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Bullish Europe Risk Assets PDF Print E-mail
Written by Burnham Banks   
Wednesday, 18 September 2013 01:04

 

We began to be bullish US equities 14 Oct 2011. On 13 Jan 2012, we called a buy on Europe across all risk assets on the back of the ECB’s unprecedented 3 year repo facility. This was a bit early and required the investor to sit through quite a lot of volatility. Some would have folded in May 2012 on the adverse price movements, but it turned out to be a profitable trade after all.

We continue to like the US and Europe. US equities, while still attractive on the back of a recovery are no longer as cheap as they were a couple of years ago, and are also more advanced in the profit cycle. While we continue to maintain exposure to the US, we now turn our attention to Europe, an under-represented exposure in many investors’ portfolios.

Last Updated on Wednesday, 18 September 2013 01:12
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Confusing and Conflicting Signals. Contamination by QE. PDF Print E-mail
Written by Burnham Banks   
Tuesday, 10 September 2013 00:18

Its all rather confusing. But not any more so than usual. Things are always confusing in the present and clear in the past. What is confusing today, are the number and strength of the conflicting signals. We therefore consider, in broad summary, the bull and bear cases for general conditions. 

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Current Thoughts About Hedge Fund Investing PDF Print E-mail
Written by Burnham Banks   
Wednesday, 04 September 2013 00:26

Concepts like volatility and correlation can be hard to visualize or grasp intuitively. I sometimes like to think simplistically about complicated matters. The insights gained are often far from simplistic. Hedge funds are unfortunately, a complicated subject, and try as one might, it is difficult to reduce the complexity of the issues.

One of the reasons that hedge funds are an attractive investment is that because they don't spend long spells in decline, they are a useful investment for someone who doesn't know when they might need liquidity and have to sell their investment. A steadily rising NAV provides a useful store of value which can be realized based on ones' needs and liabilities rather than based on the performance of the asset.

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Ten Seconds. Are Developed Markets a Threat to Emerging Markets? PDF Print E-mail
Written by Burnham Banks   
Thursday, 22 August 2013 02:46

Economic growth in the developed markets appears to be in a general if tepid recovery. The US continues to exhibit steady recovery in economic growth supported by a robust housing recovery and manufacturing which has even now widened to a slightly healthier labor market. Tempering this is a falling participation rate, which is troubling since the unemployment is in the younger cohorts, and the increasing proportion of temporary work, which is more likely a consequence of Obamacare, which requires employers to provide health insurance to full time employees.

Last Updated on Thursday, 22 August 2013 02:48
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Some Rudimentary Thoughts About Risk Measurement in a Simplistic Portfolio PDF Print E-mail
Written by Burnham Banks   
Tuesday, 06 August 2013 02:58

A couple of thoughts on risk…

In a portfolio consisting of assets of varying complexity, liquidity and aggregation structures (such as mutual funds, structured credit and structured products), the problem of risk measurement and management becomes a bit more complex.

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Youth and New Graduate Unemployment PDF Print E-mail
Written by Burnham Banks   
Saturday, 27 July 2013 07:17

As the world recovers slowly from the Great Recession of 2008, employment has lagged, particularly youth and new graduate employment. Why is this? Employing new graduates and the young is a longer term investment involving money, time and resources towards future productivity. Employing older, experienced workers is an investment in current productivity. Any future productivity must be subject to discounting by variability depending on general business conditions. In times of uncertainty, it is rational to invest in fixed capital, for which there is ownership over a potentially transferable, marketable asset, and experienced workers. Only when there is less uncertainty, or sufficient comfort from current success will businesses invest in future productivity, which incidentally may be mobile with the benefits accruing to the employee, not the firm. Business investment is likely to be a leading indicator, therefore, for a recovery in youth and new graduate employment. Evidence supporting this conjecture can be found in the recovery in part time employment, while full time employment has lagged. The thesis that education derives more value as a signaling device is also supported here. Employers prefer a hard signal, that is, actual and relevant work experience over an indirect and soft signal carried by a college degree. This does not suggest that a college degree is unimportant; workers without a college degree with similar years of (in)experience fare even worse.

 
Pre Bernanke Report to Congress PDF Print E-mail
Written by Burnham Banks   
Wednesday, 17 July 2013 00:05

The market will be awaiting Bernanke's pronouncements this Wednesday in his monetary policy report to Congress. Ben will likely have prepared two speeches, one hawkish and the other dovish. Almost a month ago Bernanke telegraphed the Fed's intention to eventually taper off QE. Since then the Fed has prevaricated and indicated that monetary policy would be accommodative. Bernanke himself talked a dovish position as recently as a week ago. Today, Bernanke is likely to be hawkish in his report to Congress. 

