Category Archives: Equity analysis

The state of disunion address.

After two weeks pondering money aspects of economic theory, it’s time to review where we stand in the global panorama. These are, in a perverse chinese sense, interesting times. And things keep moving under the seemingly calm surface. So this post intends to be something like the annual presidential overview in the USA: the state of the Union address.

I am aware of some facts. First, I am not the president of anything, not to mention the USA; my opinion is highly irrelevant. I hope my thinking is better rated. Second, it is a little early as it should come well after Christmas. No problem; the early bird gets the worm. And third, the world is nowadays a civilized disunion of countries desperate for economic survival, so we can hardly talk about the global picture with a “union” characterization in the concept. So I renamed the address. After the brotherly G20 communiqué, a trace of realism is what the doctor ordered.

When you write, you have certain advantages over the reader. But he can read you in the comfort of his sofa, and backtest what you say, particularly with the benefit of time. Once you assume the challenge, it is all downhill pedaling. Everything else is up to you. You run the show.

So, in use of that capacity, I determine to focus on two pressing matters.

1.- Update on money printing and its actual practical effects in financial markets (no economic theory today). We use US markets as a proxy for the rest. The situation is very similar in all the developed world.

2.- A long hard look at income distribution. Where we come from, and where it’s going to take us.

Money printing and financial market prices.

The issue of money printing has been debated in these posts to the point of exhaustion. The reader already knows what I think. He now wants to check my views against future outcomes. He’s not to blame for that, specially after reading tons of material -with the entirely opposite views- sustaining Saxonomics, Helinomics, Abenomics, and now Draguinomics. I lack the institutional back up to enhance the credibility of my line of thinking. Time will tell. In the meantime, I am 100% certain of the validity of my thinking in this matter. For what it’s worth.

I keep on gathering evidence wherever I find it. Not trying to prove anything. Just checking the validity of my thinking daily. Doing my homework, I stumbled upon a few charts included in a Tyler Durden post in Zero Hedge last saturday. Correlation is certainly not causation.  But if you look at them for a while, they certainly seem to fit the wording I have used in past posts to characterize the incidence of money printing in financial markets.

They also seem to corroborate Cantillon’s conclusion that money printing affects the equilibrium between asset prices and consumption pricing. Once aggregate supply became plentiful (with globalization), money creation ceased to generate consumer price inflation. Money went directly into investment assets (financial markets), with scarce and decreasing spillover into the real economy.

Globalization is not the agent of the actual economic malaise; it has simply allowed insane central bankers to continue their printing game for ever, because it effectively provided near unlimited supply of most products. After Globalization, aggregate demand is local but supply is global. Prices will remain reasonably near marginal costs for as long as supply is perfectly elastic.

Central Bankers had been taught that they were there to target an specific inflation figure, and (explicitly in the US, or implicitly in the other countries) use whatever leeway was left, to stimulate economies with as easy money as possible. Consumer inflation is undoubtedly a monetary phenomenon, but not the only variable to watch. Easy monetary policy produces other side effects. An uninflationary environment is not an ecstatic situation that allows you to write checks for free. It’s not only about inflation Mrs. Yellen!

20140920_Irrataional5_0

Tyler Durden. ZeroHedge. Fifty years later, market cap deflated by the monetary base is constant. Funny coincidence. Doesn’t really prove anything but …

 

Tyler Durden Zero Hedge

Tyler Durden Zero Hedge. Nothing to write back home about. A factor of two for over a century of data. Please observe that ever since the highs of the year 2000, it is obvious that M2 expansion supports equities.

Another way to show that it’s money debasement (and no other relevant factor) that moves asset prices. Again from Tyler at Zero Hedge, using a Citibank graph.

Citi Econ 4_0

Market Capitalization or house pricing show a disturbing logic, when put in contrast with the main money aggregates, be it base money, or M2. In different countries. There could be other explanations of course, but according to Ockhams razor principle, this is “the explanation”. It is certainly the simplest and most direct cause-effect for achieving the actual market price level.

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Mal pronóstico para los resultados empresariales

He elegido un titular problemático. La prensa general y financiera, vienen contaminadas con las bondades de la evolución de los beneficios empresariales. Unas bondades ciertas y evidentes, a la luz de los datos de los últimos años. Hace ya mas de una década, que el excedente bruto empresarial evoluciona en sentido inverso, tanto respecto de la parte del pastel adjudicada a costes laborales, como en relación con la sostenibilidad de las cuentas públicas (por subsidios a la población).

Pero rentabilidades pasadas nunca presuponen rentabilidades futuras. De hecho, suelen ir inversamente correlacionadas. Es difícil que un fondo de inversión repita un trienio con rentabilidades excepcionales. Difícil, pero no imposible. Simplemente, el cálculo de probabilidades está en contra. Recuerde que unos de los parámetros básicos de una decisión de inversión es la Esperanza de Retorno, entendiendo esperanza en sentido estadístico. Suelo repetir a quien me consulta, que la esperanza como virtud teologal es meritoria, pero no es una estrategia de inversión viable. Pues bien, la Esperanza estadística de la distribución de posibles beneficios empresariales futuros, esta por debajo de la cuota sobre PIB que ostentan actualmente.

