WHERE'S THE ALPHA?

At a recent cocktail party one evening an attractive, young couple off in the corner were apparently debating the market and interest rates.

At one point in the discussion, now at a boisterous level that attracted others in the room, the lady yelled at her companion: 

"Up your alpha!" To which her companion promptly replied: "Well, screw your beta!"

A few minutes later, hand in hand, the couple smilingly announced they were off  to another more hip gathering and ebulliently sauntered out.

Lemmings don't wear stripes or signs. But they should.

In the market these days there's much ado about what many mom and poppers either don't care to or can't grasp--alpha and beta.

Simply stated, alpha is any added value or return active management brings to one's investment table. Beta, on the other hand, is a measure of the risk arising from exposure to general market movements or asset classes, all things equal.

A few years back when hedge funds fell off their once envied shelf, it was hard to avoid all the negative press there were receiving. Recall  hedge funds originally  were the alternative kid in town, taking advantage of things, to use the Street vernacular, not correlated to what was available for many reasons to the mom and pop crowd.

And forget not that once upon a time the mom and pop crowd included, except for their economic clout, pension funds, university endowments, insurance companies and the like. The huge California pension fund, Calpers, should come to mind. It was one of the first to open its deep wallet and invest in hedgers.

The search for return, safe or otherwise, as we're seeing in this yield-starved, Fed-created scenario of low interest rates, has its own energy. Some might refer to the run-up in bond prices and the run-down in yields as a form of momentum investing. A kind of perverted go with the flow mentality MSM and other various talking-heads love to promote.

Hedge funds are noted for taking around 20% off the top of performance and high fees. Their meme, big alpha, supposedly justified the costs. It was a culture available to only a select fee. That is to say they invested in things not correlated for the most part to the general stock market and it's often prosaic movements.

The bad news these bad boys were experiencing then--dwindling assets, closures, toothless returns, to name a few--apparently now rest comfortably on the scrap heap of investor memories. At least that's what the numbers show.

As the stock market get larger, so too have those hedge funds as money once again is pouring in from investors of all stripes. Only this time there's a difference. 

It's the absence of their once ballyhooed negative correlation. According to what we read, not only are assets in these funds growing but the data also shows that they're more correlated than ever with the  stock market.

In short, back to alpha and beta, investors are paying up for the privilege of alpha but mostly likely will only receive beta, which they already most likely are getting other places. If as they say a rising tide raises all boats, then positive correlation can do the reverse.
t. man hatter

SIFIS

 t. man hatter

Who caused much of the financial trouble of the last recession? Most agree it was the Fed's big buddies, big banks.

So what do the bureaucrats in Congress and at the Federal Reserve do, implement more regulations.

David Hunt is CEO of Prudential Investment Management, the $890 billion asset management subsidiary of the huge insurer, Prudential. Here's a quote from a recent  interview in the Financial Times. Prudential has been designated, overlook if you can the stilted economic language used here, a systematically important financial institution. To use the acronym, it's a Sifis.

You should be familiar with them because Fed Chair Janet Yellen loves to bring them up in her little media chats. 

Now we already have selfies, but this is Sifis. Imagine if you can two strangers at a cocktail party and one, after a few brief exchanges, innocently asks the other one what he does. 

"I work for a Sifis."

"What'd you call me?" the first guy responds

A Sifis is bureaucratic babble for too big to fail, also know as TFTB.

Hunt: "... cautions that increasing difficulties of meeting regulatory requirements will reshape asset management as smaller players struggle to meet rising legal and compliance costs."

So what's the point, you ask? The point is simple. Perhaps too simple for most to get. Regulators do what they always do, the only thing they know: Punish the many to get the few.

So let's repeat our original question. Who caused the financial turmoil, the big guys or the little guys? One of the current on-going criticisms of the haves is they have ways or access to ways around things little guys don't  Big corporations is synonymous for haves.

So read Mr. Hunt's statement carefully. If you drive the smaller players out you're only left with the the big players who committed the foul deeds in the first place. Whether it's accounting changes, pension funding, compliance with environmental regulations or health insurance, this principle is true across the entire economic landscape.

When the subject of shadow banking comes up and the increasing role asset managers play in it, Hunt is careful to differentiate his firm. "We don't believe in that model at all, " to which he adds that this firm lends "directly to companies with which it has long-term relationships, instead of via an agent."

