Opinion

James Saft

What if the market has it right?: James Saft

Jul 8, 2014 04:01 UTC

July 8 (Reuters) – The past 15 years of bubbles and busts
notwithstanding, sometimes it may be best to just assume
financial markets have got it right.

The central problem facing investors today is how to
reconcile patchy and uneven growth in the economy with very full
valuations for stocks and other risky assets.

What has been a constant tension over the past five years,
during which U.S. stocks have more than doubled, was highlighted
yet again last week when decent but not outstanding U.S. jobs
figures (wage growth for example was poor) prompted investors to
underwrite yet another stock market run to record territory.

In trying to figure out why financial markets are doing so
well and risk is so well bid, there are two broad competing
theories.

The first explanation is that financial markets are ahead of
the curve. In this reading a stronger recovery which will
justify rich valuations is just around the corner. If true,
companies will see revenues jump along with overall economic
growth, and margins with them, prompting a new round of
investment in capacity and allowing for the vast majority of
recently made risky loans to be repaid.

Jobs data doesn’t change Yellen sweet spot: James Saft

Jul 3, 2014 15:59 UTC

July 3 (Reuters) – Good news on the jobs front is even
better news for investors in risk assets as it does little to
move markets away from the Janet Yellen sweet spot.

U.S. nonfarm payrolls increased by 288,000 last month,
topping the 200,000 level for five straight months for the first
time since the go-go late 1990s. Unemployment fell to 6.1
percent, its lowest since September 2008, the month the collapse
of Lehman Brothers rang the opening bell for the financial
crisis.

The Yellen Sweet Spot, as I like to call it, is the idea
that risk assets should legitimately rally because the Fed is
committed to loose conditions and the economy is not really
doing all that badly.

Re-thinking the equity glide path

Jul 2, 2014 20:35 UTC

July 2 (Reuters) – The equity weighting glide path – the
idea that savers should cut risky holdings of stocks
mechanically as they approach retirement – is an appealing
metaphor, easy to understand and instinctively right feeling.

But for many, especially those unlucky enough to live
through one of the many historical extended periods of low
returns, that glide path ends well short of the runway.

One of the fundamental early insights of investing has been
that, as equities are volatile, as you approach needing your
savings to live on you should cut back on stocks and buy bonds.

Central banks and all tomorrow’s parties: James Saft

Jul 1, 2014 04:01 UTC

July 1 (Reuters) – In focusing on their traditional role as
guardians of the punchbowl, central banks are failing to see how
tonight’s party always slides into tomorrow’s need for a
hangover cure.

In a barbed annual report, the Bank for International
Settlements, the so-called central banks’ central bank, attacks
policymakers for a misguided emphasis on the short-term ups and
downs in the economy and a blindness to the longer-term costs.

The critical distinction here is between the business cycle,
a six-to-eight-year cycle of ups and downs which central banks
seek to manage, and the financial cycle, which is most easily
viewed in terms of asset prices and which can last upwards of 20
years.

Drawing a line between pricey markets and globalization: James Saft

Jun 26, 2014 21:34 UTC

June 26 (Reuters) – If global policy makers are wrong about
globalization, and they could be, we may be in for more low
growth, low rates and the high asset prices they support.

At issue is the bedrock belief that globalization lifts all
boats, making us all richer by allowing the flowering of
individual countries’ comparative advantage.

That some classes of people – low-skilled workers in the
West, for example – have not done well out of globalization
should by now be obvious.

Likelihood and risk are not the same

Jun 25, 2014 19:46 UTC

June 25 (Reuters) – The GDP release is a salient reminder
that right now, the big risk for most investors is that the
consensus is too complacent.

How else to interpret a world in which U.S. growth falls at
an unexpectedly steep 2.9 percent annual clip in the first
quarter and yet stocks rally?

One easy conclusion is that everyone is leaning more or less
the same way, making the risk, if not likelihood, of an upset
all the greater. Low-probability events can have outsized
impacts.

The leveraged-up less well off and profits

Jun 4, 2014 21:11 UTC

June 4 (Reuters) – Americans are borrowing more, renting
more rather than owning, eating in restaurants more and saving
less, leading inevitably to questions of sustainability.

That’s true both for Americans and for the corporations
whose profits they create.

What’s more, the kind of financing backing all this
indicates that a goodly bit of the balance sheet straining
activity is concentrated lower down the income and wealth scale.
Juxtapose this with vertiginous rates of corporate profitability
(and intriguing hints that a top may have been hit) and you have
the making of some serious upcoming tests for the economy and
stock market.

Can the low volatility bargain hold?

Jun 3, 2014 12:05 UTC

By James Saft

(Reuters) – It is this year’s bargain: central banks will remain easy, allowing asset prices to march higher despite all those pesky details about growth and inflation.

There is lots of evidence to show this is a genuine phenomenon – the ECB is expected to ease on Thursday, perhaps in new and creative ways, and the Federal Reserve, while theorizing about some fine day it will raise rates, is careful not to encourage any breath-holding.

And markets are doing their part, with asset prices of both stocks and bonds rising slowly and steadily, all amidst unusually low volatility. Not only is the benchmark S&P 500 index up 5 percent this year, and 17 percent over one full year, yields on benchmark 10-year U.S. government bonds have fallen strongly in most major markets, powering gains almost across the board in fixed income.

Can the low volatility bargain hold?: James Saft

Jun 3, 2014 04:01 UTC

June 3 (Reuters) – It is this year’s bargain: central banks
will remain easy, allowing asset prices to march higher despite
all those pesky details about growth and inflation.

There is lots of evidence to show this is a genuine
phenomenon – the ECB is expected to ease on Thursday, perhaps in
new and creative ways, and the Federal Reserve, while theorizing
about some fine day it will raise rates, is careful not to
encourage any breath-holding.

And markets are doing their part, with asset prices of both
stocks and bonds rising slowly and steadily, all amidst
unusually low volatility. Not only is the benchmark S&P 500
index up 5 percent this year, and 17 percent over one
full year, yields on benchmark 10-year U.S. government bonds
have fallen strongly in most major markets, powering
gains almost across the board in fixed income.

Cheap vs affordable, Apple edition: James Saft

May 29, 2014 20:46 UTC

May 29 (Reuters) – Apple’s $3 billion purchase of
headphones and music business Beats shows exactly how foggy our
thinking about the distinction between ‘cheap’ and ‘affordable’
has become.

At first glance the deal, which values Beats at about three
times more than when it sold a roughly 50 percent stake in
itself to the Carlyle Group in September, appears to be at a
very rich valuation.

And yet in analyzing the deal, media and analyst reports lay
stress on how the deal is only about 0.5 percent of Apple’s
massive market cap. Or better yet, that the $2.6 billion cash
portion of the deal is only 1.7 percent of Apple’s $151 billion
cash hoard as at the end of March.

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