WSJ – Daily Shot: BlackRock – US Corporate Profits over the Business Cycle 1965-2019 12/12/19
Government bonds issued by big developed economies have surged in price this year — pushing yields to record lows. A key reason is that these “safe assets” are in short supply.
A wide variety of investors and corporations prize the highest-quality government bonds for their cash-like qualities — and the near certainty of getting their money back.
According to research by Oxford Economics, the resultant global shortage of these safe assets is going to get worse. The consultancy calculates that the supply of these assets will grow by $1.7tn annually over the coming five years — with a $1.2tn issuance of bonds to fund the US budget deficit the largest driver. But demand for these assets is estimated to grow more rapidly, creating a $400bn annual shortfall and indicating that government bond yields are set to remain low.
“The largest buyers are relatively price-insensitive and will continue to accept low returns in exchange for safety,” said Michiel Tukker, global macro strategist at Oxford Economics.
Mr Tukker said the extra demand would come as the global economy grew more quickly than the supply of safe assets. Governments around the world could alleviate the shortage by issuing more debt, he said. Indeed, higher borrowing has recently moved towards the top of the political agenda in the UK, the US and even the eurozone.
However, a big shift towards looser fiscal policy around the world is unlikely, unless there is an economic downturn, Mr Tukker thinks. In that case, he said, central banks would be likely to respond by ramping up their own purchases of safe assets — adding to demand.
The number of companies reporting non-GAAP numbers has proliferated. In 1996, only 59% of filers used non-GAAP figures according to firm Audit Analytics. By 2017, that had grown to 97%. A gander at the wide range of valuations that non-GAAP creativity implies shows just how dangerous creative accounting can be for investors, too. Zion Research Group recently calculated Ebitda figures four different, but often used, ways for companies in the S&P 500 by sector. The communications sector produced the widest range between the lowest and highest figures—a difference of $25 billion for the sector as a whole between the most and least flattering techniques.
WSJ – Daily Shot: Chartr – US Stock Market Daily Movements (Last 10yrs) 8/13/19
Traditionally, these swung low when oil prices were very high, in anticipation of an inevitable cyclical downswing, and rose when prices fell, pricing in the next recovery. In this latest cycle, however, that relationship has changed. When oil prices fell sharply in 2015 and 2016, valuation multiples soared (and equity issuance spiked). But when oil dropped in late 2018 and this summer, multiples fell alongside it.
The higher risks around energy earnings and damaged trust means investors demand more to buy into them – meaning a higher cost of capital expressed in lower valuations.
When patients in need of medicines in America go to fill their prescription the price they have to pay can vary wildly. For generic off-patent drugs prices are usually low for the uninsured and free for those with insurance. But for newer patent-protected therapies prices can be as high as several thousand dollars per month. Those without insurance might end up facing these lofty list prices. Even those with coverage will often have to fork out some of the cost, called a co-payment, while their insurance covers the rest.
These co-payments, which for the most expensive drugs can themselves be prohibitively high, can act as a deterrent to filling a prescription. Into this gap a new type of charity has emerged: one that offers to pay co-payments for patients. There are two main types of such charities. There are independent ones, like the Bill and Melinda Gates foundation, America’s largest charity, which spent $3.4bn on co-payments in 2014.
There are also co-pay charities owned by drug makers themselves. According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The co-pay charity run by AbbVie, a drug maker that manufactures humira, a widely taken immunosuppressant, is the third largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth largest. Johnson and Johnson, an American health conglomerate, runs the fifth largest. Half of America’s top 20 largest charities are co-pay charities owned by pharmaceutical companies.
The impact of these charities is large and growing. Most of them are less than 20 years old. In 2001 just five drug makers operated co-pay charities, spending a total of $370m. That had risen 20-fold to $7.4bn by 2016. According to Ronny Gal, an analyst at Bernstein, a research firm, the co-payment on the price of a drug is usually just 10% of the cost the pharmaceutical company ultimately charges to the insurance provider. This would mean that $7.4bn spent on copayments could earn drug makers $74bn in revenues, which would account for nearly a quarter of total drug spending in America. Add in spending by the Gates Foundation and this share rises to a third.
