You are here

Feed aggregator

Shrine Visit Retribution? China Seizes Japanese Cargo Vessel (Over War-Debts)

Zerohedge - Mon, 04/21/2014 - 20:58

We noted yesterday, Japan's decision to send an Abe cabinet official to the Yasukuni shrine (home of Class A war criminals) and Abe's sending of an offering, warning it will likely see retaliation from China. We didn't have to wait long. As BBC News reports, China has seized a Japanese cargo ship (over a pre-war debt). With President Obama due to visit in days, it seems the tensions between China and Japan may force his hand to pick sides.

 

As BBC News reports, China's seizure of a Japanese cargo ship over a pre-war debt could hit business ties, Japan's top government spokesman has warned.

Shanghai Maritime Court said it had seized the Baosteel Emotion, owned by Mitsui OSK Lines, on Saturday.

 

It said the seizure related to unpaid compensation for two Chinese ships leased in 1936.

 

The Chinese ships were later used by the Japanese army and sank at sea, Japan's Kyodo news agency said.

 

"The Japanese government considers the sudden seizure of this company's ship extremely regrettable," Chief Cabinet Secretary Yoshihide Suga said on Monday.

 

"This is likely to have, in general, a detrimental effect on Japanese businesses working in China."

It seems the Japanese shrine visit sparked some more "war" memories for the Chinese...

The owners of the shipping company, identified by Kyodo as Zhongwei Shipping, sought compensation after World War Two and the case was reopened at a Shanghai court in 1988, China's Global Times said.

 

The court ruled in 2007 that Mitsui had to pay 190 million yuan ($30.5m, £18m) as compensation for the two ships leased to Daido, a firm later part of Mitsui, Global Times and Kyodo said.

 

Mitsui appealed against the decision, but it was upheld in 2012, Kyodo said.

 

Kyodo said this appeared to be the first time that a Japanese company asset had been confiscated as war-linked compensation.

 

...

 

Japan has always held that the issue of war-related compensation was settled by a 1972 agreement between the two sides when ties were normalised.

 

But now for the first time, a Chinese court has ignored that agreement - and the Chinese government appears to be giving full support, says the BBC's Rupert Wingfield-Hayes in Tokyo.

It seems China and Japan are testing their relationship with the US...








The Earnings Season: "House Of Cards"

Zerohedge - Mon, 04/21/2014 - 20:32

Submitted by Lance Roberts of STA Wealth Management,

Just like the hit series "House Of Cards," Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C. From time to time I do an analysis of the previous quarters earnings for the S&P 500 in order to reveal the "quality" of earnings rather than the "quantity" as focused on by Wall Street.  One of the most interesting data points continues to the be the extremely low level of "top line" revenue growth as compared to an explosion of the bottom line earnings per share.  This is something that I have dubbed "accounting magic" and is represented by the following chart which shows that since 2009 total revenue growth has grown by just 31% while profits have skyrocketed by 253%.

As I have discussed previously:

"Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression.  The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth.  This has been achieved by increases in productivity, technology and offshoring of labor.  However, it is important to note that benefits from such actions are finite."

As we enter into the tsunami of earning's reports for the first quarter of 2014, it will be important to look past the media driven headlines and do your homework.  The accounting mechanizations that have been implemented over the last five years, particularly due to the repeal of FASB Rule 157 which eliminated "mark-to-market" accounting, have allowed an ever increasing number of firms to "game" earnings season for their own benefit.  

This was confirmed in a recent WSJ article which stated:

"If you believe a recent academic study, one out of five [20%] U.S. finance chiefs have been scrambling to fiddle with their companies' earnings.

 

Not Enron-style, fraudulent fiddles, mind you. More like clever—and legal—exploitations of accounting standards that 'manage earnings to misrepresent [the company's] economic performance,' according to the study's authors, Ilia Dichev and Shiva Rajgopal of Emory University and John Graham of Duke University. Lightly searing the books rather than cooking them, if you like."

This should not come as a major surprise as it is a rather "open secret." Companies manipulate bottom line earnings by utilizing "cookie-jar" reserves, heavy use of accruals, and other accounting instruments to either flatter, or depress, earnings.

"The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big "restructuring charge" that would otherwise stand out like a sore thumb.

 

What is more surprising though is CFOs' belief that these practices leave a significant mark on companies' reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study's respondents said it was around 10% of earnings per share."

 

Of course, the reason that companies do this is simple: stock based compensation. Today, more than ever, many corporate executives have a large percentage of their compensation tied to company stock performance. A "miss" of Wall Street expectations can lead to a large penalty in the companies stock price. 

As shown in the table, it is not surprising to see that 93% of the respondents pointed to "influence on stock price" and "outside pressure" as the reason for manipulating earnings figures.

Note: For fundamental investors this manipulation of earnings skews valuation analysis particularly with respect to P/E's, EV/EBITDA, PEG, etc. Revenues, which are harder to adjust, may provide truer measures of valuation such as P/SALES and EV/SALES.

So, as we head into earnings season, it is important to be aware of what is real, and what isn't. Wade Slome brought this into focus recently via the Investing Caffeine blog: where he pointed out four things to look for:

"Distorted Expenses: If a $10 million manufacturing plant is expected to last 10 years, then the depreciation expense should be $1 million per year. If for some reason the Chief Financial Officer (CFO) suddenly decided the building would last 40 years rather than 10 years, then the expense would only be $250,000 per year. Voila, an instant $750,000 annual gain was created out of thin air due to management’s change in estimates.

