domingo, octubre 23, 2016

BEYOND WELLS FARGO: ARE BANKS HEADED FOR A FALL? / BARRON´S MAGAZINE

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Getting Technical

Beyond Wells Fargo: Are Banks Headed for a Fall?

Bad price action on good news – as we’ve seen with JPMorgan, Citigroup, and others – is a bearish sign.

By Michael Kahn     
 

Getty Images
 
 
When it comes to big banks, something sinister is lurking beneath the surface. Several saw their shares jump up on good earnings news. only to give back most if not all of their gains by the close of trading the same day.
 
In technical analysis, bad trading action on good news is bearish – as is the simple failure of an upside breakout to hold, as we’ve seen with many regional banks. Combined, these two trends do not bode well for the sector.
 
There is a reason the first half hour of stock-market trading is called “amateur hour.” Typically, it is when less sophisticated investors, whether individuals or professionals, act on the hot news of the day. It is also when orders placed overnight all hit the market at once, which can cause spikes higher or lower.
 
Sophisticated traders let the initial frenzy subside and often trade in the opposite direction from the initial move. A case in point: last Friday’s action in JPMorgan Chase (ticker: JPM). The company reported lower third-quarter profits, but both earnings and revenue beat Wall Street’s expectations.
 
The stock opened the trading session 1.6% higher, but quickly started to head lower, finishing in the red for the day (see Chart 1). The doubters were right not to chase the initial jump higher.

Chart 1

The overall trend from the bank’s June low may still be intact, but the negative intraday reversal is a rather bad sign for the bulls. Other chart issues, including falling momentum indicators, suggest the power behind the bank’s recent rally is gone.

Peer Citigroup (C) also reported lower earnings and beat expectations anyway, and its stock did nearly the exact same jump at the open and drop into the close. Bad action on good news.

On Monday, Bank of America (BAC) jumped about 1% at the open following similar news. The stock peaked immediately and soon after was trading in the red.

Amateur hour, for sure, but it was another time a major bank failed to break through resistance. Technical indicators confirm this weakness, too.

Rounding out the top four giants by market value, embattled Wells Fargo (WFC), reeling from its sales-tactics scandal, still managed to beat its earnings and revenue estimates for the third quarter. While not as dramatic on the charts, the stock opened strong last Friday before closing slightly in the red.

This stock has a different look from its peers, thanks to the scandal. Technically, it broke down below support last month and rallied back to touch that level last week (see Chart 2). This is called a “test” of the breakdown, and it gives bears one more chance to sell at better prices. The bears obliged, leaving this stock with a weak outlook, albeit for different reasons than its peers.

Chart 2

Last Thursday, most banks fell in part on fears that slowing growth in China could delay the Federal Reserve’s schedule for interest-rate increases. Both the SPDR S&P Bank KBE exchange-traded fund (KBE) and its SPDR S&P Regional Banking KRE counterpart (KRE) completed technical failure patterns that day by falling sharply just days after moving through resistance to 2016 highs.

Many regional-bank stocks echoed this pattern. North Carolina-based BB&TCorp (BBT), for example, broke out to the upside on Oct. 5, edged still higher, and then abruptly reversed course on Oct. 11. On Oct. 13, it fell sharply, leaving a gap on the charts, and then closed back below its previous breakout level (see Chart 3).

Chart 3

Again, the rising trend here remains intact, but the sharp turn of events to the downside is a big warning sign. Either the news that drove the initial breakout was overruled, or investors decided it just was not as good as they initially thought. Either way, the market is telling us that something is wrong.

Capital One Financial (COF) and PNC Financial Services Group (PNC) are but a few other large banks with regional offerings with a similar pattern in force.

At best, it looks like the entire banking sector threatens to end its brief period of market leadership, and, at worst, looks ready to lead the market to the downside. Whether this shift is a tell on future Fed policy is debatable, but for investors, the risk/reward ratio with these stocks is no longer favorable.


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domingo, octubre 23, 2016

TAKING IT TO 11 / THE ECONOMIST BUTTONWOOD COLUMN

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Buttonwood

Taking it to 11

How central banks are distorting the corporate-bond and equity markets
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IN THE spoof “rockumentary”, “This is Spinal Tap”, Nigel Tufnel, the band’s guitarist, displays his amplifiers with pride. The dials range not from one to ten, but up to 11. On a normal amp, he explains, when you reach ten, there is nowhere to go, but “these go to 11.”

