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Weekend Scan: FOMC to release minutes: Pacific pact near conclusion after seven years of talks
Capital Markets
<p>Earnings seasons starts up again this week, with Alcoa reporting earnings on Thursday. Investors will be looking for clues on how the Federal Reserve is interpreting economic data when the Federal Open Market Committee releases the minutes from its last meeting, also on Thursday at 2 p.m.</p> <p>Pacific trade pact near. The U.S. and 11 Pacific countries seemed on the verge of signing the Trans Pacific Partnership after agreeing on how to handle how long pharmaceutical companies should be able to control new biotech drugs. The trade talks have been ongoing since 2008 and any deal must still go through Congress early next year.  Reuters</p> <p>Syria's president says Russia air strikes are vital. Bashar al-Assaid said the West's air campaign in Syria and Iraq have hurt and are the source of th spread of terrorism.  Reuters</p> <p>Banks may shoulder some of Glencore's woes. The troubled mining and commodities giant struck a $1.4 billion deal with Chad over four years. Banks lent money for the upfront deal when oil was priced at $100/barrel. The loan was backed by oil shipments from Chad, not by cash flows at Glencore. Wall Street Journal (paywall)<br /> You won't believe this.<br /> Mice may help scientists find birth control pill for men. Women will probably rejoice. Vice<br /> Photo: Brookings Institute</p>
Are buybacks an oasis or a mirage?
Capital Markets
<p>Key Points<br /> 1. In 2014, the S&amp;P 500 Index’s dividend (1.9%) + buyback (2.9%) yield = 4.8%, but this yield was not realized by investors.<br /> 2. As in most years, in 2014 issuance of new shares—for management compensation, new investments, and funding mergers and acquisitions—exceeded buybacks.<br /> 3. The dilution rate for the U.S. equity market in 2014 was 1.8% compared to the historical dilution rate of 1.7% over the 80-year period from 1935 to 2014.<br /> 4. U.S. equity investors in aggregate—contrary to appearances—have not realized a benefit from the recent spate of stock repurchases.<br /> Like travelers in the desert searching for water, we survey the parched investment landscape looking for high-yielding assets to quench our thirst for investment income. Shimmering on the barren surface of zero real yields, is that a lush garden of stock buybacks that we spy on the horizon? We examine the impact on investors of the recent increase in buybacks using an approach introduced by Bernstein and Arnott (2003).<br /> In 2014, buybacks represented 2.9% of the S&amp;P 500 Index’s market capitalization. When this distribution of cash is added to the 1.9% dividend yield of the S&amp;P 500,1 it produces a dividend-plus-buyback yield of 4.8%. For yield-thirsty investors, this combination appears to be an oasis in the capital market desert. To be that oasis, however, buybacks must not be diluted by net new issuance. We scour a range of sources to tally new issuance, discuss why companies issue new stock, and explain the possible dilutive impact of this new issuance.<br /> Who’s Buying Back Stock?<br /> In 2013, S&amp;P 500 companies, the largest in the United States but nonetheless a subset of the market, spent $521 billion on buybacks. In 2014 that amount rose to $634 billion and moved higher still to $696 billion when total repurchases by all publicly traded companies in the U.S. market are included.2 The top 15 companies by repurchases are listed in Table 1.</p> <p>Six of the 15 top companies are in the tech sector: Apple, IBM, Intel, Cisco, Oracle, and Microsoft. Combined, these six huge cash-flow-generating companies are respo</p>
Let’s not get het up about systematic portfolio management
Capital Markets
<p>Various types of computer-driven trading are being blamed for volatility in securities markets. To some extent, this blame game is just newspapers selling newspapers. See a recent FT story here. That is, it sounds sensational to suggest that computers are polluting the securities markets.</p> <p>There is a serious side to this blame game: HFT (high frequency trading) is, in my opinion, pernicious to the rest of the market because it adds nothing of value and seeks to grab income by front running or misleading other algorithms. HFT could be dealt with by a simple small tax on each trade in a financial instrument. The tax would be designed not to obtain revenue but, as the late Professor James Tobin put it, to throw sand in the wheels of high-speed traders. Their activity simply would become uneconomic.</p> <p>A second type of computer-driven strategy that is more lately in the news (see the FT story linked above) is “systematic” trading that seeks to maintain a consistent volatility profile for a portfolio. That type of strategy requires that the portfolio reduce its exposure to volatility when volatility is high and increase its exposure to volatility when volatility is low. Some of the world’s most respected hedge funds engage in this type of strategy.