Decision Time - Two Critical Thursdays of the Year

This Thursday (November 27), while Americans will be enjoying their Turkey dinners with their loved ones, the 12-member oil-sheiks dominated oil cartel, OPEC will meet in Vienna to decide on what to do with oil production. The current OPEC quote is 30 million barrels a day. Oil investors are counting on OPEC to cut production to bring it in-line with demand, and they will be disappointed if they do not cut the quota by at least 1 million barrels. Note that OPEC does not have explicit country quota, just total production ceiling - they did away with country quota in December 2011 meeting in Oran, Algeria. Even if they decide to cut production, how credible is that going to be. All depends on what Saudi Arabia, the Central Banker of oil industry promises to do. So far they have been sending mixed messages. It  will be an interesting Thanksgiving for US oil investors.

 

Next Thursday (December 4) the ECB will meet and decide on whether to embark on another round of QE. Investors are expecting Draghi to deliver on his promises. In the last post-ECB meeting press conference, Draghi suggested Eur1 trillion of asset purchase and he made that even more explicit at a recent speech in Frankfurt. This optimism is pushing the German 10-year to a record low (0.73%), and Spanish (1.97%) and Italian (2.16%) 10-years below the US (2.24%). But it is not a foregone conclusion that QE will happen given conflicting messages out of ECB Board members.

 

 

Today's Read

Rates Low Why? Demand Exceeds Supply By $400 Billion

Susanne Walker from Bloomberg tries to explain why bond yields globally are the record low levels. Supply exceeding demand, duh! According JP Morgan, next year, net issuance of bonds, not sure what kind but may be all kind of bonds, will be $2.4 trillion while demand will only be $2 trillion. According to them the ECB and BoJ alone with buy $400 billion and $700 billion of bonds next year, which is more than $1 trillion bought this year including by the Fed.

Singularity in Economics

Dr. Krugman argues that when the economy hits rock-bottom, “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.” Government spending doesn’t compete with private investment — it actually promotes business spending. This is akin to Singularity in physics, when all laws of physics break down. Kind of makes sense. If you go with that argument the whole debate about fiscal prudence i.e. in Japan, Germany and in the Republican circles becomes irrelevant because the classical relationship on which the argument is based on goes away.

 

Powerful People Behaving Badly

The Turkish President made a fool of himself with this asinine comments, "Men and Women are Not Equal"

We have another Wall Street "big swinging dick", the CEO of Delphi Financial Group, Robert Rosenkranz, behaving badly. He had an affair but that's not the bad part because who on Wall Street does not ;-), but the bad behavior is not paying his mistress as promised. Now the mistress is spilling beans.

This cartoon from The New Yorker magazine expresses the sentiment towards those Alpha Males.

 

Cramer's Game Plan for Week of November 23 2014

Earn $66K/Month By Teaching "How to Make iPhone Apps" Course Online

How this 25-year-old made $66,000 in a month by teaching an online course

Business Insider, 17-Nov-14

By Libby Kane

 

When the iPhone started taking over the US in 2008, Nick Walter was in Japan doing Mormon missionary work without a smartphone.

"When I got home, my dad was super nice and bought me an iPhone 4, and it was my first introduction to apps," the 25-year-old remembers. "I was like, 'These things are crazy! They can do anything!'"

 

Since that first introduction, Walter, who graduated from Brigham Young University with an information systems major (which includes elements of both computer science and business), learned to code and started doing freelance work building iPhone apps for local companies in Utah.

 

About four years later, Walter was reading "The 4-Hour Workweek" and was inspired by the idea of creating a business that wasn't super time intensive. Author Tim Ferriss recommended creating an online course, but Walter didn't know what he could possibly teach — until Apple announced its first new programming language in over a decade, called Swift.

 

"From the day they announced it, everyone was on an equal field trying to learn," Walter recalls. "I thought, 'Personally, I'd love to learn it just for fun and future stuff, but I have an opportunity to be one of the first people to teach it to other people. Maybe I could make a class where I'm learning as I teach.'"