Three of the world’s most important central banks—the Bank of England, Bank of Japan (BoJ) and the European Central Bank (ECB)—have dialled monetary policy up to 11, expanding their asset purchases from government bonds to embrace corporate debt and even equities.

With government bonds and short-term interest rates already at historically low (and in some instances, negative) levels, such asset purchases were seen as the next logical step.

The expanded policy has several justifications. It is not clear that driving government-bond yields or short-term interest rates any lower will do a lot to help the economy; negative rates may dent bank profits, for example, making them more reluctant to lend. And if the aim is to get companies to borrow more, then buying their bonds will reduce the cost of that borrowing via lower yields.

But there are many more types of private-sector assets than there are government bonds. (The ECB’s government bond-purchase programme is linked to the size of each euro-zone economy, so it cannot be accused of favouring one nation over another.) Central banks simply cannot buy all corporate bonds or equities in equal measure.

Naturally, they choose the most liquid and the least risky. But the bonds and equities they buy are likely to perform better than others. Since the ECB announced its bond-buying programme on March 10th, the spread (or excess interest rate over government bonds) on corporate bonds that it deems eligible has fallen by over half, from 100 basis points (one-hundredths of a percentage point) to 44 basis points, reckons Citigroup. The spread on ineligible bonds has also fallen but by only a third, from 154 to 104 basis points.

When companies seek to issue new bonds, the prices and yields of their existing bonds are an important benchmark. To the extent that central-bank actions lower the cost of capital of businesses within the programme, it must give them a competitive advantage over their rivals.

The Bank of England, for example, is buying bonds issued by Walmart (which owns the Asda chain in Britain) but not bonds issued by Tesco or Morrisons, two rival supermarkets. The effect may be small, but it is still a questionable thing for a central bank to do.

Moreover, the British corporate-bond market is not as deep as the American equivalent so the Bank of England is limited in the bonds it can buy. This leads to some odd-looking inclusions. Will the purchase of sterling bonds issued by Apple, Daimler or PepsiCo really lower the cost of capital for British finance?

Investors will adjust their behaviour to allow for the actions of central banks. “It almost feels as if our role shifts from analysing the bonds’ fundamentals to advising clients on the eligibility criteria,” says Matt King, a bond strategist at Citigroup.

The BoJ has already been forced to adjust its equity-buying programme after it seemed to distort the market. The bank might have thought it was playing safe by purchasing an equity index. But a lot of its money was going into the Nikkei-225 average, a benchmark weighted by share price rather than market value (see chart). So its investments were having a disproportionate effect on the share prices of some small companies. In the case of Fast Retailing, the BoJ already owns half of the free float (the shares available to outside investors).

Future purchases will be weighted to the more sensibly constructed Topix index.

Another issue is how the central banks will eventually dispose of their holdings. Although, when they started in 2009, government-bond purchase schemes were seen as short-term measures, central banks have yet to reduce their bond piles. The Federal Reserve is slowly tightening monetary policy by pushing up short-term interest rates, not by selling bonds.

Corporate bonds are less liquid than government bonds, particularly since post-crisis rules have made banks less willing to hold inventories. A likely consequence of this is that central banks will be big owners of private-sector assets for a while, with all the distortions that implies. They will not want to risk a big shock by selling billions of bonds into an illiquid market. If that day comes, traders might be quoting Mr Tufnel again: “How much more black could this be? And the answer is none. None more black.”

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domingo, octubre 23, 2016

GLOBAL DEBT GROWS AND CENTRAL BANKS ARE BUYERS / SPROTT ASSET MANAGEMENT

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Global Debt Grows and Central Banks Are Buyers

By Tim Taschler, CMT



The IMF reported last week that global debt hit a record $152 trillion.  I’m old enough to remember when a million was a lot, and in the past two decades we have blown right through talking of millions and billions and are now throwing around trillions like its nothing.

 

Much of this debt has been purchased by none other than the big central banks.  Sunday, Bloomberg reported that central bank assets have grown at the fastest pace in five years, topping $21 trillion:

The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis to boost lackluster economic recoveries with asset purchases that are supporting stock and bond prices.

The 10 largest lenders now own assets totaling $21.4 trillion, a 10 percent increase from the end of last year, data collected by Bloomberg show. Their combined holdings grew by 3 percent or less in both 2015 and 2014.

 

You might think that with all this zero-rate and negative-rate money sloshing around that liquidity in the markets would not be an issue.  But take a look at what happened in the forex markets last week.  The British Pound (GBP), which is a major currency and heavily traded, took a 6% dive in less than two minutes.  For reference, anyone watching the forex markets knows that a 1-2% move in the currency world is considered a big move, and 6% in two minutes is certainly not expected in something as liquid as the Pound.

 

The explanations for this move range from the standard “fat thumb” (i.e. someone inadvertently typed some extra zeros onto a sell ticket and swamped the market) to the easy-to-blame algo computers.  Regardless of the reason, if there was one other than someone simply dumping a large number of Pounds onto the market, this type of thing shouldn’t really happen with so much liquidity sloshing around.  People are certainly becoming complacent with ‘flash’ crashes, as if they are a normal occurrence and nothing to pay any attention to. I disagree. I think it could be a ‘tell’ and something to keep an eye on.

Think about where we are since 2008.  The Fed keeps yapping about raising rates and normalization (though they do little other than talk), which has resulted in bond prices lower and interest rates higher.  This is going to put enormous pressure on banks, pension funds and anyone else with a large amount of Sovereign bonds.  A bond trader friend of mine told me that seeing all these bonds trading above par (i.e. over their face value) is going to lead to a massive problem.  If you pay $1,100 for a $1,000 bond, you are only going to get $1,000 at maturity.  At some point there will be losses as these bonds are marked back to par ahead of maturity.

Maybe the central bankers will be able to print and talk their way through to some successful outcome without actually raising rates.  Or maybe they can have rates rise without causing some major dislocation in more asset classes, whether it be bonds, stocks, forex or commodities.  But then again, maybe they can’t and that is why so many large, successful investors such as Soros, Druckenmiller and Buffett are sitting with large allocations of cash.  With moves like we had in the Pound last week, it seems that the end game might be drawing near, and people might just want to be a little careful in the construction of their portfolios.

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domingo, octubre 23, 2016

COMPROMISING IN THE CAUCASUS / GEOPOLITICAL FUTURES

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Compromising in the Caucasus

Normalizing Russian-Turkish relations are unlikely to lead to an understanding on security in the Black Sea region.

By Antonia Colibasanu


Azerbaijani President Ilham Aliyev has said that a “reasonable compromise is possible” on Nagorno-Karabakh, hinting at the possibility for the breakaway region to become an autonomous republic. This comes after Russian Foreign Minister Sergey Lavrov invited Turkey to participate in moderating the peace talks between Armenia and Azerbaijan over Nagorno-Karabakh, during the annual summit of the Russia-led Collective Security Treaty Organization (CSTO) held in Yerevan on Oct. 14. The CSTO operates under the Minsk Group, a mediating body founded in 1992 that oversees the Nagorno-Karabakh peace negotiations. The Minsk Group is chaired by the U.S., France and Russia who also have decision-making powers in the negotiations, while Turkey (which is also a member of the group) doesn’t have a deciding role. Russia’s move to recognize the positive role that Turkey can play in the negotiations seems to be a significant shift – even if it is not an invitation to co-chair the Minsk Group, which would have to be approved by consensus.


Russian President Vladimir Putin (R) shakes hands with Armenian President Serzh Sargsyan as he arrives at the Yerevan airport on Oct. 14, 2016. MIHAIL METZEL/AFP/Getty Images


Toward the end of the Soviet Union, in 1988, Azerbaijani troops and Armenian secessionists began a war that resulted in a truce brokered by Russia in 1994, which left ethnic Armenians in charge of the de facto independent Nagorno-Karabakh territory. Since the cease-fire, Azerbaijanis resent their loss of Nagorno-Karabakh, which they regard as rightfully theirs, while Armenians show no willingness to give it back. Clashes following the breach of the cease-fire, as well as failed negotiations, have turned the area into one of the more critical post-Soviet frozen conflicts in the Caucasus.

Nagorno-Karabakh is where all the regional powers meet as they project power to maintain influence in the region. The Caucasus region is important for Russia, as it blocks Turkish and Persian access to the heartland. While keeping control in the North Caucasus around Chechnya and Dagestan is a strategic imperative for Russia, keeping the balance in the South Caucasus to counter Turkish, Iranian and above all Western or American influence is also important.

Russia has forged economic and military relations with Armenia, coordinating closely on regional affairs. For Turkey, Armenia has been an enemy since the end of the World War I. As the Ottoman Empire was collapsing, the Turks killed a large number of Armenians, which Armenia insists was genocide. The Turks have denied that a genocide occurred. But the large Armenian community in the U.S. has used this event to try to shape U.S. policy toward Turkey.

While Turkey has reportedly attempted to normalize relations with Armenia, it cannot reach an understanding, considering the historical differences and Russian influence over Yerevan.

