IPOs and Secondaries Surge
Alibaba’s IPO last week – which amounted to $21 billion in value – was the biggest in history. It was also wildly successful, as the stock surged by 38% on its first trading day. However, the US IPO market was already heating up before Alibaba’s debut: Q2 2014 saw the heaviest issuance since Q4 2007.
Recall that in spite of the fact that NBER later dated the beginning of the recession to Q4 2007, there was zero awareness that a recession might even be in store at the time. In October of 2007, shares in companies that would be bankrupt and in need of bailouts a few months later were still trading in the stratosphere (Fannie Mae’s common stock changed hands for $70, shares in mortgage insurer Ambac did likewise – the latter eventually fell to less that 2 cents). The opinion of the bien pensants at the time was that the “sub-prime mortgage credit crisis was well contained”, and the DJ Transportation Average even climbed to a new all time high in May of 2008. So Q4 2007 was definitely still a fairly good time to flog IPOs.
The time is even better now – in the wake of Alibaba’s IPO, 2014 is already all but certain to break previous issuance records. Here is a chart showing the pre-Alibaba situation as of Q2:
By Q2 2014, 160 IPOs had been issued – almost as many as in the 7 quarters Q1 2009-Q3 2010. 2011 and 2012 were relatively quiet years, but that has changed in 2013 as the market continued to surge. 2014 is well on its way to becoming a record year – click to enlarge.
It’s a Deal – We Will Make Growth Together …
News from the recent G20 pow-wow range from the slightly scary – such as a deal to further undermine financial privacy under the guise of “battling global tax evasion” – to the outright hilarious. The by far funniest report on the meeting appeared in the Australian press and reads as though it came straight from some stand-up comedy routine. You have to see this to believe it (put down the coffee, just to be safe…):
“A global deal on growth appears on track to create millions of jobs after the world’s most powerful finance ministers announced plans to add at least 1.8 per cent to their combined economic output.
The G20 finance summit has ended in Cairns with a renewed commitment to a growth target that is meant to add $2 trillion to the world economy, in a positive sign for Australia’s leadership of the group this year. Joe Hockey hailed the outcome as another step towards a major agreement on reform alongside progress on bank regulation, infrastructure investment and a crackdown on tax evasion.
“We are 90 per cent of the way there to meet out 2 per cent goal but I want to emphasize there is much to do,” he told a press conference in Cairns shortly after midday. “It is critical that we take concrete steps to boost growth and create jobs.”
While observers warn the global forum is not acting fast enough to deliver on its rhetoric, the meeting of finance ministers and central bank governors issued a formal communique that commits to actions to lift growth. Central to the agenda is a growth ambition agreed in February to add 2 per cent over the next five years to collective growth when compared to a “business as usual” scenario without new action.
G20 members have submitted about 900 plans to reach the target, ranging from workplace participation programs to infrastructure investments and competition reforms, but the Cairns summit concluded these were not enough to meet the target. The communique said the preliminary analysis of the plans showed collective growth could be 1.8 per cent higher.
“These measures, along with macroeconomic policies, are designed to lift global growth and contribute to rebalancing global demand,” the statement said.
Priced for Perfection
We got back from Argentina on Saturday …
The Argentines have seen it all. They know that politics, like markets, follow cycles. Good follows bad… followed by good again.
“We’ve had a rough time,” said one Argentine analyst we talked to.
“Because the government has been so stupid. But people now know it has been stupid. There’ll be a change in a year, and it will almost surely be for the better.
“The trouble with the US,” continued our friend, “is stocks are already priced for good things. The Fed has to manage its withdrawal from money printing flawlessly. Profits have to go higher. Inflation and interest rates have to stay at record lows.
“The economy doesn’t have to get a lot better, but it can’t give us any big surprises on the downside. And none of the geopolitical or other threats – like the Ebola virus – can get much worse.
“I’d rather invest in a market that is already priced for disaster and be pleasantly surprised when it works out better than expected. Going into a market that is priced for perfection is always a mistake.”