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Fed Policy and Communications. Strong US Economy. Threats to the Recovery PDF Print E-mail
Written by Burnham Banks   
Friday, 12 July 2013 00:59

As expected the Fed is prevaricating over its plan to slow the pace of QE. The Fed was always going to telegraph its intentions well in advance and to prevaricate publicly until the market was weaned off the idea of perpetual QE before they actually taper it off. 

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I Have A Dream PDF Print E-mail
Written by Burnham Banks   
Tuesday, 02 July 2013 06:14

I have a dream. A dream of a different wealth management model. A model where the interests of the staff, the firm and the clients are aligned. Where the reward relies on the minimum of subjectivity. Where the people are at the top if their field. Where the infrastructure is adequate and efficient and supports the client and the business. And where there is mutual and universal professional and personal respect.

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European Equities are a Buy PDF Print E-mail
Written by Burnham Banks   
Monday, 17 June 2013 04:40

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Thoughts about General Investing Conditions. Why We Should Invest in Managed Products. PDF Print E-mail
Written by Burnham Banks   
Friday, 07 June 2013 00:06

Economic Growth

In the decades prior to 2008, rising credit allowed most economies, even inefficient or unstable ones, to grow and prosper. 2008 marked a turning point in the long term credit cycle. With global deleveraging, weak and strong economies have been revealed for what they are.

Last Updated on Friday, 07 June 2013 13:45
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Japan QE. Rationalized Equilibria. Lucas Critique. PDF Print E-mail
Written by Burnham Banks   
Thursday, 30 May 2013 07:08

The policies that Japan has embraced in an effort to revive its flagging economy are indeed desperate measures. To be clear, I believe that they will work in at least boosting asset prices and reviving the economy for a period of time. The long run prognosis is not so good.

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Europe's Troubled Economy and the Euro. Why the Euro Doesn't Work and Where it will Break. PDF Print E-mail
Written by Burnham Banks   
Sunday, 19 May 2013 23:24

 

The credit infused growth of the last twenty years has allowed many an inefficiency to persist undetected or un-addressed. The EUR is one such inefficiency. Unless national factor prices are flexible or factor productivities converge between countries in the Eurozone, a single currency must impede market clearing leading to inefficient allocation of resources leading to underemployment or unemployment. Only the acute dearth of credit has exposed this systemic weakness, at least to some. Many economists and central bankers continue to focus on the financial markets effects of the EUR without addressing its impact on the real economy. A point will be reached when the real economy issues will demand resolution.

Last Updated on Monday, 20 May 2013 00:58
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Recap on 2Q investment outlook PDF Print E-mail
Written by Burnham Banks   
Thursday, 16 May 2013 03:00

Not everyone has time to read the lengthy, boring letters that I write, so I thought I'd summarize and simplify.

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Exiting QE. The Game of Chicken. Welcome to the Hotel California. PDF Print E-mail
Written by Burnham Banks   
Monday, 13 May 2013 23:18

 

The game of chicken is played when two cars are driven at each other at high speed. The one that flinches first, loses. The one that flinches last, wins. If neither flinch, they both lose. 

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Fear Not QE Tapering PDF Print E-mail
Written by Burnham Banks   
Tuesday, 10 September 2013 00:25

Do not fear QE tapering. Its a good thing.

1. Its a sign of strength, that the economy is able to tolerate tighter monetary conditions.

2. US treasury issuance is falling as a result of improving economic growth and thus tax receipts. If the Fed maintains its purchases as a proportion of issuance, it would have to slow its rate of purchases.

3. By operating QE, the Fed is removing from the market the most ubiquitous, important, and highest quality collateral used in repo agreements. The Fed does not rehpothecate its assets on a large scale ongoing basis, although it has been contemplating a reverse repo facility in its last FOMC meeting. QE therefore reduces the liquidity in the collateralized lending market. Given that LIBOR markets have thinned, since 2008 and then the LIBOR scandal, the repo market is extremely important to global credit and liquidity. QE tapering is positive for repo liquidity. Because collateralized lending, particularly on such short tenures has a highly advantageous risk weighted treatment under Basel 3 capital rules, it is an important source of credit in the current environment.

