EUCOM Economic Analysis - Part I

[Surferbeetle]

There has been some political turbulence in Spain and Italy of late. This turbulence may have translated into interest rate increases in 10 year government bonds today, with a one day 23 and 14 basis point move (23/10,000 and 14/10,000) respectively. This results in annual yields of 5.44% and 4.47%, again respectively, and can be compared to yields of 0.76% in Switzerland and 10.92% in Greece. Preparatory work continues on European and Asian Free Trade Agreements however, so I am keeping the faith.

Meanwhile, on this side of the pond/back at the ranch, ISM and January BLS Non Farm Payroll numbers have been of interest as has the DOJ lawsuit against the S&P.

• Bloomberg 10 year Government Bond Yields, http://www.bloomberg.com/markets/rates-bonds/
  
• Spanish Leader Pledges Transparency Amid Corruption Inquiry, By RAPHAEL MINDER, Published: February 2, 2013, NYT, http://www.nytimes.com/2013/02/03/wo...ef=europe&_r=0
  
• Italian Banks Fall as Politics Spreads Uncertainty: Milan Mover, By Sonia Sirletti & Francesca Cinelli - Feb 4, 2013 4:55 AM MT, Bloomberg News http://www.bloomberg.com/news/2013-0...lan-mover.html
  
• Basis point, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Basis_point
  
• Obama puts trade at heart of agenda, By Richard McGregor in Washington, February 4, 2013 5:56 pm, Financial Times, www.ft.com
  
• Institute for Supply Management, http://www.ism.ws/ismreport/mfgrob.cfm
  
• Bureau of Labor Statistics, http://www.bls.gov/news.release/empsit.nr0.htm
  
• Reports: U.S. Plans To Sue S&P Over Mortgage Bonds Ratings, by EYDER PERALTA, February 04, 2013 2:40 PM, NPR http://www.npr.org/blogs/thetwo-way/...-bonds-ratings

[Firn]

A couple of links:

Dude where is my cheap oil?

It's obvious from the above price charts that it makes no economic sense to add gallons of ethane or propane to gallons of crude oil to try to summarize global oil supply. But growth of natural gas liquids has been a key factor in the reported increases in "world oil supply" over the last few years and is also a key component of recent optimistic assessments of future oil production by Leonardo Maugeri and the IEA.

There is no question that the boom in production of natural gas liquids is providing a great benefit to industrial users of ethylene. But if you're waiting for it to lower the price you pay for gasoline at the pump, you may have to wait a while longer.

I enjoyed this nice short blog entry. So far it doesn't make much sense to see ethane or propane as good enough substitutes. They should become such goods if we see enough cars running on them with the proper network aka pump support.

---

From Krugmans blog I posted an important argument about a topic which has made headline thanks to story in which more is at stake then an Apple and an Ei(nhorn). [Sorry for the bad pun which only a few will understand ]

In short it is what to do with all that cash on the balance sheet of sometimes highly profitable companies? My personal take is (unsurprisingly) heavily influenced by Buffet and Graham. If the company is not able to find something with a high enough ROI it should check first if it is sensible to buy back stock if the price is higher then it's value. (Highly efficient and no taxman involved). If it isn't it should start to pay out more dividends.

The macro view:

Still Say’s Law After All These Years

When John Maynard Keynes wrote The General Theory, three generations ago, he structured his argument as a refutation of what he called “classical economics”, and in particular of Say’s Law, the proposition that income must be spent and hence that there can never be an overall deficiency of demand. Ever since, historians of thought have argued about whether this was a fair characterization of what the classical economists, or at any rate his own intellectual opponents, really believed.

Not being an intellectual historian myself, I won’t venture an opinion on that subject. What I will say, however, is that Say’s Law (Say’s false law? Say’s fallacy?) is something that opponents of Keynesian economics consistently invoke to this day, falling into exactly the same fallacies Keynes identified back in 1936.

