from MacroScope:
Foreign investors still buying American
Overseas investors have yet to sour towards U.S. assets despite high government debt levels, according the latest figures on capital flows.
Including short-dated assets such as bills, foreigners snapped up $107.7 billion in U.S. securities in February, following a downwardly revised $3.1 billion inflow for January. At the same time, the United States attracted a net long-term capital inflow of just $10.1 billion in February after drawing an upwardly revised $102.4 billion in the first month of 2012.
The data showed China boosted purchases of U.S. government debt for a second month in February, but also some waning of demand for longer-dated securities.
Still, recurring fears that foreign investors might be scared off by high levels of U.S. debt have thus far proven overdone. Writes Millan Mulraine at TD Securities:
Overall, the massive foreign flow into U.S. assets in March suggests that US securities continue to enjoy healthy global appetite in time of fear (Treasuries) and times of hope (equities). The reallocation from Treasuries to shorter-term securities in February is broadly consistent with the risk-on tone that prevailed during the month, reversing the trend of the past few months, when concerns in Europe resulted in the flight to quality.
Even the downtrend in Treasuries may have been short-lived, said George Goncalves at Nomura, as evidence by the recent drop in benchmark 10-year yields to around 2 percent:
Three snapshots for Friday
The correlation between individual country equity indices is rising again:
U.S. consumer spending jumps in February but income growth tepid.
Apple vs. RIM market value:
Russia’s new Eurobond: what’s the fair price?
Russia’s upcoming dollar bond, the first in two years, should fly off the shelves. It’s good timing — elections are past, the world economy seems to be recovering and crucially for Russia, oil prices are over $125 a barrel. And the rise in core yields has massively tightened emerging markets’ yield premium to U.S. Treasuries, offering an attractive window to raise cash. Russia’s spread premium over Treasuries hit the narrowest levels in 7 months recently and despite some widening this week it is still some 75 basis points below end-2011 levels.
Initial indications from the ongoing roadshow are for a two-tranche bond with 10- and 20-year maturities, possibly raising a total of $3.5 billion.
But market bullishness notwithstanding, investors say Moscow should resist temptation to price the bond too high, a mistake it made during its last foray into global capital markets in April 2010. Fund managers have unpleasant memories of that deal, recalling that Russia unexpectedly tightened the yield offered by 25-28 bps, making the bond an expensive one for investors who had already placed bids. The bond price fell sharply once trading kicked off and yields across the Russian curve rose around 25-30 basis points. Jeremy Brewin, a fund manager at Aviva said:
Russia has a slightly disappointing reputation.. We all ended up paying a tighter spread than we expected. Everyone is concerned they will get pulled in too tight again.
James Croft, head of emerging debt trading at Mitsubishi-UFJ agrees:
The demand for Russian risk is such that getting this bond away should be no problem. The only impediment that could make the transaction harder is investors’ wariness, based on the negative experience of the last deal back in 2010.
Dear Ms. Rao,
A recent claim successfully put forth by the Russian Government before two French courts (see below) could have drastic financial implications for the Russian State’s budget, stemming from the existence of billions of unpaid russian sovereign debt.
We believe credit rating agencies and emerging debt managers should follow developments in this matter very closely.
The current investment grade ratings enjoyed by the Russian Federation are based on a negligent analysis of inaccurate financial data.
The public accounts of the Russian Federation’s financial position make no mention of (and therefore actively dissimulate) the existence of due debt issued or guaranteed by the Russian State prior to 1917.
It has been put forth to the French Senate (Sénat, Commission des Affaires Etrangères de la Défense et des Forces Armées, rapport no. 150 – 1997 – 1998, projet de loi relatif au règlement définitif des créances réciproques entre la France et la Russie, annexe au procès verbal de la séance du 3 décembre 1997) that the 1997 value of this debt was in excess of 40 billion US$.
If the leading credit rating agencies adjusted the Russian Federation’s public accounts, as they should, to include an additional liability of US$ 40 billion this would no doubt lead to a change in their opinion on that State’s capacity to repay debt, and so to the ratings they issue.
While credit rating agencies and the Russian Federation have both argued wrongly in the past, and still do, that debt issued or guaranteed by the Imperial Russian State is not a full faith and credit obligation of the Russian Federation, they may not be able to do so in the future because recent claims sucessfully put forth recently by the Russian Federation have drastically changed the situation.
