As a "Cassandra", I would be remiss if I didn't offer some more general predictions for the coming year 2007 - particularly the kind that hopefully will stimulate debate because they are contentious. Of course, as the legend goes, few will believe them irespective that many will come to pass....
1. US Housing "Crisis" will be shallower than pessimists believe.
This one is easy. So long as central banks accumulate reserves, allowing US deficits to persist and grow coincidental to stable interest rates, economic growth will NOT implode and nominal house prices will stabilize preventing the apocalypse - at least for the moment. This doesn't mean "Buy Homebuilder Stocks", but it does mean that if one was considering purchasing a home, one shouldn't fear that he bottom will drop out further. Rather nominal tides will rise to float most boats.
2. "Intermediate Frame Price Momentum" will continue to be a factor that strongly contributes to Stock Returns in Japan.
Contrary to popular belief, wisdom, and experience, what outperformed in the recent intermediate frame will continue to outperform. This will, be due to a combination of continued money flows by investors alreadyh invested in japan alongside continued earnings growth of enterprises that have been experiencing earnings growth. This unspide-down world (for Japan) will perplex reversion-oriented traders, and reward trend-followers, however,, hollow and shallow theior relative intellect may be.
3. Contrary to contrarian calls by KBC's Jonathon(!!) Allum Dec07 Topix ~15000 call (note: this was incorrectly referred to originally as Nikkei~15000 -ed.), the Nikkei will rally to 20,000 and the TOPIX will rally to 2,000 (not necessarily in that order).
BOTH Large cap and small cap will rally as Japanese asset prices continue to look both relatively and absolutely attractive on a world stage where the only action is inaction."God Bless Apathy!" said one long and leveraged English Hedge Fund Manager
4. PM Abe will visit Yasukuni
....but he will do so under the cover of darkness. Unfortunately papparazzi will not be denied and yet another Japanese Prime Minister will once again have to explain the inexplicable.
5. California's official sponsorship of Universal Healthcare will prompt national debate on the compelling wisdom of universal healthcare, and the even-greater wisdom of a single-payor
Shares of HMOs will tank as the market begins to conceive of a healthcare world less-intermediated. America will receive [unwelcomed by Conservatives] advice from France on systemic reform, and as in 2003, America will again harass and fun of the Frenc, despite the wisdom and correctness of their advice.
6. US dawdles Yet Again on Energy Policy - Oil avgs $75bbl in 2007
The side effect of continued US deficits underpinning global demand combined with stubbornly pig-headed lack of energy policy and no carbon taxes is energy prices stay firm, and rally. At least once during the year, a crisis will cause a spike in crude to within a millimeter of triple digits. Refining margins will NOT deteriorate, and Valero (ticker VLO) will return 50%. Nippon Oil will be a stand-out investment in Japan also appreciating 50%.
7. Wolfowitz is Impeached and Relieved of Command as President of the World Bank
"Mutiny on H-Street" it will be called. The only thing more stupid than placing John Bolton in a diplomatic position was ejecting Paul Wolfowitz from the Pentagon to the helm of the World Bank. Many are still pinching themselves (those that haven't resigned) perplexedly asking themselves "How did HE get here??!?" OK its too early to say "things are right as rain", but little by little in bite-sized moresels, the good guys are reclaiming control, to the eventual benefit of humankind.
8. "The Carry Trade" Makes it to the Cover of Time Magazine
No major move on the RmB. Pathetically small increases in the BoJ discount rate. No move in US fiscal or monetary policy. No GCC currency appreciation. Continued reserve accumulation of USDs by all the usual suspects. All will mean the carry trade lives. It will make the cover of time magazine because a hedge fund manager consortia in partnership with a private-equity consortia will propose to take the entire remaining S&P 500 private, using - yes, you guessed it - YEN financed funds from Japan. This will get Congress to hold hearings, at which Rep. Barney Frank will chide Lloyd Blankfein & John Mack for "shitting on their own dinner plates by facilitating and participating in the "Stealing of America's Assets".
Wednesday, December 27, 2006
How to Hide an Elephant - (Update)
If only my market-timing were so good! Just last week in the previous post in fact, Cassandra detailed the (oh so brief) history of reporting transparency in the Japanese equity market, leading up to an observation positing that "the elephants" (FMR, Cap Research, etc.) and the large-but-simply-paranoid have been employing "new" techniques to non-report their market pecadilloes.
Well this morning new regulations will take effect, according to Bloomberg, whereby authorities will be demanding that holders of greater than 5% positions are now required to file position updates twice a month. This apparently is in direct response to the rather un-cricket rule-bending discovered by authorities in their investigation of Takefumi Horie and the Livedoor affair. While any loophole-closing is better none (at least in Cassandra's view), this doesn't address the specific loop-hole of transactions that, in spirit confer ownership, such as swaps, OTC option-like structures that are employed for, and priced as if there were no other reason for the transaction than to to accumulate a position without triggering disclosure.