 

Magical Revenues: Some companies have been known to do what’s called 'stuffing the channel.' Or in other words, companies sometimes will ship product to a distributor or customer even if there is no immediate demand for that product. This practice can potentially increase the revenue of the reporting company, while providing the customer with more inventory on-hand. The major problem with the strategy is cash collection, which can be pushed way off in the future or become uncollectible.

 

Accounting Shifts: Under certain circumstances, specific expenses can be converted to an asset on the balance sheet, leading to inflated EPS numbers. A common example of this phenomenon occurs in the software industry, where software engineering expenses on the income statement get converted to capitalized software assets on the balance sheet. Again, like other schemes, this practice delays the negative expense effects on reported earnings.

 

Artificial Income: Not only did many of the trouble banks make imprudent loans to borrowers that were unlikely to repay, but the loans were made based on assumptions that asset prices would go up indefinitely and credit costs would remain freakishly low. Based on the overly optimistic repayment and loss assumptions, banks recognized massive amounts of gains which propelled even more imprudent loans. Needless to say, investors are now more tightly questioning these assumptions. That said, recent relaxation of mark-to-market accounting makes it even more difficult to estimate the true values of assets on the bank’s balance sheets."

For really short term focused traders none of this really matters as price momentum trumps fundamentals. However, for longer term investors who are depending on their "hard earned" savings to generate a "living income" through retirement, understanding the "real" value will mean a great deal. Unfortunately, there are no easy solutions, online tips or media advice that will supplant rolling up your sleeves and doing your homework. 

As the WSJ article concludes:

"The CFOs in the study named and ranked several red flags.

 

First and foremost, investors should keep an eye on cash flow: Strong earnings when cash flow deteriorates may be a sign of trouble. The advantage of this approach is that, unlike some of the other warning signs, it is easily measurable, arming the investors and analysts who do their homework with strong ammunition against management.

 

Secondly, stark deviations from the earnings recorded by the company's peers should also set off alarm bells, as should weird jumps or falls in reserves.

 

The other potential problem areas are more subjective and more difficult to detect. When, for example, the chief financial officers urge stakeholders to be wary of 'too smooth or too consistent' profits or 'frequent changes in accounting policies,' they are asking them to look at variables that don't necessarily point at earnings (mis)management.

 

As the quarterly ritual of the earnings season approaches, executives and investors would do well to remember the words of the then-chairman of the Securities and Exchange Commission Arthur Levitt in a 1998 speech entitled "The Numbers Game."

 

'While the temptations are great, and the pressures strong, illusions in numbers are only that—ephemeral, and ultimately self-destructive.'"

Couldn't have said it better myself.








DIY Food: When You Add These Two Things Together Something Magical Happens

Resilient Communities - Mon, 04/21/2014 - 20:31

Aquaponics is the growing of plants fed by nutrients from fish, which in turn provide a source of food when they reach maturity. Ann Forsthoefel of “Aqua Annie” is excited about it and for good reason, as you’ll see in this video.

“I envision for our city and cities around the nation that we start having growing-hubs in every neighborhood… Every neighborhood should have the opportunity to grow their own food.”

Ann Forsthoefel

Do you want a growing-hub in your community? Then why don’t you share this video with your friends below and get them excited about it too! It’s really a great way to boost your resilience.

Testosterone in the Financial Markets

Zerohedge - Mon, 04/21/2014 - 20:22

Follow ZeroHedge in Real-Time on FinancialJuice

Too much testosterone in the room? Heard that all before. It’s the adolescent-like traders that were battling with levels of testosterone and cortisol, pounding on their chests like Tarzan swinging through the trees in the jungle of the financial markets that brought the world down too. It wasn’t just the crazy race for money and money-spinning winners that were never going to burst. It was proved in 2008 by the University of Cambridge that the movements of the markets are correlated to levels of those two hormones in traders’ bodies.

Testosterone is associated with aggression and sexual behavior and cortisol is a stress hormone. Two scientific researchers took swabs from saliva glands of traders over an eight-day period to show that there was a direct correlation with rises and falls in the levels of those to hormones which affected the way that they acted and reacted on the financial markets. The results showed that traders made most money when they had the highest levels of testosterone in their bodies. We get told that you have to be calm and collected and rational, a good thinker and a quick snap-second decision maker when working on the financial markets. But, the research showed that while the people might be outwardly calm, their testosterone levels inside were bubbling at boiling point. What’s worse is that prolonged levels of testosterone and cortisol lead the prefrontal cortex and the hippocampus to shrink. It’s precisely in those two areas that the brain associates factual memory and decision-making. So, traders end up with “learned helplessness”, meaning that actions taken in risky situations will have no effect on the outside world; they simply don’t matter.

Remember that the stock market ended 2013 with a confetti of champagne-popping orders to buy, buy, buy. It hadn’t been that bullish with record highs for the S&P 500 in 16 years. It was the best year for the Dow Jones Industrial Average in 18 years. What a great year it was in 2013The Federal Reserve and the economic policies of the US government have strongly shown that it is believed that the solution to macroeconomic problems in the USA are to be found in new inflationary bubble-attitude, bringing about the inflation of asset values, so that the landing from the last financial crash in 2008 would be a little bit easier. But, it’s precisely the Federal Reserve’s liquidity policies, the loose money, the free and easy Quantitative Easing that has inflated another bubble from a bubble burst. In the meantime, the testosterone levels of the traders have been shooting through the roof since they have been on a winning streak. They have definitely entered the period of “learned helplessness”. Their actions (in their opinion), doped up to the eyeballs on testosterone, allow them to believe that they will have no effect on the world.