A cynic might suggest that sounds like an accurate description of crony capitalism. Last time we checked Washington lobbyists have long term relationships with Congress members who keep getting re-elected. Ask any self-aggrandizing lobbyist his or her worst nightmare and you'll get a one-word answer--turnover.

Prudential is the 10th largest asset manager in the world. With few exceptions the government always lets the little guys go out of business. Keep the concept of level playing field in mind when you're ruminating about this, if you ever ruminate.

Too big to fail is a bureaucratic excuse for keeping dysfunctional, bloated behemoths on the taxpayer funded respirator when in even a semi-free market they'd be mercifully euthanized before you or I can spell Sifis backwards.

HELLO WAGE INFLATION

At the risk of sounding trite, though we've written about it before, we'll mention it again--wage inflation.

In this world of crazy easy money that's been gifted to one and all by the globe's well-intentioned central banking crews, wages are that go-clunk-in-the-night-other-shoe hitting the economic floor.

We've been suggesting for a while now such is the case. Higher wages lead to higher prices and higher prices that dreaded big I word. We'll be kind and skip the bogus numbers about inflation that these bureaucrats, like the mad magicians they are, conjure up.

Some might suggest higher prices lead to higher wages, but we'll bypass the academic economic soirée palaver.

What's important here is we're not alone in our assessment. Here are some charts from Business Insider.



There are more at the link below.
t. man hatter
http://www.businessinsider.com/wage-pressure-charts-2014-7

OUR VIEW

As we skirt around the web reading various and sundry articles it becomes increasingly clear nearly everyone has a pick to bone. Yea, we know that's a play on an old cliche' and we're not embarrassed in the least.
 

Take the recent job numbers MSM sought to rave about as did many economists and the administration. 

The more one learns about economists, the more one realizes how straight out, goofy benighted most are. But we'll get to that on another occasion.

Mort Zuckerman is a billionaire. He's a liberal and he's a prominent editor. He is also a graduate of the University of Pennsylvania and Harvard Law School and a Canadian born, American business tycoon.

Here's a quote from a Washington Post story about him late last year.

Mortimer Zuckerman, 76, is known for being a regular on the political talk show “The McLaughlin Group”and for owning such media properties as the New York Daily News, U.S. News & World Report and the Atlantic Monthly, the last of which he sold to Washington businessman David Bradley for about $10 million in 1999.

But he made his fortune, estimated at more than $2 billion, buying and constructing office buildings. He is the founder and chairman of Boston Properties, a publicly traded real estate investment trust with 138 properties, many of them in the Washington market. His is one of the most respected minds in the real estate business.

To assume Zuckerman is not well-connected enough to get a better scoop on the jobs numbers is to assume that New York City officials love Walmart. In case you don't know, they don't. Recently, Zuckerman penned an article for the Wall Street Journal questioning those fine figures, raising the question MSM loves to dodge at every turn, of why so much ado about what is essentially a bogus report getting bogus kudos.

Here's a quote from Zuckerman's article.

The Obama administration and much of the media trumpeting the figure overlooked that the government numbers didn't distinguish between new part-time and full-time jobs. Full-time jobs last month plunged by 523,000, according to the Bureau of Labor Statistics. What has increased are part-time jobs. They soared by about 800,000 to more than 28 million. Just think of all those Americans working part time, no doubt glad to have the work but also contending with lower pay, diminished benefits and little job security.

On July 2 President Obama boasted that the jobs report "showed the sixth straight month of job growth" in the private economy. "Make no mistake," he said. "We are headed in the right direction." What he failed to mention is that only 47.7% of adults in the U.S. are working full time. Yes, the percentage of unemployed has fallen, but that's worth barely a Bronx cheer. It reflects the bleak fact that 2.4 million Americans have become discouraged and dropped out of the workforce. You might as well say that the unemployment rate would be zero if everyone quit looking for work.

This may seem a bit petty and if MSM and their apologists for this administration had their way, that's how it would get dealt with. But there's more to it here, particularly if you're an investor who invests his capital seeking some kind of return.

Government figures you can't trust is a government you can't trust. And that, my thirsty friends, applies to governments left, right or straight ahead down the middle..  

That's our view. We hope you know yours.
t. man hatter

http://online.wsj.com/articles/mortimer-zuckerman-the-full-time-scandal-of-part-time-america-1405291652

FULLY WIPE THE SLEEPERS FROM YOUR EYES

I never thought that anything was irksome if it helped me to trade more intelligently.
                 JesseLivermore 

Everyone gets good ideas.

