Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

BEARNOBULL’S WEEKENDER

FactSet StreetAccount Summary – US Weekly Recap: Dow +0.45%, S&P +0.31%, Nasdaq +0.89%, Russell 2000 +0.73%

SENTIMENT WATCH
Value of the global art market hits record €51bn in 2014

ChartsWhen Pablo Picasso’s “Women of Algiers (Version O)” fetched $179.4m at Christie’s on Monday it became the most expensive artwork to be sold at auction.

In the same sale, Alberto Giacometti’s life-sized sculpture “Pointing Man” sold for $141.3m making it the most expensive sculpture sold at auction.

(…) the total value of the global art market surpassed €51bn in 2014, a 7 per cent increase on the previous year and its highest ever level, according to estimates in the 2015 Art Market Report published by the European Fine Art Foundation. Lots sold for more than €1m accounted for 48 per cent of the value of the fine art market. (…)

The volume of sales also rose 6 per cent in 2014, with 39m works sold. This, however, was less than the peak reached in 2007. About 1,530 lots worth more than €1m were sold at auction, a rise of more than 16 per cent on 2013. (…)

But Does Picasso Sale Signal a Top for Stocks?

(…) Whether we’re in a bubble or even an overvalued market is a worthy debate. But these examples are not proof of overvaluation or really much of anything else. They are anecdotal observations, one-off transactions in a ludicrously small market dominated by a ludicrously wealthy clientele. Given the choice between quantifiable data or anecdotal tidbits, you should always choose the data.  So no, these sales are not proof of anything other than the simple truth that some people have very large bank accounts that they are unable to exhaust through normal profligacy or by paying insane prices for a handful of unique objects of art.

There are many ways to understand why these stunning nine-figure transactions are not investment-sentiment indicators.

Anecdotes can tell you about a small subset of investors or even individuals, but they don’t measure the crowd. This is important, because sentiment is a yardstick of the crowd’s emotional state. Collectively, what are the masses thinking, saying and most importantly doing with their money? There are many ways to measure sentiment, and the best of these avoid anecdotes.

Some traders rely on sentiment surveys, especially the American Association of Individual Investors’ bull-bear readings. I have yet to find a whole lot of value in this metric aside from those rare times when the readings are at extremes. Survey responses tend to swing wildly in response to what just happened, and they typically lag behind market cycles.

If you are going to use AAII survey data, I prefer the asset allocation survey. During the past 23 years, individual investors on average have held a portfolio made up of 60 percent stocks. As of April, stocks and stock mutual funds made up 67.9 percent of individual portfolios, according to AAII. That is a somewhat higher than the average, but below the extremes seen in the past. In 1999-2000, equity holdings were 17 percent higher than the mean, while in 2005-07 they were 10 percent more.

There are lots of other ways to measure sentiment: the VIX (sometimes known as the fear index), mutual-fund flows, put-call ratios, the Arms Index (a technical measure of advancing and declining shares), the percentage of stocks reaching new highs and lows, the percentage of New York Stock Exchange shares trading below their (choose one) 50- or 200-day moving averages and so forth. For the most part, these kinds of sentiment readings tend to be quite noisy while offering no definitive insight much of the time.

Back to the artwork: There are more than 7 billion people in the world. There are almost 320 million people in the U.S. How many folks can afford to spend almost $200 million on a Picasso or $150 million on a Giacometti? There are about 2,300 billionaires in the world. That pretty much defines the size of the market for these sorts of collectibles.

That means these record-breaking art auctions may say something about the rarefied world occupied by the super-rich, but their informational value is of little importance to market sentiment. So stay calm and don’t panic just yet.

Fingers crossed Maybe.

BID image

Ghost But let’s consider other investor sentiment gauges, courtesy of Short Side of Long:

Retail investors currently hold least amount of cash since 2000

AAII Cash Allocations

Households equity exposure remains 2nd highest since WW2

Newsletter writers & finance advisors are extremely complacent

Investor Intelligence Bears
Global fund managers continue to be highly overweight equities
Merrill Lynch Fund Managers Global Equity Weighting

Nerd smile Not much fire power left…

Epsilon Theory: More Probable Than Not

The only thing that I ask from this group today and the American people is to judge me from this day forward. That’s all I can ask for.