Pharmaceutical companies will often claim that helping patients with their co-payments is one way of making expensive drugs more accessible. But it has the fortunate consequence of making their customers price insensitive, because insurance companies will often use high co-payments to nudge their customers into opting for generics over costlier branded drugs: no co-pay, no incentive to save money.
Using co-pay charities to support high prices is good for business, but charitable contributions foster healthy profits in another way too: they are tax deductible. The corporate tax codes of most countries allow companies to deduct the cost of any charitable giving from pre-tax profits. But in America the system is more generous, says Jason Factor, a tax lawyer at Cleary Gottlieb Steen and Hamilton. Companies that give products for the benefit of the “needy or ill” can deduct up to twice the cost of gifted goods.
If you were only to read one thing…
- “The most troubling takeaway from two days of congressional hearings on Facebook Inc. was this: Mark Zuckerberg didn’t want to explain how the social network operates.”
- “Zuckerberg found it hard to plainly acknowledge that Facebook tracks users from device to device, collects information on websites people visit and apps they use, gathers information on people’s physical locations, collects phone call logs from Android smartphones and pulls in some online activity from people who don’t even have Facebook accounts.”
- “Zuckerberg declined to acknowledge that Facebook’s ad system and products are informed by all of this information gathering on and off the social network. If Facebook were a true bargain with users — they get a useful, free service in exchange for seeing advertising based on their interests and activity — then Zuckerberg should be comfortable explaining how it all works.”
- “Instead, given the option to articulate Facebook’s relationship with users (and non-users), he dodged. A lot.”
- “He said he couldn’t answer queries from Senator Roy Blunt, who asked on Tuesday whether Facebook tracks users across their computing devices or tracks offline activity. The answer to both is yes. During the House committee hearing on Wednesday, Zuckerberg claimed not to know what ‘shadow profiles’ are, even though this term has been used for years to describe Facebook’s collection of data about people who don’t use its services by harvesting the inboxes and smartphone contacts of active Facebook users. (Zuckerberg reluctantly acknowledged that Facebook gathers information on people who aren’t signed up for Facebook for what he said were ‘security purposes.’)”
- “Most people do not understand the scope of Facebook’s data collection. Lawmakers tried more than once to get Zuckerberg to say this, but he never did. Here’s a piece of evidence lawmakers could have showed the CEO: In a survey conducted recently by Digital Content Next, a trade group of news organizations that is frequently critical of Facebook, a majority of respondents said they didn’t expect the social network to track use of non-Facebook apps to target ads, collect their physical location when they’re not using Facebook or harvest information from non-Facebook websites that people visit. Spoiler alert: Facebook does all of those things.”
- “It’s not people’s fault if they don’t know how Facebook works. If Zuckerberg and Facebook were comfortable with the data-based bedrock of their business, he should be able and willing to explain all the ways Facebook collects data on everyone and how it uses it.”
- “It felt as though the company made a calculated decision to deflect rather than talk openly about the scope of Facebook data collection and its data-based ad system. And to me, that was a sign that Facebook is embarrassed about what it does for a living.”
Markets / Economy
- “The world’s poorest countries are increasing their borrowing at a worrying pace and face the mounting risk of debt crises, the IMF has warned.”
- “Since 2013, the median ratio of public debt to gross domestic product in low-income countries has risen 13 percentage points to hit 47% in 2017, according to new research by the IMF.”
- “The research found that 40% of low-income developing countries face ‘significant debt-related challenges’, up from 21% just five years ago.”
