment rate – Forecast: unchanged at 6.4%</p> <p>4:30 pm – U.K. Q2 final QoQ GDP growth rate – Forecast: 0.7% from 0.4%</p> <p>5:00 pm – Eurozone September flash YoY inflation rate – Forecast: unchanged at 0.1%</p> <p>5:00 pm – Eurozone August unemployment rate – Forecast: unchanged at 10.9%</p> <p>8:15 pm – U.S. September Adp employment change – Forecast: 200K from 190K</p> <p>8:30 pm – Canada July MoM GDP</p> <p>9:45 pm – U.S. September Chicago PMI – Forecast: 53.2 from 54.4</p> <p>Thursday:</p> <p>2:00 am – Fed Chair Janet Yellen speaks</p> <p>7:00 am – Fed Board of Governors member Lael Brainard speaks</p> <p>7:30 am – Australia September AIG Manufacturing Index – Forecast: 51.1 from 51.7</p> <p>7:50 am – Japan Q3 Tankan Large Manufacturing Index – Forecast: 13 from 15</p> <p>9:00 am – China September NBS Manufacturing PMI – Forecast: 49.8 from 49.7</p> <p>9:45 am – China September final Caixin Manufacturing PMI – Forecast: 47 from 47.3</p> <p>9:45 am – China September Caixin General Services PMI – Forecast: 51 from 51.5</p> <p>8:30 pm – U.S. September/26 initial jobless claims – Forecast: 272K from 267K</p> <p>9:30 pm – ECB President Mario Draghi speaks</p> <p>10:00 pm – U.S. September ISM Manufacturing PMI – Forecast: 51 from 51.1</p> <p>Friday:</p> <p>12:30 am – San Francisco Fed President John Williams speaks</p> <p>7:30 am – Japan August unemployment rate – Forecast: unchanged at 3.3%</p> <p>9:30 am – Australia August MoM retail sales – Forecast: 0.68% from -0.1%</p> <p>4:30 pm – Hong Kong August YoY retail sales – Forecast: 6.94% from 1.9%</p> <p>8:30 pm – U.S. September non-farm payrolls – Forecast: 202.8K from 173K</p> <p>8:30 pm – U.S. September unemployment rate – Forecast: unchanged at 5.1%</p> <p>Saturday:</p> <p>12:00 am – Fed Vice Chair Stanley Fischer speaks<br /> Photo: flazingo</p>
Barron's weekend roundup: Financial planning faces new hurdles
Capital Markets
<p>In this week's cover story, Barron's writes about the need to plan about how to care for aging parents. Older parents are now taking as much financial priority as children's college tuition or retirement planning. Private banks are being forced to adapt to meeting these new financial and emotional needs of maintaining two generations of retirees in the same family at the same time.</p> <p>Car makers are dirtier than we thought. Barron's feature story examines the Volkswagen scandal and how it's blowing apart the auto industry.</p> <p>There's more than one way to make money. Hedge fund Harvest Small Cap Partners invests "scared," Barron's writes. Jeff Osher uses his background working through the Asian financial crisis and the dot-com bubble to learn to sense danger, and invest accordingly.</p> <p>&nbsp;<br /> Photo: spatz_2011 </p>
What we’re reading: Volkswagen, interest rates, and the Pope
Capital Markets
<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
Capital Markets
<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
Capital Markets
<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
Capital Markets
<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
Capital Markets
<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>
People Moves: HSBC names new APAC chief; RBC loses fixed income boss
Capital Markets
<p>HSBC names new Asia-Pac chief. Paul Skelton, a long-time HSBC man, has been named by the firm as its new Regional Head of Commercial Banking, Asia-Pacific. Here’s what Simon Cooper, HSBC’s Global Head of Commercial Banking, had to say:<br /> “Paul brings with him a wealth of experience from both MENA as well as from his time within Asia-Pacific. He will focus on capturing the region’s emerging wealth by connecting corporates to opportunities across the world, with a renewed focus on China’s Pearl River Delta as well as the rising Asean.”<br /> Skelton was previously Regional Head of Commercial Banking for HSBC Middle East and North Africa, a post he held after spending 13 years in HSBC’s corporate and investment banking business in the Asia-Pacific region. He will report to the aforementioned Simon Cooper, as well as to Peter Wong, the firm’s Deputy Chairman. Global Trade Review</p> <p>BAML appoints Greater China equities head. Xia Yang, a 10-year veteran investment banking veteran, has been appointed Head of Greater China equities by Bank of America Merrill Lynch.