– Alex Rodriguez press conference, February 17, 2009, regarding his steroid use from 2001 – 2003.

I’m ready to put this chapter behind me and play some ball.

– Alex Rodriguez “apology” letter, February 17, 2015, regarding his steroid use from 2010 – 2012.

Brady:                 I would never do something that was outside of the rules of play. I would never have someone do something that I thought was outside the rules.

Reporter:          So you never knowingly played with a football that was under 12.5 pounds?

Brady:                 No.

– Tom Brady press conference, January 22, 2015.

Now, we all know that air pressure is a function of the atmospheric conditions. If there is activity in the ball relative to the rubbing process I think that explains why when we gave them to the official and the officials put them at let’s say 12.5 … once the ball reached its equilibrium state it’s probably closer to 11.5.

– noted physicist and football coach Bill Belichick, January 24, 2015.

That is an allegation [FOMC quashing their own General Counsel’s investigation of leaks] that I don’t believe has any basis in fact. I’m not going to go into any detail but I don’t know where that piece of information could possibly have come from.

– Janet Yellen press conference, March 18, 2015.

The Board’s Inspector General and the Department of Justice are in the midst of an investigation into this matter [FOMC leaks to journalists and market consultants]. We are cooperating fully with them and look forward to the results of their investigation. … I had one meeting with Ms. Regina Schleiger of Medley Global Advisors during the period covered by the staff review. As Vice Chair of the Board, I met with Ms. Schleiger on June 11, 2012, to hear her perspectives on international developments.

– Janet Yellen letter to Rep. Jeb Hensarling, May 4, 2015.

Mr. Bernanke said that he was sensitive to the public’s anxieties about the “revolving door” between Wall Street and Washington and chose to go to Citadel, in part, because “it is not regulated by the Federal Reserve and I won’t be doing any lobbying of any sort.” He added that he had been recruited by banks but declined their offers. “I wanted to avoid the appearance of a conflict of interest,” he said. “I ruled out any firm that was regulated by the Federal Reserve.”

– New York Times, April 16, 2015.

Senator:             Fletcher, there’s an old saying, to the victors belong the spoils.

Fletcher:            There’s another old saying, Senator. Don’t piss down my back and tell me it’s raining.

– “The Outlaw Josey Wales” (1976)

(…) I’ve inherited a lot of my father’s traits, and one of them is his intolerance for this mendacity of language, this intentional failure to call things by their proper names, this linguistic exercise in self-puffery and cover-up. Unfortunately for me and anyone else who shares this peculiar sensitivity, mendacity of language has never been more rampant in all of our social worlds, from sports to politics to markets.

With the advent of always-on mass media that projects the illusion of a one-to-one personal connection with cartoons like “Tom Brady” and “Jim Cramer” – corporate entities that are connected with but distinct from human beings like Tom Brady and Jim Cramer – language intentionally designed to influence rather than inform is now ubiquitous in the business of sports and politics and markets Why? Because it works. It delays sanctions until after you play in the Super Bowl, until after you sign a quarter of a billion dollar contract. It deflects attention until after your term in office is over, until after you cash in with a book deal and hedge fund consultancy.

To use the ponderous, legally parsed language of the NFL’s Wells Report on “deflate-gate”, language which I think wonderfully encapsulates the pinched spirit of our age, here are four things that I believe are “more probable than not”:

1) Alex Rodriguez has routinely used steroids and PED’s of various stripes since he was a sophomore in high school.

2) Tom Brady has routinely bribed equipment managers with autographed jerseys and new shoes in order to receive footballs deflated well below what he knew was the legal limit.

3) Janet Yellen has routinely leaked market-moving information to favored private sector conduits, and has also sought to quash internal investigations of same.

4) Ben Bernanke is for sale to the highest bidder.

But here’s the thing. I’m not that worked up about ANY of these issues. Yes, A-Rod has been juicing for 25 years, and Tom Terrific breaks the rules he thinks he can get away with breaking. Okay. Them and about 5,000 other professional athletes. Janet Yellen, the prime author of Fed “communication policy” (the intentional use of words to influence market expectations), leaks her viewpoint as part of that communication policy and then tries to kill an internal investigation. Okay. Her and every other senior politician and bureaucrat in the history of human civilization. As for Bernanke … a former President of the United States and the leading candidate to be the next President of the United States have personally received more than $100 million in “donations” from mega-corporations and foreign governments, and I’m supposed to be outraged about Ben Bernanke cashing a big check from Ken Griffin?