Looking out for evil dudes hiding in the sand …
(Photo via talkmarkets.com)
The Man with Nothing to Lose
France’s president Francois Hollande these days finds himself at a similar crossroads as another French socialist president once upon a time: Francois Mitterand. After nationalizing vast swathes of industry and introducing all sort of policies favored by the Left, Mitterand was eventually forced to do an 180 degree turn to avoid inflation spiraling out of control and in order not to suffer the embarrassment of the French franc falling out of the ERM (European Exchange Rate Mechanism). Mitterand later was forced into cohabitation with a conservative parliamentary majority, and concentrated on foreign policy and defense, leaving economic policy to Jacques Chirac.
Mr. Hollande these days enjoys the relative freedom that comes from being the most despised French president in all of history. The “welfare state incarnate” as Gaspard Koenig once called him, has seen his approval rating plunge to 13% in September. Ironically, if one adds up the approval ratings of Hollande and the reportedly evil Vladimir Putin, one gets 100%. And yet, it is Hollande who is now the relatively more unconstrained of the two, after all, no matter what he does from here on out, things simply cannot get much worse.
A first sign that Hollande realizes that different economic policies are required was his appointment of the centrist Manuel Valls as prime minister about six months ago. The recent “purge”, that saw former economy minister Arnaud Montebourg, minister of culture Aurelie Filipetti and education minister Benoit Hamon replaced by people more in line with Valls’ new course was an even stronger sign. Montebourg specifically was highly influential early in Hollande’s term and as might be expected, pursued policies extremely hostile to business. All three of the ministers that were replaced were considered “Socialist rebels” – i.e., far to the left of Mr. Valls. Montebourg was replaced by his polar opposite, someone on the very right of the Socialist Party, former investment banker Emmanuel Macron. How did Valls survive the confidence vote the purge necessitated? In spite of the rebellion of the left, French socialist parliamentarians are well aware that a new election would sweep most of them out of the halls of power. It is this fear Hollande and Valls gambled on, and they were proved right.
Readers may recall that earlier in Hollande’s term, we often argued that Hollande’s baffling reluctance to embrace reform could be explained by his fear of being overtaken from the left – not only the extreme leftist wing of his own party, but also the La Gauche party led by Jean-Luc Melenchon. However, recent polls in France seem to suggest that Melenchon’s outfit is facing a lot of competition from another radical party, namely the Front National (FN). To be sure, the FN is likely to steal votes from every quarter, but for a small party like Melenchon’s this can conceivably mean total wipe-out. And so it comes that Hollande is now embracing Valls’ reform course, which aims to slash government spending, lower business taxes and introduce some badly needed deregulation.
Manuel Valls and Francois Hollande, thinking things over …
(Photo credit: AFP)
This Country Will Get Worse Before It Gets Better
Scotland voted to stay part of Britain …
Even so, we’re considering a campaign to free Maryland (about which, more anon).
We are in Uruguay giving a speech to a group of Argentine investors. What can we tell them that they don’t already know? They’ve seen it all.
Yesterday’s edition of El Clarín newspaper reported that the Argentine peso had dropped past the 15-to-the-dollar level for the first time. When we first came to Argentina – it must have been in about 2005 – we recall getting only 5 pesos per dollar.
“No one knows what the annual rate of inflation is,” says a friend. “Most think it is about 40%.” Based on that alone, it should be obvious why the peso is dropping – to everyone but Argentina’s 42-year-old minister of the economy, Axel Kicillof, that is.
In loose translation from El Clarín:
“Kicillof accused the US of having pushed the peso down. “Oddly, [US ambassador] Sullivan used the word ‘default’ [to describe Argentina's failure to make the required payment on its foreign debt] when everyone knows it was selective… and then the dollar goes up and gives the impression of a general panic.
“Contrary to the opinion of the market,” Kicillof continued, “there is no economic or financial reason for the peso to trade at 15 to the dollar.”
Well, that pretty much settles it for us!