A big test will be at this year-end to see who, with the large position, is increasing their holdings (and as a result the stock price of said holdings) into the mutual fund bonus measurement period and the hedge fund calendar year-end. Anyone care to guess who'll win the ignominimous award of being the most blatant?!?!
Well this morning new regulations will take effect, according to Bloomberg, whereby authorities will be demanding that holders of greater than 5% positions are now required to file position updates twice a month. This apparently is in direct response to the rather un-cricket rule-bending discovered by authorities in their investigation of Takefumi Horie and the Livedoor affair. While any loophole-closing is better none (at least in Cassandra's view), this doesn't address the specific loop-hole of transactions that, in spirit confer ownership, such as swaps, OTC option-like structures that are employed for, and priced as if there were no other reason for the transaction than to to accumulate a position without triggering disclosure.
A big test will be at this year-end to see who, with the large position, is increasing their holdings (and as a result the stock price of said holdings) into the mutual fund bonus measurement period and the hedge fund calendar year-end. Anyone care to guess who'll win the ignominimous award of being the most blatant?!?!
Friday, December 22, 2006
How Do You Hide an Elephant
Being a fly on the wall means that sometimes one has to make conjectures, hypotheses, and suppositions in order to attempt to make sense of the world. For things are often not what they seem.
And, nowhere is this more germane than in the case of reporting large positions to stock exchange regulators around the world generally, and in Japan particularly. Japan seemingly has a love-hatre relationship with transparency. Reading who has bought what and when was a fascinating exercise. On one hand, ownership changes were only detailed twice a year, and even then, only the larger holders either through the YuHo or Toyo Keizaei. So it was long after the fact that one realized who had bought the slugs of stock that vaulted the price an issue by triple digit percent. Yet, at the same time, turnover identification was available on each stock at the end of each day. This was a dead give-away as to whether purchasers were foreign or domestic, sporadic or persistent. The strange mix of obfuscation and transparaency juxtaposed each other.
A few years ago, the authorities decided, for unexplained reasons, not to "fix" this, but to turn it own its head, by eliminating the revelation of who was responsible for what percentage of turnover in a security on a particular day, while instituting a requirement to report ownership positions in a security greater than 5% (and thereafter) within some timely interval that is apparently indecipherable when reviewing the very wide variety in reported actions and compliance. Now, one couldn't see the day-to-day colour (rumours were that it was Fidelity and foreign brokers who successfully lobbied for this at a time when transaction volumes were very low, an intimations of an increase in turnover following a decrease in transparency).
The position reporting game reveals information that can be beneficial or detrimental depending upon ones objectives and motives. For example, if you are trying to buy 10% of a company at the best prices, reporting after 5% is not in one's interests. On the other hand, if one intends to buy 10%, having bought 5% at lower prices, disclosing the position might attract copy-cat buying that is beneficial from the point of you of having "the market" do some of the subsequent heavy lifting that raises the price, making the initial 5% rather more profitable and validating the purchase decision. However, if one desires to acquire 10% before encouraging the copy-cats to pile in, then reporting requirements clearly creates adverse issues.
When reporting was first enacted in I believe 2003 (and foregive my imprecision as my memory is fraying), Japan was not popular with international investors. In fact, most were underweight from a GDP adn a market cap weighting for all manner of reasons. But for the few who were operating, it revealed valuable information about who was ramping what. It mathced the proverbial name to the face. For when Fidelity was buying a truckload-sized position, a potential short-seller would be wise to recall the words of Jim Croce: "You don't tug on Superman's cape, you don't spit into the wind, you don't pull the mask off that ol' Lone Ranger, and you don;t mess around with Jim!".
Some [foreign] organizations have taken the view that they'll report quarterly, some time after the end of the quarter. And it seems that despite the apprent flaunting of the letter of the regulations, no action has been taken in customary Japanese fashion. Others such as Steel Partners, have complied for obvious reasons that publicizing their now-greater-than-5%-position attracts other buyers hoping for a quick buck. But now, it appears even the "big boys" are fed up with the annoyances of reporting. For beginning last quarter or so, it seemed that rather than institutional investors accumulating positions and reporting them as they accumulated them, brokers were accujmulating them, and anecdotally, shortly thereafter, the broker would report a drop in the position and a "real investor" (Fidelity, Cap Research etc.) would assume ownership. Now, IF I am correct and they are using these methods to obfuscate ownership acumulation until they've achieved their desired quantities, they must in order to do this, be using some option or derivative structure that technically complies with the regulation, but is contrary to the spirit of the regulation. This is of course, the raison d'etre of much of the derivatives market, but nonetheless is disturbing for those that are cannily trying to unmask price manipulations of all variety for fun, public interest, and profit.
The technology exists of course to ascribe meaningful ownership changes - and thereby the potential misuse of material non-public information - with precision and regularity. Bearer shares exist no more, and info is there for public consumption. When will Japanese authorities codify and enforce such regulations with the efficiency we've come to know and admire from this nation? Hmmmm. One would have thought that the Horie affair would have provided sufficient mpetus for change. But shenanigans certainly continue amongst powerful domestic interests, and in such an event, one must wonder for the like of Softbank and others, what unsavoury deeds might be revealed or disrobed in the process.