 

Walter spent four days reading Apple's documentation of Swift, "kind of translating into English and giving some extra examples." Apple announced its release on June 2, and four days later Walter posted 50 videos, or one full course, to the online education site Udemy. It was an introduction to Swift for beginners, called Swift By Examples.

That first month, his course earned him $45,000.

 

Udemy charges students a set price — in this case, $99 — to access the online course as many times as they want. If these students find the course through a link sent by Walter, he gets 97% of the money. If they find the course through Udemy, he splits the money 50/50 with the company.

 

Not every month was quite so dramatic. Walter estimates that the following month, he earned $7,500, then $5,000 the month after that. His earnings evened out around $3,000 for a few months, until he put up his second course in September: How To Make iPhone Apps, for $199.

 

That month, he earned $66,000, a full year's salary for many people.

 

One might imagine a 25-year-old with that kind of windfall would head straight to Vegas. But Walter, who is a longtime fan of financial guru Dave Ramsey and highly recommends "The Total Money Makeover," did nothing of the sort. "I bought a 2010 Toyota Corolla," he says. "I got my full emergency fund set up, and I've just been investing the rest in mutual funds."

 

Today, more than 8,500 people have taken the original course on Swift, and more than 3,500 have gone through the iPhone class.

 

Next, Walter plans to publish a class on how to build apps for the Apple watch (he's now running a Kickstarter campaign to fund its creation) in which, he says, there's a lot of opportunity for someone who wants to create the kind of income stream that he has. 

 

"It reminds me of when apps first came out for the iPhone," he says. "I think there's a real opportunity for people to make apps for this new watch and be the first-comer there. Someone has to be the first weather app or the first jogging app. If you can move quickly enough, you're bound to have an awesome advantage."

 

Fed Paper Argues That Trend Economic Growth Falls After Recession

November 12, 2014

Potential Output and Recessions: Are We Fooling Ourselves?

Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson 

The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend.

Economic models usually assume that recession-induced gaps will close over time, typically via a period of above trend growth. In our results, growth is not faster after the recession than before, implying that the recession-induced gap is closed primarily by revising estimates of trend output growth lower. Interestingly, much of the downward revision to estimates of trend output happens well into the recovery. In particular, as economies recover and the lower level of actual output persists, potential output is gradually revised down toward actual GDP.

This pattern of revision also holds true if potential is calculated using a growth accounting framework, the method used by policymaking institutions such as the OECD. To see how estimates of potential using this methodology are adjusted around turning points, we use projections from the OECD's bi-annual economic outlook for 62 recessions from 1989 to 2009 in 23 advanced economies and construct a database of various vintages of the OECD's estimates of potential growth--i.e. forecasts made a year prior to the recession trough, at the trough, and three years after the trough. Figure 4 shows these vintages averaged around recession troughs. These data reveal a pattern of downward revisions to the level of potential around turning points. Even three years post-trough, potential growth is still being revised down. This same pattern of systematic underestimation of the impact of recessions on potential and the subsequent downward revision of potential output holds true for other policymaking institutions in the wake of the Great Recession. While it is tempting to attribute this to the impact of the financial crisis on growth, the discussion above suggests that this pattern is long standing. Ironically, despite being known as the dismal science, economists may be too optimistic about the recovery path of output following recessions.

Buy TBT (ProShares UltraShort 20+ Year Treasury ETF)

The yield on 10-year treasury and US economic data have moved in the opposite direction since April. Such discrepancy won't continue forever. One of them is wrong, and my hunch is that it is the 10-year treasury.

I’d be buyer of TBT (i.e. short 10-year treasury) at these levels. TBT is struggling to get past the $54 resistance level. If it does get through it, hopefully this week, there is clear path until $60. If I am wrong, I would put stop-loss at $52. Click here for more details.

Kids Explain "Futures Trading"

Mario Draghi - "To Do Or Not To Do"

At its monetary meeting, the ECB kept the Deposit Facility Rate unchanged at -0.2% and the more important Refinancing Rate at 0.05%. Both were in line with market expectations.

