Month: August 2013

By Profit Confidential

The global mobile phone market is massive. There were a staggering 6.8 billion mobile subscriptions at the end of 2012, according to The International Communication Union. (Source: “Global mobile statistics 2013 Part A: Mobile subscribers; handset market share; mobile operators,” mobiThinking, last accessed August 22, 2013.)

The numbers are huge and even though the number represents about 98% of the earth’s population, we all know that there are still billions who don’t have mobile accounts, including those in the emerging markets.

Once the rural areas have the infrastructure to support mobile networks, I expect the numbers to surge for the emerging markets.

In fact, the potential for mobile phones is huge in the emerging markets, where consumers are seeing a rise in their income levels as the global economy connects. (Read “The Only Way Apple Will Survive the Cutthroat Mobile Market.”)

According to the report, to no one’s surprise, China is the largest mobile market in the world, with 1.15 billion mobile subscribers at the end of 2012, followed by India at 699 million and the United States at just under 322 million. And there are many emerging markets available for growth.

A communications company that works to funnel out these potential subscribers in the emerging market is Netherlands-based VimpelCom Ltd. (NYSE/VIP). With a market capitalization of close to $19.0 billion, the company is not small, but it is much smaller than a company like Verizon Communications Inc. (NYSE/VZ), which has a market cap of $136 billion.

VimpelCom holds licenses to sell wireless, fixed, and broadband services in emerging markets, including Russia, the Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Vietnam, Cambodia, Laos, Algeria, Bangladesh, Pakistan, Burundi, Zimbabwe, Namibia, and the Central African Republic. The company also operates in Canada and Italy.

According to the company, its subscriber base stood at 214 million mobile subscribers at the end of 2012.

Chart courtesy of www.StockCharts.com

Revenues doubled from $10.52 billion in 2010 to $23.06 billion in 2012, and the growth is estimated to continue into this year and 2014 (albeit, at a rate that needs improvement).

At just above its 52-week low of $9.56, I feel VimpelCom has good long-term capital appreciation potential for those of you patient enough to hold the stock. Of course, you will need to make the evaluation yourself before deciding whether VimpelCom is a viable investment.

Moreover, the stock pays a nice dividend of $1.40 annually for a current dividend yield of 12.9%. However, with a net debt of just over $24.0 billion, I’m not sure if you can depend on these dividends. The one thing about VimpelCom, though, is that the company could offer a good risk-to-reward mobile play in the emerging markets.

Article by profitconfidential.com

By Profit Confidential

This is a story of how the big banks pulled gold prices from under our feet, but why their plan for the stock market won’t pan out…

When gold bullion prices went into semi-crash mode in late spring of this year, some stories written by financial analysts suggest big banks colluding together to bring gold bullion prices crashing down. If you remember, The Goldman Sachs Group, Inc. (NYSE/GS) came out with a report saying gold bullion prices would go down…and magically, they did!

At about the same time Goldman Sachs gave a “sell” recommendation on gold bullion, JPMorgan Chase & Co. (NYSE/JPM) was selling gold bullion on the paper market. The plunge in gold bullion prices started in April—but JPMorgan was selling gold since the beginning of the year. From January to April, the big bank’s house account had a net short position of 14,749 100-ounce COMEX gold contracts—or about 1.47 million ounces of gold bullion. (Source: “Year to Date Delivery Notices,” CME Clearing, August 19, 2013.)

I’ll be the first to admit it: the gold bullion price takedown that started in April sure looks and smells fishy.

Once the sell-off in gold bullion began, no one cared about demand or supply (the reason why gold bullion prices increase or decline). The fundamentals were thrown out the window. Irrationality and emotions took over, and investors ran for the exit.

Gold bullion prices have started to climb back up. They are above $1,300 an ounce and marching towards the next big level at $1,400.

The gold “play” is over for the big banks; they’re onto something else—the stock market.

The wave of optimism towards the stock market continues to gain momentum. Big banks are telling us the stock market is going to go higher.

Some calling for higher stock prices say earnings are good, some say valuations are good, some say the economy is improving, and others say investors will move out of the bond market and into the stock market.

Goldman Sachs says the S&P 500 will increase eight percent in the next 12 months. Its target for the S&P 500 is 1,825. Its reason: economic growth will pick up its pace. (Source: Bloomberg, August 13, 2013.)

When I look at Goldman Sachs’ latest prediction, I have two questions: Will it and other big banks be right on the stock market like they were on gold? And will the key stock indices continue to increase in their desired direction?