In the past I’ve caught Brian Riedl and John Cochrane doing it; now Peter Dorman finds Tyler Cowen in their company.

Cowen can’t see why corporate hoarding is a problem. Like Riedl and Cochrane, he concedes that there might be some problem if corporations literally piled up stacks of green paper; but he argues that it’s completely different if they put the money in a bank, which will lend it out, or use it to buy securities, which can be used to finance someone else’s spending.

But of course there isn’t any difference. If you put money in a bank, the bank might just accumulate excess reserves. If you buy securities from someone else, the seller might put the cash in his mattress, or put it in a bank that just adds it to its reserves, etc., etc.. The point is that buying goods and services is one thing, adding directly to aggregate demand; buying assets isn’t at all the same thing, especially when we’re at the zero lower bound.

What’s depressing about all this is that Say’s Law is a primitive fallacy – so primitive that Keynes has been accused of attacking a straw man. Yet this primitive fallacy, decisively refuted three quarters of a century ago, continues to play a central role in distorting economic discussion and crippling our policy response to depression.

In simple terms 1€ spent on an investment means 1€ of increased demand while 1€ spent on an asset means that only a part of that dollar creates demand - especially if the rates are so low due to the liquidity trap.

[Firn]

Sorry about the double post, I think it helps to the reader more then overly long posts.

Wiki has a decent write-up about the Dividendum

Dividends are not created of course equal.

The Deutsche Telekom AG is an interesting case. It does not divide the earnings of the company but the earnings + the capital. If a company earns over the last 7 years something like 0,5 per share but pays out a bit more then 0,7 something is usually very wrong. At least for the investor and 8,5€ per share certainly don't look cheap from this angle alone. ( At a low enough share price a disinvesting business could be quite attractive)

The France Telecom looks different. Over the last 7 years it has paid out 1,3€ per share while earning roughly 1,7 €. That is a high proportion and might be a bit too much as the shareholder might have had a higher return from higher amount of retained capital*. Quite recently FT has decided to cut the dividend to 0,8€ for 2012 and 2013. Earnings have suffered a bit but they should be higher then 1,2 IIRC for 2012. At a price of ~ 8€ the dividend yield is very high, at least before the dreaded taxes. It is certainly remarkable that in a world without taxes a shareholder with 1 share could have bought another one 7 years later just with the dividends. (No inflation and investment taken into account) Of course in this case he might be not too happy as he invested into this first share somewhat over 20€.

The first stock is not worth a second look, as time is precious, but the second one might be well worth the time even with those wicked French socialists² in power.


*A business typically needs to invest more then the depreciation takes just to keep it's current position to it's competitors.

²They leave you just 60% of your dividend while the dear US takes less the 30% away...

[Fuchs]

In simple terms 1€ spent on an investment means 1€ of increased demand while 1€ spent on an asset means that only a part of that dollar creates demand - especially if the rates are so low due to the liquidity trap.

He's still wrong to put the blame on the corporation instead of on the bank.

Meanwhile if he's irritated by the reserves held by banks - part of them are obligatory, and the Fed is free to pump more money into the system if those reserves are a problem.

Money held back slows down the rate of circulation which according to a quite established theory (not necessarily the theory Krugman likes) means less inflation. So this "less inflation" can be seen as a problem as Krugman does or as an opportunity to do something that usually drives inflation, such as the Fed giving the U.S. a gift in shape of buying some debt obligations at ridiculous conditions.

He's very, very arbitrary in blaming liquidity-hoarding corporations.

[Firn]

He's still wrong to put the blame on the corporation instead of on the bank.

Meanwhile if he's irritated by the reserves held by banks - part of them are obligatory, and the Fed is free to pump more money into the system if those reserves are a problem.

Money held back slows down the rate of circulation which according to a quite established theory (not necessarily the theory Krugman likes) means less inflation. So this "less inflation" can be seen as a problem as Krugman does or as an opportunity to do something that usually drives inflation, such as the Fed giving the U.S. a gift in shape of buying some debt obligations at ridiculous conditions.