Las fuerzas estadísticas que impulsan la tendencia a la reversión a la media son potentes. Cuando uno invierte, por profundo que sea el análisis, no conoce el devenir de los acontecimientos futuros. Hay una distribución de probabilidad del retorno esperado. La probabilidad a favor, y un binomio riesgo rentabilidad aceptable, son vitales para la supervivencia financiera. Y más en los tiempos que vivimos. Invierta contra la tabla de probabilidades de retornos esperados, a su riesgo. Para una serie suficientemente larga de decisiones, acabará pobre (o sin empleo).

Los de Goldman Sachs, “sell side” donde lo haya, lo tienen claro, los beneficios no pueden seguir subiendo mas que el PIB nominal:

Business Insider 12th august 2014

Ya tenemos una razón para tomarnos con cautela la solemne afirmación habitual en los analistas “sell side” (esta vez Goldman aparte), sobre el magnífico futuro de los beneficios empresariales. Pero, simplemente porque las probabilidades vayan en contra, no vamos a dejar de invertir, en base  a una tendencia que creieramos que va a seguir produciéndose. ¿Va a seguir produciéndose?

Para intuir la probabilidad de que las cosas sigan evolucionando como en el pasado más reciente, otra consideración de partida es la clásica ley de Stein: “cuando algo no puede continuar para siempre;  parará”. Nadie se acuerda de ella cuando la experiencia previa ha sido gratificante. Constituye una de mis guías espirituales.

¿Puede proyectarse a cinco o diez años, la constante mejora, en términos porcentuales sobre PIB, del excedente bruto empresarial? Porque, cuando alguien se lleva cada año más trozo del pastel, otros se llevan menos. Eso es cálculo básico de fiesta infantil de cumpleaños. ¿Es asumible el correspondiente declive adicional del trozo del pastel asignado a las rentas salariales?

Llevamos más de una década de constante mejora generalizada y significativa de los beneficios empresariales en toda la OCDE, salvo Japón. Los consumidores cada día más pobres, y el excedente empresarial cada día más alto. Social, y económicamente (por la propensión marginal al consumo), la tendencia es insostenible. Seguro. Y, probablemente, reversible en al menos parte del trayecto recorrido.

Pero, espero que el lector intuya que no me voy a quedar en afirmaciones, más o menos sensatas y novedosas, pero de corte generalista. No es mi estilo. Tampoco entraré a discutir los pronósticos de beneficios para el 2015 de las empresas del IBEX, el DAX o el Russel 2000. Los analistas bancarios le dedican al tema muchas más horas que yo, y aunque pintan los resultados con tintes rosáceos para mantener su bonus, es inútil dedicarse a rebatirles caso a caso. Mi “time frame” es más amplio. Hay que adelantarse al mercado (aunque admito que yo frecuentemente me paso de rosca con ello).

Lo cierto es que existen cinco criterios macroeconómicos seculares que fundamentan la afirmación de que estamos viviendo los altos del ciclo del excedente bruto empresarial. Al menos para las empresas cotizadas y las grandes multinacionales.

  • La ecuación de Kalecki. El impacto de los déficits públicos, en los beneficios empresariales agregados.
  • La fiscalidad efectiva que recae sobre las multinacionales, y las ayudas públicas.  Su insostenibilidad estructural.
  • El sesgo ejecutivo hacia el beneficio inmediato, y la asignación del free cash flow a la recompra de acciones, frente al aumento o mejora de la capacidad instalada.
  • La implausibilidad de una súbita mejora sostenida de la demanda agregada real durante algún tiempo.
  • Los costes de financiación. La mayoría de los analistas e inversores creen que los tipos cero durarán mucho. Discrepo.

Todos estos criterios tendrán una importancia decisiva a cinco años vista, aunque son compatibles con una prolongación del ciclo actual por unos meses o algún año más. En cualquier caso, bueno es recordar que los criterios de valoración no pueden ser usados nunca como elemento de “timing” en las entradas o salidas de posiciones inversoras. No venda sus acciones mañana, tras leer este post. Si lo quiere hacer, lease primero el post anterior, sobre el timing de los altos del ciclo. Continue reading

Timing the top.

Kobe Bryant

Kobe Bryant

The challenge of a life time. Now I know how Kobe Bryant feels, when his teammates hand him the ball with just a few seconds left on the shot clock. With no time left to create a better choice, he just has to get lucky on a miracle shot.  Financially speaking, after years of market manipulation -if not outright deception- by central banks, it’s really now, or never. Last chance to make big money with this new, last super bubble of the lot.