This time, dear reader, big banks won’t be right. They could be longing stocks and they could be saying stock prices will rise so their bets on the market get even more profitable; but this time around, they’re simply too optimistic.

If the theorists are right and big banks did drive gold bullion prices lower, we must remember that big banks were only able to drive the gold bullion market lower for a very short period of time, as the metal’s price is now bouncing back.

The stock market will also snap back to reality, as optimism faces the facts.

What am I talking about? Take a look at the chart below of margin debt (the amount of money people borrow to buy stocks).

The margin debt on the New York Stock Exchange (NYSE) is at a record high—it stood at $376.6 billion in June, higher than what it was before the “Tech Boom” bust in 2000, and just about the same level it was at in 2007, just before stock prices started to come down. (Source: New York Stock Exchange web site, last accessed August 20, 2013.)

The higher the margin debt goes, the bigger the sell-off in stocks will be, because with so much leverage, one negative move in the stock market will result in a domino effect, as investors make good on their margin calls.

Earnings for public companies are dismal. So far, 72% of the companies on the S&P 500 were able to beat their already lowered earnings expectations for the second quarter. Great? Don’t be so quick to judge. Only little more than half of them—53%—were able to beat revenue estimates (source: FactSet, August 16, 2013), and companies have been engineering earnings growth through a record amount of stock buyback programs. But earnings at the big banks—they were stronger than ever!

Of the S&P 500 companies that have already provided guidance for their third-quarter corporate earnings, 75 offered a negative outlook, while only 17 have given a positive outlook. (Source: Ibid.)

As for the economy, I don’t think I have to go into detail here again. My family of Profit Confidential readers knows the real scoop on the economy: it’s anemic at best.

While the majority of jobs created in the U.S. since the credit crisis have been in the low-paying retail and service sectors, millions of Americans still live in homes with negative equity. And with mortgage rates rising, the housing market is in trouble again. Look at Wells Fargo & Company (NYSE/WFC), one of the big banks. It announced yesterday it was laying off 2,000 people from its mortgage unit because higher interest rates are cutting demand! (Source: Bloomberg, August 21, 2013.)

If I have to bet, I would go against Goldman Sacks in its call that the stock market will be eight percent higher in the next 12 months. I’d take the opposite position. I like ProShares Short S&P500 (NYSEArca/SH), an exchange-traded fund that shorts the S&P 500; I also like SPDR Gold Shares (NYSEArca/GLD), a play on rising gold bullion prices ahead. I, for one, am betting against the big banks—all “shows” can only go on for so long.

(Michael says there are a total of six reasons why the stock market is coming down. In case you haven’t seen his Dire Warning for Stock Market Investors video yet, you can see it here now.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in Profit Confidential, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

Article by profitconfidential.com

By MoneyMorning.com.au

Technology:

This Could be the Most Important Global Initiative Ever

If you’re reading this right now you’re a part of the one third of the world with internet access. Obviously that means two thirds of the world are unlikely to read FutureWatch.

That makes me sad. We’ll it doesn’t really, but it does highlight an issue. If two thirds of the world don’t have access to the internet, it’s fair to say they’re missing out on a basic human right.

Now I know many might say, ‘As if the internet is as important as food, shelter and medicine.’ But I disagree. I put access to the internet up there with those staples of humanity.

Hear me out. In order for the world to progress, advance technology and help make the earth better for everyone, we need to be connected. We need to pool resources and utilize all the intelligence the world has to offer.

If we can tap into the other two thirds of the world, who knows how much faster we could advance? Take some time to think about the benefit the internet has contributed towards your own life. Hopefully now you start to appreciate where I’m coming from.

Thankfully I’m not alone in my thinking. There’s an ever-growing population of people across the world trying to connect people. And some of the world’s most influential people are helping to push the cause.

Internet.org launched this week. Its goal is to connect the entire world through the internet. It’s a massive project. Considering it means getting the internet to about another four billion people, it will take some time.

Of course it will also take some serious corporate power (because let’s face it, governments can’t do it). And on board are some of the biggest players in the world: Samsung, Nokia, Facebook, Ericsson, QUALCOMM, Mediatek and Opera are all involved.

As it’s just getting off the ground, there’s little detail as to how you and I can exactly help at this point. However you can get to the site, and connect through Facebook, Twitter and Google+ to keep up to date with it all.

I plan to get on board in any way, shape or form I can. It’s that important an initiative; the future of the world depends on it.