 

The bombshell for the market, especially the currency market, came during the post meeting press conference. There ECB President Mario Draghi said that he expects the central bank’s balance sheet to rise toward early 2012 levels. The size of the current balance sheet is around 2 trillion Euro and the peak in June 2012 was 3.1 trillion Euro suggesting 1 trillion Euro of asset purchase. If the ECB buys that in a year that'll be comparable to the rate the Fed bought Treasuries/MBS during QE3 ($85 billion a month).

 

Again nobody is sure if Mario Draghi can pull that off especially given well-know opposition from the German Bundesbank. No bigger authority than former Fed Chairman Ben Bernanke said so. The next ECB meeting is on December 4 and we'll see what happens then.

ECB President Mario Draghi's Press Conference (Transcript of the Press Conference)

 

Bid-Ask Spread Set to Widen 5x?

This is an interesting story because what the SEC decides to do will have implications on not only trading costs for individuals and institutions but also profitability of Wall Street brokers.

 

In a story yesterday, SEC Inches Closer to ‘Five-Cent Tick’ Test,  the WSJ reported that,

 

The Securities and Exchange Commission said late Monday it was releasing for public comment a highly-anticipated plan to determine whether trading the stocks of smaller companies in wider “tick sizes,” or the difference between what traders bid and offer for the shares, would boost interest in the stocks.

 

The 45-day comment period is a crucial step needed to get the test program off the ground and comes more than two months after U.S. stock exchanges and the Financial Industry Regulatory Authority, a Wall Street self-regulator, submitted the plan to the SEC.

 

The program is one of the first major stock-market initiatives launched by SEC Chairman Mary Jo White . It comes amid mounting concerns about the impact of computer-driven trading in the stock market.

 

Phasing out trading in penny increments has long been championed by some lawmakers, smaller investment banks and stock exchanges, who say trading in wider bands would make it easier and more profitable to trade shares of smaller companies, as well as lessen volatility.

 

That's a full circle from January 29 2001 when the New York Stock Exchange made history by converting all of its stocks to decimal pricing ending two centuries of pricing in fractions.

 

The decimalization of stock trading was supposed to have democratized the Wall Street and become the permanent way of doing business, but it did not. Apparently there were flaws and unintended consequences. 

(1) A paper released by Grant Thorton in 2009, Market Structure is Causing IPO Crisis, blamed the decimalization for taking away all the economic incentives for trading and researching on small cap companies thus hurting the IPO market. Basically, they were saying the brokers need to be  bribed, through wider bid-ask spread, to create market for small, under-followed companies.

(2) People argued that it encouraged HFT (high frequency trading) given the low cost of each trade. By 2010, it was estimated that HFT accounted for more than 70% of equity trades taking place in the US.

 

The SEC came up with its own study in July 2012. While it did not address the HFT issue, it concluded that "there is less available information related to how lower spreads may have negatively impacted capital formation, especially with respect to the complex, competitive dynamics and economic incentives of market intermediaries who provide liquidity."

 

Guess everything changed when Mary Jo White became the SEC Chairperson in April 2013. On June 24, 2013, the SEC unveiled a one-year "tick size" pilot program to let some stocks trade in five-cent increments instead of one-penny increments and the rest is history.

 

It will be interesting to see how all this moves forward.

 

 

 

Today's Read...

Impact of Mid-Term Election on Stock Market

The US mid-term election is tomorrow but the market is largely ignoring it, and rightly so. Given the BoJ's massive stimulus last Friday, oil price gyration due to Saudi Arabia today, the ECB on Thursday and Payroll on Friday, investors have a lot on their plate. For what its worth, Nate Silver gives 72% chance of Republicans taking over the Senate. But we may not know that for a while because (1) ballot counting in Alaska can go on for days (2) if winning candidate in Louisiana does not get over 50%, the run-off elections will be held on December 6, and (3) if winning candidate in Georgia does not get over 50%, the run-off elections will be held on January 6.

 

There is a fair bit of research on the impact of mid-term election on stock market. Fidelity says, the 12 months after midterm elections tend to be good for stocks, averaging 16.1% gain. UBS technical analyst, puts the mid-term election in the context of 4-year US Presidential Election Year Cycle Theory. Again the outcome is good for the market. The reason is that, after the mid-term election, the political machinery of the incumbent focuses on the Presidential election and that produces favorable policies towards the market in the 3rd and 4th year of the Presidency.