Since the worst lows of the financial crash that were seen in March 2009 for the S&P500 Index, we sit back and witness the 180%-increase in the market. It’s been the longest and the highest bull market in history, hasn’t it? Stocks are priced to give below-average returns in the coming months and that’s a signal if ever there was one of market performance (take a look at the Shiller P/E 10 ratio; it’s above 25, while the historical average is 16.5).

Another obvious identification of testosterone and cortisol causing “learned helplessness” is the results of sentiment surveys. When sentiment surveys are in extremes, then the market tends to move in the opposite direction. Today Investors Intelligence Sentiment Poll shows that bulls outnumber bears by 45% on the financial markets these days. That’s extreme. That’s a bad sign for the financial markets. The guys believe that their actions simply don’t matter any longer.

More women and less testosterone would mean a whole lot less of “learned helplessness” on our hands. Cocaine-induced party-animals with primal instincts that have been cut off from reason because their testosterone has gone into over-drive and their cortisol has cut them off from reality all thrown into the financial markets and multiplied by thousands means that the crash-landing will be worse this time. Even Christine Lagarde of the International Monetary Fund stated that the financial crash would never have happened had the Lehman Brothers been the Lehman Sisters. The risk profile of women means that they spend less and save more. Certainly, there may be less money to be made, but there may be less to be lost too.

Maybe someone has realized that this is the case today. We’re slowly changing the way we look at women and the representation that we have of them. The financial services industry has cottoned on to that and there are more women according to researchers in financial ads these days (whether they be clients or part of the workforce). Pamela Grossman of Getty Images has shown that there is an increase of 20% of women in adverts linked to the financial sector today compared with five years ago. But, it’s not sufficient to just show cognitively-adept and good-looking women that are high-flyers in adverts related to the financial sector; that isn’t going to change anything. It’s recruiting them also in the world of finance. We haven’t done that. According to studies by the Boston Consulting Group men are interested in plain old wealth, while women are interested in long-term financial security (not only for themselves but for their families). But, the financial sector is male-dominated, testosterone-induced and helplessly rigid.

Women in advertising are just marketing techniques for the masses to fool the consumer these days; yet again. The financial markets are still testosterone-reeking bull-pits where men have lost touch with reality.

Originally posted: Testosterone in the Financial Markets

Day Trading Data Sheets Futures and Forex








"Faith" In One Chart

Zerohedge - Mon, 04/21/2014 - 20:00

Another day, another downgrade in the expectations for US economic growth in Q1 (to a mere 1.5%). But have no fear, oh ye of little faith, for the hockey-stick of hope will refuel that exuberance by the year-end to an underwhelming 2.7% 2014 growth rate...

 

 

Crucially, GDP will always mean-revert up from a drop... but profit margins will never mean-revert down from an exuberant extreme easy-money surge.

 

 

 

h/t @Not_Jim_Cramer

Bonus Chart: The Death Cross of Global Rationality continues









Japan Has Proven That Central Banks Cannot Generate Growth With QE

Zerohedge - Mon, 04/21/2014 - 19:47

The following is an excerpt from a recent client letter.

 

The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.

 

Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.

 

Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.

 

In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…

 

$1.4 trillion is…

 

1)   The equivalent of 24% of Japan’s total annual economic output.

2)   Enough to fly every human being in Japan to California for a 2-week vacation.

3)   The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.

 

Moreover, with $1.4 trillion, you could…

 

1)   Buy Australia’s entire economy for a year.

2)   Fund NASA for the next 82 years.

3)   Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.

 

For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding.

 

Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.

 

To whit, since announcing this program Japan has seen:

 

1)   GDP growth accelerate for only two quarters before turning down again.

2)   Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.

3)   Household spending crater 2.5% year over year in real terms.

4)   The Yen lose an astounding 25% of its purchasing power.

5)   Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.

6)   Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.

 

In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now).

 

Thus, the Bank of Japan’s massive QE campaign has revealed:

 

1)   That QE does not generate economic growth

2)   There will be political consequences for its failure

 

Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.

 

This concludes this article, swing by www.gainspainscapital.com for a FREE investment reports Protect Your Portfolio, which outlines how to protect your portfolio from bear market collapses.

 

Best Regards

 

Phoenix Capital Research

 

 

 








Japan Has Proven That Central Banks Cannot Generate Growth With QE

Zerohedge - Mon, 04/21/2014 - 19:47

The following is an excerpt from a recent client letter.

 

The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way.

 

Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough.

 

Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.

 

In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…

 

$1.4 trillion is…

 

1)   The equivalent of 24% of Japan’s total annual economic output.

2)   Enough to fly every human being in Japan to California for a 2-week vacation.

3)   The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.

 

Moreover, with $1.4 trillion, you could…

 

1)   Buy Australia’s entire economy for a year.

2)   Fund NASA for the next 82 years.

3)   Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.

 

For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding.

 

Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.

 

To whit, since announcing this program Japan has seen:

 

1)   GDP growth accelerate for only two quarters before turning down again.

2)   Prices rise for nine straight months… pushing Japan’s cost of living to a five year high.

3)   Household spending crater 2.5% year over year in real terms.

4)   The Yen lose an astounding 25% of its purchasing power.

5)   Multiple new record trade deficits, with January being the worst ever January on record… ditto for October, November and December last year.

6)   Over 77% of Japanese citizens not feeling as though Japan’s economy is improving.

 

In simple terms, Abenomics has failed to revitalize Japan. Just as importantly, this failure is being noticed by the press (articles regarding the failure of Abenomics have emerged in Forbes, the Financial Times, and CNBC) and is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now).

 

Thus, the Bank of Japan’s massive QE campaign has revealed:

 

1)   That QE does not generate economic growth

2)   There will be political consequences for its failure

 

Now, Central Bankers will never openly admit that they or their policies have failed. But Japan has proved that they have. It’s only a matter of time before the world catches on.