Health:

Mice, the Most Important Guinea Pigs in Regenerative Medicine

When you’re building a house there are a couple of things needed to make it structurally sound.

First you need solid foundations. Then you need a frame. Sometimes a scaffold takes place of a frame. These all help to keep the structure rigid.

Finally you fill in the frame or scaffold with materials to complete the structure. Sometimes you use concrete, brick, timber or plaster.

Now assuming you have a good builder and they follow the right steps, you end up with a good quality house.

The process builders use to build a house are the same processes scientists can use to build…re-born organs. This is part of the regenerative medicine revolution.

For some time we’ve talked about tissue regeneration. Kidneys, livers, skin and other body parts. We’ve talked about heart regeneration too. However the tricky thing about the heart is that it’s quite complex. It has many tissue types, which make it the most difficult organ to regenerate.

Add to the matter if it fails…everything fails.

However the potential to regenerate the heart starts to be a more likely prospect when you add stem cells to the mix…literally.

And because of stem cells scientists have reached a new breakthrough in regenerative medicine.

The research paper published in Nature Communications explains the breakthrough:

‘We create heart constructs by repopulating decellularized mouse hearts with human induced pluripotent stem cell-derived multipotential cardiovascular progenitor cells. We show that the seeded multipotential cardiovascular progenitor cells migrate, proliferate and differentiate in situ into cardiomyocytes, smooth muscle cells and endothelial cells to reconstruct the decellularized hearts. After 20 days of perfusion, the engineered heart tissues exhibit spontaneous contractions, generate mechanical force and are responsive to drugs.’

Wow, that’s a lot of science talk. Simplified, it means the scientists took human adult stem cells and put them in a stripped down scaffold of a mouse heart. With some tweaking and fine tuning, it started to beat again.

Sure it’s just a mouse heart for now. But as we’ve said before, it’s another example of the strides forward taken by science. If you ignore the journey you never appreciate the destination as much.

With the science and technology of stem cells the science world is discovering some amazing breakthroughs.

Nanotech:

Graphene Just Got Demoted to Second Place

A slight departure from the usual Energy topic we provide in FutureWatch. But rest assured this breakthrough is worthy of a disruption to normal transmission.

Hopefully you’ve heard of graphene. If you haven’t, some have touted it as the future ‘wonder material’ that will change the world. It’s super strong, conductive and lightweight.

However graphene is now the number two super material of the future. It’s replacement? A new nanomaterial called Carbyne.

Teams of scientists from Rice University, Texas and Konkuk University, Seoul are the ones that cracked this new nanomaterial.

Instead of sifting through the 19 page long scientific document full of formulas and algebra, here’s the key information you need to know:

‘The comprehensive ‘portrait’ of carbyne that we have drawn can be formulated like this. It has an extreme tensile stiffness—stiffer by a factor of two than graphene and carbon nanotubes—and a specific strength surpassing that of any other known material.

‘This combination of unusual mechanical and electronic properties is of great interest for applications in nanomechanical systems, opto-/electromechanical devices, strong and light materials for mechanical applications, or as high– specific-area energy storage matrices.’

Carbyne is evidence of the non-stop progression of technology and science. And with its supremacy over graphene, we might just need to realign our thinking on super-materials.

At the end of the day humankind has discovered every naturally occurring element. But with nanotechnology, we’re now discovering amazing new materials like graphene and carbyne.

These are materials that will help drag the world forward and open new horizons.

Industries such as aerospace, electronics, energy and medicine will all benefit. The potential of carbyne, graphene and other nanomaterials is huge and makes for an exciting future.

Sam Volkering
Technology Analyst, Revolutionary Tech Investor

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From the Archives…

How Many Warren Buffett’s in a Bar of Gold?
16-08-2013 – Kris Sayce

Two Points to Consider from the Commonwealth Bank…
15-08-2013 –  Kris Sayce

Take Control of Your Superannuation, but Know the Limits
14-08-2013 – Vern Gowdie

Why I’m Glad I Missed a Dividend Stock That Doubled…
13-08-2013 – Kris Sayce

No Profit in the Federal Reserve Divination
12-08-2013 – Dan Denning

By MoneyMorning.com.au

The big news this week is the gurgling sound everybody heard as money drained out of emerging markets and headed home to the USA. That’s thanks to the US Federal Reserve threatening to turn off the easy money spigot sometime this year.  

Bloombergreported that money is moving back into US shares at the fastest pace on record.  Net result: emerging market stocks and currencies took a spanking.