By successfully claiming ownership, before two French courts (Tribunal de Grande Instance de Nice in 2009 and Cour d’Appel d’Aix en Provence in 2011), of the Orthodox Cathedral in Nice on the grounds that the building had been paid for out of the Imperial Russian State budget and that the Russian Federation was the successor governement to the Imperial Russian State, the Russian Federation has in fact asked the court to acknowledge what defaulted sovereign bondholders have been saying all along: that the Russian Federation is the successor government to the Imperial Russian State and as such is both entitled to claim its assets and bound to pay off Imperial Russia’s debt.
For more on the matter of negligent sovereign debt rating analysis, please visit our website at:
We thank you for your attention.
The Credit Rating Agency Observatory – CRAO
from Mike Dolan:
Sparring with central banks
Just one look at the whoosh higher in global markets in January and you'd be forgiven smug faith in the hoary old market adage of "Don't fight the Fed" -- or to update the phrase less pithily for the modern, globalised marketplace: "Don't fight the world's central banks". (or "Don't Battle the Banks", maybe?)
In tandem with this month's Federal Reserve forecast of near-zero U.S. official interest rates for the next two years, the European Central Bank provided its banking sector nearly half a trillion euros of cheap 3-year loans in late December (and may do almost as much again on Feb 29). Add to that ongoing bouts of money printing by the Bank of England, Swiss National Bank, Bank of Japan and more than 40 expected acts of monetary easing by central banks around the world in the first half of this year and that's a lot of additional central bank support behind the market rebound. So is betting against this firepower a mug's game? Well, some investors caution against the chance that the Banks are firing duds.
According to giant bond fund manager Pimco, the post-credit crisis process of household, corporate and sovereign deleveraging is so intense and loaded with risk that central banks may just be keeping up with events and even then are doing so at very different speeds. What's more the solution to the problem is not a monetary one anyway and all they can do is ease the pain.
Low interest rates and liquidity schemes can't solve what ails the developed world. Societies must accept that in order to alter their current perilous course they must undergo great change, moving away from entitlements to which they have become accustomed. The alternative is weak economic growth, a loss of competitiveness and negative external balances -- a loss of face and place in the global hierarchy.
As if to reinforce the underlying point that the developed world faces a protracted reform period that tests political, economic and social priorities, credit rating firm Standard & Poors' -- not the most popular company in corridors of power over the past year -- warned on Tuesday that it may downgrade the debt of "a number of highly-rated" Group of 20 countries from 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to ageing populations.
For Pimco, the political and social resistance to this sort of change is already showing itself to be significant both in Europe and the United States. People clearly don't want to see pensions and benefits cut but politicians have already grown government and sovereign indebtedness close to their maximum. Accommodative central banks that helped them get there only ended up fueling credit, consumption and housing bubbles and distorting the balance of the economy away from production and into an increasingly bloated financial sector. That, clearly, ended in tears as finance itself needed bailing out and compounded the sovereign debt burden.
So if harder, longer-term choices and reforms are now needed, central banks ability to continually reflate the world economy by monetary means alone is at best uncertain, Pimco argues. The risk of major upheavals along the way in Europe, for example, has the potential for major market volatility and economic seizures.
Avoid financial meltdown – use a thesaurus
So it’s not just investors who are guilty of moving in a herd-like fashion.
Financial journalists use the same verbs and nouns with greater frequency as stock markets overheat but display more variety in their phraseology after the bubble bursts, a study by Irish computer scientists has shown.
Trawling through nearly 18,000 on-line news articles that mention the Dow Jones, FTSE and Nikkei stock indices between 2006 and 2010, Aaron Gerow of Trinity College Dublin and Mark Keane of University College Dublin found that the language used by the writers had become more similar in the run-up to the global financial crisis.
“Meaningful regularities” in language employed before the crash showed “progressively greater agreement” in “positive perceptions of the market”.
Financial commentaries from The Financial Times, the New York Times and the BBC as well as news wire services such as Reuters, for instance, deployed increasingly similar noun-phrases as the market overheated, possibly reflecting a “narrowing of reporting to a relatively smaller number of key events/companies.”
The verbs “rise”, “fall”, “close” and “gain” were most popular through 2007 but their usage peaked the week of October 12 when the crash begins.
