Could credit beat stocks when the Fed tightens?

It’s common to hear that central banks have “distorted” markets with low interest rates and asset purchases, especially from people who think that stocks will do better than bonds once the Fed begins to “normalise” policy. Even economists at the New York Fed seem to sympathise with this view. In 2013, they estimated that the equity risk premium — the amount that shareholders get compensated for buying stock rather than bonds — hit all time highs, mainly because interest rates were so low:

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The Guardian as contrarian indicator

You’ve got to hand it to Alan Rusbridger: he’s a great contrarian indicator. The editor of The Guardian launched his valedictory campaign to demand divestment from fossil fuels with a wrap-around promotion and the paper’s full moral force. Read more

Markets Live: Monday, 27th April, 2015

Live markets commentary from 

The House of Wirecard

Wirecard is a little known German tech stock worth €5bn, and a puzzle. It offers payment services, owns a Munich bank, and transacts millions of online credit card payments behind the scenes at familiar websites. It grows at breakneck pace, but buys obscure payment companies around the world which keep the growth going.

The company says it was founded in 1999, but it went bust after the dotcom crash. The real beginning was 2002, when chief executive Markus Braun took over and injected cash. Three years later Wirecard joined the stockmarket through the reverse takeover of a defunct call-center business. Allegations of balance sheet inconsistencies were made in 2008. The accuser subsequently landed in jail, and the stock has since been a rocket, rising eightfold.

Enthusiastic investors have given Wirecard half a billion euros to spend, and the company used much of it to buy customers, so-called portfolios of relationships, piling almost all the cash its business has produced since 2009 into these customer relationships.

The puzzle is an accumulation of questions: why does the company pay big sums upfront, months before deals complete? Why are key parts of transactions not fully transparent? Why spend millions on struggling Asian businesses? Why do accounts filed in Singapore not match totals reported in Germany? What are €670m of intangibles on the balance sheet really worth? Read more

The Wirecard documents

To help anyone following along as we look at aspects of Wirecard, the German listed online payment provider, we’re going to post the documents and company filings referenced here.

Feel free to direct us to other relevant documents in the comments, or point out details we might have missed. Read more

You’ve taken our bonds, so we’ll….

Ever wondered why hedge funds remain so popular? Against much sense?

Here’s one suggestion from JPM’s Niko Panigirtzoglou and team, with our emphasis:

Why is the HF industry continuing to attract large amounts of capital [$18.2bn in Q1 up from $3.6bn in the previous quarter] despite disappointing performance? This puzzle is also reflected in HF surveys such as those conducted by Preqin. The performance of HFs has lagged institutional investors’ expectations for every single year since the Lehman crisis with the exception of 2013. At the same time institutional investors reported that they intend to increase rather than decrease HF allocations over the next 12 months.

Steady demand for convexity since the Lehman crisis is clearly one reason behind the inflows into HFs. But we believe there is another reason, which is the quest by investors for alternatives to bonds. Successive QE programs by G4 central banks have withdrawn $8tr of bond securities since the Lehman crisis and have made bonds very expensive as an asset class, inducing institutional investors to seek higher yielding alternatives to bonds even as these alternatives entail illiquidity risk. And HFs have to an extent become an alternative to bonds as the collapse in HF volatility has made HFs look a lot more like bonds rather than equities in recent years. This is shown in Figure 1 where the volatility of monthly HF returns has collapsed to that of the US Aggregate bond index over the past three years. In other words, with an annualized volatility of only 3.2%, HFs are equivalent to a bond rather than equity investment in terms of their second moment.

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Further reading

Elsewhere on Monday,

- “Aggregate demand, driven by animal spirits, is pulling the economy from one inefficient equilibrium to another.”

- The story of the deflation of China’s credit mountain will be a book of many chapters.

- There’s a growing sense of powerlessness in all aspects of (nearly all) our lives.

- “Do you realize,” he sneered, “that I could charter a helicopter right now, and we could be having dinner in Napa?”