Such is the power from controlling the US money supply and interest rates. It’s amazing to think of the effect the Federal Reserve can have on millions, both money and people, everywhere.

However, it’s the task of today’s Money Weekend to wonder if Ben Bernanke and friends might have created an interesting buying opportunity…

Cashing in the Casino Chips

More on that shortly. The first thing to note is the one country that managed to miss the trouble this week: China. HSBC’s manufacturing survey even scraped over the line to show expansion.

CNBC also pointed out that the yuan has held steady over the last month against the US dollar. Compare that to the central banks of India and Brazil. They scrambled to prop up their currencies. The Brazilian real and Indian rupee traded at all-time lows against the greenback this week.

Unfortunately, the story isn’t much better for the Australian dollar. The distress in the emerging markets is showing up here. The poor old Aussie dollar is now down over 13% for the year, according to MoneyBeat.

They say the dip under US90c was partly because 76% of Australian exports go directly to Asia and because the Aussie is a proxy for less liquid Asian currencies.

That’s another way of saying that, for a developed nation, we’re in the slipstream of global trends affecting the BRICs and South East Asia. For now, money is shifting out.

That has shown up in the fall of the Aussie. Will it show up with selling in the stock market that will drag the index down?

You’d think so, in the short term at least. If you ask our value investing expert Greg Canavan, the answer is a definite yes. Here’s what he told his subscribers this week:

‘The point is, you’re seeing global capital flow back into the US, not because the US economy is improving, but because the punters are cashing in their chips and getting out of the casino. That this is going on during what looks to me like a pretty convincing topping formation is a major cause for concern.’

You can see how he thinks it might play out in Australia in more detail here.

By the look of it, Greg is right when he says it’s less to do with the ‘improving’ US economy. That’s if you look at where a big chunk of the selling is coming from. According to the Wall Street Journal, the answer is ‘mom and pop’ investors in the US. They’re not just worried about the Federal Reserve removing the juice. They’re also getting spooked about slowing Chinese growth dragging the world down with it.

Check it out from the WSJ this week:

‘Retail investors have led the summer stampede out of emerging-market stocks, bonds and currencies, pulling almost twice as much money as institutional investors such as insurance companies and pension funds…

‘Since the start of June, retail investors have pulled $18.1 billion from emerging-market bond funds, about one-third of the amount they had put in since the financial crisis, according to fund tracker EPFR Global. By comparison, institutional investors have pulled $9.3 billion, or about 10% of their postcrisis inflows. The same pattern can be seen in the stock market, where retail outflows continue even as institutional investors have largely stopped selling.’

The Long Term Bet You Can Make

The takeaway for us is there’s nothing like a bit of a panic to get share markets down to a clearing level. This looks like a good chance to find some compelling value outside Australia if you’re happy to take a position for the long term and ride out the inevitable volatility. That’s how you buy low and sell high.  

It’s not as if emerging markets are going to fall off the map. Ask fund manager Jeremy Grantham. He manages $100 billion out of Boston.  He sees emerging markets as still the engine of growth over the next seven years.

Source: GMO

Or take this from the Wall Street Journal article we mentioned earlier:

‘[Retail] investors are behaviorally doing the exact opposite of what they should be doing," said Steve Blumenthal, whose advisory firm manages $550 million for investment advisers and retail clients. "Emerging markets have perhaps the best valuation level of any of the markets, but they’re in a selloff.’

Of course, you’ll never be able to pick the exact bottom. And emerging markets are a pretty broad bunch of countries, from Turkey to India to Brazil. It probably pays to be a bit choosy if you can. India, for one, looks like you should give it a wide berth for a while.

We mentioned a few weeks ago in Money Weekend how our colleague Nick Hubble has been hunting the growth story in South East Asia. He calls them the ‘Tiger Cub’ economies.  He measures each country, alongside cheap valuations, by a key ingredient.  If you’re looking for ideas on which markets and ETF’s to investigate, you can check out what he’s got to say here.

We could be wrong, but it’s hard not to see this as a great chance to pick up value on the cheap.  At the very least, it’s worth a look.

Callum Newman+
Editor, Money Weekend

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From the Port Phillip Publishing Library

Special Report: Panic of 2013
 
Daily Reckoning: The Federal Reserve’s Minutes Add to the Confusion

Money Morning:  Why Al Gore Won’t Like Big Data

Pursuit of Happiness: Taxpayers, You’ve Only Got Two Choices When You Vote…

By The Sizemore Letter

For a staid old department store with a 111-year-old history, JC Penney Company (JCP) has been in the news a lot this year, though not for any noteworthy operational developments; the retailer continues its slow march into irrelevance, and it’s not likely to change course any time soon.