What I AM worked up about, though, is the mendacity … the utter lack of character and authenticity … on full display in ALL of these cases. All of these cases and so many, many more.

You want to go work for Citadel? Fine, go work for Citadel. But OWN IT. Don’t insult my … I’m not even going to say intelligence, because it’s not an assault on intelligence we’re talking about here … don’t insult my 50 years of life as a reasonably self-aware human being by claiming that you’re taking the high road here by working for Citadel instead of, say, JP Morgan. I mean, the notion that access to the Fed’s regulatory authority over big banks is somehow the defining characteristic of why Ben Bernanke is a sought-after commodity, or that any public outrage here is clearly misplaced because, after all, he won’t be a – gasp! – bank lobbyist, per se … it’s all just horrifically insulting to anyone with the common sense to know that the sky is blue, that 2 + 2 = 4, and that you don’t meaningfully change the air pressure in footballs by rubbing them vigorously. It’s mendacity and inauthenticity in the first degree.

You want to embark on a conscious policy of manipulating market expectations (yes, manipulating is a strong word, but it’s exactly accurate) by planting a carefully constructed Narrative with journalists like Jon Hilsenrath at the Wall Street Journal and consultants like Regina Schleiger at Medley, journalists and consultants who you know will be influential precisely because they are trumpeting their exclusive access to you? Fine. I totally get it. Once you’ve hit zero on short rates and pushed your balance sheet up over $4 trillion in LSAP’s, jawboning is the only bullet you’ve got left in the gun. But OWN IT. Don’t tell me that you’re meeting with Regina Schleiger at Medley because you want to hear HER perspectives on monetary policy! I’m sure that Ms. Schleiger is a very smart person. I’m sure that she is an insightful observer of the international economic scene. But – and I’m trying to say this in the kindest possible way – there’s not 1 in 100,000 investors who even knows who Ms. Schleiger is, and fewer still who would be willing to pay money or time to hear her personal opinion about the proper course of monetary policy. The exception, we are told, is the Chair of the Federal Reserve, in many respects the most powerful person on the planet … she, of course, is terribly keen to hear Ms. Schleiger’s views on international economics.

And yes, I know that Fed governors have these consultant meetings all the time. I know that their guests do most of the talking. But I also know, because I’ve done it, that professional investors and allocators are willing to pay tens of thousands of dollars to consultants like Medley, solely to glean a scrap of insight as to what the Fed is thinking, solely to be a willing host of the Narrative virus that the Fed is trying to spread. More to the point, Janet Yellen knows it, too, which is why she has these meetings. The act itself is not a horrible thing … not for A-Rod, not for Brady, not for Yellen, and not for Bernanke. It’s not a crime, or at least not a crime that will shame your children or your fan base. Certainly it’s a difficult and unpleasant thing when you’re revealed, because now you’ve got to deal with the Roger Goodell’s and the Bud Selig’s and the Jeb Hensarling’s and the Elizabeth Warren’s of the world – petty tyrants, all – but you knew there was this chance when you made the decision to break the rules, (or the “rules” in Bernanke’s and 2009 A-Rod’s case). But don’t turn a difficult situation into a personal capitulation to mendacity. Far better to own it.

Believe it or not, I’m not just venting my spleen at the outrageous displays of mendacity that assault us at every turn. I think that there’s an enormous political opportunity today (and I mean political in the broadest sense of the word, a sense that clearly includes the Fed, and arguably includes the NFL and MLB) to embrace authenticity, even if you are authentically an unlikable or – to use the insult du jour – a “polarizing” person. Not only am I convinced that we are each more likely to be successful in our chosen field when acting authentically (don’t you think that if Tiger Woods had embraced his authentically heel-ish nature in 2009, grown a goatee and moved to a casino suite in Vegas, that he’d still be winning majors today?), but also specifically within the chosen field of politics I think there is such a hunger for authenticity that ANY display of honest conviction when confronted with adversity, even if the adversity is well-deserved for breaking a rule, quickly becomes an enormous asset. Maybe this will turn out to be a more interesting election in 2016 than we think. Then again, with the vast campaign coffers already accumulated by Clintonâ„¢ and Bushâ„¢, two profoundly inauthentic corporate entities, maybe not. 