Last Updated on Tuesday, 10 September 2013 02:07
 
An Alternative Investment Methodology PDF Print E-mail
Written by Burnham Banks   
Wednesday, 04 September 2013 09:32

Is Caterpillar a US company or a Latin American one, or a European one, or an Asian one? Is Santander Spanish, British, or Latin American? Is Alstom French, or Nestle Swiss, or HSBC British, or Chinese? Are any of the large listed Swiss companies Swiss?

When we say equities are cheap and bonds expensive, to which companies do we refer?  Should we compare the equity valuations of large caps with the bond yields of high yield issuers? Could the cheap equity issuers have even cheaper bonds?

The world fears peripheral European banks. How then should an investor regard the securities of the German operations of a Spanish bank? Or the securities of the Swiss operations of a US investment bank? How much did the holder of Lehman International UK bonds get in recovery, 9 cents or a dollar and change?

 

Last Updated on Wednesday, 04 September 2013 23:47
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Emerging Market Currencies. Defend or Debase? PDF Print E-mail
Written by Burnham Banks   
Wednesday, 28 August 2013 05:47

In this time of emerging market capital flight, governments may be tempted to defend their currencies. This is a mistake. Such a defense rarely works. As governments buy local currency and sell hard currency, foreign reserves are further depleted signaling weakness to speculators who are encouraged to further short the currency. This establishes a death spiral. A better strategy, albeit a rather frightening one, is for governments to join in the carnage and sell local currency for hard currency. This drives the currency down improving the terms of trade and export competitiveness. In the short term it boosts reserves, and in the longer term, it boosts reserves.

There are of course, risks, to this strategy. The currency could depreciate too quickly. Governments have to stand ready to close the capital account in that eventuality. The alternative tends to lead to the same conclusion anyway.

 
Wall of Refinancing and EM assets PDF Print E-mail
Written by Burnham Banks   
Monday, 12 August 2013 08:12

The wall of refinancing in the developed markets presents a high risk to emerging market fixed income assets as they divert capital away from these markets.

Last Updated on Tuesday, 20 August 2013 08:15
 
Philanthropic Equity. PDF Print E-mail
Written by Burnham Banks   
Sunday, 04 August 2013 07:33

Let us consider a model for philanthropic, development finance. An interesting model for development philanthropy is one which provides equity capital to target low income groups to finance and encourage enterprise within this group.

Last Updated on Tuesday, 20 August 2013 08:16
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Income and Wealth Inequality - Tipping Point? PDF Print E-mail
Written by Burnham Banks   
Saturday, 27 July 2013 07:17

Nothing happens without enterprise. Nothing happens without labor. There is at least the perception, that in the past few decades, and certainly accelerating into the past few years, enterprise has had the upper hand. 3 decades of falling interest rates have certainly helped enterprise through cheap funding while returns to savers have steadily diminished but funding costs are a side show. A paradigm shift is behind the steady rise of inequality. Under a purely capitalist, market economy, the strong thrive and the weak do not. Social security and welfare are socioeconomic band aids cobbled together to address the survival of the weak, or the unlucky. It takes an exceptionally enlightened capitalist elite not to over-exploit labor. Post the Great Depression, with the rise of labor unions and the rise of Communism, the capitalist elite were circumspect in dealing with labor. The fall of Communism has, among other things, removed the need for any pretense by removing Capitalism's nemesis and alternative. It has also contaminated the capitalist model but that is another story. On purely mathematical grounds and importantly ignoring important limitations and behavioral phenomena, a pure free market economy is efficient. However, it implies that the strong will thrive and the weak may not survive.

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QE Tapering. A Significant Risk PDF Print E-mail
Written by Burnham Banks   
Tuesday, 16 July 2013 07:35

The risk that faces the Fed today is that it will not be able to taper of its asset purchase program. All indicators point to a sustainable, albeit weak recovery. It is only reasonable that if this were true, the Fed would at some stage be well advised to reduce its balance sheet, if nothing else so that it would have the means to address the next crisis whenever that might be. By maintaining its current policy the Fed would have few other policy tools to deal with another recession or financial crisis. QE tapering is therefore a good thing and the markets appear to have come to that conclusion. Attention needs to turn now to economic fundamentals. A slowdown from here would not allow the Fed latitude to moderate its asset purchases. A climbdown by the Fed on QE tapering might come to be construed as a sign of weakness.

