Research Watch

The safe assets shortfall, the Aussie banks bubble, shorting the $A, bear traps, gold explained, the price of leaks, bad bankers, and corporate ink.

Summary: This week's Research Watch contains a range of investment snippets, including the safe assets shortfall, the Aussie banks bubble, shorting the $A, bear traps, gold explained, the price of leaks, bad bankers, and corporate ink.
Key take-out: The rate of expansion of financial securities from Europe, the US and Japan has slowed by more than $1 trillion over the past two years.
Key beneficiaries: General investors. Category: Portfolio management.

There has been plenty of talk about a global shortfall of “safe” assets since the crisis, but could that sparsity extend to all securities? This week, Citi discovers the investible universe is growing at half the rate we’re used to, which could explain the powerful rally – that, and an equity buying spree by central banks. In fact, the good times have gone on so long that Richard Russell, one of the biggest permabears of the past five years, is now feeling sorry for the bears. Elsewhere, one analyst says shorting the Australian dollar will be the “trade of the century,” while another thinks you’d be better off buying gold. A new study reveals the dark art of leaking deals, a spandex-clad roller-girl demands bankers get a spanking and, on video, where would you get your company’s logo tattooed?

Go long on a short supply of assets...

Graph for Research Watch

“Growth in the investible universe has slowed from around $3.5-4tn annually before the crisis, to less than $2.5tn over the last couple of years. In other words, the rate of expansion of financial securities has slowed by more than $1tn. That’s a pretty penny, when you think about it. When the effect of central bank interventions (quantitative easing and LTROs) in orange is subtracted, the reduction in the supply of new assets available to financial investors becomes even more dramatic: Apart from a brief period in H1 2011 (where markets incidentally did not perform particularly well), the investible universe of financial assets has grown by less than $2tr per year over the last three years – half the run-rate that we were used to. In fact, in some quarters net issuance of securities been virtually zero.  We think this ‘supply effect’ on financial markets of central bank interventions is widely underestimated.” (Citi Research via Pragmatic Capitalism, April 26)

Australia's great bank bubble...

“We are conscious of the bull case for Aussie banks and all ‘yield’ stocks: further Quantitative Easing; rate cuts; falling TD rates; asset allocation flows into equities; the ‘least worst investment’; value of franking credits. However, bank dividends are a result of significant leverage; they are not annuities comparable to TDs. It must be noted Aussie banks are trading on a Record PE of 14.9x (CBA is on 16x). … As with all asset bubbles, they can go higher and for longer than many expect. With a solid near term earnings outlook there is nothing stopping the market bidding dividend yields in to ~4.5% (historical lows) implying about 10% share price upside. As Chuck Prince (former CEO of Citi) famously said 'As long as the music is playing, you’ve got to get up and dance'. All we can say is buyer beware.” (Jonathan Mott of UBS, May 1)

As central banks load up on stocks...

“Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities. In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23% said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10% of reserves. ‘In the last year or so, I have spoken with 103 central banks on diversification,’ said Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners. ... ‘If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.’” (Bloomberg, April 24)

But the Australian dollar might be the ‘trade of the century’...

“‘It’s difficult to see any clear major direction in any of the currencies other than the Aussie dollar longer term, which we obviously think looks like the trade of the century, trying to short the Aussie,’ Paul Gambles, managing partner at advisory firm MBMG International told CNBC’s ‘Asia Squawk Box’ … Gambles said he expects the Aussie dollar to fall as low as 60 US cents from the current $1.03 mark within 18 months … [as] an intertwining of several factors like a slowdown in China and falling global commodity demand could lead to weakness in the domestic economy. This in turn can push the Reserve Bank of Australia, which has kept interest rates steady this year, to cut rates, which will be negative for the Aussie. … He added that ‘speculative, yield-seeking inflows that currently inflate the Australian dollar value by some 15% will not only disappear, but actually turn negative.’” (CNBC, April 29)

Nouriel Roubini explains the gold rout...