</p> <p>It is easy to see that systematic strategies of this type might tend to increase volatility on the upside and decrease it on the downside. Thus, it is like other momentum strategies. But why should one be alarmist about such tendencies? The market knows about them. Traders can adjust to their presence. Long-term investors can ignore them.</p> <p>The problem appears to be that someone has foisted the idea that markets are supposed to be calm or consistent. But that is not always the nature of markets. Markets take wild swings when emotions seize participants or when information is potentially scary but not definitive. Those conditions can exist for fairly long periods of time. As Lord Keynes remarked, the market can stay irrational for longer than you can stay solvent. And during those periods of apparent irrationality, newspapers (using the term broadly) wonder what the regulators are doing to curtail the volatility and uncertainty.</p> <p>As a guy who believes in markets (not because they are either perfect or free but because they are better than the alternatives), I think uncertainty is a part financial life. As financial actors (as economists would call us), we compute the possibilities and place our bets.</p> <p>Systematic trading is no different from many other momentum strategies. The fact that its decisions are made by computers does not make the strategy any different or scarier, even if they are pro-cyclical.</p> <p>Although governmental policies that are pro-cyclical should be avoided, private parties should be allowed to make such bets. Other private parties should, of course, try to take advantage of those pro-cyclical bets. That’s what markets are for.</p> <p>Photo: Mike Licht</p>
International economic week in review for Sept. 28-Oct.2; Japan flashing yellow, edition
Capital Markets
<p>For the fourth consecutive week, a major institution issued a negative report regarding global growth.This time it was the IMF, who, in a report titled, “Rise in Emerging Market Corporate Debt Driven by Global Factors,” noted the large build-up in emerging market debt may careen out of control as EM currencies decline and trade slows. Nonfinancial company debt in emerging economies increased from $4 trillion to $18 trillion between 2004 and 2014. Chinese raw material demand, low interest rates in developed countries and rising commodity prices spurred the trend. But as all three trends reverse course, companies that issued the debt face a potential triple whammy of declining home country currency values, declining revenue and increasing developed market interest rates negatively impacting their respective balance sheets. It’s possible this situation has started as some sovereign EM debt is already trading at higher levels seen in 2013’s “taper tantrum”.<br /> In a recent speech, Bank of Japan Governor Kuroda offered the following positive view of the Japanese economy:<br /> Japan's economy has continued to recover moderately with a virtuous cycle from income to spending operating in both the corporate and household sectors, although exports and production are affected by the slowdown in emerging economies. That is, in the corporate sector, profits have marked a record high and firms' fixed investment stance has been positive. In the household sector, wages have been growing -- as seen in the rise in base pay for two consecutive years in a situation where the unemployment rate has declined to the level that can be regarded as almost corresponding to "full employment" -- and private consumption has been resilient.<br /> His analysis is more hopeful than current statistics warrant. Governor Kuroda’s optimism is based on the Tankan survey:</p> <p>While these readings are positive, they are prospective, not commitment of funds. In fact, machinery orders are down in the 1H15:</p> <p>And although corporate profits are high, actual investment is not as strong as indicated:</p> <p>In the latest reading, large and medium/small non-manufacturers saw capital investment decreases of -3.1% and -5% respectively. The respective numbers for large and medium/small manufactures were -2.5% and +5.4%. And both data sets are far below pre-recession levels. As for consumers, although wages increased in the latest quarterly reading, consumption expenditures sharply decreased in the 2Q15:</p> <p>And the Governor’s statements stand in stark contrast to those of Etsuro Honda, a top aide to Prime Minister Abe, who stated Japan needed additional fiscal stimulus to insulate the country from China’s slowdown. This statement</p>
NexAsia Week Ahead: Fed minutes; BOJ rates coming up
Capital Markets