Gerow and Keane argue that this convergence of language can be used to identify stock market bubbles and supplement traditional volatility analyses.
Venezuela — high risk, higher yield
Which bond would you rather buy — one issued by a country with an unpredictable leader but huge oil reserves, or one with a dictatorial president as well as empty coffers? The answer should be a no brainer. Not so. The countries are Venezuela and Belarus, and a basic comparison of their debt profiles shows how strangely risk can be priced in emerging markets.
Venezuela’s 2022 dollar bond yields 15.5 percent while the 2022 issue from state oil firm PDVSA trades at 17 percent yield. Venezuelan debt pays a 1200 basis point premium to U.S. Treasuries, according to the EMBI Global bond index.
Now check out Belarus. Dire public finances, a huge recent currency devaluation, and seeking an $8 billion bailout from the IMF, yet able to pay 11 percent on its 2018 issue. Its yield premium to Treasuries is 900 bps or three percentage points less than Venezuela.
Is such a huge risk premium on Venezuela justified? RBC analyst Paul Biszko says Venezuelan yields should logically be 300-400 bps lower than current levels, given the strong recent track record in servicing debt — it did not miss a payment even when oil prices fell to $10 a barrel a decade back. Oil is well over $100 a barrel now, yet investors seem unwilling to trust in President Hugo Chavez’ willingness to keep up payments.
“People see him as one day saying he won’t pay so there is limited sponsorship externally for the bonds,” Biszko says. “Meanwhile those who do hold it get rewarded with high premiums…it doesn’t make sense that the premium is double that of Argentina.”
Sure, Venezuela’s economy isn’t in great shape. Inflation is running at 30 percent a year. There is an election coming up. Also, PDVSA has a $2.5 billion bond maturing mid-July. But Chavez is a shoo-in for the election while PDVSA has enough money to pay the bond. And no one can doubt Venezuela’s ability to pay — Barclays estimates its trade surplus this year may hit $90 billion.
Exotix economist Stuart Culverhouse suggests buying the 2019 and 2022 Venezuelan bonds, citing the high yield. ”Concerns over willingness to pay…to some extent overstate Venezuela’s default risk,” he says.
The long term problems with Venezuelan debt are aren’t insignificant. The country has used massive amounts of future oil supplies as collateral for loans from China, so long term ability to pay is diminished. Additionally, the underinvestment in the country’s oil infrastructure is starting to reduce output. Granted, proven reserves are immense but twelve years of Chavez rule have turned the country into a basket case. The country imports everything at this point and the government has turned to complete control over the currency market to cover up what I believe is a coming crisis in forex reserves.
Yes, Chavez will play the safe game with the debt until his reelection next year (an almost certitude). After the election, he’ll have much less incentive to pay on good terms. Given the decision to pay debt payments or pay for absolutely necessary improvements in infrastructure I wouldn’t bet on payments. He may not immediately default the bonds, but a threat of nonpayment is not so unimaginable. Here is the real danger in Venezuelan debt, with hightened levels of risk must come higher yields. As yields increase, prices must decrease. Unless you are planning on holding the debt to maturity you will not realize your expected yield if you have to sell the bonds for a discounted price.
I would not invest in Venezuelan debt but I probably would not invest in Belorussian debt either. At minimum, the investment should be hedged with some kind of default swap or option relevant to your holding period.
Joseph Hogue is a Research Economist for the State of Iowa. He is a candidate for the level III CFA exam and sits on the board of the CFA Society of Iowa.
The best stocks of 2010
For all the doom and gloom associated with the broader economy—historic unemployment in the United States, debt woes and mandated austerity in Europe—it’s been a remarkably positive year for the stock market. As we enter the last week of 2010, the S&P 500 index is up nearly 13 percent for the year. That’s far from a record (1954 witnessed a breakneck 45 percent rise), but at least the index this year climbed above the level hit before Lehman Brothers declared bankruptcy in September, 2008. The stock comeback story is not unique to America, either; this week, Korea’s stocks hit their highest level in more than three years.
At one time, the gurgling stock market would have been a fairly reliable predictor for a healthy economy in the near future—and who knows, that may still be the case. More bearish observers point to artificial stimulants, like an unsustainable commodity bubble and the Fed’s quantitative easing policy.
