Fed-Bashing and Fund Flows
Former Tiger Mgm analyst Thomas K. Brown in bankstocks.com defends the Federal Reserve:
''What alternative monetary policy would the Republican candidates prefer? They seem to think the Fed should ignore that the economy’s weak and businesses are operating in an environment of huge regulatory uncertainty.[I]t should simply focus instead on controlling inflation that’s already so low that nobody seems to notice it. That all sounds very prudent--except that it’s nuts. If you doubt it, look at what the European Central Bank has been up to amid the chaos in Europe. The ECB’s policies have been much closer to the sound-money, Ron-Paul-approved approach the Republican candidates seem to be pining for—which is one reason Europe is on the brink of collapse. If Bernanke weren’t being aggressively accommodative, it’s very likely GDP would be growing slower than it has been and unemployment would be higher. How would that be a good thing?
''Critics of the Fed, Republican candidates included, seem to believe that the first, last, and only job of a central bank is to safeguard the currency. That’s wrong.''
Abraham Beilin of Morningstar writes of ETF fund flows:
''The most publicized price competition in ETFs continued as Vanguard MSCI Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index (EEM) continued to wage a one-sided asset battle. Year-to-date inflows to VWO totaled just more than $7.4 bn, while outflows to EEM weighed in at $7.1 bn. Given that the funds track the same benchmark, the MSCI Emerging Markets Index, and that their primary difference is that EEM charges 0.69% annually against VWO's 0.22%, we believe this to be a bout of cannibalization. For the year to date, both products are down 16.5%.
''Despite the offsetting flows of VWO and EEM, the international-stock asset class saw year-to-date net inflows of $13.5 bn. VWO's inflow was followed by iShares MSCI EAFE (EFA), iShares MSCI Japan (EWJ), and Vanguard MSCI EAFE ETF (VEA), which collected $4.3 bn, $2.2 bn, and $1.9 bn, resp. ''The best performer, EFA, lost 10.6% for the year to date.
''Flows to international-stock offerings were volatile. Thus far, net flows to the asset class have shifted from inflows to outflows (or back) six times in 2011. Since late Mar., both the foreign and emerging markets have maintained similar performance. Not surprisingly, there were only two months in which the cash flows of VWO and EFA did not move in the same direction. For the first 5 mos of 2011, flows responded to performance of the prior month. Since May, however, flows remained largely positive despite poor performance. The divergence may be the result of market participants looking to build out international exposure on the dips.''
More from Scotland, Spain, Belgium, Israel, Finland, Canada, Britain, Japan, Australia, India, and Ireland. Despite having sat with Andrea Fiano of Milan at the Bank of New York-Merrill Lynch 2012 outlook breakfast, I have nothing on Italy. I will report on the insights received tomorrow.
The Titanic and Postal Service
Martin Ferara sends a brilliant comment from someone he used to work with in London about the EU summit, Terry Smith of inter-dealer brokerage Tullet Prebon:"The UK is as isolated as someone left on the dock in Southampton as the Titanic sailed away."
Ben Pace III, chief investment officer of Deutsche Bank's private client group with whom I had breakfast yesterday, said “I hope we will be talking about inflation at this time next year because it will mean we have higher demand.” But “interest rates higher than they should be are not a sign of inflation, but of a slow-down in the economy.” “After quantitative easing ends, bond prices will become a clearing mechanism when the Fed ends the program, because of technical factors”, not because of inflationary expectations.
Our newest stringer, based in South Africa, insists on being paid by Paypal or (costly) wire transfer because the country's post office is corrupt and larcenous. What a shame!When we were on top of Table Mountain near Cape Town two years ago I was enchanted by the antique red Victorian letter boxes we used to send postcards home. But “VR” letter-carriers did not steal peoples' checks.
It reminds me of another country where they steal checks from the mail, India.
And our Russian reporter, while very pro-Putin, gets his checks paid into a bank account in the UK.
Even in NYC a mail carrier was stealing envelopes heading for the diamond district around 47th St., some with jewelry inside. He got caught and arrested. However awful the USPS may be, its ethics are pretty high.
More from China, Spain, Brazil, South Korea, Ireland, Israel, Germany, France, Thailand, Britain, and Finland follows:
Mind Your Ps and Qs
Italy issued T-bills today at 5.952% which is supposed to cheer us up.
Eric Kraus writes from Moscow:
''The elections represented not just protests against corruption, deeply uninspiring politics, bad weather, and a slowdown in economic growth (to a still respectable 4%/yr), but also, a sharp reaction against the liberalizing, pro-Western line embraced by Pres. Medvedev The liberals of Yabloko took a thumping 3% of the vote – the Communists and Hard-Line Nationalists a combined 33%. This is no Orange Revolution.