<p>(Note: all times HKT)<br /> Good morning everyone. Earnings season kicks off in the U.S. this week, giving investors a quick respite from the constant Fed watching that prevailed the past few weeks. I should emphasize quick though, since the FOMC minutes is set to come out on Friday, and traders are probably itching to dissect that thing for any insights of an upcoming rate hike. The RBA, the BOJ, and BOE meanwhile are all scheduled to reveal their respective interest rate decisions. While they’re all likely to keep rates unchanged, the Bank of Japan’s concurrent easing decision should be of particular note given that deflation reared its ugly, chud-like head again. Here’s what else you should look out for:</p> <p>Monday:</p> <p>6:30 am – Australia September AIG Services Index – Forecast: 53.31 from 55.6</p> <p>9:35 am – Japan September Nikkei Services PMI – Forecast: 51.99 from 53.7</p> <p>3:00 pm – Turkey September YoY inflation rate – Forecast: 7.9% from 7.14%</p> <p>4:30 pm – U.K. September CIPS Services PMI – Forecast: 55.31 from 55.6</p> <p>10:00 pm – U.S. September ISM Non-manufacturing PMI – Forecast: 58 from 59</p> <p>Tuesday:</p> <p>8:30 am – Australia August balance of trade</p> <p>10:30 am – Hong Kong September Nikkei Manufacturing PMI – Forecast: 49.52 from 44.4</p> <p>11:30 am – Reserve Bank of Australia interest rate decision – Forecast: unchanged at 2%</p> <p>1:00 pm – India September Nikkei Services PMI – Forecast: 50.82 from 51.8</p> <p>2:00 pm – Germany August MoM factory orders – Forecast: 0.7% from -1.4%</p> <p>8:30 pm – Canada August balance of trade</p> <p>8:30 pm – U.S. August balance of trade</p> <p>Wednesday:</p> <p>1:00 am – ECB president Mario Draghi speaks</p> <p>11:30 am – Bank of Japan interest rate decision – Forecast: unchanged at 0%</p> <p>2:00 pm – Germany August YoY industrial production – Forecast: 1.02% from 0.5%</p> <p>4:30 pm – U.K. August YoY manufacturing production – Forecast: -0.18% from -0.5%</p> <p>4:30 pm – U.K. August MoM manufacturing production – Forecast: 0.2% from -0.8%</p> <p>8:00 pm – Brazil September YoY inflation rate – Forecast: 9.57% from 9.53%</p> <p>8:30 pm – Canada August MoM building permits – Forecast: -0.2% from -0.6%</p> <p>Thursday:</p> <p>7:50 am – Japan September MoM machinery orders – Forecast: -0.38% from -3.6%</p> <p>7:50 am – Japan August current account</p> <p>1:45 pm – Switzerland September unemployment rate – Forecast: 3.3% from 3.2%</p> <p>2:00 pm – Germany balance of trade</p> <p>7:00 pm – Bank of England interest rate decision – Forecast: unchanged at 0.5%</p> <p>7:00 pm – Bank of England MPC minutes</p> <p>8:30 pm – U.S. Oct/3 initial jobless claims – Forecast: 273L from 277K</p> <p>9:30 pm – St. Louis Fed president James Bullard speaks</p> <p>Friday:</p> <p>2:00 am – FOMC minutes</p> <p>3:30 am – San Francisco Fed president John Williams speaks</p> <p>8:30 am – Australia August MoM home loans</p> <p>4:30 pm – U.K. August balance of trade</p> <p>4:30 pm – U.K. August YoY construction output – Forecast: 2.05% from-0.7%</p> <p>8:30 pm – Canada September unemployment rate – Forecast: 6.9% from 7%</p> <p>8:30 pm – Canada September employment change – Forecast: 20K from 12K</p> <p>Saturday:</p> <p>9:00 am – China September new yuan loans<br /> Photo: Moyan Brenn</p>
What we’re reading: Silvio, the Fed, and a woman screaming 'bear don’t eat my kayak'
Capital Markets
<p>From Silvio and Vladi sitting in a tree, to Bronte Capital’s views on Sun Edison, here are some great reads for you this weekend.</p> <p>Silvio Berlusconi and Vladimir Putin: the odd couple. A great look into the relationship between the fallen Italian president and his powerful Russian counterpart. Is it all business, or do they actually share something more? Financial Times</p> <p>Should U.S. monetary policy have a ternary mandate? Joe Peek, Geoffrey M.B. Tootell, and Boston Fed president Eric Rosengren apparently set out to examine “the role of financial instability concerns in setting monetary policy.” They did this by identifying buzzwords “related to financial instability appearing in FOMC meeting transcripts” and used their word counts to see how they impacted Fed policy. The results are astounding. Boston Fed (pdf)</p> <p>Lagarde-ian of the Galaxy. Guardians of the Galaxy reference aside, here’s a great interview with the IMF’s Christine Lagarde, where she shares her thoughts on Greece, the refugee crisis, and noisy Americans. Huffington Post</p> <p>Sun Edison - some comments and a way forward. Sun Edison’s recent fall took down more than few a big-named fund managers with it. Here’s John Hempton on why he took a long position on it. Bronte Capital</p> <p>Watch woman yell “bear don’t eat my kayak” as bear eats kayak. A riveting tale featuring a kayak, a bear, and a woman who pepper sprays it in the face. The Verge<br /> Photo: European People's Party</p>
Weekend Scan: US equities, bonds rally despite ugly jobs report
Capital Markets
