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Investors, financiers and financial analysts do business in a governmentally constructed funhouse. The interior décor features unconventional mirrors. Concave and convex, they can make a short yield look taller but they can’t make that illusion pay cash. Which fact brings us back to the universal thirst for income and to the corporate structures that exist to slake it.
At America's big banks, the live-in regulators seem almost to outnumber the paid help. A risk-averse cadre are these government overseers. Good, safe loans are what they want. Enter here a new real estate finance company with designs on the lunch that banks no longer seem to have permission to eat.
No bull stock market is complete before the debut of the kind of equity that's valued on the quality of its narrative. "The road is better than the inn," wrote the immortal Cervantes centuries before the Twitter IPO. Herewith, a review of the new crop of story stocks.
If gold finishes the year above $1,675 an ounce, Trey Reik reminded the conference, 2013 would mark the 13th consecutive year of a bull market that many have chosen to forget. What caused it? Lipstick on the collar It's been a bumper year for private equity and the bank debt that finances it. The Fed leaves its telltale mark.
By the looks of things, the post-Bernanke Federal Reserve will be much like the Bernanke Federal Reserve, except, perhaps, more open-handed. The ideal hedge against the possible consequences of an overly aggressive monetary policy would be a value-laden equity that could prosper in any macroeconomic setting but could shine in an inflationary one. Herewith, candidates to fill the bill.
From zero to 60 miles per hour was once the test of a thoroughbred-racing machine. From the original sticker price to the tens of millions of dollars is the new standard for the age of QE. As most everyone knows, the prices of tangible assets have taken flight. Why? is the question before the house.
The more vexingly slow the rate of economic growth, the greater the pressure to legislate, regulate and stimulate. And the more heavy-handed the federal response to unsatisfactory growth, the smaller the scope for markets to operate, including the all-important markets in money and credit. Free interest rates, we say; suppress the central bankers.
To judge by the market in volatility, a warm glow of hope is suffusing the stock market. Exchange-traded notes that appreciate when stock-market volatility subsides have returned 71% in the year to date. However, we think, tranquility is not for this era of threatened government defaults and actual government monetary manipulation.
On Sept. 19, a survey of investor sentiment uncovered a rare meeting of the minds: Everyone was bullish on stocks. This arresting fact we take as our cue to update an old theme. Sell bonds, buy blue chips, this publication counseled at intervals in 2010-11. An answer to the timely question, "What now?"
Over the past three months, the Bank of England, the Swiss National Bank and the European Central Bank have reduced their assets by a grand total of $128.2 billion. But the Fed and the Bank of Japan have more than compensated. Thanks to low interest rates, home prices are rising wherever English is spoken and even some places where it isn't.
On the occasion of the fifth anniversary of the 2008 financial upheaval, the CEO of Morgan Stanley, James P. Gorman, told the TV cameras, "I would say the probability of it happening again in our lifetime is as close to zero as I can imagine." We write to dispute that contention.
Earlier this month, Jason Kidd bought $500,000 worth of the team of which he's the head coach, the Brooklyn Nets of the National Basketball Association. How different things might have been had he invested in the company that owns a portion of the team rather than the team itself.
When this publication dropped tools to head to the beach last month, emerging equity markets were still standing. Returning to the office, we find that they—and their currencies and bonds—are recumbent. Some are prostrate. Herewith, a survey of one near perfectly flattened branch.
Since May, when the updraft in mortgage interest rates began, home-building stocks have fallen by as much as 30%. Sales of new, single-family homes have dropped off, and the rate of rise in house prices has leveled off. All of which frames the continued rise in the share price of a certain specialty retailer.
To the readers (and potential readers) of Grant’s:
The attached anthology of Grant’s pieces, both ancient and modern, is not only for you, but also for your friends—and co-workers, clients, classmates, shipmates, brothers-in-law and maids-of-honor, too. Please pass it along, with our compliments, to any and all prospective members of the greater Grant’s family.
We resume publication with the issue dated Sept. 6, 2013.
In its fair and balanced coverage of U.S. monetary policy, this publication censures the Fed for its downward suppression of interest rates. Yet, equally, we extoll the prudent exploitation of that public-policy blunder for private gain. Enter—or rather, re-enter—a certain value-laden real estate finance company.
One day soon, banks will have on deposit at the Federal Reserve $2 trillion more than the rules require them to hold, a mountain of excess reserves that could, at the outer limit of what is theoretically possible in money and banking, support $20 trillion of new lending. What is the meaning of this imminent fact?
We humans want what we want when we want it. To salve the pain of delayed gratification, we ask for compensation, and we got it too, until ZIRP came along. It would be nice to know where interest rates are going. It would even be nice to know what they mean—a humbler, attainable aspiration.