And, nowhere is this more germane than in the case of reporting large positions to stock exchange regulators around the world generally, and in Japan particularly. Japan seemingly has a love-hatre relationship with transparency. Reading who has bought what and when was a fascinating exercise. On one hand, ownership changes were only detailed twice a year, and even then, only the larger holders either through the YuHo or Toyo Keizaei. So it was long after the fact that one realized who had bought the slugs of stock that vaulted the price an issue by triple digit percent. Yet, at the same time, turnover identification was available on each stock at the end of each day. This was a dead give-away as to whether purchasers were foreign or domestic, sporadic or persistent. The strange mix of obfuscation and transparaency juxtaposed each other.
A few years ago, the authorities decided, for unexplained reasons, not to "fix" this, but to turn it own its head, by eliminating the revelation of who was responsible for what percentage of turnover in a security on a particular day, while instituting a requirement to report ownership positions in a security greater than 5% (and thereafter) within some timely interval that is apparently indecipherable when reviewing the very wide variety in reported actions and compliance. Now, one couldn't see the day-to-day colour (rumours were that it was Fidelity and foreign brokers who successfully lobbied for this at a time when transaction volumes were very low, an intimations of an increase in turnover following a decrease in transparency).
The position reporting game reveals information that can be beneficial or detrimental depending upon ones objectives and motives. For example, if you are trying to buy 10% of a company at the best prices, reporting after 5% is not in one's interests. On the other hand, if one intends to buy 10%, having bought 5% at lower prices, disclosing the position might attract copy-cat buying that is beneficial from the point of you of having "the market" do some of the subsequent heavy lifting that raises the price, making the initial 5% rather more profitable and validating the purchase decision. However, if one desires to acquire 10% before encouraging the copy-cats to pile in, then reporting requirements clearly creates adverse issues.
When reporting was first enacted in I believe 2003 (and foregive my imprecision as my memory is fraying), Japan was not popular with international investors. In fact, most were underweight from a GDP adn a market cap weighting for all manner of reasons. But for the few who were operating, it revealed valuable information about who was ramping what. It mathced the proverbial name to the face. For when Fidelity was buying a truckload-sized position, a potential short-seller would be wise to recall the words of Jim Croce: "You don't tug on Superman's cape, you don't spit into the wind, you don't pull the mask off that ol' Lone Ranger, and you don;t mess around with Jim!".
Some [foreign] organizations have taken the view that they'll report quarterly, some time after the end of the quarter. And it seems that despite the apprent flaunting of the letter of the regulations, no action has been taken in customary Japanese fashion. Others such as Steel Partners, have complied for obvious reasons that publicizing their now-greater-than-5%-position attracts other buyers hoping for a quick buck. But now, it appears even the "big boys" are fed up with the annoyances of reporting. For beginning last quarter or so, it seemed that rather than institutional investors accumulating positions and reporting them as they accumulated them, brokers were accujmulating them, and anecdotally, shortly thereafter, the broker would report a drop in the position and a "real investor" (Fidelity, Cap Research etc.) would assume ownership. Now, IF I am correct and they are using these methods to obfuscate ownership acumulation until they've achieved their desired quantities, they must in order to do this, be using some option or derivative structure that technically complies with the regulation, but is contrary to the spirit of the regulation. This is of course, the raison d'etre of much of the derivatives market, but nonetheless is disturbing for those that are cannily trying to unmask price manipulations of all variety for fun, public interest, and profit.
The technology exists of course to ascribe meaningful ownership changes - and thereby the potential misuse of material non-public information - with precision and regularity. Bearer shares exist no more, and info is there for public consumption. When will Japanese authorities codify and enforce such regulations with the efficiency we've come to know and admire from this nation? Hmmmm. One would have thought that the Horie affair would have provided sufficient mpetus for change. But shenanigans certainly continue amongst powerful domestic interests, and in such an event, one must wonder for the like of Softbank and others, what unsavoury deeds might be revealed or disrobed in the process.
Tuesday, December 19, 2006
Quote of the Day
In an interview with Bloomberg, Ara Hovnanian CEO President of the company bearing his name said:
"We really didn't see it [the housing slowdown] coming...."
He added (scratching his head):
"What's unusual [about the slowdown] this time, is that interest rates are low." "It's unprecendented!"
"Demand has slackened most in areas where prices had gone up the most" (strange, that!! -ed.)
-- Ara Hovnanian, President/CEO Hovnanian Enterprises
My comment: That would be fine if Mr Hovnanian was, say, perhaps a "Boulanger", an Elementary School Arts Teacher, or a Juggler in "Le Cirque du Soleil". But as the President & CEO of one of America's, (and the world's, I might add) largest residential homebuilders, his foresight is rather deficient....
"We really didn't see it [the housing slowdown] coming...."