 

This concludes this article, swing by www.gainspainscapital.com for a FREE investment reports Protect Your Portfolio, which outlines how to protect your portfolio from bear market collapses.

 

Best Regards

 

Phoenix Capital Research

 

 

 








John Hussman On The Federal Reserve's Two Legged Stool

Zerohedge - Mon, 04/21/2014 - 19:32

Excerpted from John Hussman's Weekly Market Comment,

“Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions… Recall how this worked during the couple of decades before the crisis. The FOMC's main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. Many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values. The famous Taylor rule provides one such formula.”

 

- Janet Yellen, FOMC Chair, April 16 2014

In her first public speech on monetary policy, Janet Yellen made it clear that the Fed intends to pursue a more rules-based, less discretionary policy. This is good news. The bad news, however, is that Yellen focused only on employment and inflation. In that same speech, not a single word was said about attending to speculative risks or financial instability (which are inherent in Fed-induced, yield-seeking speculation). Without attending to that third leg, the Fed is resting the fate of the U.S. economy on a two-legged stool.

The problem is this. In viewing the Fed’s mandate as a tradeoff only between inflation and unemployment, Chair Yellen seems to overlook the feature of economic dynamics that has been most punishing for the U.S. economy over the past decade. That feature is repeated malinvestment, yield-seeking speculation, and ultimately financial instability, largely enabled by the Federal Reserve’s own actions.

To overlook yield-seeking speculation as a central element connected to the Federal Reserve’s mandate is to invite a repeat of dismal economic consequences over and over again. The Fed’s mandate need not explicitly refer to financial stability – it is enough to recognize that the failure to take speculation, malinvestment, and financial stability seriously has been one of the primary causes of economic and financial crises that prevent the Fed from achieving that mandate. Indeed, the Fed has again baked such consequences into the cake as a result of its policy of quantitative easing, and an associated lack of appreciation for how equity valuations work (particularly the need to consider valuation multiples and profit margins jointly, whenever one uses earnings-based measures).

Nearly every argument that stocks are not in a “bubble” begin with an appeal to 2000, as if the most extreme valuations in history should be a upside objective, below which anything else is acceptable. As long as conditions are not as extreme as 2000, the word “bubble” presumably cannot be applied. Others might argue that the word “bubble” implies certain mathematical features, such as violations of “transversality” that are difficult to test in real-time. We clearly observed a Sornette-type bubble in the advance to what we still view as a January singularity, with slight marginal new highs since then being part of a broad topping process - as we also observed in 2000 and 2007. Still, to avoid these semantics, maybe it’s best to use the phrase “speculative extreme.”

While 2000 was certainly the most extreme period of equity speculation in U.S. financial history (taking valuations well beyond even what was observed at the 1929 peak), it is certainly not the only one that deserves that distinction. For example, in 1901, valuations reached a peak that would be followed by a 20-year period of negative real total returns. Stock prices were below the 1901 peak even two decades later. Undoubtedly 1929 would fall into the definition of a speculative extreme, as it was also followed by a 20-year period of negative real total returns. And while valuations in the mid-1960’s did not reach similar extremes, they too were followed by nearly two decades of negative real total returns, with the level of the S&P 500 little changed even 18 years later.

The chart below shows the position of valuations on the basis of Robert Shiller’s cyclically-adjusted P/E. As I’ve noted elsewhere, the reliability of the Shiller metric is greatly improved by adjusting for the implied level of profit margins (Shilller “earnings” divided by S&P 500 revenues) embedded into that P/E. At normal profit margins, the Shiller P/E would presently be above 30.

Remember also that the 2000-2002 decline wiped out every bit of S&P 500 total return, in excess of Treasury bill returns, all the way back to May 1996, and that the 2007-2009 decline wiped out every bit of the market’s excess return all the way back to June 1995. Valuations were stretched to further extremes for a few months in 1929, as well as in 2000 and 2007, but those gains were the first to be surrendered. The possibility that valuations may become stretched further in the short-term does nothing to remove concern about dismal long-term returns even if we take the Shiller P/E at face value.

On the basis of other measures that are even better correlated with actual subsequent market returns, valuations now meet or exceed the levels observed at prior market extremes in history that were followed by 18-20 year periods of negative real returns. We call these extremes not just “cyclical” but “secular” market peaks. Present market extremes can only be excluded from this class of speculative instances if we restrict the definition of "extreme" to the 2000 peak alone. Even then, the price/revenue ratio of the median stock is now higher than in 2000 (as smaller capitalization stocks were much more reasonably priced at the 2000 peak than today).

Make no mistake. The Federal Reserve’s policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt, and other securities. Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors.

To quote a decades-old passage by economist Ludwig von Mises, and as a reminder of what we should have learned after Fed-induced yield-seeking led to a reckless expansion of mortgage debt, a bubble in housing, and the worst economic collapse in modern times:

“The recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.”

Friedrich Hayek concurred

“To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection or production, we want to create further misdirection - a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end.”

Frankly, I don’t have any strong impression that economic outcomes in the completion of the present cycle must be severe. Further policy mistakes would be required beyond a QE-induced speculative run. On the other hand, I have no doubt at all that having driven equity valuations to present levels, investors will be starved of total return – from current prices – for at least a decade (assuming valuations never move below historical norms), and possibly much longer (in the event that valuations do indeed move below historical norms 15 or 20 years from today).