The headlines have mostly surrounded one particularly vocal shareholder, Bill Ackman of Pershing Square Capital, who owns about 18% of the company.  Up until recently, Ackman was also on the JC Penney board of directors…until he resigned in a hissy fit after demanding that the company replace its CEO within 45 days.  And this after Ackman’s choice for the job—former Apple (AAPL) executive Ron Johnson—ran the company into the ground.

Ackman likes to think of himself as a “shareholder activist” who shakes up complacent or self-serving company boards and unlocks value for shareholders.  But to his detractors, he is nothing more than a corporate raider—a pirate in a suit that loots and leaves.  JC Penney Chairman Thomas Engibous called him “disruptive and counterproductive.”   And given Ackman’s recent behavior, it’s hard to argue with the chairman.

All of this brings me to Penney’s new “poison pill” provisions.  After the Ackman experience, JC Penney never again wants to become the personal plaything of a hedge fund titan.  For those unfamiliar with the term, a poison pill floods the market with new stock in the event of a hostile takeover.  It makes it impossible—or at least very expensive—for a corporate raider to take over a company without management’s blessing.  The Penney poison pill would kick in whenever an outside shareholder acquired 10% or more of the company’s stock.

And this is where the theater of the absurd starts.  The poison pill is being called a “shareholder rights” plan by management.  So, we have a “shareholder rights” plan being implemented to protect investors from “shareholder activists” like Ackman.  If you’re a Penney shareholder, you must really feel special.  It looks like everyone is looking out for your best interests.

Except that they’re not.  Corporate raiders like Ackman—and some of his high-profile rivals like Carl Icahn and Daniel Loeb—are absolutely correct when they say that corporate managements tend to run companies for their own benefit rather than for the benefit of the shareholders.  In business school they call it the “principal-agent problem,” but we don’t need to get bogged down in fancy terminology.  Unless motivated by altruism or idealism, people tend to look out for number one first.

So if management are the “bad guys,” does that make Ackman & Co. the “good guys.”

If you believe that then you have no business investing.  “Shareholder activists” may inadvertently help smaller shareholders by driving up the stock price after successfully engineering a reorganization of the company.  But they do so for their own benefit, not yours.  This is Wall Street…not charity.

So, now that I have sufficiently jaded your view of humanity, what are we to do with this information?  Should we view poison pills favorably…or should we run away screaming when a company we own implements one?

I would frame it like this: If you’re investing in well-run companies, it generally won’t matter.  Good companies with healthy prospects generally don’t need poison pill provisions.  Yes, Bill Ackman made a mess of JC Penney.  But JC Penney was already a company in terminal decline long before Ackman got his paws on it.  Rather than waste your time and capital on an investment in Penney, you could have invested in a healthier rival like Wal-Mart (WMT) or Target (TGT)—both of which are monster dividend raisers and share repurchasers.

And Wal-Mart is a fine example of the next point I’d like to make.  If your last name is Walton, then your livelihood disproportionately depends on the performance of Wal-Mart.  The same would be true of Michael Dell and Dell Inc. (DELL).  When your name is on the signage, the company’s destiny is your destiny; you can’t simply walk away.  But outside investors—and particularly regular, individual investors—have the luxury of voting with their feet.  If you don’t like the way a company is run, don’t waste your time in a shareholder proxy fight that you can’t realistically influence.  Sell the shares and allocate your funds elsewhere.

Finally, while you should always assume that a large high-profile investor is investing for their own benefit and not yours, it doesn’t mean you can’t tag along for the ride.  I regularly look at the trading moves made by my favorite money managers.  But be careful here and choose your gurus and their picks wisely.  Yes, Carl Icahn is a smart investor, and yes, tracking his trading moves can be insightful.  But I would steer clear of some of his recent high-profile buys like Dell and Herbalife (HLF). Both have become battlegrounds for hedge fund titans, and as an individual investor you have a serious information disadvantage.

Disclosures: Sizemore Capital is long WMT.

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London Gold Market Report
from Adrian Ash
BullionVault
Fri, 23 Aug. 08:50 EST

The PRICE of gold held just shy of last week’s 2-month closing high in London trade on Friday, retreating $10 from an overnight high of $1380 per ounce as world stock markets also held flat.

