Bloomberg writes that Pimco, the fund manager, is creating a “tail risk” fund to protect Wall Street against a 15% drop in some market index we are not being told the name of. Tail risk is a term invented by Nassim Nicholas Taleb (n NYU prof.) and publicized in his book “Black Swans”.

I saw black swans in South Africa last summer and have a picture of the birds on my bulletin board to remind me that they exist. (They were first found in Australia; until then all swans were assumed to be white.) Now even the ballet features black swans along with white ones dancing in “Swan Lake”.

Tail risk is bumps in the seemingly long and low tails of a normal curve, which looks like a hat in profile. The tails appear in the brim.

The Newport Beach CA fund group, co-headed by Mohamad El-Erian (who used to run money for Harvard Universtiy before he ran the endowment down 30%), hired a Harvardian to run the new tail risk fund. He is Vineer Bhansali, a PhD in theoretical particle physics (despite quantum mechanics not the same as theoretical wave physics.)

Mr. Taleb forecasts investors will not have the patience to wait for a big payoff because tail risk takes years to appear.

Today is a big news and earnings day with many reports for our paid subscribers which follow. Too many countries to list today.

Read more »

Pundit Jeremy Grantham (of Grantham, Mayo, Van Otterloo) writes bearishly:

I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor. Even three months ago, I was studiously trying to stay neutral on the “flation” issue, mesmerized by the potential for money supply to increase dramatically, given the floods of government debt used in the bailout. But now, better late than never, I take sides: With weak loan supply and fairly weak loan demand, the velocity of money has slowed, and infl ation seems a distant prospect.

He adds:

It is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future. With unexpectedly strong fiscal conservatism from Europe and perhaps from us, this slowdown looks downright frightening. I recognize that in this I agree with [Paul] Krugman, but I can live with that once in a while.

Many Americans (except Grantham and Krugman) don't believe our government's stimulus measures did any good, as unemployment is still so high. Imagine how many more people would be jobless had stimulus not been tried. If you want a been-there-done-that insight into how to deflect deflation, what better source than Japan which managed to inch its way out of deflation over the past decade?

From Japan, Daiwa Securities forecasts the world economic outlook:

On concerns over the possibility of a 'double-dip recession', there are reasons why it is not the most likely outcome. Moving toward fiscal tightening appears generally to be relatively measured. This year, the euro area and China are likely to run somewhat expansionary fiscal policies while others are likely to start on some fiscal restraint. Next year, almost all countries are likely to tighten policy, but the contraction fiscal impulse seems fairly modest in most cases. While fiscal policy is tightened, monetary policy is likely to remain expansionary.

Earlier expectations of a an exit from the low interest rate and non-standard monetary policy have been shifted well into 2011. With discretionary spending on durables and structures already having fallen to recent historical lows, this key driver of economic downturns has much less room to be compressed than before the crisis began. Indeed, this is one reason double dip recessions are so rare. The more and the longer such spending are [sic] compressed, the more pent-up demand builds to support the eventual expansion. Durable goods that have worn out eventually need to be replaced. With pent-up demand beginning to show through consumer and business spending, the economy is developing sufficient momentum through 2010 to deflect the upcoming headwinds to a significant degree. A positive feed-back look between investment, employment, and consumption seems to have emerged in most major countries.

Meanwhile Japan Equity Fund is behaving like a rabbit staring at the approaching headlights, with Toyota still its 3^rd largest holding despite flaws, because the portfolio is looking for “names.” With political disarray and a high yen hurting Japan Inc., we are happy with more modest names small caps for the long-term, companies, not so bound up with current exports. These are selected by Chris Loew from his base in Osaka. JEQ is off 2.51% in the last month vs a mere 1.45% drop in Topix index. And it is off 10.19% in the last quarter vs a drop of 9.48% in the index. Which is not to say that we haven't also lost in Tokyo. Details for paid subscribers below.

Tax simplification we should learn from the Brits. UK Treasury minister David Gauke said: "The tax system created by the previous government was overly complex and has made the tax affairs of millions of families and businesses across the UK extremely complicated. We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal. The Office for Tax Simplification will provide important advice [for] making the right reforms to the tax system that will help to pave the way to bringing more international business to the UK, which will give our economy the boost it so urgently needs in the years ahead." The program will not address tax credits or local taxes.

Oak Value Fund like Vivian in Q2 sold Diageo. They wrote of DEO, a British maker of booze:

Diageo is an advantaged business that generates significant free cash flow. The company has announced a strategic realignment to step up its investment in marketing and innovation in order to drive top line trends in their more mature markets. With the prospects of Europe remaining weaker for some time, we were faced with the reality that Diageo’s growth opportunities are likely to be somewhat muted for the next couple of years and that the costs of this realignment will weigh on the company’s profitability until it reaches scale and productivity. Diageo is an outstanding company and a leader in its industry. We will continue to monitor the company’s progress. Meanwhile, we believe the Fund portfolio will be better served with this capital allocated to other opportunities.

I owe an apology to Ron the web designer and Alex the webmaster. My problem yesterday with truncated emails from our website was not the fault of the drupal settings but arose with Google with my personal e-mail. Hysterical laughter greeted my woes from an associate who went to NYC's Stuyvesant High School. I admitted I was technically-challenged.

I attended Stuyvesant's archrival, Bronx Science. Science alumni are not supposed to be puzzled by tech. At Science I learned communication technology in shop class by building a transistor radio in a cigarette case. There have been some advances since. Although you still have to hold your cigarette case right for the Apple I-phone antenna to work...