Keep in mind, however, that a significant retreat in valuations even over the next couple of years could dramatically reverse this situation, creating the prospect for very good long-term investment returns from those lower price levels. I remain very optimistic that strong opportunities will emerge even over the completion of the present cycle. Given supportive conditions and the absence of extremely overvalued, overbought, overbullish syndromes, reasonable opportunities would not even require a retreat to historically “normal” valuations. It’s just that from current price levels, the prospect of adequate long-term returns is thin. In short, the same amount that investors are likely to obtain by selling equities years from now is already sitting on the table for the taking today. For investors without multi-decade horizons, it may be wise to use that opportunity.








What the Education Debate Misses

Mises Canada - Mon, 04/21/2014 - 19:12

There is a constant, neverending debate about what should be done with education policy. Should we use technology in the classroom? Should we have stricter national standards? Should teachers be paid more? Should they be paid less? Should children go to school more hours each day, or fewer? And on and on and on.

This is both tragic and pathetic, because we already know what works in education. We have known it for hundreds of years. Great thinkers like Thomas Jefferson, Isaac Newton, and Leonardo da Vinci were not crammed into overcrowded classrooms and forced to sit still for eight hours a day. What worked for them is what can work for everyone – individual, one on one instruction that allowed them to pursue their interests and go at their own pace.

As Murray Rothbard observes in Education: Free and Compulsory, every child is different, interested in different things, and equipped to learn at a different rate than his fellows. Consequently, the most effective education will be personal and individualized to meet his needs, ideally coming from a parent or a private tutor. Failing that, the competition resulting from a wide variety of private schools can offer an education more tailored to the child’s needs than simply lumping him in with other children of the same age in his immediate geographic area.

These observations are so simple and obvious as to be almost trite, and yet they must be repeated again and again because of an unwillingness to listen on the part of parents and policymakers alike. Parents do not want to accept the fact that individualized education is best for their children, because it is easier to delegate that responsibility to the public school system. With no out of pocket costs, and the ability for both parents to pursue a career while the child is out of the home, the public education system represents the ultimate convenience. It takes far more dedication to assume responsibility for one’s own offspring, and the hiring of a personal tutor is prohibitively expensive for most families. Even with this is not the case, we have been so indoctrinated to the idea that schools, filled as they are with guns and drugs and bullying, are a great way to learn to be a well-adjusted, productive member of society.

For those public servants tasked with determining education policy, the endless tinkering with a broken system stems merely from an all too human desire to justify their jobs and their existence. When you are paid by the Department of Education, there is precious little incentive to promote individualism and personalization of schooling.

Making education work is not complicated, it just takes the will to do it. As public schools begin increasingly to resemble prisons, more and more parents will seek alternatives for their children, and my hope is that this will ultimately lead to more localized schooling, with the individual home, of course, being the most localized of all.

I realize that not everyone has the time or resources to provide a personalized education for their children, but the expansion of charter schools and a reversion to local control at least represents an improvement over the status quo.

Sadly, a lot of the problem with our education system is cultural, with children viewed as more of an inconvenience than an opportunity, or better yet, as actual people to be treated with respect and dignity. As Kant advised, we have to stop thinking of kids as means to an end, but instead as ends in themselves.

The issue of children’s rights is a thorny one, and too complex to treat in detail here, but a few cursory remarks can be made. Clearly, below a certain age children have no ability to be rational actors and determine their own destinies. Additionally, they cannot properly be said to be the property of their parents, who created them, or else it would follow that the parents would have the right to do anything they want to their offspring including killing them. This is evidently false. I think the most logical course is to regard children as possessing rights which they are temporarily unable to assert, somewhat analogous to a sleeping person, with the parents acting as stewards.

If more people adopted this attitude, parents would be less eager to delegate their responsibilities to the state and the state of education would improve, as children received  the individual attention they both require and deserve.

april 21/GLD loses another 3.00 tonnes of gold/SLV remains constant/gold and silver whacked as London is closed (physical markets closed)

Harvey Organ - Mon, 04/21/2014 - 19:07
Gold closed down $5.40  at $1288.00 (comex to comex closing time ). Silver was down 25 cents to $19.34   In the access market tonight at 5:15 pm gold: $1290.00 silver:  $19.45 Today the crooks took advantage that the major physical market in gold and silver was closed.  We also had a three day weekend and generally the crooks like the whack on events like these.   Let's head Harvey Organhttp://www.blogger.com/profile/08732619537060012229noreply@blogger.com0

The IPO Window Is Closing Fast

Zerohedge - Mon, 04/21/2014 - 18:58

With a multitude of equity valuation dreams hinging on the success of Alibaba's forthcoming IPO, the following chart is likely the most frightening one for many VC companies currently. As Bloomberg notes, it's becoming much harder for companies to close IPOs successfully with only 2 companies last week raising money at an amount within the expected range. On average,  the eight companies from last week priced their offerings 12% below the mid-point of their range. As one analyst noted, "investors have more or less said "enough"."

 

As Bloomberg notes,

while 167 companies are still on tap to raise $12 billion through U.S. IPOs, the calendar for the rest of April looks bare with only two issuers seeking less than $100 million combined, data compiled by Bloomberg show.

 

That doesn’t include Alibaba Group Holding Ltd...








Another Sign That Central Planning Works: Condom Shortage In Cuba

Zerohedge - Mon, 04/21/2014 - 18:28

Submitted by Simon Black via Sovereign Man blog,

Having traveled to well over 100 countries, I have seen some pretty shocking signs of poverty around the world.

In parts of Asia, it’s not uncommon for parents in poor villages to sell their children for bags of rice… or for children to be stolen outright and sold as orphans to unsuspecting foreigners.

In Africa, I’ve seen people who are so destitute they intentionally mangle and gash their own bodies just to give themselves good cause to shock foreign tourists into donations.

But I’d have to rank poverty in Cuba as the most extreme.