Silver prices were similarly unchanged for the day and the week, trading around $23.15.

Both the Euro and British Pound reversed an early rally following stronger-than-expected GDP data.

“The bounce [in gold] may be coming to an end,” said Natixis analyst Nic Brown to Reuters Insider TV today, pointing to the possibility of QE tapering by the US Federal Reserve next month.

“Higher US interest rates would raise the opportunity cost of owning” gold bullion.

“We still don’t think,” adds brokerage INTL FCStone,” that investors have fully discounted September as being a potential start date [for QE tapering].

“Various commodity complexes, including gold, could run into more selling pressure next month as this realization sets in.”

“Rising US Treasury yields,” agrees a note from bullion market-maker HSBC, “are historically negative for gold and the potential for further weakness to US Treasuries may weigh, in our view.

 “However, sideways trading is likely to persist for the gold market in the near term.”

 On the currency market, the Indian Rupee meantime ticked higher from yesterday’s new all-time lows below 64 per Dollar.

 The world’s #1 gold consuming nation “should target structural impediments in the economy,” says an op-ed at Bloomberg, “rather than frantically [trying and failing at] shoring up the currency.”

 After Deutsche Bank warned this week that the Rupee could fall to 70 per Dollar, analysts at Barclays today targeted a 12-month rally to 61 instead.

 “Sideways trading in silver and gold,” however, “point to near-term bullish exhaustion,” the bank’s technical analysts said separately.

 “Watch for a pullback before an attempt at resistance,” advises Barclays – now pegged at $1400 and then $1440 per ounce in gold bullion.

 India’s aggressive anti-gold measures, plus the traditional ‘close season’ of Chaturmas, have seen gold imports fall to zero so far this month.

 In contrast, India’s silver imports have soared in 2013 so far, rising 285% from the same period last year.

 In world #2 gold consumer China, “Once the summer is over, we will see consistent [bullion] buying from September through the end of the year,” reckons Peter Fung at Wing Fung dealers in Hong Kong.

 Physical gold deliveries through China’s Shanghai Gold Exchange already total more than 1,100 tonnes this year, overtaking full-year 2012. End-user demand rose 54% in Jan-July. China’s silver imports, in contrast, have dropped by 40% and more.

 “Indian imports are robust, where silver demand seems to be benefiting from government policies aimed at constraining gold demand,” the Wall Street Journalquotes HSBC analyst James Steel.

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich or Singapore for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By www.CentralBankNews.info    (Following is the second of four reports based on papers presented at the 2013 Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City. The reports will be published as soon as the authors present their papers to the symposium.)