</p> <p>Yang joins BAML from the Swiss giant UBS, where he was most recently Head of Equities for UBS China and chairman of UBS Futures China. He spent almost a decade at the firm, working at its Tokyo office from 2005 to 2007 and at its Hong Kong office from 2007 to 2012 before relocating to Shanghai. He will report to Olivier Thiriet, Head of Asia-Pacific equities for the American firm. Finance Asia</p> <p>RBC loses fixed income boss. Frédéric Lainé, an old hand in Hong Kong’s fixed income trading scene, has reportedly left RBC Capital Markets sometime this month.</p> <p>Lainé, who has over 20 years of rates and currency experience under his belt, was the Canadian firm’s Head of Fixed Income and Currencies for Asia the past four years. Prior to joining RBC, he was Asia ex-Japan chief of Credit Agricole’s Financial Institutions Group, and served the French firm as its Asia ex-Japan fixed income trading head from 2004 to 2010. Before that, he spent 12 years at Credit Lyonnais, with his most recent post there being Head of Interest Rate Derivatives, Asia ex-Japan. Global Capital</p> <p>For Asset Management moves, click here.<br /> Photo: Wendy</p>
China’s President Xi and his reform agenda – really
Capital Markets
<p>&nbsp;</p> <p>Thanks to misguided stories about President Xi’s reforms, America risks losing the opportunity to participate appropriately in China’s massive economic rebalancing and reform drive.</p> <p>In their Animal Spirits, George A Akerlof and Robert J. Shiller, two Nobel Prize winners, show how human psychology drives the economy and why it matters for global capitalism. In particular, they show how stories move markets and are themselves a real part of how the economy functions.</p> <p>The same goes for other economies, including China. What “we” in America know about China is filtered through aggregate stories by Washington’s political pundits, policy wonks, economic analysts, and news oracles. Some stories reflect realities; others don’t. Still others are misguided and flawed, while the rest have self-serving agendas.</p> <p>As President Xi Jinping is in his first official state visit in the U.S., he remains an enigma to most Americans – not in spite of these stories, but because of them.</p> <p>Stories about Xi’s secret agenda</p> <p>After his first year in power, leading media, such as Bloomberg, reported that “Xi amassing most power since Deng raises reform risk.” After two years, the Chinese president was portrayed in the West as “Xi who must be obeyed” as The Economist put it in its cover story, calling him the most powerful Chinese ruler certainly since Deng, and possibly since Mao.</p> <p>What united these stories, which quickly spread across the world via lesser-tier media channels, was their common denominator: Xi had acquired too much power.</p> <p>More recently, Washington’s stories would like us to believe that the problem with President Xi is not that he has too much power, but that he is increasingly powerless.</p> <p>The new conventional wisdom came about after Chinese equity market volatility, which the Financial Times thought showed that “Xi’s imperial presidency has its weaknesses.” That wisdom was quickly seconded by the Wall Street Journal, which reported that crises put dents in Xi’s armor as “Chinese president is looking more vulnerable than at any time since taking office in 2012, insiders say.”</p> <p>Despite the demise of the Cold War, the West’s old imperial inclination to see the world through the glasses of good (“we”) and evil (“they”) permeates the Xi biographies. From Foreign Affairs and Foreign Policy to the Atlantic and the New Yorker, the story starts with an “insider” anecdote, a political recollection or recent event that presumably serves as an intro to the Xi narrative. In reality, it is a Potemkin bridge because of its basic point: If you serve in a Communist Party, you are “Born Red,” as Evan Osnos entitled his Xi story in the New Yorker – not one of “us” but “them,” and thus neither credible nor trustworthy.</p> <p>Xi’s policy stance d</p>