Only last month, stocks and real estate and other income-producing assets were capitalized for a 2% 10-year Treasury yield. But if 2% was a fake rate of interest, the valuations deriving from 2% were likewise ersatz. Thus, the world is making adjustments. Interest rates, causes and consequences, is the subject at hand. Subsidiary points of focus include monetary management and—a somewhat lengthier topic—monetary mismanagement. For the sake of his always fragile mental health, Mr. Market might recall a relevant precedent to today’s bond upheaval. Our plan of action is to place today’s turmoil in historical context, to review the dramatic events of recent weeks and, most important, to propose a course of investment action suitable for the occasion.
In the second quarter, the net asset value of the portfolio that Ben S. Bernanke manages declined by one-third of 1%. In contrast, the net asset value of the portfolio that Bill Gross manages declined by 5.2%. How did the chairman outperform Gross? Footnotes to the Fed’s H.4.1 report reveal Bernanke’s secret.
Many a financial institution has been rooting for a normalized yield curve. The ZIRP-y structure of rates in place punishes them on both sides of the balance sheet. Low rates mean that assets yield less and liabilities cost more. Rising rates deliver a double measure of relief. Who stands to benefit?
Herewith an update on China (sinking), Australia (sympathetically sinking), and a handful of Grant's short-sale names (also sinking, except for the one that soared). Our longstanding China backstory has lately moved front and center. China's banking and credit structures are evidently cracking.
You need gray hair or a library card (or a subscription to Grant's) to know that the gold value of the dollar was fixed as recently as 1971. You need a good memory to recall the uproar that greeted Chairman Ben S. Bernanke's helicopter-money manifesto in 2002. We live in the midst of a monetary revolution, though few seem to know it.
According to data from Green Street Advisors, average office nominal cap rates stand at 5.6%, down from 8.8% in April 2009. The current average nominal cap rate is lower than any seen before the fatally optimistic era of 2006-2007. Herewith a comparative tale of weird, ZIRP-induced cap rates in thriving Austin and not-so-thriving northern New Jersey.
Measured against the dollar over the past eight months, the yen has fallen by 24% while the renminbi has appreciated by 3% and the won has depreciated by 1%. The Ph.D. standard surely has no finer friends than the monetary elite in the world's No.3 economy. Evidently, money printing is the cross-cultural cure-all.
A certain trust, priced to deliver a very temporary double-digit dividend yield is Exhibit A. Junk bonds, sovereign debt and a certain financial institution comprise Exhibits B through one-loses-count. Now begins a new installment in the chronicles of the great yield famine.
In the first quarter, falling mortgage-backed securities prices dented the book value of two of the biggest mortgage REITs, while a third mortgage REIT, tiny by comparison, sailed through almost un-dinged. Which of the three is the best candidate to continue to deliver yields in the low to mid-double digits is the topic at hand.
The sound you hear isn't a snowbound driver futilely spinning his wheels (it's May in the Northern Hemisphere, after all), but the Fed performing its QE. Reflation, as this publication was not the first to perceive, is sometimes more easily said than done--in the Occident, at least.
Federal Reserve investigators can't seem to detect more than a few market excesses traceable to the monetary policy of the Bank of Bernanke. To fill the void, this publication contributes the results of its own search for grievous distortions of asset values not unrelated to the availability of money.
In the first quarter, European peripheral states issued more debt than in any three months since the first period of 2010. In America, BB-minus-rated H.J. Heinz raised $3.1 billion through a sale of seven-year notes at the lowest interest cost ever attached to any public LBO-related debt in America. The message of the market is that Cyprus is a blip, or news particle. We write to contend that it is no such thing.
Finance is the servant—the handmaiden—of commerce, not the other way around, as the ancients used to say. The whole point of stocks and bonds is production, not “carry” or commissions or bonuses. Recalling this truth, Grant’s redirects its gaze from the fleshpots of Wall Street to the future home of the South Carolina Inland Port.
Ideas are hard to contain. A governmental skimming of bank deposits, imposed from afar on a Saturday morning and presented to the victims as a “stability levy,” will, we think, be impossible to contain. The event will fade but the fact that it happened is indelible. Central banks cry out to be mistrusted.
“Think of all the benefits that nuclear energy can bring to bear on a growing civilization.” The author of those words, which appeared on March 7, was none other than Patrick Moore, the Canadian co-founder of Greenpeace. Herewith, a bullish appraisal of the element that the greens once loved to hate.
It’s nobody’s idea of news that Sears Holdings Co. and J.C. Penney Co. are on their uppers or that smart phones facilitate price comparisons or that you don’t have to go to the mall to go shopping. Yet, since the stock market took off four years ago, the Bloomberg REIT Regional Mall Index has out-returned the S&P 500 by 568% to 121%, counting reinvested dividends. To this anomaly we now turn.
Sitting in 126 crates on the Melbourne docks is a prefabricated, six-story hotel in which workers on BHP Billiton’s projected $22 billion harbor expansion project in Port Hedland, Western Australia, would lay their weary heads at night. But the project has been scrubbed, and the hotel-maker is broke. The resource-led investment cycle that has fed Australia’s growth is fading. What to do about it is the question before the house.