    The U.S. Federal Reserve should spell out its conditions for winding down quantitative easing (QE) to avoid further damaging rises in long-term interest rates, according to a paper delivered at the Jackson Hole symposium.
    So far, the Federal Reserve has been deliberately vague about its plans for asset purchases – so-called large scale asset purchases or LSAPs – to retain flexibility in its policy given its limited knowledge of how this tool affects the real economy, according to economists Arvind Krishnamurthy and Annette Vissing-Jorgensen, both professors of finance at the Kellogg School of Management, Northwestern University, who received their PhDs at MIT.
    But the jump in global bond yields and the plunge in stock markets following the June 19 meeting by the Federal Reserve is evidence of the acute sensitivity of investors to the future of LSAPs, mainly because QE targets long term bonds whose prices are very sensitive to expectations of future policy.
    “Lacking clear guidance on the states that drive LSAP policy, investors will react to any information regarding the Fed’s intensions over LSAPs,” the economists said in “The Ins and Outs of LSAPs.”
    One of the distinguishing features of QE is that it entails the purchase of longer maturity assets, such as mortgage-backed securities (MBS) or Treasury bonds. This compares with traditional monetary policy that typically focuses on short-term rates, and in the case of the Fed, the overnight fed funds rate.
    “Since the prices of long maturity assets are much more sensitive to expectations about future policy than short maturity assets, controlling those expectations is of central importance in the transmission mechanism of QE. Therefore, how an exit is communicated to investors matter greatly,” they said.
    Looking closer at the volatility in financial markets around the June 19 meeting – when Fed Chairman Ben Bernanke said purchases of assets would be reduced later this year and ended by mid-2014 if the economy continues to improve – the authors found that financial markets pulled forward the timing of a rate tightening cycle by about four months but it was not clear whether that was the intention of the Fed.
    “By being imprecise in the state-dependence of LSAP policy, the Fed has left it to investors to form expectations over the future of LSAPs,” they said.  “The large moves in rates on that day is clear evidence of the role of policy shocks – if investors found it easy to predict Fed policy changes, one should not see large moves in rates upon announcements.”
    One of the challenges facing the Fed in communicating its plans to exit QE is that investors appear to have closely tied together the path of the fed funds rate with QE, a reaction to the Fed not articulating a framework for the use of LSAPs.
    “Investors only understand that LSAPs are a tool to be used when the zero-lower-bound is binding. Thus when the Fed communicates that it plans on not using LSAPs, investors assume that the zero-lower-bound will not be binding and that rate hikes will follow,” they wrote.
    Apart from asset price volatility, another drawback of the Fed’s imprecise communication over LSAP policies is that the Fed cannot tailor an exit.
    “Currently, with the Fed’s discretion strategy, any exit step will be taken by investors as a signal of policy-maker preferences, which then can have wider consequences,” as illustrated by the sharp moves in asset prices around June 19.
  Based on their analysis of how LSAPs have affected the yields in the market for mortgages and U.S. Treasuries, Krishnamurthy and Vissing-Jorgensen propose a specific exit strategy for the Fed from almost five years of asset purchases.
    First, the Fed should stop buying Treasury bonds and then sell down its portfolio. The reason is that a sale or cessation of Treasury bond purchase will have minimal negative effects. Although it will raise rates on long-term Treasury bonds, and thus the financing cost for the U.S. government, it will have limited negative consequences to private borrowers as corporate bonds have been less affected by QE.
    One of the important findings by the two economists is that QE largely works through narrow channels that affect the price of the purchased assets with limited spillover on other assets.
    “It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds,” the economists write, returning to one of the controversial themes that characterized some of their earlier work.
    The second step in the Fed’s exit should be the sale of its higher-coupon, older MPS as this will have minimal effect on primary market mortgage rates.
    “The last step in this sequence is that the Fed should cease its purchases of current coupon MBS as this too is currently the most beneficial source of economic stimulus,” they wrote.
   In order to grasp the impact of the Fed’s purchases of MBS, the authors find that a new channel, the so-called scarcity channel, provides the best explanation.
   The Fed’s purchases of a substantial amount of newly-issued MBS has led to a scarcity premium on the current coupon MBS, driving spreads relative to Treasury yields below zero.
    This generates incentives for banks to originate more loans and relieve the shortage of current coupon MBS, lowering secondary market MBS rates with beneficial economic effects.
    Since current MBS prices depend on the expectations of Fed purchases, news that the Fed is likely to stop purchases will lead to an immediate rise in yields, regardless of what the Fed does with its portfolio.
    “Sales of higher coupon, older MBS from the Fed’s portfolio will have minimal negative spillover effects,” as these securities do not have the same scarcity as new, current coupon MBS.
    Over time, as the Fed tapers purchases of MBS, the scarcity premium will gradually diminish and after the Fed ceases the purchases, this premium will fully disappear as new loans are originated, they wrote.

    www.CentralBankNews.info

By www.CentralBankNews.info     (Following is the first of four reports based on papers presented at the 2013 Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City.The reports will be published as soon as the authors present their papers to the symposium.)

    Pent-up demand for investment on business plants and equipment, homebuilding and consumer durables will strengthen the U.S. economy and the main danger over the next two years is that the Federal Reserve contracts its portfolio of assets or raise rates on reserves before the economy has returned to a normal state, according to a paper delivered to the Jackson Hole symposium.
    Most of the forces that led the U.S. and other advanced economies into the 2007-2009 recession are self-correcting and Robert E. Hall, professor of economics at Stanford University, found that investment flows are beginning to return to normal and the labor market has returned to normal in terms of jobs value notwithstanding the continued high unemployment rate.
    In his paper “The Routes into an out of the Zero Lower Bound,” Hall finds that the deleveraging pressure on households has subsided and the rise in the stock market since 2009 means that the risk premium for business income is more or less back to normal so as output continues to recover, investment should return to normal.