Turkey has close relations with Azerbaijan, with whom it shares ethnic kinship, cooperating on political, economic, energy and military issues. The European Union also looked into ways to develop relations with Azerbaijan in an attempt to diminish its dependency on Russian natural gas, since Azerbaijan has vast energy reserves. Therefore, a change in the status quo of the frozen Nagorno-Karabakh conflict would affect all regional players.

Russia shifted its policy on Armenia before the attempted coup in Turkey in July. At the beginning of April, Azerbaijani and Armenian forces clashed in Nagorno-Karabakh in one of the most violent incidents since the implementation of the 1994 Bishkek Protocol and its provisional cease-fire. The clashes left 200 dead on both sides and the prospect for a graver escalation to follow, if no progress on peace talks was made. Russia negotiated a cease-fire in Nagorno-Karabakh on April 5, and then developed a diplomatic campaign that aimed for a long-term settlement of the conflict.

In May, reports citing unnamed sources close to the negotiations said that Russia would present a peace plan, which may include the restoration of Baku’s control over some of the so-called occupied territories (outside Nagorno-Karabakh) that were taken over by the Armenians, as well as security guarantees for the unrecognized republic of Nagorno-Karabakh. In July and early August, demonstrations in Yerevan called on the government to resist Russia’s plan for unilateral concessions. While the protests weren’t big, the fact that they were anti-Russian and were related to the Nagorno-Karabakh resolution is telling. Russian President Vladimir Putin met with the presidents of Azerbaijan, Armenia and Turkey to discuss a deal on Nagorno-Karabakh, but no apparent understanding came through. However, Russia is working on a rapprochement with Turkey, so it will likely push for a resolution on Nagorno-Karabakh, as that gives both Turkey and Azerbaijan something to appreciate.

Russia is doing this because it is concerned about what it sees as a U.S. containment strategy in Europe from the Baltic Sea to the Black Sea and possibly reaching Azerbaijan. Moscow has been closely following U.S. relations with Poland and Romania and has grown concerned, as the U.S. builds up military capabilities in both countries. For Russia, the Black Sea is militarily and commercially strategic. Russia has watched Turkey work with Poland and Romania on defense-related projects and it definitely didn’t want to see Turkey joining a U.S.-sponsored alliance in the Black Sea. Russia needed to be less hostile to the Turks to avoid them aligning with the Americans. The talks on Nagorno-Karabakh and the good will gestures are a way for Moscow to build trust with Ankara.

Azerbaijan would follow Turkey toward the Russians or the Americans. Azerbaijani foreign policy is complex, with Baku balancing between Iran and Russia in order to maintain its independence. It has always had a strong relationship with Turkey, which it has enhanced during the last few years, as it has acted against the Gülen movement. The two countries share ethnic and cultural ties, and Turkey acts as the main transit country for Azerbaijani energy.

Moreover, they share a common enemy: Armenia. Azerbaijan sees Armenia as wrongfully occupying Nagorno-Karabakh territory and a resolution would give back at least part of what Azerbaijan claims to have lost. For Turkey, Armenia is responsible for the way the U.S. has shaped its policy towards Turkey, considering the Armenian genocide, and for bringing Russian forces into the Southern Caucasus. This is why a potential settlement imposed on Armenia could strengthen Turkey’s position in the Caucasus.

In return, Russia seeks gains to the rear of what it perceives to be the American containment line in Europe and expects Turkey to pull away from Poland and Romania. Russia giving up part of its position in the Caucasus could trigger Turkey to give in? as well in the Black Sea.

This is a smart maneuver to lay the groundwork for a positive long-term relationship, but it is unlikely to come to fruition. The Turkish Foreign Ministry responded to Russia’s gesture, saying it “appreciated the statement by Lavrov.” If Russia and Turkey don’t go beyond gestures, their rapprochement will not last as it doesn’t have solid fundamental basis.

Geopolitical forces pay no attention to nice gestures. Geography is paramount, and the Black Sea embeds the geopolitical tension between Russia and Turkey. While Turkey cannot allow Russia to dominate the Bosporus, Russia can’t allow Turkey to be the single power in the Black Sea. For a settlement on Nagorno-Karabakh and for Turkey's decreasing involvement in the U.S. alliance to be the beginning of bilateral cooperation between Russia and Turkey, the two countries need to continue working together to establish influence in the Balkans or Central Asia. But their interests in these regions often diverge. And once different interests exist, clashes between the two become probable. This is why gestures are nothing but gestures, no matter how significant they may seem.

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