''Russian politics is about to become a lot more 'interesting'. 'Democracy' requires that the government respect the wishes of the electorate, and the electorate does not wish to cuddle up to NATO, render Ayn Rand obligatory reading in high-schools, privatise Gazprom, nor allow the West a free hand in the CIS. It represents an aspect of the Russian body-politic which [I] would rather forget – as would most of our readers, even those who disagree with us most strongly regarding the rest.
''Investment implications: Expect a somewhat more stimulatory fiscal policy, with a shift towards a more statist model.
''Those familiar with Russia’s 19th century history cannot fail to see the parallels. An ineffectual liberal opposition, almost Fabian in its outlook and obsessed with maintaining its own ideological purity, was totally unwilling to compromise with what they saw as the corrupt Tsarist establishment, choosing instead to go into a sterile and destructive opposition. Russia was thus left with only two political forces of any consequence – the ultramontane Tsarist right, and the radicals who ultimately formed the hard-core Bolshevik faction. The outcome was not a happy one.''
*Lou Basenese wrote in SeekingAlpha: ''It’s been 61 years since Japanese stocks traded so cheaply in comparison to U.S. stocks. That’s based on the ST Ratio, which hit a high of 1.73 in Nov. (Bloomberg data). The ratio is simply the price of the S&P 500 Index [divided] by the price of the Topix Index.''
Chris Loew, our local reporter, commented from Osaka, where people have been told to turn down the heating to avoid brown-outs from power shortages:
Many reasons explain why Japanese companies are not doing well. A VP of Toyota sub Daihatsu lists in its house newsletter 6 major problems:
1) The high yen;
2) A 40% corporate tax rate;
3) The Trans-Pacific Partnership free-trade agreement hurting agriculture;
4) Unwillingness to employ in Japanese factories low-wage foreign labor;
5) Costs of meeting the Kyoto environmental standads;
6) Lack of sufficient electric power in many areas from the earthquake.
Selectivity is the most important rule for investing in Japan. Japanese small-caps are good value but you should not simply compare the p/e ratio of the Topix to the S&P 500.
There will be no blog on Tuesday Dec. 13 or Thursday Dec. 15 as I am attending year-end investor conferences at Deutsche Bank and Merrill Lynch resp. If there is news requiring subscribers to act I will send it to them only.
More for paid subscribers from South Africa, Singapore, Switzerland, France, Britain, Scotland, Ireland, Israel, Cyprus, India, and Canada, including two new recommendations.
I just updated the tables for closed positions for the world to see, and for our current holdings in stocks, bonds, close-end and exchange-traded funds for subscribers only to view.
With my portfolio betwixt and between I could compare how current and well-tracked prices were between the Schwab brokerage and E-Trade. Frankly E-Trade covers inter-day movements vastly better than Schwab does for OTC-traded shares from Europe, Britain, Japan, and even Israel (whose market is closed on Fridays). Yet another reason to undo the move, proving to be a major hassle.
Eggnog All Over My Face
From the Investors Chronicle editor today:
“J'accuse! We're not very popular in euroland. France Pres. Nicolas Sarkozy said that no agreement came out of last night's summit because Britain was too busy defending its narrow interests. Only the Hungarians are with us! But [PM] David Cameron was right to say no. We may not be comfortable with the idea of so much tax revenue coming from the casino activities of the City, but it's reality. And the financial transactions tax proposed by the EU is flawed.
“When James Tobin first proposed such taxes, the idea was that they would be levied globally and used to alleviate poverty. The Franco-German proposal envisages a tax levied locally and diverted into the coffers of an institution that is profoundly undemocratic, and whose internal financial controls are such a mess that its own auditors refuse to sign its accounts. The outcome is not as bad as it could have been but it sets the stage for months more uncertainty.
“Cheer up! While Europe obsesses over the single currency, the rest of the world is getting on with it. “US economic growth is ticking along and Chinese inflation is coming down.”
At this time of year the Xmas party cheer is nullified for newsletter writers like me because we have to do our prognostications for 2012 without getting eggnog all over our faces.
Looking at recent charts of Stock Markets Past, I have drawn an important lesson for Stock Markets Future.
More for paid subscribers from Spain, Chile, Mexico, France, China, Israel, Brazil, and some musings on strategy, for paid subscribers only:
Mexico Instead of BRICs
BRICs are last year's idea. Now Brazil has stopped growing and its economy may be shrinking. Russia is rejecting Putin and political stability. India has again vetoed modern commerce by banning supermarkets, which will hurt its poor most of all. And China, fighting inflation, has pushed its currency to the very bottom of its band against the dollar (which hurts all China shares earning renminbi.)