Regardless, a lot of equity holders will be popping Champagne (or prosecco) this week. Our chart below shows the top ten performers in the S&P 500 for the year—so what does it tell us? Well, the best-performing stock of the year is Cummins Inc., an Indiana-based company that makes power generators and diesel engines. Not surprisingly, its strong market performance this year is based on healthy sales abroad, particularly in emerging markets enjoying the rise in commodity prices. Another top performer has been AIG, the once-mighty insurer which lost nearly all of its value in 2009 but has made a strong comeback thanks to a massive taxpayer bailout. Two other financial firms that also flirted with the abyss made the top ten.
Looking at much of the rest of the list, you’d be forgiven for thinking we are living through a second dot-com boom. It includes Web-accelerator Akamai, veteran travel site priceline.com, enterprise software firm salesforce.com, and telecom service provider Qwest Communications. One Web star that didn’t make the list is Netflix, which is up an astonishing 233 percent this year. If Netflix can sustain growth like that in 2011, it will likely make the chart next year, because this month it was added to the S&P 500.
Equities — an ‘even years’ curse?
Are global equity markets under an ‘Even Years Curse’ that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International’s’ director of asset allocation Trevor Greetham suspects so.
“It’s not just hocus-pocus but to do with global inventory levels,” he explained at a forum organised by the London-based investment house.
The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.
Looking at the MSCI All World Equity Index, Greetham found equities generating a 69-percent return over the 12-year period starting from 1998. Breaking this down into odd and even years, equities went down by 30 percent in even years, and up by 143 percent in odd years.
On an annualised basis, growth was 4.5 percent, down three percent in even years and up 7.7 percent in odd-numbered years.
Compared against the JPMorgan Government Bond Dollar Index, equity returns beat bonds by 13 percent per annum on an average compound basis during odd-numbered years. In the even-numbered years, global stocks underperformed bonds by 15 percent.
How do rich people get rich?
An upcoming book by Kaye Thomas explains in plain English the secret of succesful investing: Turning money into more money.
While everyone goes through good times and bad times, the 1980 Harvard Law School graduate suggests sticking to four main rules for success:
1) Create and maintain a regular programme of saving, in an amount that makes sense relative to your income level and financial goals.
2) Create and maintain an appropriate division of your money between bonds and stocks, in a ratio that makes sensein relation to your time horizon and risk tolerance.
3) Within each division, create and maintain good diversification.
4) Keep investment expenses to a minimum.
“Every investment has two sides. A great deal for one side is a lousy deal for the other, and no one wants a lousy deal. When investment looks amazingly good, ask yourself why would offer to enrich you at his expense. Ask yourself why isn’t everyone buying this investment if it’s so great. The better an investment looks, the more likely there’s a hidden catch,” Thomas writes.
Unless you’re incredibly self-aware and have a very clear career path designed for yourself, go to the best possible school/college you can get into. These places can open up a LOT of options.
Recognize your limitations. If you’re the third best player on your middle-division college football team, it’s unlikely that you’re going to become a professional athlete. Invest in a good education. It’s just best chance to raise your standard of living.
Specialize!!! If you want to ensure you have a well-paying, secure job, do something that requires some skill. It can be a blue-collar job even but something that requires a couple of years of training, ideally something that requires judgment. That’s something machines can never replace.
Keep your savings in REAL money – precious metals – rather than in fiat currency that loses over 8% of its value each year. That’s an extra 8% you’re paying in income tax due to loss in purchasing power.
DON’T pay Interest on ANYTHING. If you can’t buy it outright then invest your money in something that earns you a decent return (hold it in gold even) and then wait until you can afford to buy it outright. This applies to houses, cars, gadgets. If you do some financial analysis, you will see that you are almost always better off.
Most of all, you have to be PATIENT!!! People don’t become millionaires overnight. Even the bankers who make millions today have had to work 70-80+ hrs/week for about 10 years to get to the point where they are now making real money. Social mobility is TOUGH and the least you can do is move up a notch and then give your kids the skills so that they can move up a notch from there. There is no easy route to becoming rich. Trust me 
.
from From Reuters.com:
Following the smart money
At least 20 of the 30 biggest hedge funds boosted their positions in financial institutions in the last quarter, a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.
The push into financials indicates fund managers including Steven Cohen and John Paulson -- closely watched as barometers of risk -- have shifted from routine merger arbitrage plays to directional bets with more reward potential.
More coverage analyzing the Smart Money:
