Research Watch

PORTFOLIO POINT: This is a sampling of this week’s best research notes. In a world of too much information, we hope our selection helps you spot the market’s key signals.

If the US election was a party, the hangover has hit. New research shows just how partisan US politics has become, which is expected to affect upcoming critical negotiations surrounding spending cuts and tax increases – although one analyst points out the so-called “fiscal cliff” isn’t nearly as perilous as the metaphor suggests. To help navigate the uncertain political terrain, Deutsche Bank is out with a handy list of the best performing assets during Obama’s presidency thus far. Elsewhere, Jeff Saut says US housing is taking over from manufacturing, presenting a long-term investment opportunity, and Citigroup illustrates Australia’s world-class yields. Meanwhile, Morgan Stanley calls the end of global outsourcing, while Capgemini Consulting uncovers huge upside in “digitally mature” investments (and we’re not talking tech stocks). Also this week, Turkey goes investment grade, Paul McCartney’s Aston Martin and, on video, $1 million for Donald Trump’s hair.

The best performing assets under Obama...

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(Jim Reid of Deutsche Bank, November 5)

America’s political divide...

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“The chart comes from Nolan McCarty, Keith T. Poole and Howard Rosenthal who wrote a book called Polarized America. The “first dimension” refers to voting patterns where the positions are liberal-moderate-conservative.” (Via FT Alphaville, November 7)

The fiscal cliff isn’t a cliff...

“Metaphors are dangerous, and nothing illustrates that better than the concept of a ‘fiscal cliff’ and worry about going over it. A salient fact about non-metaphorical cliffs is that falling over them is generally irreversible. … The ‘fiscal cliff’ by contrast isn’t like that at all. Rather, it’s a set of policy changes – mostly tax hikes plus some steep spending cuts – that if they were all locked into place would constitute a significant drag on economic growth over the course of a year. But if the Bush tax cuts fully expire on a Tuesday morning it’s not as if some catastrophe strikes on Wednesday where suddenly middle class families have no money. It’s true that if the new higher rates were to be locked in, then the medium-term drag on middle class take home pay would delay the deleveraging cycle and damage the recovery. But to resolve that, all you need to do is introduce a new package of middle class tax cuts on Wednesday afternoon, have Congress pass it on Thursday, and then the president signs it on Friday. The fact that taxes were higher for three days–or even three weeks–is simply not that consequential. Obviously to the extent that higher middle class taxes is bad, one day of them is worse than zero days and three days is worse than one day. But it’s a deeply banal situation. There’s no particularly large virtue to ‘averting’ the fiscal cliff on Day N-3 versus ‘going over the fiscal cliff’ and then fixing it in retrospect on Day N 3. If ‘going over the cliff’ gives the White House leverage to lock a better medium-term fiscal policy in place, then going over the cliff is a no brainer. Because there is no cliff.” (Matthew Yglesias via Slate, November 7)

US housing is the new manufacturing...

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"The vigor of [exports and manufacturing] sectors has been waning. Meanwhile, the housing market has been picking up noticeably. Indeed, residential construction rose more than 14% recently, contributing 0.33 percentage points to GDP. Additionally, home prices are rising, which not only drives expenditures for equipping a new home but also contributes mightily to consumers’ wealth effect. … [US] housing looks to be an undiminished investment theme over the long run." (Jeff Saut of Raymond James, November 5)

Baby you can drive my car...

“Paul McCartney’s 1964 Aston Martin DB5 recently fetched $495,000 USD at RM Auctions’ Battersea Evolution event in London, a price just above its pre-sale estimate. The car is reportedly the first Aston Martin that McCartney owned and was bought brand new in 1964 – right before the Beatles star went on tour that year – staying with him for six years and amassing 40,000 miles during that period. Featuring a 280 horsepower engine, the Sierra Blue coupe also includes a Motorola radio, Philips Auto-Mignon record player, and a black interior that once showcased a stitched music note pattern.” (Hype Beast, November 4)

The end of outsourcing...