So how about another developing country, Mexico? Poor Mexico, so far from God and so close to the United States. Read more »
The Beatles and Gorbachev
As the Beatles sang:
You don't know how lucky you are,
Back in the USSR.
For years, my sometime contributor Eric Krause has been berating the global press (like The Economist), the great and the good (like the Carnegie Foundation), and your editor (who can read Russian) for failing to appreciate the deep love Eric claimed Russians feel for Vladimir Putin. He's there and I'm here, so I tended to run his copy from time to time, although in my heart of hearts I felt he was more like an agent in place than an independent reporter.
Eric sprouted the Kremlin line over the looting of the Hermitage Fund, created in Russia by Bill Browder, the British grandson of the former head of the US Communist Party, Earl Browder. Russian tax authorities manipulated to replace the fund managers with crooks and killed Browder's lawyer.
Eric also backed Putin over Mikhail Khodorkovsky, an occasionally idealistic Russian plutocrat who languishes in Siberia because he ran against Putin on an anti-corruption ticket. Khodorkovsky, the subject of a new movie, was jailed on trumped-up tax charges not because of how he became wealthy (standard Russian oligarch dirty methods) but for not keeping silent about politics later.
Another guy based in Moscow, Mikhail Gorbachev, today told Interfax news that Russia should annul and re-run the parliamentary elections because of widespread reports of election fraud.
Thousand of Russians demonstrated in Moscow and St. Peterburg against the way polling fraud, facing off against tens of thousands of police and Interior Ministry troops. Reportedly hundreds of protestors were arrested, often brutally (as you can see on You Tube and the Internet.)
Gorbachev was the last head of the Soviet Union Communist Party, who launched perestroika. He also allowed Russian satellite countries to break away without sending in Russian tanks and negotiated to reduce nuclear weapons with the US. Gorbachev's negotiating partner, Pres. Reagan, famously said: “Trust but verify”. Reagan did not decide to trust his Russian opposite number by looking into his eyes like George W. Bush did with Putin.
More for paid subscribers from Canada, Colombia (3 items), Spain, Singapore, Britain, Ireland, Israel, the USA (3 items), and Kazakhstan. And a sale.
Volatility and Risk
Today's issue is about bargain stocks. I am examining them in order to pick 2012 favorites for publications. This exercise occurs at the start of every New Year and I join in to help lure new subscribers.
But first a note from Jeff Nielson of Bullion Bulls Canada who writes:
“While watching television the other night, I was once again confronted by my biggest pet peeve: investment professionals who confuse risk and volatility. The offender was a TV commercial heralding the supposed virtues of an annuity with a guaranteed rate of return. The suggestion is that such an arrangement removes risk from the table. The investor is led to think, 'If I pay monthly payments of $X now, I am guaranteed future payments of $Y in the future.' But every investment carries risk, and a fixed payout structure doesn't obviate that risk.
“These companies have a financial interest in confusing investors, but the unfortunate by-product of decades of this marketing is that very few people, and not even most financial journalists, know the difference between risk and volatility. As always, logical analysis starts with definition of terms.
“Once we simply note the nature of volatility and risk in explicit terms, the flaws to which I alluded should begin to become self-evident to readers. While it can be very difficult to quantify risk, defining it is simple. Risk, in the context of investment, is the probability that something you purchased will end up being worth less than what you paid for it when you decide to sell it. We can get more technical by adding in the concept of opportunity costs, but it's important for everyone to have at least an elementary understanding of risk first.
“Volatility, on the other hand, is a concept that is as easy to recognize in the real world as to define. Volatility is a purely mathematical concept [for] 'deviations from the mean.' If we establish a trend line for the price of any investment (a 'moving average'), volatility refers to the average size of the bounces in price on either side of the trend line. "Most importantly, to the long-term investor, volatility is a small factor in assessing risk.
"Here we can only point to the gross failure of all of the 'experts' (and most financial advisors) in the investment community, who regularly confuse these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors.
“Recalling our definition of volatility, we should immediately note why it provides us little insight about risk: because it implies absolutely nothing about the direction of the trend for any particular investment, i.e. up or down. A particular investment can have a volatility of effectively zero, while marching steadily down to a valuation of zero.”
More from Ireland, Israel, the Dutch Antilles, Australia, Singapore, Canada, and Finland follows for paid subscribers about our stocks.