Friday, April 17, 2015

Bloomberg media

So as a person who watches Bloomberg television channel often, and as someone who frequents the bloomberg.com website to update myself on the day's financial and market news, I was taken aback by something I noticed today, or rather something I didn't notice. One of the major news in the markets today, albeit with less impact, was an outage of the bloomberg terminals that caused a disruption for traders worldwide. Here is an excerpt from an article in today's Wall Street Journal (http://www.wsj.com/articles/bloomberg-terminals-go-down-globally-1429262782) 

"Bloomberg LP was hit by a massive computer-network outage Friday, forcing its terminals out of action for hours and leading to major disruptions for traders around the world who rely heavily on the machines.
The blackout, which started shortly after European markets opened, also caused the U.K. to postpone a scheduled multibillion buyback of government debt. The £3 billion ($4.5 billion) tender was rescheduled for the afternoon."
And here is an except from an article in today's New York Times (http://www.nytimes.com/2015/04/18/business/dealbook/bloomberg-terminals-outage.html?_r=0) - 
"The failure at Bloomberg, which provides data and trading services for 325,000 financial professionals around the world, effectively shut down some parts of the capital markets and forced traders to confront their level of reliance on the Bloomberg system."
Now, I was actually watching Bloomberg television channel this morning - almost for an hour just before the financial markets opened and Bloomberg never reported this news. I actually first found out when I accidentally switched channels to CNBC which had this "breaking news". I thought I might have missed this reporting on the Bloomberg channel when I was busy enjoying the taste of my morning coffee. But then I went to bloomberg.com and still didn't see this news anywhere. And now again in the evening, I checked the site and even googled for it - but I don't see it. I just don't see it. I don't know if it is buried somewhere in the website under the pile of news, but I don't see it.  
I have had great respect for bloomberg media, but if they did not report this news or under-reported it, then I am afraid that I just would have lost a little bit of respect for them. 

Thursday, April 16, 2015

Netflix

Netflix: is a company I admire; it’s product I enjoy; its stock I watch with envy. Just five years ago, a Netflix share was around $100. Today, it closed at around $560. That is a whopping 460% rise in the share price of the company. Just from the beginning of 2015 alone, the stock has risen more than 60% - that is, in the last 4 months.

This is a company where you could have the “felt” the growth over the years – a company that grew almost without any formidable competitor. I have to admit that I have been a Netflix customer for less than two years now, but even I “felt” it in this time period. As cable channels grow boring and repetitive filled with commercials every day, Netflix becomes interesting with ever changing content. Recently, I have also noticed that the content quality has vastly improved. What’s more? - For a crime/mystery/thriller fan like me, who is very much into the details of every scene and dialogue, the “rewind” option comes handy, which I don’t get it in regular TV. And that is just one lovely option amongst many.

Moreover, Netflix has a lot of room to grow in international markets and the company has tested only one kind of revenue streams so far – the subscription model. All this make me drool for this stock. And by the way, I have to admit that I have entered and exited this stock once with a small profit in the past. But I question myself: why did I exit so early? First of all, I entered this stock because of enormous growth potential. But I exited the stock (in hindsight too quickly – it was relatively a quick in and out) because of some of the same reasons why I won't enter again today –

·        The stock is trading at 130 times its earnings. That’s too high a ratio for me to be comfortable with.

·        I fear that the potential future growth in the international markets is over-estimated. Yes, in Europe, Japan, Australia and New Zealand, I see enormous room for growth. But in other Asian markets, I fear that Netflix might face a severe competition from piracy. Lack of proper high-speed broadband infrastructure in most of the Asian and African markets is not even discussed in Netflix’s strategy. And what about local content and their costs? And what about competitors in these international markets from local businesses? Like I said, I still see a lot of room for the growth in subscribers, but I just fear if the expectations are running too high that potentially could not be met due to the above mentioned reasons.

·        Competition is starting to pop up. I am amazed that Netflix has had too little competitors so far – who, by the way, were not even close to Netflix’s brand and growth. But I see that changing. Amazon Prime is a prime example. At first, I shrugged it off. But with their package model – where reduced rate (or free) retail shipping combined with video-streaming looks like it is working. Going forward, online shopping is going to be the norm, and amazon is well positioned to capture these twin markets of online shopping and video-streaming in one package offer. My opinion is that – currently, the pricing model of amazon is crippling its growth, but over-time, I think they might be able to work it out – especially given the fact they have multiple businesses under the same brand - which they can leverage.

·        Apple/HBO product could turn up to be another formidable competitor.

·        I tend to agree with people who say that Amazon or Apple/HBO need not necessarily cripple Netflix because the customers might go for both Netflix and amazon (or HBO) instead of choosing one among the many. But my problem is that this fact is already priced into the stock.  And what about more competitors? I am thinking that there is going to be many more companies before new competition fizzles out. I know Netflix has a first-mover advantage in the market, but the companies that will be entering this space in the future are ones who already have the infrastructure or will move so fast that it will be difficult to see a significant time-lag (remember, this is based on internet technology and not machine parts production).

 All this being said I still love Netflix. I so badly wanted in. In fact, an analyst recently mentioned that the stock could go to $900 a share. I might be completely wrong and would have missed a great opportunity, but because of its enormous price tag for a share where all the positives of the company are already priced in, I fear any negative can significantly bring down the stock price. Netflix has mentioned that they might do a stock split preceded by possible dilution – if they do, depending on the diluted price, I might look for a good entry point. But for now, I am going to sit on the sidelines while enjoying my Netflix shows.    

Monday, April 13, 2015

Monetary policy and financial stability

With very low (near zero) interest rate setting in many of the advanced economies, there have been many discussions recently (check this link) on if monetary policy should even be used as a tool to maintain financial stability? Many experts argue that any risks to financial stability is better handled through macro-prudential tools (such as regulations, oversight, capital reserve requirements etc.) and the monetary policy of setting interest rates and controlling money supply in the economy should be used only to achieve price stability and full employment.  They argue that any meager benefit one would get by using monetary policy tools to address the risks to financial stability (such as asset bubbles) is not worth the cost of losing price stability and/or full employment.

Now, in my view, there is partial truth to this, but only partial. There are lots academic papers that dwell into this, but we don’t have to go that far. Just by looking at our own bank statements, we could come to the conclusion that holding money in the bank today in, say for example, US, is guaranteed to give us a return that doesn't even exceed the inflation rate. In essence, this means that we are in a negative real interest rate setting. To put it in other words, holding money in a savings account today that barely gives 1% return annually is equivalent to losing the value of that money to inflation. So naturally, every individual is forced to chase assets that would give them a better yield. And how do they do it? More importantly what vehicles they have to do this? – stocks, bonds and real estate are the most commonly used vehicles by an average investor to make some returns on their capital a.k.a savings!

Now what is the basic definition of price inflation? – too many people chasing too few goods. So again, too many individual investors (a.ka. retail investors) chasing too few high performing assets inflates the price of these assets, thereby forming an asset bubble. And when asset bubbles form, many individual investors who were forced to invest in these assets, have a false sense of economic security – they see their net worth going up every day (not knowing why and not understanding the fundamentals) and start to take a lot of risk to further improve their net worth. It gives them a sense of comfort to take out loans (with the assets as the collateral and note: no amount of financial supervision can determine the "real" value of an asset other than the market value of the asset itself) and misallocate capital. This was one of the main reasons for the 2008 financial crisis (albeit that crisis had more to do with failure of regulators and financial supervisors to prevent banks from taking excessive risks where people who shouldn't have been given a loan were given a loan). But as you can see, monetary policy mistakes can also lead us to the same situation as monetary policy affects short term rates, which have an impact on your bank rates. In essence, a monetary policy that punishes savers is never a prudent policy in the long run. No nation or individual can survive indefinitely without adequate savings. And without a proper rate of return on savings for individuals, the misallocation of capital will continue to occur.