He added (scratching his head):
"What's unusual [about the slowdown] this time, is that interest rates are low." "It's unprecendented!"
"Demand has slackened most in areas where prices had gone up the most" (strange, that!! -ed.)
-- Ara Hovnanian, President/CEO Hovnanian Enterprises
My comment: That would be fine if Mr Hovnanian was, say, perhaps a "Boulanger", an Elementary School Arts Teacher, or a Juggler in "Le Cirque du Soleil". But as the President & CEO of one of America's, (and the world's, I might add) largest residential homebuilders, his foresight is rather deficient....
Monday, December 18, 2006
Cassandra's Xmas Presents to You
OK, Santa has come early. Of course some will say just "Buy Gold", but the smart investor is always trying to optimize, and do better. After all, bullion yields nothing, is risky, can be confiscated, and has few uses outside the speculative and decorative. Here is a Xmas investment (adn trading) shopping list that should, if nothing else allow the Goldbugs or just the worriers to BOTH invest and sleep better in the evenings.
1. Short High-Grade Copper vs. Long Gold
(Lots more HG1 about than GOLDS. Easier money for those with strong constitutions than phishing bank details from Nebraskans).
2. Long Cheap Japan Domestic Stocks vs Short Expensive US Consumer Discretionary stocks (currency unhedged).
The Easiest money may be gone, but this will continue to pay. Own the sub-book value soon-to-appreciate currency vs. the sector that once again will be ask investor owning it to bend-over (and get the yield pick-up while you wait to offset the high cost of shorting YEN)
3. Long CAD vs. Short GBP
Erosion of USD value vs. contractionary outcome will insure Canada doesn't roll over and so Bank of Canada will not be cutting rates anytime soon. In the race to see who cuts first, BoE will blink first cutting sterling rates before loonies.
4. Long YEN vs. Short Euro
Twenty-percent in 2007 on this one (Take 10% in Q1 if you get it, and put it back on again in July). If it don't happen, random Japanese tourists will be ritually sacrificed on the banks of the Seine.
5. Short USD Bonds
Rebalancing of CB reserves, means some of the distortions in the USD bond market will cease. And since no new taxes until 2008, and no new rate rises in 2007, US fiscal, trade and CA deficits will continue to provide ample reason to short bonds.
6. Short USD Quality Spreads
Short conumer-sensitive junk bonds where a continued retrenchment by consumer from higher energy prices bites and forces cutbacks.
7. Short Nucor vs. Long Newmont
There is an impending surplus of steel. Maybe not as fine as Nuecor's specialty, but nonetheless this trade will pay and pay and pay. Similar rationale to short the physical copper and long the physical bullion. Do it in options (short call vs. long call for the meek and timid).
8. Long Devon (DVN), Anadarko (APC), Apache (APA), Cimarex (CMX), Encana (ECA), Suncor (SU), Conoco-Philips (COP) Chevron (CVX) & Marathon MRO).
All are well south of heavily discounted NPV using low forward oil price estimates. The essential play is one of property rights in that US & Canadian resource property rights - in the absence of world-rogering depression - are most secure. Recent moves in Bolivia, Venezuela, Russia are harbingers of future actions that will see nation-states take greater control. These are wonderful "stores of value" with attractive current yields, trading is discounts, relatively secure. Should be part of any portfolio.
9. Stay Long: Global Sante-Fe (GSF), Diamond Offshore DO), Cleveland-Cliffs (CLF); Raynier (RYN)& PlumCreek (PCL), & Svenska Cell 'B' (SCAB SS), and Sherritt (S CN).
Assets. Assets. Assets. It takes three years to build deepwater rigs like these, and there aren't many out there. Attractive valuations, wonderfully abundant free cashflow, little encumbrances, should continue to make DO & GSF prized assets. Geography will continue to favor CLF over CVRD or BHP for NAm steel. Great balance sheet, and still cheap. RYN & PCL are Timberland LPs that are far south of book, nice current yield, and great assets - the kind the Chinese would love to buy. Bearts thought the Timberland boom passe, but recent transactions (admittedly by RYN) just paid $2200 acre in Texas, goosing implied values substantially.
10. Eastern European (& German) Real Estate.
OK so you feel bad that you didn't buy them when they were giving them away. Shame shame shame. But do not forget that Central Europe was the Center of the Civilized Chistian World for a very long time. Paris and London were hovels in comparison to Prague, Budapest, and Belgrade. Croatia, Serbia, Hungary, Berlin rural Greece, all afford excellent value for those with a long view. When the coming Europe vs. Asia trade wars come, Eastern Europe will continue to prosper as the lower-wage periphery of developed Europe. Europeans will (rightly) prefer to pay a bit more and buy from THEIR periphery where 80% is recycled back into Euro-area economies than from Asia. Farmland, coastal property, and urban locations still will afford attractive long-term appreciations on long-view with acceptable (but rising yields) in the interim.
And with anything left over, just go buy some Titanium, Uranium concentrate, or ultra-pure polysilicon and warehouse it safely.