The Federal Reserve, which is on course to buy 60% of net Treasury issuance this year, is investigating any fund holding $2 billion or more in 10-year Treasurys on suspicion of price manipulation. “Holding large positions in Treasury bonds isn’t illegal,” a March 16 Wall Street Journal dispatch helpfully notes. Neither is price manipulation—if you happen to be Ben S. Bernanke.
The Federal Reserve's toy interest rates give economic actors too much time to stall and dither. Zero-percent rates institutionalize delay in everyday business and investment transactions. They lead to postponement of needed adjustments. It’s as if basketball never got the shot clock.
In constant dollars, reports the February edition of the AgLetter published by the Federal Reserve Bank of Chicago, Seventh District land prices—i.e., Illinois, Indiana, Iowa, Michigan and Wisconsin—leapt by 52% over the past three years, the most since the mid-1970s. On cropland values, money printing and wheat.
Herewith, Grant’s compares two recent interest-rate commentaries: The first by Ben S. Bernanke himself, the second by John Hathaway, co-portfolio manager of the Tocqueville Gold Fund. Interestingly, the manager of the country’s top gold fund by assets agrees with much of what Bernanke said. But the substance of Hathaway’s remarks differs in radical and revealing ways from Bernanke’s
Lesley Stahl, anchor of the eternal weekly American TV news program “Sixty Minutes,” asked Wang Shi, chairman of China Vanke Co., the mainland’s largest homebuilder and developer, if there’s a real estate bubble in China. “Yes, of course,” replied Wang. So the capitalists caught on to the China bubble before the Communists did. But, we think, the capitalists have not fully exploited every short-on-China trade.
Buying long-dated Japanese Government Bonds, as Shinzo Abe’s pick for the next governor of the Bank of Japan suggested on Monday, may not save the Japanese economy, but it would allow Japanese banks to jettison their holdings of government securities, which amount to 900% of Tier-1 capital. Walking the path so famously trod by the Reserve Bank of Zimbabwe.
The facts of the dismal labor market "are not just statistics to me," the Vice Chairman of the Federal Reserve Board told the AFL-CIO on Feb. 11. Indeed, they constitute a terrible indictment of something or other in the management of American economic and financial affairs. But what might that something be?
Try as it might, the Fed can’t seem to stomp out every last source of interest income in America. Mortgage REITs and business development companies, for instance, still yield enough to sustain the body and spirit of your favorite charity, retiree or lay-about heir. An update on the risks and rewards of yield hunting.
At year-end 2012, the average price of income-producing real estate in the United States was 20% below the peak, according to Moody’s/RCA Commercial Property Price indices. It was, however—let the inflationary glass be half full—33% higher than the January 2010 trough. Herewith a survey of value, non-value and leverage.
Of the 25 largest global buyout transactions executed in the golden age of 2002-2007, only two failed. The largest private equity funds survived, and the limited partners met their financial commitments. So the world loves the big public purveyors of private equity and so-called alternative assets?
Most of the world’s major central banks are resting on their oars, but investors seem willing to bet that the lull in money printing is temporary. The yen is now the most shorted currency in the world, according to Tuesday’s Financial Times, followed by sterling. Gold must figure in the most-hated list, too.
In pursuit of the yields formerly known as "high," investors winged $254.2 billion into taxable bond mutual funds in 2012. The influx worked its bullish magic on prices and yields of the larger, more liquid names. But it hardly nudged the prices of issues in the minnow class of speculative-grade debt.
What would "normalcy"--Warren G. Harding's word--look like in monetary affairs? Some central bankers are beginning to demonstrate. However, not all of Europe is content to watch Ben Bernanke or Masaaki Shirakawa's replacement print until the cows come home while Mario Draghi sits on his hands.
Institutionally sponsored bearbaiting arrived on Wall Street with the Jan. 3 debut of a financial instrument created to punish the short sellers. Probably, Deutsche Bank wouldn't have marketed its creation unless its clients asked, and its clients wouldn't have asked unless they were very bullish. Never go unhedged.
On Dec. 31, the national debt bumped its head against the statutory ceiling that never seems to contain it. That would be $16.394 trillion, or the cash equivalent of 360.7 million pounds of $100 bills. In possession of paper money and the reserve-currency privilege, a nation of saints might resist the urge to overdo it. As for us mortals, the debt ceiling speaks for itself.
In this Fed-centric world, people are spending less time reading corporate filings and more time parsing the deliberations of their monetary masters in Washington, D.C. So much the better for the inefficiency of markets, we say. Herewith, an exercise in security analysis.
The old year closed with a slower gait of money printing in Europe, Britain and the People’s Republic. The pace of dollar creation, too, has slackened from the white-hot days of early QE, though there seem to be plenty of greenbacks to go around: Foreign exchange swaps between the Fed and other central banks plunged to $8.9 billion on Jan. 2 from $109.1 billion as recently as Feb. 15, 2012.