“In his opinion every bit of the gold move can be explained by shifting inflation expectations. While an irrational fear of inflation plagued the market, gold’s well publicised ‘inflation protection’ qualities made it do well. Once inflation expectations corrected this month, the logic to hold gold diminished rapidly. This correction was magnified by the fact that the ‘hold gold to protect against inflation’ mantra had been undermined by a clear lack of inflation over the last five years. Meaning … if there was ever a time to grab profits from unhedged gold positions, now was it. And thus the floodgates opened.” (FT Alphaville, May 1)

And Albert Edwards sticks to his $10,000 forecast...

“Gold prices will top $10,000 per ounce, the stockmarket will tank and Treasurys will yield less than 1%, Societe Generale’s Albert Edwards forecast in a trademark bearish report … ‘My working experience of the last 30 years has convinced me that policymakers’ efforts to manage the economic cycle have actually made things far more volatile… The current round of quantitative easing will be no different,’ said Edwards in a weekly strategy report. … In the note, Edwards said central banks’ stimulus measures will drive the world towards global recession, soaring inflation and a ‘Japanese-style’ loss of confidence in policymakers.” (CNBC, April 25)

Richard Russell must be feeling sorry for him...

“I can’t believe I’m saying this, but I really feel sorry for the bears. First, they rubbed their hands together in glee as they waited for the roof to cave in via the fiscal cliff. Nothing happened. Then they got excited over the sequestration menace, and again nothing happened. Cyprus came and went, so what’s left? Oh yes, the debt ceiling – which, if it isn’t lifted, should collapse the economy. And it does seem we are in a currency war. Japan’s new central bank president startled the world by doubling its QE quotient. Japan, copying the Bernanke recipe, will buy everything in sight until Japan experiences 2% inflation. How can I explain the weird disconnect between the stock market and reality? I fall back on the old Wall Street aphorism – ‘The market always does what it’s supposed to do – but never when.’ I feel most sorry for the impatient bears. Waiting on the market to do what you think it should do can try one’s patience and nerves. It looks as though the stock market will continue to head north until we receive indications that something is wrong. So far, nothing in the price structure has told us to be cautious. My guess is that this stock market will, when it is ready, produce some kind of ‘warning pattern,’ such as a formation (H&S pattern) or a distinct non-confirmation in the Averages. Until then, my suggestion is to stay with your position...” (Richard Russell via Pragmatic Capitalism, May 1)

The dark art of leaking deals...

“According to the study, conducted by the Cass Business School in London … sellers are often perversely rewarded by leaks in the marketplace: buyers of companies involved in deals that leaked before the announcement paid a premium averaging 18 percentage points more than in deals that did not leak. … On average, the study suggests, despite anecdotal evidence to the contrary, that leaks have actually been reduced in recent years. According to the study, 11% of all deals were leaked between 2008 and 2009. Between 2010 and 2012, it fell to 7%. … Remarkably, there is a huge divergence based on region. During the period examined, 19% of all deals in Britain were leaked, while only 7% of deals in the United States were leaked; 10% of deals were leaked in Asia. … The Cass study also reflected a distinct downside to deal-leaking: a deal’s chances of completion drop significantly. Leaked deals were 9 percent less likely to close than those kept under wraps and took, on average, a week longer to complete, perhaps given the added commotion and complexity created by the leak.” (Deal Book, April 29)

Bankers need a spanking...

Graph for Research Watch

“About 20 protesters gathered outside [Citigroup’s annual shareholder meeting] at the Hilton Hotel on 6th Avenue in New York, chanting ‘Banks got bailed out; we got sold out’. While they mostly walked in a circle holding signs, one female protester skated by on roller blades, dressed in spandex, carrying a sign that read ‘bankers need a spanking’.” (Financial Times, April 24)

Video of the Week: Corporate ink...

“A real estate company in New York is giving each of its 800 employees a permanent 15% raise for no additional work. All it’s asking for in return is that the employees tattoo the company’s logo somewhere on their bodies.”
Graph for Research Watch

(Gawker, May 1)

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