Peace to all!
1. Short High-Grade Copper vs. Long Gold
(Lots more HG1 about than GOLDS. Easier money for those with strong constitutions than phishing bank details from Nebraskans).
2. Long Cheap Japan Domestic Stocks vs Short Expensive US Consumer Discretionary stocks (currency unhedged).
The Easiest money may be gone, but this will continue to pay. Own the sub-book value soon-to-appreciate currency vs. the sector that once again will be ask investor owning it to bend-over (and get the yield pick-up while you wait to offset the high cost of shorting YEN)
3. Long CAD vs. Short GBP
Erosion of USD value vs. contractionary outcome will insure Canada doesn't roll over and so Bank of Canada will not be cutting rates anytime soon. In the race to see who cuts first, BoE will blink first cutting sterling rates before loonies.
4. Long YEN vs. Short Euro
Twenty-percent in 2007 on this one (Take 10% in Q1 if you get it, and put it back on again in July). If it don't happen, random Japanese tourists will be ritually sacrificed on the banks of the Seine.
5. Short USD Bonds
Rebalancing of CB reserves, means some of the distortions in the USD bond market will cease. And since no new taxes until 2008, and no new rate rises in 2007, US fiscal, trade and CA deficits will continue to provide ample reason to short bonds.
6. Short USD Quality Spreads
Short conumer-sensitive junk bonds where a continued retrenchment by consumer from higher energy prices bites and forces cutbacks.
7. Short Nucor vs. Long Newmont
There is an impending surplus of steel. Maybe not as fine as Nuecor's specialty, but nonetheless this trade will pay and pay and pay. Similar rationale to short the physical copper and long the physical bullion. Do it in options (short call vs. long call for the meek and timid).
8. Long Devon (DVN), Anadarko (APC), Apache (APA), Cimarex (CMX), Encana (ECA), Suncor (SU), Conoco-Philips (COP) Chevron (CVX) & Marathon MRO).
All are well south of heavily discounted NPV using low forward oil price estimates. The essential play is one of property rights in that US & Canadian resource property rights - in the absence of world-rogering depression - are most secure. Recent moves in Bolivia, Venezuela, Russia are harbingers of future actions that will see nation-states take greater control. These are wonderful "stores of value" with attractive current yields, trading is discounts, relatively secure. Should be part of any portfolio.
9. Stay Long: Global Sante-Fe (GSF), Diamond Offshore DO), Cleveland-Cliffs (CLF); Raynier (RYN)& PlumCreek (PCL), & Svenska Cell 'B' (SCAB SS), and Sherritt (S CN).
Assets. Assets. Assets. It takes three years to build deepwater rigs like these, and there aren't many out there. Attractive valuations, wonderfully abundant free cashflow, little encumbrances, should continue to make DO & GSF prized assets. Geography will continue to favor CLF over CVRD or BHP for NAm steel. Great balance sheet, and still cheap. RYN & PCL are Timberland LPs that are far south of book, nice current yield, and great assets - the kind the Chinese would love to buy. Bearts thought the Timberland boom passe, but recent transactions (admittedly by RYN) just paid $2200 acre in Texas, goosing implied values substantially.
10. Eastern European (& German) Real Estate.
OK so you feel bad that you didn't buy them when they were giving them away. Shame shame shame. But do not forget that Central Europe was the Center of the Civilized Chistian World for a very long time. Paris and London were hovels in comparison to Prague, Budapest, and Belgrade. Croatia, Serbia, Hungary, Berlin rural Greece, all afford excellent value for those with a long view. When the coming Europe vs. Asia trade wars come, Eastern Europe will continue to prosper as the lower-wage periphery of developed Europe. Europeans will (rightly) prefer to pay a bit more and buy from THEIR periphery where 80% is recycled back into Euro-area economies than from Asia. Farmland, coastal property, and urban locations still will afford attractive long-term appreciations on long-view with acceptable (but rising yields) in the interim.
And with anything left over, just go buy some Titanium, Uranium concentrate, or ultra-pure polysilicon and warehouse it safely.
Peace to all!
Friday, December 15, 2006
Groundhog Day
Markets have a way wearying even the most enthusiastic and energetic observers. There is a wonderful scene in the Bill Murray film, Groundhog Day where the cynical Murray re-lives the same day over and over as the weatherman who has traveled to the middle of nowehere to present a fluff piece on "Punxatawney Phil", the Pennsylvania rodent whose legendary shadow is renown for predicting whether winter will be short or long. And like Euro/Yen's relentless percolation against all reason and internationalo monetary responsibility, Murray, having delivered the same intro, on the same morning, with the same people, in the same town for the umpteenth time, has lost his will, become, bored, lethargic and even hostile at the absurdity and futility of living the same day over and over and over....