Sigh. I know I’m not going to change anything by writing about this stuff, any more than my father was going to change a sports commentator’s patter by yelling at the TV. Like my father, though, I just can’t help myself. It’s never easy to be authentic. It’s never easy to call things by their proper names. It’s never easy to own it. But here in the Golden Age of the Central Banker, it’s never been more important. Or more politically savvy.

Auto The View from the Front Seat of the Google Self-Driving Car After 1.7 million miles we’ve learned a lot — not just about our system but how humans drive, too.

NEW$ & VIEW$ (15 MAY 2015): Deflation not dead; No Chinese QE.

Economists’ Forecast: Here We Grow Again WSJ Survey: Forecasters expect the U.S. economy contracted during the first quarter, much like 2014. They expect a rebound during the rest of the year, much like 2014.

(…) the panel, on average, sees annualized economic growth of 2.8% in the second quarter, supported by stronger job gains and wage growth.

They also see the drag from weak trade and a strong dollar dissipating by the second half, delivering average economic growth at a 3% pace.

The survey of 62 economists, not all of whom answered every question, showed a widespread expectation that consumers would start spending again after several months of avoiding the mall. (…)

The economists’ first-quarter rethink brought down the forecast for all of 2015 to 2.2% from 2.7% expected in the April survey. That means growth for all of 2015 is expected to be another disappointment, falling below 2014’s 2.4% rate instead of eclipsing it as many economists originally expected. (…)

In the May survey, 73% of the economists said the first rate increase will be announced at the Fed’s September meeting. That’s up considerably from the 19% who expected that in the January survey.

Less than 7% of panelists now expect a June rate rise versus 50% who thought that in January.

The U.S. Economy Just Had Its Worst Month Since the Recession The U.S. economy in March contracted at the worst pace since the financial crisis, a private-sector gauge showed.

(…) Macroeconomic Advisers on Thursday said its monthly estimate showed GDP fell an inflation-adjusted 1% in March, the largest drop since December 2008, “when the U.S. economy was in the throes of recession,” the firm said. Monthly GDP had climbed 0.3% in February and ticked up 0.1% in January after falling 0.4% in December, the firm said.

The key reason not to worry too much: The contraction reflected a drop in net exports related to the resolution of a labor dispute at West Coast ports, the firm said.

“Because the decline in monthly GDP was driven by a surge in imports that was probably unrelated to current production, we are suspicious of it and believe it overstates the underlying weakness in the economy,” Macroeconomic Advisers said in a note to clients.

Let’s pray there was indeed an overstatement. Question is: how much?

(…) That means forecasters can’t necessarily count on a rebound in the latter part of the year, the Fed economists say.

“With a second year in a row of unusually weak first-quarter growth, some analysts have argued that there may be residual seasonality in the GDP data, that is, a predictable seasonal pattern remains in the published data,” they write in a research note.

“This argument implies that there is predictable weakness in first-quarter GDP growth that will be followed by predictable strength in the subsequent three quarters of the year,” the authors add. “Our analysis here does not find convincing evidence of material residual seasonality in GDP in recent years.”

The findings run counter to recent research from the Philadelphia Fed, which found economists could do a better job at making seasonal adjustments to avoid uncharacteristic winter-quarter weakness.

Instead, the Fed board researchers find “no firm evidence” that the soft start to economic growth in 2015 “primarily reflects residual seasonality.”

U.S. Producer Prices Fall 0.4% Latest sign of persistently low inflation across the economy

Core prices, which exclude volatile food and energy categories, fell 0.2%. When excluding food, energy and trade services, the index rose 0.1%.

Economists surveyed by The Wall Street Journal had expected both overall and core prices would increase 0.1%.