He's very, very arbitrary in blaming liquidity-hoarding corporations.

I think he is perfectly right for the very reasons he wrote. The lack of direct investment of an (greatly) increased share of the national income is no good for the aggregate demand. It is 'just' one part of a bad economic spiral but still not a good one for the whole economy.

BTW dividends would of course tend to go to people which will reinvest most of the captial, buying assets instead of consuming. At least Uncle Sam would get more revenue and this by hardly taxing the poor.

[Firn]

Just a nice old link about a bet between Buffet and Protg Partners LLC.

Here's the bet, which Loomis says hasn't been reported before but has been in existence since the beginning of this year:

"Protg has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses. On the other side, Buffett ... has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protg has selected."

Both Buffett and Protg (the firm, not the funds) have contributed $320,000 to buy a zero-coupon Treasury bond that will cash out at $1 million when the wager concludes in 2018.

Still a long way to go but it is interesting tor read about the score at roughly half-time:

The strategy with the best return at the end of 2017, including the costs associated with the funds, will be the winner, with a guaranteed $1 million going to either Buffett's designated charity (Girls Inc of Omaha) or Seides' (Absolute Returns for Kids.)

Fortune's Carol Loomis reports today that Buffett's chosen fund is up 8.69 percent, easily ahead of the hedge funds picked by Protege with their 0.13 percent average increase.It's vindication, at least so far, of Buffett's long-held argument that over a number of years, the "experts" aren't able to outperform the overall stock market. It's the basis of his belief the fees "helpers" charge investors usually aren't justified.

It might be this one - behold the power of good dividends. Keep in mind that 2008 was a terrible year for the S&P, losing almost practically half of it's value. One could not have picked a worse time in the last 5 years to buy the index fund but that might have just added spice to the wager ...

[Firn]

Bad economic data for Germany, Italy & Co. Italy was hit hard by the recession, the harsh and unbalanced austerity certainly playing a part in that. Maybe even worse the man responsible for a great part of our current economic woes, the man which played a whoring* sunking while Italy burned and put us all into a financial bind seems to profit from the recent developments.

I will be responsible in my district for the voting next weekend, let us hope that the duty won't be too hard.

*a rather factual description of what happened time and time again.

---

Why is France Telecom not worth more? Of course nobody knows for sure, but a quick glance on the key statstics gives us some potential idea.

1) 'Management Effectiveness' is quite dismal. Keep in mind that on average the results were considerably better in the years past. Still not good.

Return on Assets (ttm): 5.44%
Return on Equity (ttm): 12.30%

The capital employed by FT brings (very) little return. The return on equity is a bit better but only thanks to high leverage. The high goodwill is of interest as it is amount of intangible assets on the balance sheet. A lot of question marks on those lines. If it is 'good' economic goodwill it would drive up the return on the tangible assets but it is impossible to tell before looking up the statements in detail.

2) Profitability doesn't looked too good. Recently FT has become under heavy pressure by competitors in the home market.

Profit Margin (ttm): 8.28%
Operating Margin (ttm):

3) The balance sheet shows the considerable leverage and a great deal of goodwill and intangible assets compared to the tangible ones and equity. Lots of questions here, especially if the goodwill is indeed good or if it is a no-will. The long-term debt is high, how long-term is it and how high the interest?

So the stock looks 'cheap' at first and comes with a might dividend even if multiplied by 0.6 but as usual one has to do first the homework.

[Fuchs]

GDP figures have a certain margin of error, especially early ones.
-0.6% is nothing really noteworthy as an early GDP change figure, since the technological rate of progress has moved towards 1.5 % over decades and you need to subtract the demographic influence from this in order to get the natural GDP growth path figure.

Many people have not adjusted their growth expectations to 'GDP per working age capita' yet.