The problem currently is that monetary policy is in itself is seen as a solution to a financial crisis. It never should be that way. Monetary policy should only act as a cushion until fiscal policy catches up to recover the economy. The current zero interest rate environment should be seen as just that – a cushion and not a solution.

So to conclude, in my view, it is not whether monetary policy tools or macro-prudential tools should be used to address risks to financial stability, but rather both these tools should work in tandem to achieve an overall stable financial system. 

Thursday, April 9, 2015

Chinese stocks make me dizzy

I am extremely worried about the Chinese stock markets. The growth in the value of the Chinese stocks has been explosive and never seems to back down. For the last few months, I haven't seen any fundamentals supporting such growth in the Chinese stocks other than pure speculation - speculation that China would introduce some sort of stimulus to offset any weak economic performance. 

My guess is that part of the appreciation in Chinese stocks is because the market is young - meaning, there would probably be many newcomers to the Chinese stock market. And those newcomers, per my guess, are chasing the stocks. Is there a bubble forming in Chinese stocks? I think so. And probably it is a good time go get out. But with China's massive forex reserves, they so far have always beat any fundamental logic that would call for a correction in the Chinese stock prices. 

One of the best ways to prevent any massive bubbles in the stock market and to allow for a gradual market correction is for China to allow more appreciation of its currency. The sooner they do it, the better are the chances of preventing China from becoming another Japan. Normally, the story has been that China intervenes in the currency markets to keep its currency devalued. But recently that might have not been the case and instead the dollar's strength and europe's QE might have been the reasons for yuan's weakness more so than China's intervention in the currency markets itself. If so, China's intervention might be needed again- but this time not to weaken the yuan but to strengthen it by selling dollars in the open market. If that is done, it would be beneficial to both the US and China and in fact the world economy as a whole as that would adjust the imbalances to an extent that we are starting to see in the world economy today. 

Wednesday, March 18, 2015

March 18 Prattle

The Fed did exactly what I had expected, but the markets didn't .. Poor me :( 

Speculative trading, market over-reaction and fear-mongering crushes any fundamentals or logic in today's market.  

Oh, by the way, what's wrong with the guy in the Fox news channel who keeps comparing Israel's president to Winston Churchill and the US president to Neville Chamberlain? And he calls Israel's ambassador to US on his show to second this opinion of his? Mate - you might not like your president, but he is still YOUR president! Imagine Johnny telling Kevin repeatedly that his wife is not as beautiful as Kevin's and asking Kevin: "Is it not true, Kevin? Is it not true Kevin?" - and that too on national television. Shameful! (Oh, and a disclaimer: I have no political bias.)

Oh and the other news today - President Obama endorsing a view of making voting mandatory! That's a brilliant view, in my opinion. People who argue for freedom of choice to not vote in an election are mistaken! No one has the "right" or "freedom" of "choice" to drink and drive. Why? - because not that anyone cares much about the person who is drunk, but more about the fact that a drunk person driving could put other innocent people in harm by causing accidents. It's the same logic. Few people in a democracy electing a crazy bloke to very powerful positions whose actions can influence the country as a whole is quite dangerous. If everyone votes, we could ateast know the true democratic wish of the people. 

A Washington times article( http://www.washingtontimes.com/news/2015/mar/18/obama-calls-mandatory-voting-us/ ) says that the general election turn out for the 2014 midterm elections was just a meager 36.4% and for the 2012 presidential election - just 58.2%. So much for the world's oldest democracy. This is a joke! Folks - vote! It's your RIGHT that you must exercise for the well being of the society! - and that includes you! As a prime example, you could see people in India thronging to the polling station whenever an election is held these days. There used to be times when the voting percent was just 40% or 50% or 60% there, but recently the numbers are 70% and 80% in many constituencies and that is already showing great results in many states and even at the national level - you could how some parties are trounced these days because of their corruption and what-not and the kinda mandate that people have been giving to effect change on the ground! (well, they still have to vote for the lesser devil, but that's altogether a different matter!) All this being said, voting should also be made easier using newer technologies rather than punishing people to stand in long queues! More work needs to be done in that area!