Slow Uptake of TLTRO Funding
It seems European banks are not all that eager to take up more central bank credit. The ECB has begun to offer its dirigiste “targeted long term refinancing operations” at a spread of 10 basis points above the repo reference rate. Since the repo rate was lowered from 0.15% to 0.05% at the last ECB council meeting in early September, this type of funding has become even cheaper. However, when banks obtain funding by posting collateral with the ECB, this automatically creates additional bank reserves – and those bear a penalty rate of 20 basis points these days. We continue to be mystified by the introduction of the penalty interest rate on bank reserves. We have no idea what it is supposed to achieve and in fact we suspect that it actually achieves the opposite of what the ECB ostensibly wants.
One of the goals is to weaken the euro, which is quite a hare-brained idea, as a weaker euro will affect consumer purchasing power across the euro zone negatively. Note that the euro area just posted another strong increase in its trade surplus. So even those who believe that a positive balance of trade is in any way indicative of an economy’s health (which is nonsense to begin with), will have to admit that the euro zone’s export sector hardly appears to be in need of an extra boost.
As to the TLTRO funding, this is extra-cheap long term bank refinancing tied to certain conditions – banks must use these funds to extend private sector credit (exclusive of mortgages). In the event they use the funds for other purposes like e.g. more carry trades in government debt, they merely need to repay the TLTRO funds two years earlier, in 2016 instead of 2018. Since there is very little private sector credit demand, it should perhaps not be too surprising that the first round elicited very little demand. Reuters reports:
“The European Central Bank saw far less demand than expected on Thursday for its new four-year loans to banks, raising doubts about a stimulus package it hopes will stave off deflation and revive the euro zone economy.
The launch of the scheme, a central plank of the ECB’s efforts to coax reluctant banks to lend, saw the euro zone’s central bank hand out 82.6 billion euros of 400 billion euros ($515.16 billion) on offer to 255 banks. That was well below the 133 billion euros forecast by a Reuters poll of 20 money market traders. Banks will get a second chance on Dec. 11 to apply for the cash, granted at ultra-low interest rates on condition they lend it on to businesses, when the poll predicted take-up of 200 billion euros.
Berenberg Bank chief economist Holger Schmieding called the low demand “a disappointing result for the ECB” that cast doubt on the bank’s hopes of injecting 400 billion euros into the economy through this scheme. “Simply offering more liquidity at more generous terms to banks awash in cash will not make a huge difference to the outlook for growth and inflation,” he said.
But ECB Executive Board member Peter Praet warned against reading too much into the first result, stressing that it was part of a broader policy package that “will have a sizeable impact” on the ECB’s balance sheet. He added that expectations for the first round had always been lower than for the second offering in December.
“Markets have understood that the June and September measures should be seen as a combination aiming at addressing credit impairment,” Praet told Reuters in an interview, adding the measures could only be assessed once fully implemented. Praet also reiterated the ECB’s readiness to do more should it become necessary.
Calamities Imposed by Nature and Man …
We are traveling today. No time or place to catch up on the financial markets. All we know is that the Dow closed at a new record. Gold lost $13 an ounce.
So we will tell you a bit of what went on at our ranch in Salta Province in northwestern Argentina…
It’s a beautiful spot, in a harsh and majestic sort of way. In early spring it’s windy, cold and very dry. The cattle are getting thin. But the grapes, irrigated from a small stream, are beginning to put out leaves.
“We’ll feed the cows what is left of the hay and the alfalfa in the fields. It should last until the rains begin in December,” Jorge, our capataz (foreman), explained.
“What if it doesn’t rain?” we asked.
“That happened in the late 1990s,” Jorge continued. “It didn’t rain all year.”
“What happened to the cattle?”
“We sold a few. But everybody was trying to get rid of cattle. Most of them died. We had 3,000 when the drought began. We had only a few hundred when it was over.”
In addition to the calamities imposed by nature, there are those imposed by man. Most countries operate with more or less sensible policies, most of the time… with a “hormegeddon” disaster (caused by misguided public policy on a grand scale) only rarely.