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Fed Policy. The Moderation and Withdrawal of QE. PDF Print E-mail
Written by Burnham Banks   
Tuesday, 02 July 2013 23:57

 

Lest we forget, the job of the Fed is not to support equity and bond markets but to promote price stability and stable economic growth, the former a stated goal, the latter an implied one. Yet market participants continually watch the Fed as if it was the primary driver of asset markets, at least in the short term. For the last 20 years, the Fed has, for better or worse, acted to rescue the economy, and concomitantly, financial markets, from crises. The previous Fed chairman Alan Greenspan stated that averting a financial crisis was not feasible and that the best that could be done was curing a crisis situation after it had been precipitated. In the days when the only policy tool wielded by the Fed was the short term interest rate, it was clear that this policy had its limitations. Each rate cutting cycle was less effective than the last and in fact sowed the seeds of the next crisis. Thus interest rates trended lower and featured a cycle of rate cuts to address crises or recessions followed by rate hikes, not merely to cut of inflation but to reset the policy tool in case it was needed in future. That rates trended down meant that the policy was ineffective in that rates could not be reset fully before the each subsequent crisis.

Last Updated on Thursday, 12 September 2013 23:48
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2H Strategic Outlook PDF Print E-mail
Written by Burnham Banks   
Wednesday, 19 June 2013 00:27

A very useful way of approaching investing is to first assess the underlying prospects for a particular company and then to find the best value and risk reward in its capital structure to buy. Often, however, we tend to assess macro conditions, then market implications and asset allocate between equities or bonds before we look at companies. This approach often fails to discriminate between the diverse geographical sources or revenues and costs. Unfortunately, the force of habit is so entrenched that mainstream investment strategies will find it hard to adjust to the more targeted approach, and so we march on with the old tools. One has to be cognizant of the existing methodology since it will drive current capital allocations and fund flows which move the market.

Last Updated on Wednesday, 17 July 2013 11:12
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QE Tapering. How the Fed will roll it back. PDF Print E-mail
Written by Burnham Banks   
Friday, 14 June 2013 02:39

The Fed will roll back QE gradually and will telegraph its intentions well in advance. This is clear. And it has begun. The Fed will continue to keep QE tapering in the news maintaining a 'will they won't they' stance until the market begins to get tired of the message and accept QE tapering as a reality. Only then will the Fed roll back its asset purchases. By then, the market won't care. It will be focused on fundamentals such as earnings growth, cost of capital, balance sheet quality etc. Correlations will have slowly leached out of the system.

Last Updated on Friday, 14 June 2013 07:37
 
The Bursting of the Bond Bubble PDF Print E-mail
Written by Burnham Banks   
Friday, 31 May 2013 00:53

The thirst for yield has compressed spreads across high grade to high yield bonds, and bid up the prices of sovereigns and loans and just about any security that threatens to pay an income stream. Yield junkies a.k.a investors have even bought unrated, first loss securities, paying an uncertain coupon and with infinite duration, a.k.a equities, in their quest for yield. The usual intermediaries have of course been quick to meet this demand by offering all manner of income funds.

Last Updated on Friday, 31 May 2013 23:44
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Sometimes, you can’t just buy some of something. You have to buy all of it. Japan QE. PDF Print E-mail
Written by Burnham Banks   
Tuesday, 28 May 2013 01:25

 

10 Year JGB Yields.

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Gold. the Alternative to Hope PDF Print E-mail
Written by Burnham Banks   
Sunday, 19 May 2013 23:22

The trouble with gold is that it has long derived its value as an alternative  to fiat currencies and paper assets whose values are derived from collective trust or faith and little else.  Gold has very little use except as a supply constrained store of value. As trust and faith are restored in paper assets, it is reasonable not to be surprised that gold should lose its value as an alternative. It is ironic that gold, by being an alternative to fantasy, should find its value hostage to the whims of fantasy.

 
China Trade Data Anomaly Explained PDF Print E-mail
Written by Burnham Banks   
Tuesday, 14 May 2013 23:39

Official trade data for China showed exports growing YOY by 14.7%, ahead of forecasts of 9% and imports of 16.8%, ahead of forecasts of 13%. Closer inspection of the data reveals interesting themes. Notably, the bulk of the rise in exports was to Asia, as was the bulk of imports. Ex Asia, the numbers for imports and exports were less exuberant, particularly for exports.

What's going on?

 

Last Updated on Tuesday, 14 May 2013 23:56
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A Corporate Strategy For Rising Interest Rates PDF Print E-mail
Written by Burnham Banks   
Monday, 13 May 2013 10:59

Having borrowed heavily in the bond markets in the past couple of years. If interest rates should rise substantially, a corporate CFO might be tempted to buy back their company's debt at below par and retire its debt. Its an interesting way of making money without producing a single widget.

One wonders how significant this impact could be. It certainly won't hurt to own the equity.

Last Updated on Monday, 13 May 2013 11:03
 
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