“Outsourcing measures that have allowed corporations to scale back on labour costs over the past several years may be set for a big ‘surprise’ slowdown, according to a new report from Morgan Stanley. IT services analyst Katy Huberty and chief US equity strategist Adam Parker introduced today a new model of leading indicators they say displays a significant correlation with quarterly revenue growth in the outsourcing industry. As the chart below shows, revenue growth in outsourcing hasn’t faced meaningful headwinds since the financial crisis in 2008. Yet headwinds may re-emerge.

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In the report, the Morgan Stanley team writes, ‘Outsourcing growth may be less defensive than many believe with growth decelerating through 1H13.’ Furthermore, the results of the new model has led Morgan Stanley to slash revenue and profit growth estimates across the board for players in the outsourcing business including IBM, Dell, and Accenture.” (Morgan Stanley via Business Insider, November 5)

It pays to be tech-savvy...

“Companies that embrace digital technology are more profitable, generate more revenue and achieve higher market valuations than their competitors, according to research published Monday. Didier Bonnet, vice president at Capgemini Consulting and the leader of the study into the use of digital technologies, said the difference was considerable. The most digitally mature companies are 26% more profitable, generate 9% more revenue and achieve 12% higher market valuations, the study showed. Mr. Bonnet said digital maturity meant two things: ‘Digital intensity is about how much technology are you putting in to your organization. How much are you investing in customer engagement or internal operations.’ But he said that’s not enough. ‘When we looked at the people doing well, we found that they had a transformation management intensity,’ he said. ‘This is the soft side the vision, the governance, the leadership, the engagement of the people.’ Mr. Bonnet said there was a consistency across industry sectors even if not all sectors were moving at the same velocity. Some sectors such as manufacturing, pharmaceuticals and consumer packaged goods had yet to make the sort of transformations that banking, retail and inevitably the high-tech industry, had undergone, he said.” (Wall Street Journal, November 5)

Turkey joins the currency war...

“Fitch has become the first of the ratings agencies to upgrade Turkey to investment grade, giving it its first such rating since 1994. ... From SocGen’s Benoit Anne: From a market perspective, this is obviously bullish for all TRY assets, be it FX, fixed income or even equities. In fact, Gaelle Blanchard, our long-term EM FX strategist, looked in a 2011 research report at the impact of rating upgrades on global EM FX. The conclusion at the time was that a rating upgrade to investment grade triggered a significant move in the FX market with an average 3% appreciation over 1 month following the rating change. … The interesting consequence of this landmark rating upgrade is going to be on the policy front. The way I see it, the central bank will probably use that as a pretext to be even more dovish, as this helps create some policy room. I am also thinking that if the capital inflows were to be viewed as excessive, the CBRT may well join the currency war troops with a mix of monetary policy and other unconventional measures. It would not be the first time that we would see something unconventional in Turkey on the policy front, after all.” (Benoit Anne of Societe Generale via FT Alphaville, November 5)

World-class yields...

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(Tony Brennan of Citigroup, November 2)

Europe converges...

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“The convergence between the Eurozone core and the periphery in terms of economic growth is now clearly visible in the PMI data. We may be looking at a situation in which some periphery nations have become a cheaper option for manufacturing (and other business activity), as companies shift some of their production out of the Eurozone core.” (Sober Look, November 7)

Insider trading for love...

“Jessica Mang, one of the ex- girlfriends of former Mizuho International Plc investment banker Thomas Ammann said she bought shares at his request because she wanted to show that she trusted him. Mang invested her own money because Ammann demanded it and said they could go on a vacation together afterward, she testified today at a London criminal court. Mang is on trial for insider trading along with Christina Weckwerth, another woman with whom Ammann simultaneously had a relationship. ‘He basically said that I show him that I trust him – I invest the money, he still hadn’t specified how – once that’s done, we’ll go on holiday in the Seychelles,’ Mang said. If she didn’t do it, Ammann said ‘he didn’t want to be with me anymore,’ she said... Mang is accused of getting 65,000 pounds ($103,700) from an investment of about 39,000 pounds trading on tips about Canon Inc’s acquisition of OCE NV in 2009 that she got from Ammann, who was advising on the buyout.” (Bloomberg, November 5)

Video of the Week: Trump’s $1 million haircut...

Billionaire Mark Cuban responds to The Donald’s ludicrous offer to give $5 million to charity if President Obama produced college transcripts and passport applications.

(The Daily Beast, November 3)