My college classmate, Harvard Law School Prof. Betsy Warren, has been named to head the Consumer Financial Protection Bureau established by the new law. Congratulations!

More for paid subscribers from Japan, India, Canada, Britain, Brazil, Greece, Allentown PA, Israel, Japan, France, and other centers.

Read more »

The word from Adam Carr of ICAP, the Australian brokerage, came today:

There is no doubt that market psychology is just fascinating at the moment. Look at the week just gone. We learned that US industrial production continues to power ahead, that China's economy is surging and that of 23 companies that have reported so far (US), only three have failed to beat eps estimates and only 5 haven't beat revenue estimates. I find it remarkable then that copper would be down 4%, stocks down 1% and that risk more generally has been taken off. A v-shaped recovery is underway and the data is showing us there cannot be any credible denial of that. Maybe that will change over coming quarters (maybe it won't). But this is what we have seen so far.

I can't say I'm surprised by market action though and as readers may recall, risk aversion was my fear this time last week. Misinterpretation is in vogue, it's everywhere. US retail sales were expected to fall, they did and the market reacted, despite the fact that sales had been strong in the preceding 3 months - no double-dip here - sales are doing okay (up 8%y/y in the three months to May).

 

Friday's session was pure overkill - in response to a volatile consumer sentiment survey and corporate earnings which were actually very good, US markets tanked. Truly bizarre.

Here is Peter Lynch's take on the current market. “Don't get scared out of your stocks” said the former Fidelity star manager who now is retired. “This truth cannot be over-emphasized” wrote Lynch. Keep on trucking. Keep on investing. Mr. Carr does not expect a better tone on Wall St. this week:

US data is actually expected to be woeful. Especially existing home sales (Friday) - forecast to fall 10% in June (which if they did, would only mean a 5% below average result). Housing starts out Tuesday are expected to drop a further 2.2% after a 10% drop in May. Note that a number of factors have conspired to bring the starts down here - the end of the homebuyer tax credits, difficulties in processing loans, BP's oil spill. It is therefore impossible to detect the true underlying trend.

 

Now all the while, US consumer spending has been rising, industrial production and manufacturing accelerating and private sector jobs growth have increased (albeit modestly). The point is that despite these swings in confidence, nothing changed in the real economy--it still accelerated and thus far we've witnessed a v-shaped recovery.

 

With the US dollar weakening against the Yen, the Swiss Franc, and the Euro, I think we should be shifting out of these currencies into ones which have also lagged, notably Pounds Sterling.

Interest rates have been raised by Thailand, contrary to forecasts. Rates are likely to be raised again by Israel as soon as next weekend (Shabbat Nachemu). Governor Stanley Fischer will be coming to NYC to address the Israeli Investor Conference Dec. 1, by which time there may have been further rate increases.

Here is a dispatch from Frida Ghitis:

The new word is “CIVETS”, exotic felines. These cats, like “BRIC”, are the brainchild of Goldman Sachs’s Jim O’Neill. With his BRIC now a decade old, O’Neill says spectacular future growth lies in the smaller CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. The larger BRIC economies will grow, but now that everyone knows about them, the bargains are gone.

CIVETS make up a disparate collection. Colombia, where I was born, is slowly emerging from a drug-fueled war that lasted decades. I have some investing ideas there. The future looks bright. Dodging a regional trend, Colombia’s democratic institutions survived a hyper-popular president who could have held on to powerr. Its just-completed elections were won by a competent technocrat against a flashier charismatic challenger. Pres.-elect Juan Manuel Santos, who studied economics at Harvard and the London School of Economics (no guarantee of anything) will continueUribe’s business and security focused policies. Colombians are repatriating their cash. And foreign investment that might have gone next door to Venezuela, spooked by Chavez will head to Colombia. Santos will be good for the economy and investors.

 

Indonesia, the world’s largest Muslim country, and Egypt, the major Arab nation, both have great growth prospects. But corruption and infrastructure problems make me hesitate to invest. Egypt also faces succession uncertainty as Mubarak is old and ill. Turkey has a more developed economy and its markets are dearer, so the hunt for bargains is tougher. South Africa and Vietnam are works in progress, with mostly natural resources and cheap labor on offer respectively..

 

Of the CIVETS, the one that appeals the most is Colombia. If the new president can continue to win the war against drugs and guerrillas, not ended, I will return cash to my old homeland. It’s time to check out the opportunities. Stay tuned.

More for paid subscribers follows from Mexico, Brazil, Spain, Portugal, Canada, Britain, Israel, and Switzerland.

Read more »

Summer is icumin in and stock markets are suffering from low volumes and indecisiveness. It's not the bulls or the bears these days; it's the sloths. France, which celebrated its national holiday yesterday, is still recovering from the firehouse balls and nothing will happen until next week.

 From Institutional Investor, which I used to write for in Paris, I got this:

In the article titled “Al Gore’s Fund Suffers and Green Investors are Seeing Red,” which appeared on our web site on July 13 and 14, we wrongly stated that the Generation Global Equity Fund was, according to its Securities and Exchange Commission filings, worth only $2.4 bn at the end of March 2010, having originally been worth $5.3 bn when it was closed to new investments in 2008.
We accept that these figures are wholly incorrect. The Fund’s SEC filings state the value of the Fund’s U.S. investments only (which at the end of March 2010 were approximately $2.6 bn), and not the value of the whole Fund. We understand that the value of the Fund at that date was $5.6 bn, and that the Fund has therefore grown in value since 2008.