     Since 2007 capital stocks have fallen far below their normal growth paths, with existing stocks now ageing and investment too low to avoid a deterioration in business equipment. Hall sees this as a consequence of the high risk premiums that investors assigned to business income, which then held back investment and job creation.
    “The major potential exception to the good news is the hint of a move toward deflation,” Hall said, advancing the hypothesis that businesses have not engaged in rampant price cutting because they perceive this to have higher costs than benefits.
    But if his hypothesis is wrong, Hall admits that his generally optimistic view could be quite mistaken and the “bottom could fall out of the economy as it did in the Great Depression.”
    The central danger Hall sees in the near term is that the Federal Reserve “will yield to the intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal.“
    “The worst step the Fed could take would be to raise the interest rate is pays on reserves,” Hall said, referring to the Fed’s move to pay interest on banks’ reserves at the Fed since 2008.
    “Every percentage point increase in the reserve rate drives the real interest rate up and contracts the economy by the principles discussed here,” Hall said.
     The Fed’s policy of paying interest to banks on their reserves of more than $1 trillion has often been the subject of a debate and at the 2012 Jackson Hole symposium economist Michael Woodford argued that the Fed should reduce the 25 basis point rate the Fed currently pays on reserves.
    Hall backs Woodford’s argument and adds that banks prefer to hold reserves over other assets when the interest rate on reserves is in excess of the market rate.
    “They protect their reserve holdings rather than trying to foist them on other banks,” Hall said.
    “An expansion of reserves contracts the economy. The Fed could halt this drag on the economy by cutting the rate paid on reserves to zero or perhaps minus 25 basis points.”
    The Fed’s argument for not cutting the reserve rate is that short rates would fall and money-market funds would go out of business.
    But Hall says money market funds could easily charge their customers a modest fee in the form of deductions for interest paid by using a floating net asset value as done by conventional stock and bond funds.
    “The SEC may accelerate this move by requiring all money funds to use floating NAVs,” Hall said.
    In his paper, Hall also takes issue with the traditional understanding of inflation based on the Phillips curve from the 1950s that said inflation depended on economic tightness or slack.
    “Yet extreme slack has done little to reduce inflation over the past 5 years,” Hall said.
   In order to study inflation and the zero lower bound on nominal interest rates, Hall draws on the so-called DMP economic model, which was developed by three economists that received the Nobel Prize in economics in 2010.
    “One central implication of the models is that there is no fixed “natural” rate of unemployment which the actual unemployment rate revolves around. Rather, the observed level of unemployment varies according to driving forces and is always an equilibrium,” Hall writes.
    The DMP model helps Hall understand why inflation largely has been steady despite years of economic slack.
    “The stability of inflation arises from the inertia in the wage bargain,” Hall said, adding that workers hired between bargaining times inherit their wages from the most recent bargain, explaining why wages have been so sticky.

    www.CentralBankNews.info

By www.CentralBankNews.info Here’s today’s Central Bank News’ link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

By HY Markets Forex Blog

Equities in Asia ,majorly stocks in Japan  were pushed by the series of better-than-expected macroeconomic data released from all over the globe along with the weaken yen at its lowest level against the greenback. While China had a strong rebound on Friday despite of the upbeat data released.

Over 1% in crude futures advanced overnight, which helped the region’s energy producers. As reports from Europe and the US showed a better-than-expected data, the eurozone improved in their output more than analysts predicted and the jobless claims in the US dropped. The US jobless claims in the month ended August 17 dropped to 330,500 a week, the US Labour Department figures showed.

While in Europe, the eurozone’s manufacturing gauge showed an expansion or a second month in August, advancing from 50.3 to 51.3; the Markit Economics reported. Equities increased their gains after a member of the European Central Bank (ECB) Ewald Nowotny, said the good news from the eurozone economy has cleared the need to cut the central bank’s interest rates.

Equities were expected to be seen at its lowest over the fear of the US central bank tapering its stimulus bond-buying program, the concerns from investors led to a massive sell-off in the region due to  the emerging markets as the US treasury yields rose as high as 2.93% on Thursday.

Stocks in Japan – Weaken Yen

The Japanese benchmark index Nikkei 225 gained 2.2% at 13,660.55; while the Tokyo’s broader Topix index advanced 2% to 1,141.63. Japan’s exporters were assisted by the weaker yen against the US dollar above the ¥99 threshold.

Global corporate group Citizen Holdings advanced 3.4%, while motor producing company Yamaha Motors gained 4.9%. The globe largest carmakers Toyota Motor gained 2.8%, while Kawasaki climbed .9%.

The sixth largest Japanese automaker gained 3.4% and the retail sales company Isetan Mitsukoshi Holdings soared 6.1%.

The Hong Kong’s Hang Seng declined 0.20% at 21.851, while the Chinese mainland Shanghai Composite edged down 0.48% and closed at 2,057.23.

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