- “Fiscal deficits rose between 2013 and 2017 in nearly three-quarters of the nations the IMF studied, and in nearly half of those cases the deficit increase came despite a decline in investment, an indication that the debt was not being put to productive use economically. “
- “As a result it is becoming increasingly likely that more poor countries will face a debt crisis, the IMF staff paper said.”
- “Homes prices at $4 million or more that went into contract in the first 12 weeks of the year had their asking prices cut by an average of 10%, the most in data going back to 2012, according to Olshan Realty Inc.”
- “Xi’s drive to encourage building of residences for rent opens market worth a potential $2tn.”
- “Since 2014, 30 quasi-REITs worth Rmb65bn have been issued on the Shanghai and Shenzhen stock exchanges and through private placements, according to the China REITs Alliance, an industry group.”
- “But these products trade over the counter, so liquidity is poor. Most are also not accessible to retail investors. Some also differ from true REITs because their yields derive partly from capital appreciation, not only rental income.”
- “The value of Chinese REITs could reach Rmb4 to Rmb12tn if their share of gross domestic product or of total real estate assets were comparable to the same ratios in the US, according to estimates last year by researchers at Peking university’s Guanghua School of Management.”
- “But experts say a more active REITs market in China requires action from the tax bureau. The boom in Chinese housing and land prices over the past decade means that absent new policy, older property sold off to a REIT would be subject to large capital gains taxes.”
- “High property prices also mean that rental yields are low — often less than 3% for commercial real estate and under 1% for residential. Without tax benefits, dividend yields on REITs would be too low to attract investor interest.”
Environment / Science
- “A collection of plastic afloat in the Pacific Ocean is growing rapidly, according to a new scientific estimate.”
- “Predictions suggest a build-up of about 80,000 tons of plastic in the ‘Great Pacific Garbage Patch’ between California and Hawaii.”
- “This figure is up to sixteen times higher than previously reported, say international researchers.”
- “One trawl in the center of the patch had the highest concentration of plastic ever recorded.”
WSJ – Daily Shot: Deutsche Bank – Road Quality by US State 2016 1/9
Worthy Insights / Opinion Pieces / Advice
- “Revolution is the ultimate Black Swan.”
- “Thirty percent of U.S. households have zero or negative non-home wealth. One thing is certain; this is not the location of the ‘cash on the sidelines’.”
- “Unfortunately, wealth inequality is a feature, not a bug, of democracy and capitalism.”
- “’According to research from the New York University economist Edward Wolff, the top 10 percent of American households now own 84% of all stocks. That’s up from 77% ownership in 2001′.”
- “90% of America barely participated in the massive bull market the last several years.”
- “’The majority of middle-class wealth is tied to homes, as more than 60% of investible assets are in a primary residence. Stock ownership makes up less than 10% of total assets for the middle class’.”
- But do you have the fortitude to suffer the draw-downs…
- “The men who can manage men manage the men who can manage only things, and the men who can manage money manage all.” – Will and Ariel Durant
- “The China scholar Perry Link once called the party ‘the anaconda in the chandelier’.”
- “Just by hovering, it induces self-censorship and subtle behavioral changes.”
- “‘Normally the great snake doesn’t move. It doesn’t have to,’ Mr. Perry wrote in a 2002 essay in the New York Review of Books.”
- “‘Its constant silent message is ‘You yourself decide.””
Markets / Economy
WSJ – Daily Shot: US Consumer Credit Net Change 1/8
- “Consumer credit balances saw the greatest monthly increase in 16 years.”
WSJ – Daily Shot: FRED – Total US Consumer Credit Relative to Disposable Personal Income 1/8
WSJ – Daily Shot: Piper Jaffray – US Consumers living beyond their means 1/8
WSJ – Daily Shot: FRED – Total Consumer Loans by Credit Unions 1/8
WSJ – Daily Shot: FRED – Total US Student Loan Balance 1/8
WSJ – Daily Shot: US Financial Accounts Q3 2017 1/8
WSJ – Daily Shot: Piper Jaffray – Consumer Confidence & Savings Rate Gap 1/8
- “There is a widening gap between consumer sentiment and the savings rate. In the past, this divergence was a precursor to the end of the economic cycle.”