- The economy doesn’t make stuff anymore… It makes assholes.  Read more

FirstFT (the new 6am Cut)

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Nepali authorities are still struggling to reach remote mountainous villages hit by the earthquake over the weekend with the death toll already up to 3,200. Nepal is getting help from India and China, which have both been jostling for influence there. (FT, WSJ)

Heavy rains pelted the thousands of people looking for safety on the street, where they slept for fear of aftershocks and collapsing buildings. A resident surmises : “People here help one another because they know the government cannot.” (NYT, WSJ) Read more

Charting European profits: hope vs evidence

European shares are in great demand, with cash pouring into mutual funds and ETFs following eurozone stocks, and Wall Street hungry for more.

There’s a pretty good story to tell: a weaker currency, an activist central bank and an improving economy. Unlike in the US, where corporate profit margins have been exceptionally high and look like they might have topped out, in Europe margins are depressed — suggesting to many buyers that profits are more likely to rise than fall. Even better, high operating leverage means if they do start rising, they could rise very quickly.

The reality so far is that eurozone (operating) profits over the past 12 months, as recorded by index compiler MSCI, have just fallen below the bottom reached after Lehman’s failure brought down the global economy. Read more

Just another case of the heebie-GGBies?

In this guest post, Gabriel Sterne, head of global macro research, Oxford Economics, looks at previous large drawdowns in Greek bond prices for clues about the future.

Greek Prime Minister George Papandreou “asked our partners to contribute decisively in order to give Greece a safe harbour” five years ago this week.

Since then, Greek government bond (GGB) prices have plunged by 37 per cent — or more! — four separate times, with one amazing long rally in between: Read more

The trouble with market-based financing… in China

The thing about market-based financing is that market-based financing isn’t always available the way you want it.

Which is why it’s big news in China on Friday, as the FT reports, that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer. The news comes by way of state media.

Now, the reason this is interesting is because last month when China’s finance ministry revealed its plan for provincial governments to refinance RMB1tn in debt, analysts were super cheery about its chances of lowering debt-servicing costs and extending maturities for provincial authorities. Read more

Markets Live: Friday, 24th April, 2015

Live markets commentary from 

The end of days, or yield, or whatever

From a hyperbolic Citi, a new normal stat du jour:

The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.

We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.

One third of €-denominated bonds have negative yields. 82% now yields less than 1%

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Further reading

Elsewhere on Friday,

- “The interesting question in Libor manipulation is whether it caused a net harm…”

- Varoufakis on a “new deal for Greece”.

- Buffy the eurocrisis.

- Goldman has said “that a high-level position with the investment bank had attracted applications from every official in the United States Treasury Department.” Read more

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A US drone strike killed two western hostages in an al-Qaeda compound in the Pakistan-Afghanistan border region, the White House has confirmed.

Warren Weinstein, an American held by al-Qaeda since 2011, and Giovanni Lo Porto, an Italian national who had been hostage since 2012, were killed accidentally in the counter-terrorism operation in January. The disclosure that two hostages were killed in a US strike will raise fresh questions about the limits of such operations, and whether imperfect intelligence unnecessarily risks civilian lives. (FT and NYT$)

In the news Read more

The great Bonar caper

Are you an EM fund manager?

Do you live in London or New York?

Were you by any chance offered some of the $1.4bn of Bonar 2024 bonds issued by Argentina on Wednesday, bought by Deutsche Bank and BBVA on Thursday, and settling this Friday? Or maybe you’d like to buy these bonds in the near future.

Then congratulations. You might well also be buying yourself a ticket to the next exciting stage of the pari passu saga.

PS: this may now involve the holdouts personally hunting you down. Read more

Dear SRA, a problem solved?

Last year we wondered if the Solicitors Regulation Authority had contingency plans in place for the failure of a high volume personal injury legal business. Our question was prompted by the bombed out stock price for listed UK law group Quindell, share sales by the founder, and the failure of the company to generate cash.

However the Australian law group Slater & Gordon will now buy almost all of Quindell, assuming the SRA and Financial Conduct Authority approve. The personal injury giant created will be twice the size of its nearest UK competitor.

We took a close look at Slater & Gordon’s business here, but one further thing to note: for a company of its size it operates with very little cash on hand. Read more

Markets Live: Thursday, 23rd April, 2015

Live markets commentary from 

This is nuts, we’re watching the crash

Credit pricing, yeah?

From a rather good Bloomberg piece:

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

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Further reading

Elsewhere on Thursday,

- Greece, scripophily and the edge of the map.

- Can John Deere and its tractors destroy the very idea of ownership?