Going to Cuba is like going back in time. The country lacks basic products and services, many of which we consider staples in modern life.

Most roads and buildings are in horrendous condition. And the average person in the country has to make do with just a few dollars a month.

All of this stems from a system of central planning in which government essentially owns and controls… everything. Businesses. Property. Medical services. Anything larger than a bicycle.

Teams of bureaucrats lord over the Cuban economy trying to manipulate and control every possible variable. They dole out housing allowances. They set manufacturing quotas. They control prices of goods and services.

Nevermind that any high school economics student understands why price controls don’t work… and typically lead to shortages.

That’s precisely what’s happening right now.

Cuba’s state-run condom distributor has been centrally planning safe sex for years. And, surprise, surprise, they’re not doing a very good job of it.

Condoms are now at critically low levels in Cuba. And the government’s solution is to sell expired condoms from two years ago. It’s genius.

Like the toilet paper shortage in Venezuela, the infamous electrical blackouts in Argentina, or those mythical stories of Soviet boot factories, it’s clear that central planning simply does not work. Ever.

Even in a single industry as innocuous as toilet paper or condoms, there are simply too many variables in the equation.

Taking that a step further and presuming that a government committee can centrally plan an entire economy or financial system is just ludicrous. But it doesn’t stop people from trying.

John Maynard Keynes is one of the most famous economists in history; decades ago he wrote THE economic playbook still used by governments and central banks around the world today.

His writings include such pearls of wisdom as:

“earthquakes, even wars… serve to increase wealth. . . ”

and my favorite:

“Can a country spend its way into recovery? Yes.”

Keynes was a staunch advocate of ‘state-run capitalism’, an oxymoron rivaled only by “almost pregnant” and “fight for peace”.

Keynes believed that we little people aren’t competent enough to arrange our own finances, and “the duty of ordering the current volume of investment cannot safely be left in private hands”.

He was also a staunch advocate of modern central banking– the concept of awarding a tiny unelected banking elite with total control of the money supply.

He saw it perfectly fine to have a group of men sitting in a room making monetary decisions that would literally impact the entire world… so long as it was the right men.

As he wrote, “State-run capitalism must be run by the right people.” Precisely. And everyone else is just supposed to trust them to be good guys.

Cuba may be centrally planning its condom industry. But the United States is centrally planning the entire global monetary system.

Cuba may be selling expired condoms… but the United States is selling expired credibility.

And just as in Cuba, they are creating bubbles, panics, shocks, crises, and gargantuan inefficiencies.

Like Cuba, the cracks are showing and the system is decaying rapidly. Major governments and central banks are now insolvent, particularly on a mark-to-market basis.

History shows that central planning has always had a finite shelf life. Do you really want all of your assets, savings, and income invested in this system as it collapses?








Why Putin Is Smiling At The Bond Market's Blockade Of Russia

Zerohedge - Mon, 04/21/2014 - 18:01

One of the recurring themes the western media regurgitates at every opportunity is that while the western "diplomatic" sanctions against Russia are clearly a joke, one thing that will severely cripple the economy is the capital market embargo that has struck Russian companies, which are facing $115 billion of debt due over the next 12 months.

Recall that not a single Russian Eurobond issue has successfully priced since Russia's peaceful annexation of Crimea. Surely there is no way Russia can afford to let its major corporations - the nexus of its petroleum trade - go insolvent, which is why Putin will have to restrain himself and beg western investors to come back and chase appetiziing Russian yields (with other people's money of course). Turns out this line of thought is completely wrong.

Bloomberg explains:

Russian companies, facing $115 billion of debt due over the next 12 months, will have the funds even as bond markets shut because of the Ukraine crisis, according to Moody’s Investors Service and Fitch Ratings.

 

Firms will have about $100 billion in cash and earnings at their disposal during the next 18 months, Moody’s said in an analysis of 47 businesses April 11. Almost all 55 companies examined by Fitch are “well placed” to withstand a closed refinancing market for the rest of 2014, it said in a note on April 16. Banks have more than $20 billion in foreign currency to lend as the tensions prompted customers to convert their ruble savings, ZAO Raiffeisenbank said.

 

The amount of cash on balances of Russian companies, committed credit lines from banks and the operating cash flows they will get is sufficient for the companies to comfortably service their liabilities,” Denis Perevezentsev, an analyst at Moody’s in Moscow, said by phone on April 17.

So, Russia can comfortably extend its Ukraine campaign well into 2015? Truly great news for Kiev, which is already bankrupt, and which is scrambling to get every last bcf of gas it can get its hands on before  Gazprom finally pulls the plug in under a month.

Ah, the miracles of positive cash flow... and how quickly it eliminates any so-called political leverage the bearer of the world's reserve currency thought it may have had, leading ultimately to this.








"Most Shorted" Stocks Outperform "The Market" Five-Fold Today!

Zerohedge - Mon, 04/21/2014 - 17:33

In case you were wondering where the ammunition for today's rally in US equities came from on a day of de minimus volume and no real support from JPY carry...

 

"Most shorted" stocks outperformed the market by 475% today (+1.98% vs S&P's 0.34%)... but those with shorts on from last week's highs are still winning (for now)...

 

Seems clear where all that pent-up POMO demand went...

 

Charts: Bloomberg








Netflix Rises On EPS And Intl Sub Beat, In-Line Revenues, And Domestic Subs Miss; Price Increase

Zerohedge - Mon, 04/21/2014 - 17:19

With revenues meeting estimates to the dot, and with largely meaningless non-GAAP EPS (because after all NFLX is valued on a 2024 foward basis), Netflix is choppy after hours as algos try to determine what is more important for them:the miss in domestic subs, which rose 2.25 million on expectations of a 2.31 million increase, of the beat in international (and very much money-losing although now expected to be profitable in 2014) subs, which rose 1.75MM vs estimates of 1.64MM.