What will break the cycle of this Euro vs. Yen "Groundhog Day"? Asset prices all over continue to roar (excepting perhaps Russian joint-ventures coveted by Russian partners, central government, of friends of Mr Putin), Zimbabwean farmland or Venezuelan Pasture. And Japanese Japanese asset are no exception. Tankan was upbeat, Xmas Bonuses were the highest on record, and shares on the bourse have resumed their ascent. And while the ECB prudently expresses concern (even though most know that it is essentially "hot air"), MoF and BoJ officials continue to stoke concerns about deflation, of Nippon slipping back into recession, with not a public whisper about the Yen carry trade and its role in financing everything from US deficits, renovations to SW3 townhomes, to HF managers' record bids for trophy art.
Martin Wolf presciently foresaw this tenous divergent policy in early 2004 in describing the Fed's necessity to tolerate trade and fiscal deficits with complimentary loose policy as the price for keeping the balls in the air. He accurately predicted the roaring business environment, the growing imbalances, and mercantilist surplusses alongside the temporarily-benign purgatory. However he pointed out that it would, eventually, be threated by ballooning asset prices or growing trade-frictions and protectionism.
We've undoubtedly got the first. Liquidity is so abundant listed US companies are falling prey to LEVERAGED private market buyers at the rate of several per day. Real estate is gallopping again in overbought, overheated and unaffordable markets like UK, Australia and Spain despite tepid retail sales, stagnant employment and real wage growth. A spade must be called a spade, and this phenomenon is a pure monetary phenom. We have now proceeded deep into unprecedented territory, though we are protected from the most vbicious of beasts by Central Banks willingness to hold the dollars. But it is frightening to hear talk of independant Chinese agencies to "manage the assets", or wonder what might become of them should trade frictions rise as they are certainly bound to do.
(Sod's Law: Yen/Euro moves -1% as I finished typing this post)
What will break the cycle of this Euro vs. Yen "Groundhog Day"? Asset prices all over continue to roar (excepting perhaps Russian joint-ventures coveted by Russian partners, central government, of friends of Mr Putin), Zimbabwean farmland or Venezuelan Pasture. And Japanese Japanese asset are no exception. Tankan was upbeat, Xmas Bonuses were the highest on record, and shares on the bourse have resumed their ascent. And while the ECB prudently expresses concern (even though most know that it is essentially "hot air"), MoF and BoJ officials continue to stoke concerns about deflation, of Nippon slipping back into recession, with not a public whisper about the Yen carry trade and its role in financing everything from US deficits, renovations to SW3 townhomes, to HF managers' record bids for trophy art.
Martin Wolf presciently foresaw this tenous divergent policy in early 2004 in describing the Fed's necessity to tolerate trade and fiscal deficits with complimentary loose policy as the price for keeping the balls in the air. He accurately predicted the roaring business environment, the growing imbalances, and mercantilist surplusses alongside the temporarily-benign purgatory. However he pointed out that it would, eventually, be threated by ballooning asset prices or growing trade-frictions and protectionism.
We've undoubtedly got the first. Liquidity is so abundant listed US companies are falling prey to LEVERAGED private market buyers at the rate of several per day. Real estate is gallopping again in overbought, overheated and unaffordable markets like UK, Australia and Spain despite tepid retail sales, stagnant employment and real wage growth. A spade must be called a spade, and this phenomenon is a pure monetary phenom. We have now proceeded deep into unprecedented territory, though we are protected from the most vbicious of beasts by Central Banks willingness to hold the dollars. But it is frightening to hear talk of independant Chinese agencies to "manage the assets", or wonder what might become of them should trade frictions rise as they are certainly bound to do.
(Sod's Law: Yen/Euro moves -1% as I finished typing this post)
Tuesday, December 12, 2006
Sorceror's Apprentice
OK nothing profound today, but I cannot get the image of Disney's fine depiction of Mickey & The Sorceror's Apprentice out of my head as I contemplate the state of Bretton Woods II. See our Mickey, charged with cleaning up the world by his Maestro. Being a slacker at heart, he conjures assistance in the form of help from the Asian CBs (depicted here carting away excess dollar reserves), rather than directly tackling the task and undertaking the hard work of adjustment itself. I don't know quite how far one can go with this analogy, but I continue to be amused at the thought of some larger-than-life Volcker-like character re-appearing as "The Sorceror" himself to sternly reproach his apprentice both for his laziness and rather amateurish attempt to rectify the situation with the pathetic application of magic rather than diligence.
Friday, December 08, 2006
Paradoxical Incentives
And so Marshall Wace has raised $2billion from investors for a closed-end vehicle called "MW Tops" that will pursue "hedge fund strategies". I could be accused of professional jealousy - after all, who wouldn't want to win the lottery - but that is precisely what a $2bn closed-end fund is akin to for a manager with an elevated management fee + incentive fee structure.
With no disrespect to Mssrs. Marshall & Wace, who've performed admirably andd consistently over a long period such that their success is unlikely the product of the coin-flipping survivalism. And perhaps they've discovered the "Philosphers' Stone", and imbued it into a fund management method, or engaged sufficiently talented vassals such that performance could survive the principals' extended holidays, sabbaticals to ashrams in India, election campaigns for Parliament, etc. But along with ever-more restrictive gates in top-performing firms such as Citadel, locked in capital seems at odds with the shifting sands inherent to the Fund Management business. The fortunes of even the best firms waxes and wanes with the turnover of personnel, changes in corporate culture and hunger of the founder, principals or key persons, as well as the frequent inability of even the most successful people and firms to change with the times.