<p>Good morning everyone. After dipping into the red shortly after the disappointing jobs report, U.S. markets staged a mid-day rally largely thanks to a spike in oil prices. The S&amp;P gained 1.4%, the Dow jumped 1.2%, while the Nasdaq soared 1.7%. The biggest moves however were in the U.S. bond markets, where the 10-year Treasury yield sank to a five-month low of 1.98% after returning 2.042% just the day before. 30-year bond yields meanwhile fell to 2.826%, while Fed funds rate futures – after indicating a 14% chance of an October rate hike earlier in the day – saw that chance slip to 5% shortly after the report. I wonder if the Fed feels the same way.</p> <p>Here’s what else you need to know:</p> <p>Russia, Saudi Arabia to keep foot on the gas. Despite the massive decline in oil prices, Russia and Saudi Arabia – the world’s largest oil producers – will be keeping the pedal to the metal as far as oil production is concerned. Russia apparently pumped an average of 10.74 million barrels a day in September, a figure unseen since the Soviet era. Wall Street Journal (paywall)</p> <p>World Cup sponsors demand Sepp Blatter’s head. With the Fifa president officially under criminal investigation, three of the World Cup’s largest sponsors – McDonald’s, Budweiser, and Coke – are all demanding for his resignation. Blatter’s lawyer however, had this to say: “Mr. Blatter respectfully disagrees with its position and believes firmly that his leaving office now would not be in the best interest of Fifa nor would it advance the process of reform and, therefore, he will not resign.” Financial Times (paywall)</p> <p>Civilian police worker shot in Australia. The man was murdered as he left work Friday. The gunman, who was shot and killed by police, fired shots at police officers leaving a police headquarters near Sydney. CNN</p> <p>Mudslide kills nine in Guatemala. Up to 600 people are also missing after heavy rains moved sludge and rock outside the capital city. Reuters</p> <p>At least 10 dead after Oregon shooting rampage that targeted Christians. A gunman opened fire at Umpqua Community College in Oregon, lining up victims and shooting those who said they were Christian. The suspect was killed. CNN</p> <p>Pope met with gay ex-student in Washington. Critics have slammed the pope for meeting with Kentucky clerk Kim Davis during his visit to the U.S. Davis has taken a public stance against gay marriage. The Vatican says that the pope’s visit with Davis does not mean an endorsement of Davis’ views. The pope also had a “real audience” with his former student Yayo Grassi. Grassi, a gay man, brought his partner of 19 years to meet the pope. New York Times<br /> You won’t believe this…<br /> Want a date? Use proper grammar. Grammar snobbery has become prevalent on dating sites, and is a “permissible prejudice.” Dating site users rank good grammar above a person’s confidence and teeth in</p>
The Trans-Pacific free-trade charade
Capital Markets
<p>NEW YORK – As negotiators and ministers from the United States and 11 other Pacific Rim countries meet in Atlanta in an effort to finalize the details of the sweeping new Trans-Pacific Partnership (TPP), some sober analysis is warranted. The biggest regional trade and investment agreement in history is not what it seems.</p> <p>You will hear much about the importance of the TPP for “free trade.” The reality is that this is an agreement to manage its members’ trade and investment relations – and to do so on behalf of each country’s most powerful business lobbies. Make no mistake: It is evident from the main outstanding issues, over which negotiators are still haggling, that the TPP is not about “free” trade.</p> <p>New Zealand has threatened to walk away from the agreement over the way Canada and the US manage trade in dairy products. Australia is not happy with how the US and Mexico manage trade in sugar. And the US is not happy with how Japan manages trade in rice. These industries are backed by significant voting blocs in their respective countries. And they represent just the tip of the iceberg in terms of how the TPP would advance an agenda that actually runs counter to free trade.</p> <p>Click here to read more</p> <p>© Project Syndicate</p> <p>This story originally appeared in Advisor Perspectives.<br /> Photo: International Monetary Fund</p>
Investments that pay when Korean workaholics play
Capital Markets