The monthly gauge is now down in five of the past six months. From a year earlier, overall producer prices have dropped 1.3%, and core prices are up 0.8%. (…)

The price index for intermediate demand, which tracks costs of products used as inputs for production, fell 1.1% in April, its ninth straight decline, and was down 7.8% from a year earlier, the biggest drop since September 2009.

The PPI for Final Demand Goods ex-Food, ex-Energy declined 0.1% last month after rising 0.2% in March, the only up month since September 2014. During the last 7 months, this price index for U.S. produced core goods has declined at a 0.7% annualized rate. Another index, Personal Consumption Goods less Energy, which measures prices for finished consumer goods, has dropped at a 2.4% annual rate in the last 3 months. Haver Analytics’ chart shows that services prices are also slowing.

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We know that import prices have been weak since last fall. They could have been even weaker:

After Western Port Settlement, the Deluge — of Cheap Imports

(…) As a backlog of cheap imported goods arrives on store shelves, consumer price pressures may weaken again.

(…) goods prices unexpectedly started to firm in the first quarter, just when they should have been weakening further. In fact, core goods prices outpaced core service prices in both February and March.

The third line in the chart, which denotes the supplier deliveries subcomponent of the manufacturing ISM survey, may explain why this occurred. The supplier deliveries series rises when delivery times increase. This is based on the assumption that a fast-growing economy tends to be plagued by bottlenecks and delays, whereas turnaround times shorten as capacity is idled in a slower growth scenario.

The sizeable increase in delivery times early this year coincided closely with the timing of the port dispute, and the resulting shortage of imported goods reduced the incentive for retailers to lower prices in order to move inventory (with a modest lag). Thus, the port bottleneck also halted at least some of the transition mechanism from the stronger dollar.

Goods Prices Accelerated as Port Backlogs Increased

Falling Import Prices Passing Through to Wholesale Inflation

Now that the ports are working through their backlogs, cheap imported goods are arriving on store shelves (again with a modest lag). This was evident in the latest data on import prices, which fell further, as well as the April PPI data, which missed consensus expectations in both the headline and core. With the usual lag, this price weakness is likely to materialize in the CPI over the next few months. That risks eroding the recent, modest reacceleration in the core from 1.6 percent (year on year) as of year-end 2014 to 1.8 percent as reported in March.

If this occurs, it could reduce policy makers’ confidence that inflation is indeed drifting back toward their target — and at the margin it gives them the luxury of waiting a bit longer to initiate liftoff.   

PBOC Says No Need for QE Despite More Pressure on Economy China is likely to shy away from aggressive stimulus to revitalize its slowing economy

China’s economy faces downward pressure in the short term, but there is no need to use quantitative easing to aggressively boost liquidity, the nation’s central bank said Friday.

The People’s Bank of China in its first-quarter monetary-policy report said mounting levels of debt have limited Beijing’s ability to use government-led investment to stimulate the economy. (…)

The central bank in its latest monetary-policy report reiterated it would continue its prudent monetary policy, maintain appropriate liquidity levels and keep credit growth steady.

It also said the domestic liquidity condition was affected by a stronger U.S. dollar drawing capital out of the country. (…)

The PBOC said in the report the country’s first-quarter growth was within a reasonable range and price levels were likely to remain low. (…)

US oil chief vows shale will bounce back Continental Resources’ chief reacts to ‘gloating’ Saudis

One of the leading figures of the US shale revolution insisted the slowdown in US shale was a temporary phenomenon, rejecting claims by Saudi Arabia that it is succeeding in squeezing American oil producers.

Harold Hamm, chief executive of Continental Resources, said he disagreed with claims by a Saudi official, reported in the Financial Times , that the lower oil price had deterred investment in higher-cost sources of oil such as shale.

He also argued that the Saudi comments would likely strengthen political support in the US for a relaxation of the country’s decades-old ban on crude oil exports. (…)

In his interview with the FT, Mr Hamm reiterated his view that a WTI price of about $70 per barrel, up from about $61 today, would be enough to stimulate increased activity and production growth. (…)

Bond yields challenge US stock valuations Ageing equity bull run requires revenue boost

(…) “What has been scary about the last couple of weeks is that rates have been rising without a clear improvement in the economy,” Mr Koesterich says. “That is a much more dangerous environment for stocks.”