Argentina seems to prefer a rolling hormegeddon, with the economy always either going into a disaster or coming out of one. But we’ll come back to that soon …
Puente Transpordador (ferry bridge) in Buenos Aires in the 1940s.
No Surprises in Carbon Copy Statement
If anything, the FOMC statement was probably interpreted by Kremlinologists as less hawkish than expected (although the Fed already leaked that fact via the WSJ’s John Hilsenrath on Tuesday, spurring yet another surge in risk assets). The reduction in QE by a further $10 bn. to a mere $15 bn. per month was widely expected, but the feared “change in language” was conspicuous by its absence – in short, there were no hints as to a change in the envisaged time table for eventual rate hikes.
This provoked two hawkish dissents (actually, to call them “hawkish” is a bit of an exaggeration), by regional presidents Richard Fisher & Charles Plosser, i.e., the usual suspects who were never really on board with the Fed’s unconventional policies anyway. Their beef was precisely with the unchanged guidance on the timing of rate hikes. Readers can compare the changes relative to the July statement with the help of the WSJ’s trusty statement tracker.
Interestingly, a number of markets reacted as though the guidance had been changed – gold was down $12, the dollar index jumped to a new high for the move, treasuries weakened. The stock market is usually the last market to get the memo, and at first rallied with some verve, but gave back much of its gain as the initial euphoria faded – however, it still managed to close in positive territory (after all, nothing bad can possibly happen).
Dancing on Tables with Lampshades on Their Heads …
The Dow rose 100 points on Tuesday. Gold was up one lousy dollar. We’ll take the gold, thank you very much. Because our guess is that this stock market is living not only on borrowed money but also on borrowed time.
With the addition of Chinese Web portal Alibaba, there are now 44 start-ups preparing to enter the public markets. Each of these has a valuation of more than $1 billion.
The last time there was this kind of action in the IPO market was 2000, just before the dot-com bubble blew up. And the last time stocks were this expensive was 2007, when the sub-prime/finance bubble blew up.
That was also the last time share buybacks by US corporations passed the $600 billion mark, which they will do again this year. Yes, dear reader, the party has gotten out of hand – thanks to all the free booze supplied by Ben Bernanke and Janet Yellen. It’s time to look for the car keys.
Share buybacks per quarter, via Capital IQ and Zero Hedge. If you didn’t know whether stocks are expensive or not, you only would have to look at this chart…when buybacks approach the zero line, stocks are cheap and it would actually make sense to buy them back. It sure makes no sense now. This is another example of how the monetary bureaucrats distort markets and perceptions with their policies. Those who think this is not going to end badly are deluding themselves (chart comment by PT) – click to enlarge.
Poroshenko and the Nationalists
Following the recent Minsk accords, Petro Poroshenko has done what he should have done from the beginning: he offered amnesty to the rebels in the East, and promised that the Lugansk and Donetsk regions would be granted political autonomy (three years of limited self-rule for starters). Moreover, he promised that the government would attempt to rebuild the infrastructure its shelling of civilian areas has destroyed (note that the Ukrainian army used even short-range ballistic missiles in the shelling at one point, this according to mainstream press reports).
“Petro Poroshenko’s official website said the pro-Western leader told top lawmakers the proposal would be part of a broader deal with pro-Russian rebels signed on 5 September. He intended to formally submit it to parliament on Tuesday.
The bill also extends the right of people in the rebel-held Luhansk and Donetsk regions to use Russian in state institutions and conduct local elections on 9 November, according to media reports. The bill further permits the regions to “strengthen good neighborly relations” between local authorities and their counterparts in Russia.
It protects from criminal prosecution “participants of events in the Donetsk and Luhansk regions” – appearing to apply to both the insurgents and Ukrainian government troops – and allows regional councils to appoint local judges and prosecutors.
The bill also promises to help restore damaged infrastructure and to provide social an economic assistance to particularly hard-hit areas. Mr Poroshenko had promised to offer parts of the war-torn industrial east broader autonomy under the terms of the truce agreed earlier this month with the Russian government and two separatist leaders.