All that is fine and understood for someone seeking a firm offering to manage money on flexible terms for modest fees. But the relationship deteriorates assymetrically when one turns over money to a rockstar of finance with little to no recourse, oversight, transparency, covenants against excessive leverage (Citadel is already >10x levered) or risk-taking, or in the case of Citadel, any exit. One cannot simply "vote with their feet" and walk from a heavily gated fund structure. Nor is itan appealing proposition to dump one's closed-end shares into a market where the prevailing price is a hefty 15% to 20% discount to stated NAV, a level of discount frequently seen in the market for less-than-popular closed-end vehicles where one's star manager, investment strategy, or asset-class objective has sunk.
I understand all the arguments for "dedicated capital": preventing investors from doing the "wrong thing", insuring "dry powder" when market chaos (read: opportunity) presents itself, insuring business stability and thus enterprise quality, and so on. Yet there is nothing to protect an investor, from the equally deleterious and known demons of delegated agency investment managent such (for example: hubris, excessive risk-taking, massive errors in judgement, benign fiduciary negligence), save faith itself. And in danger of being a cynic, when I look at "faith" such as UK government's "faith" that competition will insure that public retail energy prices will rise and fal symmetrically, or the faith that companies have thoroughly tested the safety of chemicals inherent in their products, or the veracity of claims that Saddam must be brought down because he possesses weapons of mass destruction, I think one (and investors) would show wisdom in being skeptical that their interests will be equally served and protected, as those interests of the concentrated beneficiaries of such highly-gated or closed end structures. Caveat emptor!
With no disrespect to Mssrs. Marshall & Wace, who've performed admirably andd consistently over a long period such that their success is unlikely the product of the coin-flipping survivalism. And perhaps they've discovered the "Philosphers' Stone", and imbued it into a fund management method, or engaged sufficiently talented vassals such that performance could survive the principals' extended holidays, sabbaticals to ashrams in India, election campaigns for Parliament, etc. But along with ever-more restrictive gates in top-performing firms such as Citadel, locked in capital seems at odds with the shifting sands inherent to the Fund Management business. The fortunes of even the best firms waxes and wanes with the turnover of personnel, changes in corporate culture and hunger of the founder, principals or key persons, as well as the frequent inability of even the most successful people and firms to change with the times.
All that is fine and understood for someone seeking a firm offering to manage money on flexible terms for modest fees. But the relationship deteriorates assymetrically when one turns over money to a rockstar of finance with little to no recourse, oversight, transparency, covenants against excessive leverage (Citadel is already >10x levered) or risk-taking, or in the case of Citadel, any exit. One cannot simply "vote with their feet" and walk from a heavily gated fund structure. Nor is itan appealing proposition to dump one's closed-end shares into a market where the prevailing price is a hefty 15% to 20% discount to stated NAV, a level of discount frequently seen in the market for less-than-popular closed-end vehicles where one's star manager, investment strategy, or asset-class objective has sunk.
I understand all the arguments for "dedicated capital": preventing investors from doing the "wrong thing", insuring "dry powder" when market chaos (read: opportunity) presents itself, insuring business stability and thus enterprise quality, and so on. Yet there is nothing to protect an investor, from the equally deleterious and known demons of delegated agency investment managent such (for example: hubris, excessive risk-taking, massive errors in judgement, benign fiduciary negligence), save faith itself. And in danger of being a cynic, when I look at "faith" such as UK government's "faith" that competition will insure that public retail energy prices will rise and fal symmetrically, or the faith that companies have thoroughly tested the safety of chemicals inherent in their products, or the veracity of claims that Saddam must be brought down because he possesses weapons of mass destruction, I think one (and investors) would show wisdom in being skeptical that their interests will be equally served and protected, as those interests of the concentrated beneficiaries of such highly-gated or closed end structures. Caveat emptor!
Monday, December 04, 2006
Mr Yen says: "Not Yet"
Despite the rollicking Euro vs. Yen movement, Dr Eisuke Sakakibara was quoted today by Bloomberg as saying that the chance of a year-end BoJ rate hike remains less than 50% (30% to 40% was his more precise prognostication). And, if so, it would hardly count a turning of the proverbial screw at a mere 0.25%. Modulating the use of Yen for all manner of ex-Japan, ex-Yen finance seems not to be an objective of the MoF, the BoJ, or, for that matter, anyone else in the world who matters.
It's ironic that everyone sees the Yen lower v. the dollar in 2007, lost of people are bearish on the dollar now, yet almost no one seems willing to say "Yes, it's now Go Long Yen!!". It this because everyone has become a is a momentum or feedback trader? Are there no more contrarians left in the world? Whatever the case, it is a situation that suits TeamJapan just fine.