Oh yes, there will be a market after this top, but it will be an illiquid one, with limited chances of making big money. Cleaning up this credit bubble is going to take a long, long time. This next top is, as Warren Buffet would put it, the fat pitch we should have been waiting for. I know most batters have been swinging at pitches lately, and they made money with this market in the interim. Good for them; but I disagree with the risk-reward targeted. Risk didn´t materialize, but it was there all the time. Unlike in baseball, there is no penalty for being patient in investing. As I grow old, my patience improves daily. Nothing else does.

This top is going to be “the mother of all tops”. And it will come, as sure as night follows day. It is keeping me awake some very long nights. As Herb Stein stated,“If something cannot go on forever, it will stop.” ¿When? In order to get the three points from the Kobe Bryant last nanosecond shot (make money shorting the next market top), we need luck, and even then, a lot of aspects around the trade have to be perfect.  Two elements have to be right: precise timing, and determining if the first top will be in bonds, or stocks.

Of course, all aspects to consider, interact between themselves, in order to make things as complex as possible. The market is a bitch. First and foremost, precise timing is crucial. A correct predefinition of the macro aggregates to watch, simplifies the problem enormously (if correct!). Then there is noise to account for, and behavioral market player considerations. The POMO desks of the Central Banks manipulating everything they can, as much as they can, for as long as possible, are also to be considered. And it’s a dog fight. It will be their last stand in the current credit expansion. Continue reading

Even more sex?

Well, it doesn’t happen all the time, but the EURUSD has performed exactly as expected since our last post.  And not only this pair; if you were short the Euro, you are “in the money” against most currencies. As I said then, it doesn´t get any better than this. The trade makes fundamental sense, and we have the POMO desk of the ECB covering our back. Sex has been good lately.

No overconfidence though. Nothing is really 100% foolproof, particularly in these turbulent times. Only two days ago, Saxo bank research came out with a long the EURUSD recommendation, with a target at no less than 1,40. Wow! I have great respect for them, and the rationale for the trade certainly makes sense. They think US interest hike fears are overblown. Most likely they are; but in my view, not to forget is the other side of the trade. The European growth scare is consolidating daily, and we are on target for the end of the year stagnation I suggested in “reading this and long time short the EURUSD”. Last figures show zero GDP growth for Europe in the second quarter (and likely coming down further in the third and fourth). Doesn’t look like the recovery everybody was expecting. I very much doubt the euro can withstand the dismantling of the growth prognosis now embedded in financial pricing in most of continental Europe. Some weakness looks unavoidable, even if we end up with a new “whatever it takes”, or similar wording, by super Mario. I think I will stick to the same sex partner (euro shorts) for the time being. A weak euro should help with some nice and reasonably safe sex over the next weeks.

Apart from our trade, Dollar longs and Euro shorts are the main theme in currency crosses. I am less certain of the longs. After all, the Fed is still a glamorous acronym for a bunch of money printers that have promised to abandon their addiction beginning tomorrow … or the day after. We have to remain a touch skeptical. Add the fact they don´t like the dollar to appreciate, because they are aware of the tightening of financial conditions implied by currency appreciation. Tightening is still anathema at the Fed. They fire you if they find out you ever dreamt of it.

Last in the main currency arena, the yen is a gambling choice. The country is bankrupt and sports sustained commercial deficits as a new part of the economic landscape. But it is also a large creditor, and still considered a safe haven by a large mass of ill-informed investors. Beware of behavioural economics. Millions of idiots can alter the investment outlook for “longer than you can stay solvent” (oh yes, I have something in common with J.M. Keynes).

It does makes sense to short the yen (long USDJPY) only if combined with a S&P500 futures contract short. “Risk on”-“risk off” wise, it balances out the trade, making it theoretically neutral to both scenarios. It is indeed difficult to imagine JPY appreciation combined with S&P500 further increases to the 2000 to 2250 area. Be careful with sizing both sides of the trade adequately: in most trades the devil is in those details. Timing the entry levels is tricky as well.

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What about some sex?

Okay, I have to admit it. Lots of posts about economic theory lately, but no sex in my blog! In economics, sex is money. And making money is undoubtedly sexy. But I stand for safe sex. ¿Is that financially viable now, without subscribing to the “common knowledge game” (and its implied risks) ?

I’m starved for sex, but don’t want to risk my capital. Return “of my money” versus “return on my money”, comes to me as a priority nowadays, and that’s not a constructive starting point. Courtesy of the large central banks (via ZIRP and NIRP), there is no safe sex available any more. And the way things are going, sex won´t be free either. In a couple of years, “one way or another”, as Blondie would say, capital controls are coming. Spain is tentatively introducing some back door regulations in this area.

For now, sex is free, but risky. We live an investment era where making money implies risking capital big time, even if that risk has not materialized until now (due to the global central bank “put”). I’m fed up with the situation. Macroeconomic musing is nice, but it’s not a real substitute for the hard core thing. I’m not going to fix the global economy, whatever I write, so I might as well engage in the sexier task of money making. If, and that’s a big if, I can.

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