WSJ – Daily Shot: Market Ethos – US Output Gap 1/8
- “The disappearance of the output gap also indicates that we are in the late stage of the cycle.”
WSJ – Daily Shot: Bitcoin 1/8
- “Bitcoin appears to be range-bound, unable to breach the $17k level again.”
WSJ – Daily Shot: Investing.com – Ripple 1/8
- “Ripple took a massive hit on Monday before recovering partially.”
Environment / Science
- “Criminal gangs seize opportunity posed by hyperinflation and a plunging bolivar.”
WSJ – Daily Shot: Bloomberg – Venezuela 10yr USD Bond Price 1/8
Happy New Year!
I hope that you had a safe and enjoyable transition and I wish you a prosperous 2018.
While I wasn’t planning a post today, I don’t want to deluge you with too much content first thing Monday, so here is a mid-day post.
- “The virtual currency boom has gotten so heated that it is throwing the list of the world’s richest people into disarray.”
- “Consider what has happened to the founders of an upstart virtual currency known as Ripple, which has seen its value skyrocket in recent weeks.”
- “At one point on Thursday, Chris Larsen, a Ripple co-founder who is also the largest holder of Ripple tokens, was worth more than $59 billion, according to figures from Forbes. That would have briefly vaulted Mr. Larsen ahead of Facebook chief executive Mark Zuckerberg into fifth place on the Forbes list of the world’s richest people.”
- “Other top Ripple holders would have also zoomed up that list as the value of their tokens soared more than 100% during the last week — and more than 30,000% in the last year. The boom has turned Ripple into the second largest virtual currency, within striking distance of the original behemoth, Bitcoin.”
- “While most of these currencies were worth nearly nothing a year ago, many are now responsible for creating billionaires — albeit with rapidly fluctuating fortunes. If this is a tulip fever, the fever has spread to chrysanthemums and poppies.”
- “Ripple, whose tokens are known as XRP, is far from the only virtual currency being fueled by the hysteria. In 2017, there were 29 tokens — including Einsteinium and Byteball — that rose more than Bitcoin’s remarkable 1,600% jump, according to OnChainFx, a data provider.”
- “Nearly 40 virtual currencies are worth more than $1 billion — when all the outstanding tokens are counted at their current value — despite many of them not having been used in any sort of transaction other than speculative trading.”
- For perspective, “… all the outstanding Ripple tokens were worth $140 billion on Thursday, while all Bitcoin were worth $250 billion.”
- “Mr. Larsen was Ripple’s chief executive from 2012 until he stepped down last year to become the company’s executive chairman. During his tenure, Ripple focused on helping banks use its software to shift money between different foreign currencies, something that most banks currently do through a cumbersome process involving separate accounts in every country where they operate.”
- “Ripple has said it has signed up more than 100 banks to use the company’s technology, including American Express and Banco Santander.”
- “But banks do not need to use Ripple tokens for Ripple’s software to transfer dollars, euros and yen. That point appears to be lost on many small time investors who are buying Ripple tokens.”
- “Most of the buying and selling of Ripple tokens is happening in South Korea, according to data providers that track virtual currency exchanges, where ordinary investors have thrown money at a wide array of virtual currencies.”
- “…Even virtual currency analysts who believe in Ripple’s software have said there is a big difference between Ripple the company being successful, and Ripple the token gaining enough traction to justify current prices.”
- “’An impossibly long list of things already needs to go right for XRP to become a reserve currency for banks,’ Ryan Selkis, a virtual currency analyst, wrote in a post on Thursday.”
- “But, Mr. Selkis added, that doesn’t mean Ripple’s price won’t keep ascending. Why? ‘Because this is crypto, and everyone in the industry is now slinging crack crypto cocaine to retail addicts,’ he wrote.”