He urged parliamentary faction leaders to quickly back his efforts to end five months of fighting that have killed more than 2,700 people and forced more than half a million from their homes. Mr Poroshenko said his proposals guaranteed “the sovereignty, territorial integrity and independence of our state”.
The presidential website said the three years of limited self-rule would give his government a chance to implement “deep-rooted decentralization, which will be the subject of corresponding constitutional changes”.
The Danger of Reaching for Apples High Up in the Tree
The Dow has risen back above 17,000. All clear. US stock market investors: Your money will probably not die today. Maybe tomorrow. But does it really make sense to be in the US stock market now?
There may be apples higher up in this tree, but it is dangerous to reach for them. We came up with our Simplified Trading System (STS) a long time ago as a way to tell us when it was time to put away the ladder. We weren’t completely serious about it then… and still aren’t now.
Still, it’s a great system … but only for people with the life expectancy of Methuselah and boundless patience. The original idea was that there was a time to be in stocks and a time to be out.
When you were out … you just stayed in cash. And because we’re talking about long periods of being in cash, you should be in the “cash” that holds up over time: gold.
P/E < 10 = Buy stocks.
P/E > 20 = Sell stocks.
Otherwise = Gold.
Simple? Well, yes and no. You have to decide how you’re going to calculate the P/E ratio, for example. And therein hangs a long and complicated tale …
Fur traders in Canada, trading with First Nations, 1777
One Last Time … Here’s to “Yes!”
A friend sent us this video, in which “Lady Alba” is explaining why she is voting “No” on Scottish independence. Why bother to make your own decisions when Westminster can do it for you?
Lady Alba voting no … she doesn’t want to be burdened by having to think for herself …
As You-Tube user Zanyzaz who put up the video added by way of explanation:
“In case there’s any confusion or you have a malfunctioning irony-radar: “Lady Alba” is voting No but I’ll be voting Yes!”
Don’t Listen to the Scaremongers
Political elites around the world are scared of independence movements. Whether it is the allegedly sacrosanct territorial integrity of Ukraine or Iraq, the possible secession of Catalonia from Spain, of Sardinia from Italy, or the vote on Scottish independence: in all cases, visions of calamity are painted in vivid colors if the overarching nation states were to split into two or more parts.
These fears are understandable from the point of view of the ruling elites: the agents representing the force monopolist State always want to have as big a territory under their control as possible. It means more power for them and a larger tax base to exploit. However, the bigger the territory under the control of a single force monopolist, the less the individual counts, the more the State’s policies will tend toward a mixture of warfare and welfare, both of which as a rule prove disastrous for the average citizen.
Ask yourself why the most prosperous places on earth are all tiny political entities. There is a reason for that. No-one expects Liechtenstein to bomb ISIS in Iraq, or whoever the US enemy du jour is. Liechtenstein doesn’t even have a military. It doesn’t need one, because it is not busy making enemies left and right. Contrary to the larger European nations, it is also not up to its proverbial eyebrows in red tape and taxes. Incidentally, no Islamist extremists have yet thought of attacking Liechtenstein; most probably they don’t even know where it is, and if they did, they wouldn’t regard it as attack-worthy. After all, it has never meddled in the affairs of their homelands.
The UK on the other hand can be expected to waste both blood and treasure on every single war cooked up in Washington, no matter how cockamamie a scheme it is. Just remember the effort to free Iraq of Saddam’s mythical “WMD” and the associated fairy tale chemical rockets, which Mr. Blair asserted “could reach London in 45 minutes”. As long as Scotland is part of the UK, everyone in Scotland is involved in these schemes as well (at a minimum as a payer), whether they want to or not.
What about the alleged inability of Scotland to go it alone on economic grounds, or on grounds of being “too small”, or any of the other reasons that have been dragged up in recent weeks? These objections were already answered in this pages in great detail (see the list below this article), but let us just say that given that there exist much smaller independent countries possessing far fewer natural resources than Scotland and all of them are rich, simple common sense should tell one that such arguments cannot possibly hold water.
