Opinion

James Saft

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.

That fall in GDP, the sharpest in five years, was driven by
a decline in inventory buildup and health care spending, but
cemented by weakness virtually across the board. Final sales, a
measure which excludes inventories, actually fell by 1.3
percent.

Now, the narrative which argues that the first quarter was
just a weather-induced blip in a slow recovery has merit, and is
more likely than not.

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.

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.

Leverage, complexity and amnesia

May 28, 2014 20:32 UTC

May 28 (Reuters) – Investors appear to have forgotten two
prime lessons of the last crisis: complexity is expensive and
leverage is dangerous.

Not that you have to look far, but two recent trends – funds
which mimic hedge fund strategies and leveraged exchange-traded
funds – exemplify the extent to which five years of market gains
and easy central bank money have lulled investors.

It is almost as if the financial crisis never happened.

First, let’s look at leveraged ETFs – exchange traded
vehicles which use derivatives or other means to create leverage
and amplify gains and losses – which have multiplied and come
in for increasing criticism.

Economics and politics align for ECB: James Saft

May 27, 2014 12:13 UTC

By James Saft

(Reuters) – If there is anything more sobering for a central banker than failing to meet the bank’s mandates, as the European Central Bank arguably has, it is having one’s very legitimacy challenged.

The recent round of European Parliament elections were, if not a disaster for supporters of the euro project, resounding notice that many voters are deeply unhappy and suffering economically, with eurosceptic parties more than doubling their seats.

And given that an ECB-engineered weaker euro would help to shelter hard-hit euro zone workers and bring inflation closer to the bank’s 2 percent target, that is exactly what we should expect.

Whacking the economy with a wrench: James Saft

May 22, 2014 20:34 UTC

May 22 (Reuters) – Did you ever get to the point when trying
unsuccessfully to fix something you just start whacking it with
a wrench?

I am getting the feeling that the Federal Reserve is
approaching that point with the economy.

Fed officials have recently outlined some unconventional
policy options that may indicate desperation, bravado or even,
perhaps, a backward kind of genius.

Sidelined Fed a boon for emerging markets

May 21, 2014 20:20 UTC

May 21 (Reuters) – U.S. interest rates are staying low for
quite some time, a backdrop which should, all else equal, favor
emerging markets.

Remember the taper tantrum last year, when fragile emerging
market countries took huge hits as investors moved to tighten
liquidity ahead of an anticipated Fed cutback on bond buying?
Well that’s all in the past and, particularly in the past week,
the noises from within and around the Federal Reserve are
painting a newly dovish picture.

That’s significant for all markets but it is an
unadulterated bonus for emerging markets, particularly those
which need to attract capital and are therefore highly sensitive
to its global cost and availability.

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