Category Archives: Investment outlook

Wolf Richter: Signs That the Startup Bubble is Totally Maxed Out

Yves here. Wolf’s longer original headline to this post focused on how gobsmacked he was to get glossy mail pieces to promote supposedly hot Silicon Valley startups. Apparently, the deemed-to-be-transgressive communications medium (by West Coast standards) was a way to cut through the new venture clutter. But what I found more surprising was how obviously lame these ideas were, yet they’ve all already gotten multiple rounds of funding and have eight figure investments so far.

Treasury Liquidity Freakout: Searching for a Market-Maker

As someone old enough to have done finance in the ~~Paleolithic~~ pre-personal computer era (yes, I did financial analysis using a calculator and green accountant’s ledger paper as a newbie associate at Goldman), investor expectations that market liquidity should ever and always be there seem bizarre, as well as ahistorical. Yet over the past month or two, there has been an unseemly amount of hand-wringing about liquidity in the bond market, both corporate bonds, and today, in a Financial Times story we’ll use as a point of departure, Treasuries.

These concerns appear to be prompted by worries about what happens if (as in when) bond investors get freaked out by the Fed finally signaling it is really, no really, now serious about tightening and many rush for the exits at once. The taper tantrum of summer 2013 was a not-pretty early warning and the central bank quickly lost nerve. The worry is that there might be other complicating events, like geopolitical concerns, that will impede the Fed’s efforts at soothing rattled nerves, or worse, that the bond market will gap down before the Fed can intercede (as if investors have a right to orderly price moves!).

Let’s provide some context to make sense of these pleas for ever-on liquidity.

Wolf Richter: Leading Indicator Amazon Gets Re-Crushed

Yves here. As Matt Stoller wrote recently, Amazon’s business strategy is all about becoming a globally-dominant trading company. It might have helped if Amazon and its investors had studied the closest historical analogue to what Amazon is seeking to become: Japanese trading companies. In their heyday, Japanese trading companies, such as Mitsubishi International Corporation, which intermediated trade for the Mitsubishi zaibatsu, and its post-World War II less-tightly-integrated incarnation, a keiretsu, had an almost impossible-looking financial statements: staggeringly large revenues, extremely thin profits (those went to the industrial companies) and enormous balance sheets with breathtaking leverage.

The Amazon 2.0 version has a lot of improved features, the biggest being impressive cash flow, since it manages to get income before it has to pay for goods. However, Amazon, like its Japanese forebearers, is interested in dominance above all. For the Japanese trading companies, that made sense because they were the sales arms for the companies in their group, so the objective wasn’t for them to prosper but to merely get by. But for Amazon, plowing its vast cash flow into growth looks less and less sensible as losses gap up. It’s one thing to incur large costs to obtain a monopoly or oligopoly position, since high margins are expected to come later. Amazon has gotten away with no profits because, in reality, cash flow generation is in many ways a better measure of the true productivity of a business. But in Amazon’s case, its hugely positive cash flow is entirely dependent on its collection v. when it pays suppliers. If suppliers, which Amazon is also squeezing on cost, start to push back this hugely successful machine will look a lot less pretty. And this ins’t a theoretical concern; Justin Fox at the Harvard Business Review points out that Amazon of late hasn’t been able to stretch payables as much at it once could. Amazon is moving on so many fronts where establishing a dominant position is far from assured, which could call its entire model into question.

Links 10/22/14

Forward Guidance: Human Plans and Divine Laughter

ves here. VoxEU has come to serve as a wonky alternative to the Financial Times comments section, which is Brit-speak for op-eds. While most FT comments are at least interesting and timely, now and again the pink paper serves as a venue where real policy players put a stake in the ground, sometimes in exclusive interviews but also in opinion pieces.

This article by David Miles of the Bank of England is clearly intended to reach a wider audience than the normal VoxEU piece. In it, he calmly and methodically tries to tell finance people that what they want from central bank forward guidance is tantamount to having their cake and eating it. Admittedly, the unreasonable expectations for what forward guidance can accomplish is partly central bankers’ own creation. In keeping, this piece suggests that a retreat from efforts at precision in forward guidance would probably be a plus.

Low Oil Prices Hurting U.S. Shale Operations

Yves here. In yesterday’s Water Cooler, Lambert posted a link from Bloomberg that indicated that oil at $80 a barrel would pop the fracking bubble, an outcome we’d discussed previously. Some readers in comments expressed doubts.

