James Saft

Jan 31 (Reuters) – It looks like the central bankers are
winning: cash is being put back to work.

Equities are having, by some measures, their best January in
more than a decade. Signs point to cash coming off of the
sidelines as an important supporting factor. Global stocks are
up almost 5 percent for the month and the Standard & Poor’s 500
Index is on track for its best January since 1997.

Meanwhile, flows of money into equity funds and ETFs have
been strong, while cash has drained out of major banks and money
market accounts.

Central banks have worked hard for the past four years to
entice worried investors and businesses to put their cash back
to work, but with only limited success. Central banks have cut
rates while at the same time buying up assets, especially
government debt. The net result is very low deposit or
short-term rates.

Therefore, if you are an investor and have a bond mature, or
are sitting on cash, you are paying a pretty hefty premium in
lost purchasing power. The cost of that premium can be measured
by looking at what you would earn in a Treasury bill minus the
purchasing power you lose to inflation. The three-year rolling
return on that is a loss of more than 5 percent, according to
Andrew Lapthorne, quantitative analyst at Societe Generale in
London.

Jan 30 (Reuters) – A bank-led credit crunch, a newly strong
euro and the shrinking of the European Central Bank’s balance
sheet are tightening conditions in the euro zone at just the
wrong time.

This should heighten pressure on the ECB to cut rates or
take other measures when it meets next week. Just don’t count on
the central bank doing much.

A confluence of forces, some positive, are combining to
effectively tighten financial conditions in the euro zone, even
as the continent struggles with unemployment and recession.

By James Saft

(Reuters) – The after-effects of the Great Crisis may still be with us, but the great correlation in global financial markets may be coming to an end.

After years of seemingly disparate markets all going up or down in concert, recent weeks have shown signs of assets actually trading on their own merits. If sustained, this would be an important sign not just of a return to normality in financial markets, but that investors see a more stable world.

Then again, it might be a giant head-fake.

Sometimes called “risk-on, risk-off”, or Ro-Ro, this has been the dominant trade since the financial crisis broke, with commodities, stocks and especially currencies moving very tightly together in predictable ways, mostly driven by major economic news and global events.

By James Saft

(Reuters) – The problem, investors, lies not in Apple but in ourselves.

Apple’s disappointing earnings report and its subsequent 10 percent-plus stock market fall on Thursday are a timely reminder that there are a lot of idiots out there.

The issue – and your source of risk as an investor – isn’t just Apple, but rather the panting hoard of trend following investors who drove its stock price so far above a reasonable valuation.

Apple is a great company making great products, and has an outstanding record of creating new markets. It enjoys margins closer to those of a software company than a consumer giant, has more than $130 billion in cash and a historically unique franchise, one it has been able to expand time and again.

Jan 23 (Reuters) – You might want to learn to stop worrying
and love currency wars, which are here to stay and, for
investors, might not be all that bad.

A host of central bankers and policy makers have been
talking currencies in recent days, generally about how their own
should be weaker and other peoples’ should be strong.

This is a natural result of the interaction of growth being
scarce and of aggressive monetary easing in many leading
economies. Everyone wants to capture what growth there is, and
those who ease monetary conditions through asset purchases get
the benefit of weaker currencies which make their exports more
competitive.

By James Saft

(Reuters) – Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007 underscores the pressing case for reform to safeguard the integrity and independence of the central bank.

Specifically Congress needs to act to make the lines between the banking industry and the governance of the regional Federal Reserve banks cleaner, guarding against a “we are all boys in this together” attitude and ensuring a diversity of views from outside the financial services industry.

As revealed in transcripts released last week of Fed meetings from 2007, Richmond Fed President Jeffrey Lacker said Geithner, now the outgoing Secretary of the Treasury, discussed with banks an upcoming change in the discount rate, a move which proved highly price sensitive when it was publicly announced.

Jan 17 (Reuters) – This is how capitalism is supposed to
work.

Goldman Sachs has cut back sharply on employees’
piece of the revenue pie, taking it to 21 percent for the fourth
quarter.

For long-suffering shareholders, this is the best news out
of Wall Street in, well, maybe forever.

Goldman paid out 37.9 percent of revenues in compensation in
2012, down from 42.4 percent from a year ago. It is the lowest
payout ratio since the firm went public in 1999. The bank did it
by shedding people. Average compensation actually rose 9 percent
to just under $400,000, helped by a 19 percent increase in
revenues.

By James Saft

(Reuters) – The risk controls may have changed but many of the preconditions for JP Morgan’s epic speculative loss remain – for all too-big-to-fail banks.

JPM on Wednesday released both its fourth-quarter earnings and a 129-page report into the details of its $6.2 billion loss in its London-based Chief Investment Office. The two documents are a good pair, demonstrating why banks are likely to fall into the same pattern of taking on principal risk to make up for the declining profitability of core banking. here here

It is impossible to understand why JP Morgan found itself so far out on a limb without reckoning with two facts: it, and other banks, are awash in deposits, but face dwindling profits from loans.

By James Saft

(Reuters) – Mario Draghi has saved the euro, for the time being, but seems less inclined to help the economies in which it is used.

After stepping in last summer to put the full faith and power of the European Central Bank behind the vulnerable euro zone common currency, Draghi’s central bank has been strikingly less aggressive than its peers in taking steps to address unemployment and recession.

With central banks in the U.S. and Japan easing aggressively, that leaves the euro liable to continue its recent gains, making countries in the currency area less able to export their way out of their problems.

By James Saft

(Reuters) – Punished by another year of bad performance from active investment managers, there is some encouraging evidence that investors are finally wising up.

Call it the triumph of experience over hope, or simply a case of slow but steady learning, but last year equity-trading volume slumped and the flow of funds into low-cost options like exchange-traded funds continued to gain momentum.

A record $188 billion poured into U.S. ETFs in 2012, according to IndexUniverse, taking assets under management in ETFs to $1.35 trillion. The vast majority of the money is in low-cost index-based vehicles. While that’s only about 12 percent of the $11.6 trillion industry, at least it represents a growing minority that is accepting the boring but rewarding reality that handsomely paid managers are not worth it because they are not going to consistently beat the market.