- “Though the U.S. saw $112 billion of mobile payments in 2016, by a Forrester Research estimate, such payments in China totaled $9 trillion, according to iResearch Consulting Group, a Chinese firm.”
- “For Alibaba and Tencent, the payoff isn’t just the transaction fees they make from merchants, typically 0.6%. It’s also the consumer data collected, which can transform their apps into marketing platforms for an expanding array of services, from bike sharing to travel.”
- “Conditions in China made it ripe for this innovation. Credit cards never caught on in a big way. Discretionary spending wasn’t an option for most people until recent years, and there has long been a cultural aversion to debt in China. On top of that, the government made it tough for Visa Inc. and Mastercard Inc. to set up shop.”
- “The rise of tech companies as financial powers has dealt a blow to traditional banks. China’s state-owned banks lost nearly $23 billion in fees in 2015 they might have collected from card fees, according to a November 2016 report from EY (formerly Ernst & Young) and Singapore’s DBS Bank. The report projected the annual fee loss could widen to $60 billion by 2020.”
- “The larger problem for banks might be that Alibaba and Tencent often know more about their customers than they do. If a Beijing car dealer uses a bank debit card for a business trip to Shanghai, the bank knows what airline he or she flew, as well as the hotel and restaurants patronized. ‘But if the ‘customer interface’ is happening elsewhere, the bank has zero visibility over transactions,’ said James Lloyd, Asia-Pacific FinTech Leader at EY. ‘That’s not a good situation to find yourself in’.”
- “Tencent and Alibaba say they have no plans to push their payment platforms to U.S. consumers. Many Americans don’t see the need for mobile payments, since their plastic cards and cash are welcomed and some merchants still accept checks.”
- “’Any new way of paying has to prove itself to be incrementally better than any other options you have,’ said James Wester of research firm IDC Financial Insights. In the U.S., ‘plastic is convenient, widely accepted and understood by the customer’.”
Worthy Insights / Opinion Pieces / Advice
- Some perspective on the cryptocurrency boom.
- “Only a strong economy can stop damage in Treasuries spreading to equities and credit.”
- “If the big US tax cut that brought 2017 to a conclusion has its intended consequences, then capital expenditures will start to rise in the next year, as will wages. With consumer confidence high, that should lead to higher consumption. It would also lead to monetary policy at the tightest end of what currently seems probable. The European Central Bank and Bank of Japan would indeed desist from their asset purchases, the Federal Reserve would reduce its balance sheet, and liquidity would flow out of world markets. The Fed could be expected to raise rates four times.”
- “This would be a consummation devoutly to be wished, vindicating both the belated fiscal stimulus that the US has just administered and the desperate muddle-through strategy that preceded it. But significantly higher rates and lower liquidity would be bad news for equity markets, which look historically expensive. High valuations can be justified while rates are historically low. Future earnings can be discounted at a low rate and the cash yields on stocks look attractive. But if all goes according to the US Republican party’s plan, interest rates will need to be significantly higher a year from now, and valuations will come under pressure.”
- “The alternative scenario is that the tax cut achieves no meaningful stimulus, and is merely put towards higher corporate dividends and expensive mergers and acquisitions. The synchronized global economic recovery of the past year peters out, as other brief post-crisis recoveries have done. In this situation, the Fed tightens far less aggressively, other central banks blink and keep buying assets, and bond yields stay where they are, or even fall. On this gloomy prognosis, the legacy of the tax cut would be no more than greater inequality. But equity markets would enjoy much the same benign conditions they have had this year.”
- “Amid Wall Street’s bullish prognoses for 2018, an inverse relationship is becoming clear. Those who are more optimistic for the economy tend to be more pessimistic about the prospects for risk assets. Some say they are so bullish they are bearish.”
- “This is realistic. If monetary stimulus really does give way to a successful fiscal stimulus, investors should expect much higher volatility, and probably outright price falls, from equity markets.”
Markets / Economy
- “Credit unions at risk of failure as loan losses mount.”
WSJ – Daily Shot: UBS Estimates – US Retail Store Closures 2017 – 1/5
- “Fund manager to keep 1m sq ft space in Canary Wharf Group towers.”
- “Brian Kingston, chief executive of Brookfield Property Partners, said property prices in London had ‘always been high’, but were now ‘very high’.”
- “’You would always have people starting out renting, but they would graduate to owning,’ said Mr Kingston. ‘But in New York and London, you could be a fairly well-compensated individual and you could still not afford to buy’.”
- “Deal will earn ousted chief over $1bn in sale to SoftBank as part of their tender offer.”
- “Chinese stockholders are ramping up borrowing against shares, driving revenue for securities houses but creating risk of a chain reaction in the event of a sharp market downturn.”
- “Shareholders in 317 Shanghai and Shenzhen-listed companies had pledged shares worth at least 40% of those companies by December 18, up from 224 companies on the same date a year earlier, according to Wind Info.”
- “Share-pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price.”
- “In September China’s two main bourses published draft rules that would tighten regulation on share pledging. One provision caps the value of loans secured by shares at 60% of the market value of the pledged shares, ensuring a buffer that will protect the lender in case a share price falls.”
- At least the mainland exchanges require that such pledges be disclosed, unlike the Hong Kong exchange, where other shareholders can be surprised.
WSJ – Daily Shot: Credit Suisse – US Household Net worth by quantile 12/15
WSJ – Daily Shot: Credit Suisse – US Household Ownership of Equities by quantile 12/15
Worthy Insights / Opinion Pieces / Advice
- “Ignorance about the scale of the problem is part of the answer.”
- A summary of the numbers provided by Erica Pandey of Axios on 12/17:
- “300% more student debt than their parents, on average.”
- “1/2 as likely to own a home as young people — ages 25–34 — were in 1975.”
- “One in five of young adults live in poverty.”
- “2.9% average annual returns on 401(k) plans, compared to 6.3% returns for baby boomers.”
- “Many millennials will have to work until the age of 75, based on an analysis of federal data.”
- “A typical 2009 college graduate could earn up to $58,600 less than a typical 2007 college graduate over a decade, based on current trends.”
- “The American racial wealth gap is widening, with the median white household projected to have 86 times more wealth than the median black household by 2020.”
- “Alas, there is an important twist today that wasn’t in play back then –central banks’ swollen balance sheets. From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world.”
- “Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.”
Markets / Economy
- “String of catastrophes expected to drive insurance prices higher.”
- “11 million Americans spend more than 50% of their income on rent.”
- “About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Tens of thousands have not made payments for months. Some 90,000 borrowers became delinquent as a consequence of Hurricane Maria, according to Black Knight Inc., a data firm formerly known as Black Knight Financial Services.”
- “Puerto Rico’s 35% foreclosure and delinquency rate is more than double the 14.4% national rate during the depths of the housing implosion in January 2010. And there is no prospect of the problem’s solving itself or quickly.”
- “At the moment, dealing with a mortgage lender about a missed payment may be a distant concern for many of the 3.4 million people in Puerto Rico. They are literally still picking up the pieces, struggling to live without electricity or trying to get insurance companies to pay claims to repair their homes. More than 100,000 people are believed to have left to go live with friends and family on the mainland.”
- “Residents won a reprieve when the federal government imposed a temporary moratorium on foreclosures, which stops banks and investors that bought mortgages at cut-rate prices from evicting delinquent borrowers or starting new foreclosures. Many lenders also have agreed to waive missed payments during the moratorium.”
- “But that moratorium is scheduled to expire in early 2018, and lawyers and housing counselors expect that to trigger a surge in foreclosures.”
WSJ – Daily Shot: Investing.com – Bitcoin 12/18
- “The cryptocurrency is gunning for $20k as it hit another record high over the weekend.”