Ideas are like viral colds. Nobody's immune. Some just get more than others.

I get some of my better ones out walking Taylor, my four-year-old,13-pound multi-phooh.  I learn a lot from him, especially when it comes to investing and trading.

And judging from the conversations with my significant other it's mutual. She learns a lot from him too, though she doesn't trade or play the market outside of her retirement planning.

To begin with, he's a lot smarter than I am. He doesn't care much for walking in the rain. He always skirts around or jumps small puddles. He'll get his feet wet, but only on his terms. That's the way I like to view entering the market. If it isn't on my terms I probably don't have any business being in there. Some might call this timing.

He always does his homework, particularly when it comes time to relieve himself. On cool mornings and chilly nights it can get a little frustrating. But he refuses to rush. He's got to find just the right spot. Sort of like knowing the right time to enter or exit a trade or the market.

He's got the patience of 10 people. Sometimes when I am slaving away on the computer, he'll come to the doorway of my office and just stand there, staring at me like a statue in utter stillness. I never know if it's one of those bigger-fool stares or what.

Other times if you don't acknowledge him he'll sit up like dogs do when they want some of your food. It can be a real attention getter, a real killer, sort of like those gut market feelings we get from time to time but often fail to heed. 

Especially when they turn out to be correct and we didn't make the trade. I think it means we all get weary and need a break, some fun. So come on, man, lighten up. It's time to play.

Taylor is extremely curious. And alert. No smell is an old smell. Because he's so small his survival instincts are keen. He gets engrossed but not so much that he loses his awareness, another good point for surviving in markets. Just when you think he's not paying attention, he'll pick his head up and look around.

In our neighborhood from dust to dawn coyotes often prowl. Sometimes at night he sees and hears things I don't hear and can't see. They're out there and he smells it. Good smellers, dogs and traders, sounds like a decent title for a good country tune about markets.

He never holds grudges. And he has no ego.

Around the house he doesn't miss much either, whether it's a faint noise outside or you're putting a coat or sweater on to go somewhere. In the car, short or long ride, he knows when you start to slow down it's close to getting-out time. I like to think about that when volume is starting to dry up and prices flatten.

For him the car is exciting to get in, but just as exciting and important to get out. You could say he has an exit strategy. When the movement stops it's time to move on. We humans call it a trend. He hasn't told me yet what he calls it. But I'd love to know.

As far as I've been able to tell, Taylor has only one bad habit. Every morning though he tries, he fails to fully wipe the sleepers out of his eyes.

But even there I learned something.                         

AROUND THE WEB

Fossil Fuel Industry Job Numbers
http://oilprice.com/Energy/Energy-General/The-Fossil-Fuel-Industry-May-Not-Help-the-Planet-But-It-Employs-Millions.html

Different Views
http://www.bloomberg.com/news/2014-07-11/plosser-says-rate-increase-closer-thank-many-people-think.html

Fed Tools For Wthdrawal
http://www.reuters.com/article/2014/07/11/us-usa-fed-exit-idUSKBN0FG2B120140711

Rich Actually Pay More Taxes
http://news.investors.com/ibd-editorials-brain-trust/071114-708479-thomas-pikettys-idea-to-tax-the-rich-would-make-us-all-poorer.htm?p=full

Wage Growth And Inflation
http://blogs.cfr.org/geographics/

Pimco Changes
http://www.bloomberg.com/news/2014-07-10/pimco-s-gross-cuts-u-s-government-related-debt-holdings-in-june.html

Energy Wars
http://oilprice.com/Energy/Energy-General/Twenty-First-Century-Energy-Wars.html

DON'T NEED YOUR WELL-THOUGHT-OUT ADVICE

Are we the only ones who think it vaguely odd that people who believe and invest in gold are called "goldbugs" by MSM.

So far with all the flight to paper assets we haven't yet seen any references to equity-hogs or bond-heads. And given the announced new direction of the Federal Reserve we as yet haven't espied the term  macroprudential prudes crop up.

Maybe that's coming later at a theater near all of us.

After soaring to $800 an ounce in the late 1980s followed by nearly two decades of snoring in ignominious silence, an oxymoron we know literary pundits will love, the yellow metal rampaged for more than a decade to $1,800 an ounce before it's recent slumber.

So at the risk of insulting entomologist everywhere including those chained to their research dungeon walls and risking being labeled a goldbug, we'll take a shot here at MSM, one of our favorite members of the pathetic lemming colony.