- Morons’ right to herd and why it’s “important to distinguish Sarao’s strategy from the ecology within which it was able to thrive.”

- And, why is spoofing bad exactly?

- “One implication of this is that scalping does not tend to cause prices to move one direction or the other. It is passive, and balances buys and sells.”  Read more

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A British futures trader who was arrested for allegedly contributing to the 2010 “flash crash” began his fight against extradition on Wednesday. Navinder Singh Sarao, a 36-year old British citizen who was operating through a company based at his parents’ house in a London suburb, was arrested at the request of US authorities and is accused of contributing to the crash. (FT)

He has been charged in Chicago with wire fraud, commodities fraud, commodities manipulation and “spoofing”, and will face trial if he is extradited. He was granted bail of £5m. (FT)


In the news Read more

Australia less bubbly than it looks?

Australia has a lot in common with other rich English-speaking countries, but unlike them, it basically missed the global financial crisis. Was that good luck, or a temporary postponement of the inevitable?

We’ve considered the case before, but we were struck by a recent speech by Glenn Stevens, the governor of the Reserve Bank of Australia, which spends considerable time on this question. Read more

Executing Trader Sarao

Craig Pirrong, Streetwise prof and futures trading expert, delves into the case of the Hounslow Spoofer, and like us, smells a rat.

For one thing, notes Pirrong, the official complaint doesn’t offer much in the way of detail on the execution strategy. It’s all very well alleging that Sarao spoofed the market with bogus orders, but none of this explains how he actually made money from the strategy. Especially given that the numbers presented don’t seem to add up. Read more

The benefits of naked shorting – Update

On the topic of supposedly malign market behaviour, remember how naked short selling was one of the bogey-people-things which nearly destroyed the financial system?

Dick Fuld gave naked short sellers (who sell stock without first borrowing it and so may “fail to deliver” the sold shares to the buyer) a share of the blame for the failure of Lehman Brothers on his watch in 2008, and the following year the Securities and Exchange cracked down on “abusive short sales”.

Well, here’s something to bookmark for the next crisis:

we do not find any evidence that Fail to Delivers caused price distortions or the failure of financial firms during the 2008 financial crisis.

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About that Wunderbund….

FT Alphaville would like to recall a post series entitled “Wunderbund,” which purported to follow the 10 year German sovereign benchmark bond all the way to a yield of zero.

We come out with our hands up. This was clearly the wrong call.

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Saving Trader Sarao

Picture the scene in the London borough of Hounslow on Tuesday lunchtime, as police moved in to arrest one Navinder Singh Sarao, holed up in a humble end-of-terrace post-war semi.

There’ll have been prior discussion of the possible need for a special forces sniper overwatch. Someone will have remarked on the security implications of having a man like this, with a Muslim-sounding name, apparently living so close to one of the world’s major transportation hubs, airliners passing just a few hundred feet overhead every 90 seconds or so on their way to Heathrow.

Because Sarao stands accused of declaring Jihad on the S&P Futures market, the Apple Pie of American finance. Read more

Markets Live: Wednesday, 22nd April, 2015

Live markets commentary from 

SOE you’ve actually defaulted?

Alternatively: SOE, do we have credit pricing in China?

Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more

Further reading

Elsewhere on Wednesday,

- Ashoka Mody on the IMF’s big Greek mistake.

- Today in the political economy of Thomas the Tank Engine: The dysfunctions of Sodor Railways.

- And how, obvs, “the great trick of Sir Topham is to employ engines who essentially evoke the image of the New Soviet man in the service of a proto-capitalist, semi-feudal enterprise.

- Of course, it’s also “no wonder Sir Topham… made enough money to buy himself a peerage.”

- Krugman weighs in on John Taylor. Read more

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A British futures trader was arrested for allegedly contributing to the2010 “flash crash”, when the Dow Jones Industrial Average plunged more than 600 points in a matter of minutes. Navinder Singh Sarao, 37, had been operating out of a suburban house under the approach path to Heathrow airport. US authorities are trying to extradite him to stand trial in Illinois. (FT)

He was charged with one count of wire fraud, 10 counts of commodities fraud and one count of spoofing – a form of market manipulation that involves putting in an order and swiftly withdrawing it before the trade takes place in order to trick others into making the trade. Michael Mackenzie explains how futures trading crashed stocks back in 2010. (FT) Read more