Perhaps more important was the company's announcement that it is slowly but surely proceeding with price increases:

As expected, we saw limited impact from our January price increase for new members in Ireland (from €6.99 to €7.99), which included grandfathering all existing members at €6.99 for two years. In the U.S. we have greatly improved our content selection since we introduced our streaming plan in 2010 at $7.99 per month. Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period. These changes will enable us to acquire more content and deliver an even better streaming experience.

What "generous" means for a period of time, only Janet Yellen knows.

Netflix also commented on the incursion of competitors:

We continue to see more capable Internet television devices launched. Chromecast, Roku Streaming Stick, and Amazon Fire TV (on which we expect to support voice search later this year) push the quality of experience and price points for adapter products. Smart TVs from manufacturers like Sony, Samsung, LG and Vizio are starting to evolve from Internet TV as a “bolt-on” to Internet TV as a critical and integrated part of the overall device interface. Roku TV will likely be available in the Fall as one of the first Internet-centric TVs. We expect this trend to continually decrease the friction required for our members to access Netflix and enjoy great content.

 

In Q1, Amazon changed strategies in the UK and Germany, closing LoveFilm as a streaming brand to compete with Netflix. They have repurposed their content deals to serve Amazon Prime Instant Video in the UK and Germany, and are investing in creating awareness of this new model. Amazon is not currently offering subscription video within Prime in Canada, France, Italy, Spain or Japan. They may choose to expand Prime Instant Video or to focus on tuning their three existing Prime Instant Video markets: U.S., UK and Germany. Since much of the content on Netflix and Amazon Prime (as well as Hulu in the U.S.) is mutually exclusive, many consumers see value in subscribing to all three networks. In general, we continue to believe that our biggest long-term competitor for entertainment time remains the MVPDs improving through TV Everywhere, as they are doing with HBO Go.

As for the topic of Net Neutrality, NFLX is "surprisingly" against the Comcast - TimeWarner merger. Why? It's called leverage:

If the Comcast and Time Warner Cable merger is approved, the combined company’s footprint will pass over 60 percent1 of U.S. broadband households, after the proposed divestiture, with most of those homes having Comcast as the only option for truly high-speed broadband (>10Mbps). As DSL fades in favor of cable Internet, Comcast could control high-speed broadband to the  majority of American homes. Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix. The combined company would possess even more anticompetitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger

Finally, on the topic of NFLX's cash flow, well - there is always next quarter... and next year.








Daystar...

TFMR - Daystar - Mon, 04/21/2014 - 17:06

Happy belated Easter.  Thank you for your work here.

  

S&P Rallies To First 5-Day Streak In 6 Months On No Volume

Zerohedge - Mon, 04/21/2014 - 17:03

With Europe still on holiday, US equity market volumes were in a word, abysmal (S&P futures only around 30% of average) but VIX saw action as volume was healthy and the machines were in charge of the action from start to finish. The Dow's intraday range (and volume) was the lowest of the year. This is the first time since Oct2013 that the S&P 500 has had 5 positive closes in a row just as we predicted this morning. Between VIX slams and JPY crosses, today's action was clearly unrigged as Biotechs pumped, dumped, then ripped 2.5% off the lows as April's largest POMO sent markets scurrying. The USD rose 0.1% (on modest EUR weakness) and commodities slid lower led by silver, gold, and copper respectively. VIX closed at 13.25% - new cycle lows.

 

Mission Accomplished...

 

The day in Biotechs

 

 

JPY carry appeared to lose its hold a few times today...

 

POMO drove FX markets...

 

Narrow range in Treasuries but once again POMO was the news...

 

Credit markets did not get as excited as the post-POMO close ramp in stocks...

 

Charts: Bloomberg








Gold Market Now Seeing Deepest Backwardation In 8 Months!

King World News - Mon, 04/21/2014 - 16:41
As global markets continue to see some wild trading, today James Turk told King World News that the gold market is now seeing the deepest backwardation in 8 months. This is one of Turk’s most important interviews ever because it exposes just how phony the paper gold and silver markets have become. Turk also discussed how this historic backwardation will be resolved in this powerful and timely interview.

"It's Impossible To Work Your Way Through College Nowadays"

Zerohedge - Mon, 04/21/2014 - 16:31

"It's impossible to work your way through college nowadays"...is the hard-to-swallow (but not entirely surprising) conclusion of Randal Olson's research into just how extreme national tuition costs have become in the US. As The Atlantic notes, the economic cards are stacked such that today’s average college student, without support from financial aid and family resources, would need to complete at least 48 hours of minimum-wage work a week to pay for his courses.

 

To better measure the cost of tuition, Olson links to a Reddit discussion of cost per "credit hours" -

MSU calculates tuition by the "credit hour," the term for the number of hours spent in a classroom per week. By this metric, which is used at many U.S. colleges and universities, a course that's worth three credit hours is a course that meets for three hours each week during the semester. If the semester is 15 weeks long, that adds up to 45 total hours of a student's time. The Reddit user quantified the rising cost of tuition by cost per credit hour:

 

This is interesting. A credit hour in 1979 at MSU was 24.50, adjusted for inflation that is 79.23 in today dollars. One credit hour today costs 428.75.

 

...

 

In 1979, when the minimum wage was $2.90, a hard-working student with a minimum-wage job could earn enough in one day (8.44 hours) to pay for one academic credit hour. If a standard course load for one semester consisted of maybe 12 credit hours, the semester's tuition could be covered by just over two weeks of full-time minimum wage work—or a month of part-time work. A summer spent scooping ice cream or flipping burgers could pay for an MSU education.