Besides the opprobrium of MSM, gold's subject to several bits of nastiness, bear markets, inflation, geopolitics and, yes, complacency.  Strangely, that somehow has a faintly familiar paper asset quality to it. Oh well, what's important is gold and it's orphan status. Not just the metal, but the mining shares.

If you want to know more about it, don't read us. We have a  research dungeon we have to get back to before the lights go dim. But here's a link that might help. Just one word of caution, leave your logic behind before you click on it.

To borrow the words of an old Don Williams tune:

I don't want to hear another word
Don't need your well thought out advice
Though I thank you all for being kind
I can make mistakes myself just fine

Problem here is, MSM ain't even apologetic about their misinformation.
t. man hatter

http://online.barrons.com/news/articles/

COMPLACENCY BY ANY OTHER NAME

                                           C. C. Chance 
A lot of what gets written recently about the the stock and bond markets centers on the risk of investor complacency.

But with a little imagintion and illogic--we prefer both in our assessments--the most complacent of all just might be Fed officials. In a nutshell here's their take on things.

1. QE unwinding will go smoothly because we have carefully planned for it.
2. We have spent numerous hours planning--see comments by a Fed member at Jackson Hole--devisng a scheme that ensures such.
3. We know better than anyone else just when to crank up the interest rate pump.
4. We are "noise" experts
5. And even if things do go a bit awry, we have the tools for correcitng it.
6. Just trust us and let us do our job.
7. We're bureaucrats and we're here to make things better.

Flasback now to the speech Fed Chair Yellen recently gave to the IMF about what's needed and this quote:

"...a regulatory umbrella wide enough to cover previous gaps in the regulation and supervision of  systemically important firms, and markets can help prevent risks from migrating to areas where they are difficult to detect or address."

Now it's a sure bet whether Yellen or whoever wrote or helped write the above felt puffed up with pride after proof readng that puppy. If we didn't know better we'd suspect she was addressing a convention of bird watchers seeking better protection from sun damage.

Yellen then rolled out what's becoming a favorite term of central bankers thoughout the intergalactic solitary universe, macroprudential. Macroprudential is one of those abstract terms that belongs more in an art dealer's studio than in the real push and shove economic world. 

But oh well. We better stop. We're starting to sound a bit....well, complacent.

UP COMING WEEK

If you've heard of Humphrey, then you probably heard of Hawkins. And no they're not distant cousins of yin and yang

It's about the Federal Reserve Bank Chairperson traipsing up Capitol Hill to fill the lads and lassies in on what's up with the economy. 

Several finance firms are on the docket along with some techies to release earnings reports. And a relative biggie June retails sales numbers.

Monday, July 14

US Economics (Time Zone: EST)

No major reports scheduled
11:00 Fed to purchase $1b-$1.25b bonds in 22-30 year range
11:30 Treasury to sell $25b 3-month bills and $23b 6-month bills

Fedspeak:

1:10pm Williams to speak in Sun Valley, Idaho

Global Economics (Time Zone: GMT)

CNY Foreign Direct Investment
09:00 EUR Eurozone Industrial Production

16:30 Draghi speaks to EU Parliament Committee

Earnings

Before:
Citigroup (C)

Tuesday, July 15

US Economics (Time Zone: EST)

08:30 Advance Retail Sales (June) - expected 0.6%, prior 0.3%
08:30 Retail Sales Ex-Auto - exp 0.5%, prior 0.1%
08:30 Retail Sales Ex-Auto & Gas - exp 0.5%, prior 0.0%
08:30 Import Price YoY - exp 1.1%, prior 0.4%
08:30 Empire Manufacturing (July) - exp 17, prior 19.28
10:00 Business Inventories (May) - exp 0.6%, prior 0.6%
11:00 Treasury to sell 4-week bills

Fedspeak

10:00am Yellen (dove, chair) to give semi-annual Humphrey Hawkins testimony to Senate Committee

Global Economics (Time Zone: GMT)

BoJ Monetary Policy Statement
01:30 AUD Minutes of RBA July Meeting
08:30 GBP CPI & PPI
09:00 EUR German ZEW Survey - Current Situation, Expectations
13:00 CAD Existing Home Sales

9:00am Carney to testify to House of Commons Treasury Committee

Earnings

Before:
JPMorgan (JPM)
Goldman Sachs (GS)