 

M&A Continues

French advertising group Publicis Groupe SA agreed to buy Boston-based Sapient for $3.7 billion in cash, a massive premium to Friday's close. The deal will expand Publicis into fast growing digital business.

Lab Corp agreed to buy Covance, a CRO (Clinical Research Organization) or a clinical trial outsourcing company for $6.1 billion. Investors were disappointed with the deal given that there are no synergies between the two , and duly punished Lab Corp, whose shares were down 7.37%.

Saudi Move the Oil Market
Crude oil initially rallied after the newswire said they raised December Arab Light to Asian customers by 95c/bbl to a 10c discount to Oman/Dubai average.

However when another headline hit that said Saudis lowered the premium for Arab Light relative to the US Gulf Coast benchmark by 45c/bbl, oil markets took a beating.

Professor Kenneth Goldsmith of University of Pennsylvania Offers a Course to "Waste Time Online"
Yeap, that's what you get for $47,000/year in tuition (also on Yahoo!Finance).
 

The Japanese Bombshell - The BoJ Launches QE4 & Japanese Pension Fund Switches into Equities

Wall Street received a Halloween treat from Japan on Friday, 31 October 2014. And it was very sweet indeed!

First, the Bank of Japan (BoJ) launched Quantitative Easing 4 (QE4) making it the most aggressive central bank in the world.

Second, Government Investment Fund, Japan, the $1.2 trillion pension fund decided to change its asset allocation dramatically. Under the new scheme, allocation to domestic bonds fall to 35% (from 60%) while domestic stock increases to 25% (from 12%), international bonds to 15% (from 11%) and international stocks to 25% (from 12%).

What exactly did the BoJ do?

After a very close vote (5-4), the BoJ initiated QE4. It decided to increase the monetary base by 80 trillion yen (US$700 billion) a year or an addition of about 30 trillion yen compared with the past. As part of the program, they will conduct the outright purchases of Japanese government bonds approximately 8-12 trillion yen (~US$70-110 billion) per month in principle effective from November 4, 2014.

The BoJ will purchase ETFs and Japan-REITs so that their amounts outstanding will increase at an annual pace of about 3 trillion yen (tripled compared with the past) and about 90 billion yen (tripled compared with the past), respectively. The Bank will make ETFs that track the JPX-Nikkei Index 400 eligible for purchase.

Why did they do it?

To pre-empt deflationary pressures given weakness in demand following the consumption tax hike in April and a substantial decline in crude oil prices have been exerting downward pressure recently. The Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

History of Quantitative Easing (QE) in Japan?

QE1 (March 19, 2001)

The BoJ changed its policy tool to the “outstanding balance of the current accounts (CAB) at the BoJ” from the “uncollateralized overnight call rate” and said the policy will continue until CPI registers stably a zero percent or an increase year on year. As part of the program, the BoJ decided to immediately increase CAB by 1 trillion yen to 5 trillion yen.

QE1 ended on March 9 2006, and the central bank's policy tool reverted back to the “uncollateralized overnight call rate”. The BoJ also decided to reduce CAB to the towards a level in line with required reserves.  

 

From March 2001 and March 2004, CAB rose from 5 trillion yen to 33 trillion yen, and it stayed at that level until March 2006. Within few months of QE1 end, CAB fell to 8 trillion yen.  

QE2  (October 5, 2010)

The BoJ decided to initiate asset purchase program in principle but the details were announced on October 28, 2010 (JGBs) and on November 5, 2010 (ETFs, JREITs). Essentially the Program authorized purchase of 35 trillion yen of assets.

QE3 (April 4, 2013)

The BoJ expanded QE2. With an unanimous vote, the BoJ decided to (1) conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen and (2) purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively.

References

Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective? (IMF)

Quantitative Easing: Entrance and Exit Strategies (Alan Blinder)

Quantitative Easing in Japan: Past and Present (St. Louis Fed)