It's ironic that everyone sees the Yen lower v. the dollar in 2007, lost of people are bearish on the dollar now, yet almost no one seems willing to say "Yes, it's now Go Long Yen!!". It this because everyone has become a is a momentum or feedback trader? Are there no more contrarians left in the world? Whatever the case, it is a situation that suits TeamJapan just fine.
Friday, December 01, 2006
Kwai Bridge & The Yen
This is NOT a Japanese hate blog. I truly like and admire the Japanese people and culture. Much of it anyway. And for years I have given super-human credit to the MITI & MoF (Ministry of Finance) for prescience, planning and organization. Yet I am having my doubts.
Yesterday I watched a PBS special on the horror and brutality employed by the Japanese in building of a Southeast Asian railway, most famously known for "The Bridge Over the River Kwai". And while historically, the allies may remember it for the unlawful use of prisoners in the construction process, nearly 100,000 Asians (mostly indiginous Malays) perished i their efforts as well. Of course this may not be a surprise given Manchuria was no secret. Nor was their pathetic behaviour in Korea, and, for that matter, anywhere else in Asia they happened to land and occupy undocumented. 60 years hence, Asians remain sensitive, and unforgetful about war-time atrocities, and for good reason: Japanese behaviour was atrocious!
Yet, many Japanese (both nationalists and otherwise) do not seem to "get" foreign sensitivity regarding visits to Yasakuni, lame textbook accounts about more or less objective history, or their seeming unwillingness to be culpabable to historical events, in the same way they eagerly seize culpablility to other Japanese, on behalf of things Japanese. This is puzzling to me, and really struck home when watching the interviews with the now-elderly Japanese engineers and soldiers who took part and oversaw the railways construction, and it's brutal consequences. They seemed to abnegate all responsibility. Yes, they admitted it was war, and things were done in the name of war. But to a man, they denied prisoners were forced into labour. They suggested prisoners' deaths were the result of "bad rice" or other such nonsense. Were these denials "real"? Sure they were concern4ed about war-crimes, and preesent-day "shame" of being brandished so. But did they actually believe this? Was it a defense mechanism of the human psyche constructed to excise and quarantine the unthinkable and the unimaginably horrible?
All which makes me think about the credit I have been attributing to the MITI & MOF and whether it is mis-placed. Just how cynical "is" the weak-yen policy? How much do policy-makers really believe that ZIRP is somehow benefitting local economic conditions, Capex, or credit take-up by the average Japanese household (who in any event are large net savers)?? Perhaps, they really believe it themselves! And, if so, what will it take to change their behaviour from parochially tribal (and damaging to the international monetary system), to one more global and responsible in nature?? If the financial system blows up, could Omi, Ota, Fukui, or Tanigaki (not to mention George Bush), be termed an "economic war criminals"?
Yesterday I watched a PBS special on the horror and brutality employed by the Japanese in building of a Southeast Asian railway, most famously known for "The Bridge Over the River Kwai". And while historically, the allies may remember it for the unlawful use of prisoners in the construction process, nearly 100,000 Asians (mostly indiginous Malays) perished i their efforts as well. Of course this may not be a surprise given Manchuria was no secret. Nor was their pathetic behaviour in Korea, and, for that matter, anywhere else in Asia they happened to land and occupy undocumented. 60 years hence, Asians remain sensitive, and unforgetful about war-time atrocities, and for good reason: Japanese behaviour was atrocious!
Yet, many Japanese (both nationalists and otherwise) do not seem to "get" foreign sensitivity regarding visits to Yasakuni, lame textbook accounts about more or less objective history, or their seeming unwillingness to be culpabable to historical events, in the same way they eagerly seize culpablility to other Japanese, on behalf of things Japanese. This is puzzling to me, and really struck home when watching the interviews with the now-elderly Japanese engineers and soldiers who took part and oversaw the railways construction, and it's brutal consequences. They seemed to abnegate all responsibility. Yes, they admitted it was war, and things were done in the name of war. But to a man, they denied prisoners were forced into labour. They suggested prisoners' deaths were the result of "bad rice" or other such nonsense. Were these denials "real"? Sure they were concern4ed about war-crimes, and preesent-day "shame" of being brandished so. But did they actually believe this? Was it a defense mechanism of the human psyche constructed to excise and quarantine the unthinkable and the unimaginably horrible?
All which makes me think about the credit I have been attributing to the MITI & MOF and whether it is mis-placed. Just how cynical "is" the weak-yen policy? How much do policy-makers really believe that ZIRP is somehow benefitting local economic conditions, Capex, or credit take-up by the average Japanese household (who in any event are large net savers)?? Perhaps, they really believe it themselves! And, if so, what will it take to change their behaviour from parochially tribal (and damaging to the international monetary system), to one more global and responsible in nature?? If the financial system blows up, could Omi, Ota, Fukui, or Tanigaki (not to mention George Bush), be termed an "economic war criminals"?
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