After:
CSX (CSX)
Intel (INTC)
Yahoo! (YHOO)
Johnson & Johnson (JNJ)

Wednesday, July 16

US Economics (Time Zone: EST)

07:00 MBA Mortgage Apps
08:30 PPI Final Demand YoY (June) - expected 1.8%, prior 2.0%
08:30 PPI Ex Food & Energy YoY - exp 1.7%, prior 2.0%
09:00 Net Long-term TIC Flows (May) - exp $25B, prior -$24.2B
09:00 Total Net TIC Flows - prior $136.8B
09:15 Industrial Production (June) - exp 0.4%, prior 0.6%
09:15 Capacity Utilization - exp 79.3%, prior 79.1%
10:00 NAHB Housing Market Index (Jul) - exp 50, prior 49
2:00 Fed's Beige Book

Fedspeak:

10:00am Yellen (dove, chair) to give semi-annual testimony to House Committee
12:00pm Fisher (hawk, voter) speaks in Los Angeles

Global Economics (Time Zone: GMT)

02:00 CNY Fixed Asset Investment
02:00 CNY Retail Sales
02:00 CNY Industrial Production
02:00 CNY GDP
08:30 GBP ILO 3M Unemployment Rate (May)
14:00 CAD BoC Rate Decision

Earnings

Before:
Abbott Labs (ABT)
US Bancorp (USB)
Blackrock (BLK)
Bank of America (BAC)
St Jude Medical (STTJ)

After:
Sandisk (SNDK)
Yum! Brands (YUM)
eBay (EBAY)
Las Vegas Sands (LVS)
Kinder Morgan (KMI)

Charles Schwab (SCHW)
PNC Financial (PNC)

Thursday, July 17

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, June 28, exp. 310k, prior 304k
08:30 Continuing Claims - exp 2583K, prior 2854k
08:30 Housing Starts (June) - exp 1025K, prior 1001K
08:30 Building Permits - exp 1042K, prior 991K
10:00 Philly Fed - exp 16.0, prior 17.8
11:00 Fed to purchase $1.75b-$2.25b notes in 4 to 5-year range

Fedspeak

1:35pm Bullard (hawk, nonvoter) speaks in Kentucky

Global Economics (Time Zone: GMT)

Japan Investors Purchases of Foreign Stocks/Bonds
09:00 EUR Eurozone CPI

Earnings

Before:
Baker Hughes (BHI)
Sherwin-Williams (SHW)
Keycorp (KEY)
UnitedHealth (UNH)
Mattel (MAT)
Fifth Third Bancorp (FITB)
Philip Morris (PM)
Morgan Stanley (MS)
WW Grainger (GWW)

After:
Capital One Financial (COF)
IBM (IBM)
Schlumberger (SLB)
Skyworks (SWKS)
Google (GOOG)

Advanced Micro Devices (AMD)
Blackstone (BX)

Friday, July 18

US Economics (Time Zone: EST)

09:55 University of Michigan Consumer Confidence (July prelim) - expected 83.0, prior 82.5
10:00 Leading Index (June) - exp 0.5%, prior 0.5%

Global Economics (Time Zone: GMT)

01:30 CNY June Property Prices
12:30 CAD CPI

Earnings

General Electric (GE)
Kansas City Southern (KSU)
Bank of NY Mellon (BNY)
Honeywell (HON)

As noted below this data is from the website Minyanville, one of the better sites we follow.

Twitter: @MichaelSedacca

Read more: http://www.minyanville.com/business-news/markets/articles/bank-earnings-earnings-report-china-gdp/7/11/2014/id/55531#ixzz37E5YlSZo

AN OPPORTUNITY READ

Read this quote and read it carefully.

Then read the article.

"By partially replacing term funding in the form of more expensive bank bonds, the [redacted] can create a scarcity of investible assets, which will result in lower yields and easier market funding conditions even for banks that have not taken part in the operations."

It's from today's issue of Minyanville. Here is the link. 
http://www.minyanville.com/special-features/from-the-buzz-banter/articles/Who-Said-It-Public-Official-Behind/

Anyone who appreciates clear, concise English, anyone who ever  read George Orwell's article about debasing a language, anyone who even faintly claims to care about good communication, ought to read this.

But there's a bigger point as the article rightly points out. Buried in here is an opportunity mixed, to be sure, with a bit or mirth. Or should we just call it what it is, central bank humor.
t. man hatter