In fact, it was already happening as oil prices were falling from over $100 a barrel through the nineties. Seasoned energy hands had warned that shale operations could be shut down rapidly, and that has started to take place. However, the author of this article argues that the shutdowns are likely to be delayed and that most US shale operations have low break-even costs, insulating them from the impact of the oil price drop. However, he misses that another driver of the shale boom has been access to super-cheap credit and an overly-bullish mentality that has not factored in the short production lives of shale wells. The junk bond market has been much less accommodating of late, and if that skittishness continues, the prognosis isn’t quite as sanguine for the industry as Cunningham suggests.

Goldman Makes It Official That the Stock Market is Manipulated, Buybacks Drive Valuations

It’s remarkable that this Goldman report, and its writeup on Business Insider, is being treated with a straight face. The short version is current stock price levels are dependent on continued stock buybacks. Key sections of the story:

Markets Panicked Over Deteriorating Fundamentals (Updated)

The “Fed can fix everything” premium has left the market.

The S&P 500 has been falling even more while I compose this this short post. It went from down over 2.2% to off 2.9% of this writing and the Dow went from down 2.1%. to down 2.6%, Ten-year Treasury yields dropped to below 2%. Oil fell sharply overnight.

Wolf Richter: Toxic Mix for Fracking – Oil Price Collapse & Junk Bond Insanity

Yves here. As oil prices have collapsed, the fundamentals of fracking, which was overhyped given the short productive life of individual wells, now looks even more dubious at current energy price levels. And given how risky the sector has become, cheap debt, even in this time of ZIRP, is no longer freely available either.

Dropping Oil Prices Send Shockwaves Through Energy Sector

Yves here. Commodity prices have been screaming deflation for some time, but oil prices remained stubbornly resistant…until now. In a period of mere weeks, oil prices have fallen considerably and the slide continues. Today, for instance, Brent fell by $1 this morning despite stronger-than-expected trade data out of China due to reports that OPEC won’t cut production till oil prices hit $80 a barrel. Note that that news hit after this post was published, and represents a much lower price level than analysts assumed. So the outlook is even gloomier than this downbeat piece indicates.

In addition, as this post discusses, the plunge in oil prices has an impact on other energy prices. Or perhaps to put it another way, the way deteriorating economic fundamentals are whacking oil prices clearly has ramifications for other fuel products.

Wolf Richter: What the Heck Just Happened in Global Stock Markets?

Yves here. One might argue that stock market jitters are a sign that investors are finally taking note of crappy fundamentals, since even ZIRP and QE, which central bankers keep insisting won’t go on forever, were starting to lose their effectiveness in already-frothy asset markets.

GFC Seer Raghuram Rajan Warns of New Crash

Yves here. There has been so much anticipation of the seemingly inevitable next financial markets crash that it’s easy to brush off yet another market call. But given Rajan’s track record, it’s worth at least listening to his reasoning.

It’s noteworthy, however, that post author Llewellyn-Smith sees no crash detonator prior to 2016, which might as well be 2025 as far as most investors are concerned. I have no idea what the timing will be, but the focus on financial/asset markets as the trigger seems unduly narrow. Geopolitics are vastly more fraught than in the runup to the global financial crisis, and we also have more unstable weather, such as the drought in California, which is certain to put pressure on food prices in the US. In other words, it appears that real economy risks, which are often wild cards, are not adequately factored into these “when might the wheels come off” exercises.

Are US Bonds the Next Widow Maker Trade?

One the markets that has been least easy to predict this year has been US bonds. The long term US bond bears, that are often monetarists at heart and believe QE will bring inflation, have been queuing up to short. Likewise, post-Keynesian’s have pointed at Japan and laughed about secular deleveraging and widow-maker trades.

The fact is, the bears have been wrong all year, and even with recent inflationary rumblings are still wrong.

Will Fossil Fuel Be the Subprime of This Cycle?

Ambrose Evans-Pritchard makes a compelling argument in his latest article: that the $5.4 trillion of investment poured into fossil fuel exploration and development projects over the last six years includes quite a lot of investments that will never show an adequate return. He argues that when that sorry fact starts to be recognized, the losses could be the wake-up call to investors who have shrugged off risk as financial assets climb to ever-more-implausible valuations.

Portuguese Bank Jitters Intrude on QE-Induced Euphoria

Despite unimpressive and often mixed economic data, market prices in a wide range of financial assets have continued to grind higher. And the results that cheered pundits are hard to square. For instance, Floyd Norris in the New York Times today scratches his head over how inconsistent recent employment gains are with the first quarter GDP contraction at an annualized 2/9% rate. It’s also hard to reconcile with reports of weak retail sales and falling in-store traffic. Similarly, China has become concerned enough about growth that it’s started pump priming again. Even so, car sales dropped by 3.4% in June. And in Japan, machinery orders plunged by 19% in May. And despite the recent discussion of Eurozone recovery, recent reports have put a dent in cheery forecasts.