Tuesday, March 17, 2015

If I were Fed

I am just thinking loud (literally) - 

1. Will the Fed provide a stronger statement that it is ready to raise rates this year?

2. If it does, then gold goes down (one can short gold then), else gold skyrockets atleast temporarily (means buy gold).

3. Or will the Fed be vague?

4. Inflation has been going down recently (per data) - meaning, rates should not be raised

5. But disinflation could be directly because of low oil prices.

6. So higher interest rates means stronger dollar and even more lower oil price.

7. Retails sales, housing starts, industrial output, exports have all been weak recently in US.

8. But job growth has been pretty solid for the past 12 months and keeps at a good pace.

9. Almost all countries around the world are lowering their rates.

10. Increasing rates in US at this time could cause extreme currency volatility in other countries. And if any country defaults because of this, then that could destabilize the global economy.

11. Which countries are at risk then? Some Asian countries like Indonesia, but I think Asia will manage. Worried about a couple of Latin American countries - especially Brazil. And then there is Russia. 

12, China, India, Singapore, Europe, Japan should benefit from an increased US interest rate...temporary outflows of money, but that will be more than well compensated by export growth and lower commodity prices. So no worries with these countries.

13. Now what's the problem if interest rates are not raised this year?  - then probably a global currency war, stock market growth (too much?), income equality and spots of bubbles.

14. What if oil prices stabilize around $65 - 70 by the end of summer? Possible? Maybe .. may be not.

15. In that case, we can see PPI and CPI pick up. And inflation when it starts to run, may run faster than many would anticipate. So will Fed be behind the curve then? May be.

16. When will oil price pick up? Not until the price goes down to such a level where some North American Shale producers would drastically cut back their production or altogether stop their production.

17. At what price level will that happen? - we are almost nearing that price level.

18. So if I were Fed, will I support oil prices by not raising rates and thereby giving any possibility to inflation.

19. I think if I were Fed, I might want to force someone (OPEC or North American Shale producers) to blink sooner rather than later - which means forcing the oil price down further for someone to cut back on their production to such levels that by the later half of this year, oil prices stabilize. Sigh! Worst thing to do - but looks like OPEC will continue this policy of over production well beyond their June meeting - as long as someone blinks. So if that is what it has to come to, why not force the outcome earlier than later - because the longer the oil stays below a certain level, deflation might become a real threat in 2015. No one wants a high oil price, but no one wants a deflation-inducing extremely low oil price environment as well. It needs to stabilize somewhere in between.

20. Now why is the retail sales and other data so low when job growth is solid and oil price is so low. My guess is savings! So if people are saving more, then should the Fed force them to spend by shooting up the stock market or should savings be encouraged by increasing the rates? 

21. Even from an international standpoint, US might be better off accepting a stronger dollar (given the situation) rather than engaging in some form of currency war - which will cause the stock market to go further up and commodities also to shoot upwards a lot - which will all come crashing down sometime in the future if not allowed a gradual correction starting from this year.

Tough call at this moment, but if I were Fed, probably I would make it clear that rates are going to start raising this year, albeit slowly - thereby making sure to the business community  and to the individuals that the rates would still be low for them - with the positive momentum and bull market continuing to run, but would increase gradually over the course of the next few years. Markets may swing one way or the other and may even correct itself to an extent, but this should dampen wild swings in due course as more economic data comes out in the coming months.