 

The cost of an MSU credit hour has multiplied since 1979. So has the federal minimum wage.

 

But today, it takes 60 hours of minimum-wage work to pay off a single credit hour, which was priced at $428.75 for the fall semester.

Olson, who's doing his graduate work at MSU, crunched the numbers further to create this graph:

 

 

Furthermore, Olson adds,

the average student in 1979 could work 182 hours (a part-time summer job) to pay for a year's tuition. In 2013, it took 991 hours (a full-time job for half the year) to accomplish the same.

And this is only considering the cost of tuition, which is hardly an accurate representation of what students actually spend for college.

As The Atlantic concludes...

Is it any surprise that so many students today are suckered into taking out non-dischargeable loans, in growing chunks, to pay for their bachelor's degrees?

...

It's more important than ever to make sure that, if you're not working 40+ hours a week at a minimum-wage job while in college, you'll be able to get a better-paying job after graduation.








Is This What a Credit Bubble Looks Like?

Zerohedge - Mon, 04/21/2014 - 16:00

Submitted by F.F.Wiley via Cyniconomics blog,

There’s been some buzz recently about a pick-up in business lending. The six largest banks increased business loans at an average annual rate of 8.5% in the first quarter, according to a Wall Street Journal report last week. Other first quarter data reported by the Fed shows commercial and industrial loans jumping 12% from last year. Charles Schwab’s chief strategist went so far as to call a chart depicting the Fed’s broader lending data “the most important chart in the world.”

Unlike some pundits, though, we’re not convinced that a surge in business credit is such a good thing. We don’t doubt that more lending to small businesses, in particular, might do some good if it doesn’t go too far. Lending to large corporations, on the other hand, is a different story. Corporations are already borrowing at a pace that’s only before been seen near cyclical peaks:

At over 4% of GDP, you might say that borrowing is too high, not too low, especially as this pace never lasts long. The bigger issue, though, is that companies are choosing not to invest borrowed funds back into their businesses. You may have seen recent posts by David Stockman or Tyler Durden, breaking down financial statements for IBM, in particular. They showed that IBM’s borrowing in recent years was matched almost exactly by stock buybacks. Clearly, this isn’t the kind of borrowing that helps the real economy, and IBM’s not alone.

We’ll take a broader look at the use of borrowed funds with the Fed’s flow of funds data, which includes a measure of the internal funds generated by all US corporations. We add the internal funds figure (with an adjustment for dividends) to corporate borrowing to estimate the cash that’s available for all purposes: capital expenditures (capex) versus acquisitions, dividends, buybacks and other financial strategies. Normally, capex accounts for between 2/3rds and 3/4ths of the total. Here’s the latest update:

Needless to say, attitudes about capex aren’t quite what they used to be (see here for more discussion). Financial engineering now consumes almost half of available funding, with the implication that companies are piling more debt than ever before on each dollar of productive assets. Although debt-to-asset ratios for the broad corporate sector aren’t yet available for 2013 (the BEA doesn’t update fixed asset data until August), we can make a decent estimate using fixed investment data. Here’s a 60 year history with our 2013 figure tacked onto the end:

We pegged the debt-to-asset ratio at 65% in 2013, 6% above the housing boom peak of 59% in 2007. That’s a big jump in a short period of time. By comparison, the ratio also climbed 6% over the 11 years from 1989 to 2000, and barely rose at all from 2000 to 2007. Glancing at the chart just four years ago without the latest results, you might have guessed that leverage was finally leveling off. Apparently not. Together with weak capex, data describes a leverage-earnings-debt spiral that looks something like this:

The spiral could continue awhile longer, and probably will, but it’s not sustainable. The longer it circles in one direction, the more strongly it circles back in the opposite direction once the inevitable cracks appear in credit markets. In other words, not only does the spiral explain much of what we’re seeing in today’s financial markets, it also describes part of the process that leads to the next recession.

When will the debt super-cycle end?

What’s more, the data also begs the question: When does the roller coaster of leverage peaks and troughs fly completely off the tracks? The idea that we may be in the late stages of a debt super-cycle isn’t welcome in some circles, but the fact is that leverage can’t trend upwards forever. Eventually, we’ll reach a point where the normal reflation no longer works. We may then begin a secular downtrend (as in the period from the Great Depression to World War 2) or, at a minimum, we’ll establish a sideways pattern that fails to make new highs. Either way, the business cycle won’t look quite like it did over the last 70 years of rising leverage, nor will it look like the last few decades of increasing financialization.

Back to the question, can companies lever up as much as, say, 70% of assets? 75%? Maybe so, but it says here that the super-cycle ends well before debt reaches 100% of assets. It’s hard to say exactly where the breaking point is, but we’ll continue to share clues as we find them. In the meantime, one clue may be the bursting of the mortgage bubble in 2008. As you look at the last chart below, keep in mind that residential mortgage debt (backed by properties) and corporate debt (backed by productive assets) are fundamentally different. Or, maybe they’re not so different? You decide.

Sidenote: Regular readers know that we’ve already taken a position on critical thresholds for government debt. See our Fonzie/Ponzi theory and follow-up posts here and here.








Pages

Subscribe to No Time 4 Bull aggregator

Disclaimer: You, and only you, are responsible for your actions.

Do your research well.

 

Copyleft: Feel free to redistribute as you please. Give credit where credit is due.

You can't own someone else's thoughts.

 

 

Sitemap

NT4B Update

Get email updates when new content is published!

Best of the Web