James Saft

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.

When investors felt things were good, everything “risky”, like equities or commodities tied to economic growth, rallied together, sometimes almost without reference to regional or individual differences. At the same time, good news was bad for the dollar, which would rally instead on disappointing or negative developments.

Now there are signs this is ending, especially in the currency markets, which, as the biggest, most liquid and frenetic market often leads the way in setting trends.

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.

Jan 9 (Reuters) – There are two big-picture reasons to doubt
corporate earnings: they are improbably high and there are
significant reasons to think they are being gamed.

The U.S. corporate earnings season kicked off this week with
a creditable performance by bellwether Alcoa and amid
expectations that fourth-quarter reports for the S&P 500 would
grow by 2.7 percent. That compares well with a disappointing
third quarter, when earnings for the group barely grew, nudging
up just 0.1 percent.

Even that modest growth, though, if it comes, will be
recorded during a period which is, by many measures, extremely
unusual. So unusual that it may make sense to apply a large
discount to discover the underlying truth. This is not an
argument about the fiscal cliff, or the cost of capital, but
simply put we may be in one of those periods when we need to
take a couple of huge steps backward to get the right
perspective.

By James Saft

(Reuters) – Bankers may just have gotten another golden ticket.

The Basel Committee on Banking Supervision, a global group of central bankers and regulators, unveiled on Sunday newly diluted plans intended to make banks capable of withstanding the next crisis, giving banks more time to meet softer requirements and, critically, hugely loosening proposed rules over the kinds of assets banks will be encouraged to hold.

This will fuel demand for riskier debt, such as mortgage-backed securities and corporate bonds, and takes the financial world a substantial step backwards towards its pre-crisis set of incentives.

But what fuels a boom for banks, capital markets issuance and riskier assets may not translate into a boon for the actual economy, as the new regulations may prove a disincentive to making loans, especially to smaller companies.