So can I make my investments accordingly?..but all this is based on "If I were Fed". So I am back to square one on - "what should I do?" :)

Tuesday, March 10, 2015

King Dollar & The Fed


The US dollar has been skyrocketing. It is up against almost all major currencies and is up more than 20% against the euro from the start of 2015. This has put enormous downward pressure on the prices of various commodities (as most commodities are bought and sold in US dollars in the international markets). The US economy has been clearly showing considerable strength for the past many months (especially when looked from the net jobs being added every month in the US). So with the dollar strengthening (especially at a time when other countries are trying to devalue their currencies to fight off disinflation or deflation forces), the question has arisen if the US Federal Reserve should raise the federal funds rate?

Now, there are arguments from many experts saying that the Fed should wait to see considerable inflation (which is running way below Fed’s target of 2%) before the rates are raised. And many argue that the wage growth is still tepid despite strong growth in the number of monthly jobs being added.

I, for one, believe that the federal funds rate should be raised, but not in summer and instead in fall of this year. Below I note some reasons for that:

1.      Wage growth is shortly about to arrive. I say this because from the recession of 2008, workers have been denied a pay raise. That lag is now closing. With an improving economy, companies will be more willing to raise the pay that is long overdue for its workers. We are already seeing that in companies like Walmart, TJ Maxx etc.

2.      More hiring, even with an assumed slower wage growth, should increase the consumer prices as measured by the consumer price index in the coming months. With winter behind and spring and summer to come, there would only be increased business activity and more hiring in the coming months. With more people having disposable income, this should only increase retail spending thereby giving a boost to the CPI.

3.      Oil prices, in my view, have stabilized a bit. There might be one more downfall of oil towards the $40 - $45 range, but that’s it and even that downfall will be short lived. Wit Europe’s QE and other nations’ interest rate cuts, demand for oil should increase to a level where prices may stabilize around $55 - $65 range by summer (and not to mention the eventual reduction in oil output from global players in 2015 due to the low oil prices). This increase in oil price should give inflation a mild boost in the coming months.

4.      As dollar becomes stronger, it might add to downward pressure on the oil prices, but data from Europe signal that the euro region is on a growth trajectory. And I believe Europe’s QE should act as a cushion against deflationary forces from that region – though disinflation could be very well be likely in 2015.

5.      It is better to increase the federal funds rate in a gradual fashion from near zero rather than to give a jolt to the economy by allowing it to heat up and raising in a more aggressive fashion (I know some banks have been calling for such a measure, but that will play only to the benefit of banks who play the equity markets to make a lot of money. Given the global scenario, such a measure will not work well for the general economy).

6.      Leaving interest rates near zero beyond 2015 will likely result in asset bubbles. Depending on where the bubble is, the burst might be disastrous for the general economy.

7.      Even if interest rates are raised starting from the fall of 2015, it would still be low – leaving enough rooms for businesses to continue borrowing for their business activities and for individuals to borrow for purposes like housing loans, vehicle loans etc. Remember we are at a near zero interest rate now and it is going to take years of monetary policy normalization (including all the QE money printed in the last few years) before the rates are at a level where we want them to be in the longer run.

Now, I say that the federal funds rate should be increased in fall rather than summer because of a particular statistic that I don’t agree - And that is NAIRU (Non Accelerating Inflation Rate of Unemployment) which the Fed believes is in the 5 – 5.5 range – meaning unemployment below this range is supposed to trigger inflation at a faster rate. Currently the unemployment rate is 5.5% and analysts believe that the number would be close to 5% by summer putting it will within the range where the Fed should act to raise interest rates. But I disagree with that range. Since we are coming out a massive recession, and with the oil sector being hit, and the fact that the unemployment number is not very accurate and generally has potential to be more on the upside, I would wait until the unemployment falls within the 4.5% – 5% range before starting the normalization process. And that would mean fall of 2015.

In the meantime, I expect gold to drop further, Fed to drop the word “patience” in the March meeting, dollar to become even stronger, Germany to grow and oil prices find a floor sooner than later.