The one thing every eligible voter in Scotland needs to be aware of before making the decision is this: those who tell you that you aren’t up to it, that Scotland and its people won’t cut it, all have motives, interests and priorities of their own. Rest assured that the world will keep turning after Scotland gains independence.
We should also mention that what holds for Scotland is also true, if to a lesser extent, for the remainder of the UK – that fact that it will be somewhat smaller, is likely to be to the long term advantage of the average citizen.
UK prime minister Cameron: He just doesn’t want to be the guy who “lost Scotland”
(Photo credit: dailystar.co.uk)
Successfully Distracted …
We can probably “thank” ISIS for having distracted everyone from the ongoing spy scandal. A new barbaric and powerful terrorist group the danger of which is blown out of all proportion by politicians and the media is no doubt a Godsend for the national security apparatus and the military-industrial complex. In fact, this reminds us that ISIS looks suspiciously like an artificial creation anyway, one that has at some point undoubtedly received assistance from one or more states.
In a previous missive (see “Equal Opportunity Spy-Fest” for details), we discussed an article in German news magazine Der Spiegel (which has by the way done some excellent sleuthing beyond merely reporting on the content of the Snowden files). The article at Der Spiegel inter alia mentioned occasions when representatives of the “national security” apparatus or government spokesmen speaking on its behalf were caught in blatant lies and noted in its conclusion:
“The next weeks and months will show whether democratic societies across the world are strong enough to take a stand against the unlimited, totalitarian ambitions of Western secret services — or not. The governments of the countries in question apparently did not have the necessary backbone. They knew full well that the kind of surveillance being undertaken lacked all democratic legitimacy. But they pursued the programs anyway, behind the backs of their electorates. It is now up to voters to defend themselves. It is up to us, whose data has landed as by-catch in the nets of Tempora. We must force our own representatives to defend our freedoms. ”
Our comment to this was:
“Shocker! They lied to the public! And now ‘we must force our own representatives to defend our freedoms‘. Apparently over at the ‘Spiegel’ magazine they have completely forgotten who’s who in the zoo. The secret services are not an entity apart from the State – they are part of it. The mirage of ‘democratic accountability’ is held up as a way out. But how exactly can one’s ‘representatives’ be forced to alter course? Surely no-one can be so naïve as the think that any of this can be ‘fixed’ by elections or mere protests. Too powerful and well-funded an apparatus stands behind these activities. It would be a miracle if anything changed; moreover, the couch potatoes can’t be bothered anyway. Those that have ordered and are involved in the spying are undoubtedly betting that the furor will die down again just as it did the first time around, and they are probably right. In the meantime, they will continue exactly as before. We’re willing to take bets on this. All that has really happened is that whistleblowers have been put on notice.”
There is no reason to assume that this pessimistic conclusion needs to be reassessed. The Snowden revelations have had zero effect on the spying activities or the legal safeguards allegedly keeping them in check. So far, the main effect of these revelations was simply intimidation on a global scale.
Actions and Consequences
October is coming. Excess liquidity is disappearing. And with the S&P 500 on a trailing P/E of 19.7, the index is fast approaching “sell territory.” Watch out.
We finished our series on investment theory last week. Now we turn to practical application. There are three parts to the investment world. The first part is Aristotelian, Cartesian, Pythagorean. It is a world of logic and calculations. He who calculates best wins.
The second part is Socratic and Emersonian. The investment world, like the rest of the world, follows moral rules. When you do something “wrong” you will pay the consequences.
Aristotle, hewn in stone
Articles that might be of interest for you:
- The Stock Market's Rebound – Internals Are Weakening
- Apriorism and the Natural Sciences
- Libya Falls Apart
- Total Capitulation of the Bears
- The Fatal Flaw That Will Bankrupt Our Democracy
- Scottish Independence, Part 1
- Should we Fear the March of the Robots?
- Comfortable Myths About High Yield Debt
- This Is When the US Government Goes Broke
- French Government Falls “Amid Turmoil”