<p>The notoriously workaholic South Koreans are starting to kick back and take life a bit easier—and it’s already fostering brisk growth across a wide swath of consumer-centric businesses. Investors, take note.</p> <p>South Koreans are still the world champs of hard work. They took only seven of their allowed 15 days of vacation in 2014, well below the 24-nation average of 19.5 days, according to online travel agency Expedia’s most recent Vacation Deprivation study. All told, South Koreans worked nearly 25% longer than their developed-world counterparts that year. But those hours of toil have been declining steadily for the past several decades, and are now 25% below where they were in the mid-1980s (Display).</p> <p>Time to Take It Easy</p> <p>Expect them to continue trending lower. Both the government and large Korean companies have launched campaigns to encourage workers to take more time off, prompted by signs that this excessive industriousness was taking a heavy societal toll. Long hours have not translated into greater labor productivity: South Korean productivity is well below developed-world levels despite much faster GDP growth. Overwork has also been linked to the country’s high rates of suicide and industrial injury.</p> <p>It is also important to note that fewer work hours haven’t meant smaller paychecks. According to government statistics, the average full-time Korean worker earned 3.4 million won (US$3,229) a month in 2014, up 36% from 2.8 million won in 2008, despite a 4% drop in hours worked. More cash to spend on fun.</p> <p>The cultural impact has been striking. A recent study found that South Koreans are sleeping more (up 9% since 1999), taking longer to eat (up 25%) and devoting more time to personal care and healthy activities (up 35%). Spending on entertainment (such as moviegoing, hobbies, sporting events, books and travel) has risen at a 4.4% annual clip since 2004, outpacing the 3.8% annual increase in overall consumer spending.</p> <p>World Travelers</p> <p>We see plenty of ways that investors can capitalize on these trends. The most obvious beneficiaries are travel-related businesses. The number of South Koreans flying to international destinations has grown exponentially, from 6 million in 2001 to 16 million in 2014. Unlike travelers in other parts of the world, Koreans much prefer packaged tours to non-packaged alternatives, as they don’t like being caught making vacation plans too far in advance. Spending on these tours has been climbing 12% annually since 2004. Interestingly, studies found that less than 40% of adults have ever traveled abroad. But as more Koreans take advantage of their time off, we expect such trips to lure a broader cross-section of the population.</p> <p>Arguably the best barometer of the country’s more laid-back lifestyle is the soaring attendance at Lotte World, a major recreation complex in Seoul that consists of the world’s largest indoor theme park, shopping malls and a luxury hotel. It received 7.6 million visitors in 2014, nearly double the levels only five years earlier.</p> <p>Coffeeholics and Chicken Addicts</p> <p>South Koreans are also spending more on eating out. Among the fastest-growing segments are coffee and beverage shops, where annual sales have been growing at twice the pace of restaurant sales overall (Display). A recent government survey reported that South Koreans consume coffee nearly as often as they do the traditional side, dish kimchi, and twice as frequently as they do white rice. South Korea now ranks fourth among countries with the largest numbers of Starbucks locations per person.</p>
People Moves: JPM makes two senior IB hires; HSBC appoints new DCM deputy chief
Capital Markets
<p>JP Morgan bolsters its Chinese investing banking bench with two new hires. Xueqian Pu, an old hand in the Chinese investment banking scene, has been named vice chairman of global investment banking for China by the U.S. bank, JP Morgan. Pu joins the firm after seven years at Rothschild, were his most recent role was head of China investment banking. He also held senior roles at UBS, and also led strategy at the Chinese conglomerate, China Merchants Holdings. Joining him at the American firm is Kelvin Cho, a Hong Kong-based ECM heavy. Cho was previously BAML’s Greater China director for ECM, and had served various roles in BNP Paribas and Credit Suisse before that. He will continue to be based in Hong Kong. Financial News</p> <p>HSBC names new deputy chief for Asia-Pac DCM. Sean Henderson, a 10-year HSBC veteran, has been named deputy head of debt capital markets, Asia-Pacific and head of capital financing, Singapore, by the British firm. Henderson was previously HSBC’s head of capital financing for Australia and New Zealand, and worked in various roles within the firm’s DCM syndicate prior to that. He will continue to be based in Singapore, and will report to Alexi Chan, HSBC’s global co-head of DCM and head of DCM for Asia-Pacific. Reuters</p> <p>Liquidnet bags quant chief from BNP Paribas. Tony Cheung, a long-time veteran of the quant trading arena, has been appointed head of quantitative analytics by the institutional trading network, Liquidnet. Cheung joins Liquidnet from BNP Paribas, where he was most recently head of product management for electronic trading. Prior to that, he built and deployed algorithms for Royal Bank of Canada in New York. He will be based in Hong Kong, and will report to Lee Porter, Liquidnet’s head of Asia Pacific, as well to Akis Georgiou, the firm’s New York-based head of quantitative sales and analytics. Asia Asset</p> <p>For Asset Management moves, click here.<br /> Photo: Wendy</p>