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Thought Bubbles from the Deep

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um, doesn't it totally depend if you group or use individuallyand the precise sequence in which you order the removals? Why not just tell us what you did and what was left...
 
sinner said:
um, doesn't it totally depend if you group or use individuallyand the precise sequence in which you order the removals?
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No, because I did all of them separately. i.e. Obtain the worst on price to book, then (on the whole group again) obtain the worst on accruals etc...and then removed all of those stocks (whether they appeared once or twenty times).

sinner said:
Why not just tell us what you did and what was left...
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Wasn't meant to be a tease or make something big out of it...I was about to end my post with the answer when I suddenly wondered if anyone else thought like I did - so I asked the question first. No biggie.

Given the way I constructed it, and we're only using deciles, I was surprised to see as many 323 stocks eliminated from the group (of 503, actually) stocks. Leaving 180.
Using deciles is being pretty lenient so I didn't expect to see 2 out of 3 stocks eliminated under this scenario.
 

I was curious to see how easy it would be to end up with ~180.

So I went to the finviz screener and selected for any US stock with market cap over 10 billion, which is about ~550 names.

Filtering on some very simple criteria, much less stringent than yours, yields a similar number, ~190:


(h/t finviz.com)

PS: Adding a requirement of 6 month return > 0 whittles it down to just 46 names.
 
CanOz said:
Thanks Sinner, appreciated.

Does anyone know what level of deposits are insured in Aussie banks ?
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The info on the net seems a little old...
 
CanOz said:
Thanks Sinner, appreciated.

Does anyone know what level of deposits are insured in Aussie banks ?
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It's $250k, http://www.apra.gov.au/CrossIndustry/Documents/APRA-FCS-FAQ-ADI.pdf

But obviously worth noting that it's only a nominal guarantee, the Government doesn't have actual funding to back all those deposits, they will be printing up fresh base money to make good on any such guarantees in the event of trouble. Just like FDIC in the US which has $25 billion in reserves while there are $9,000+ billion in deposits.

It's purely a psychological stop gap to avoid panic rushing for the doors with all the banks and their Tier 1 capital ratios of <15c/$, in the event the guarantee is necessary to be activated, those dollars will be essentially worthless. Now that is a guarantee you can "take to the bank"
 

A slightly different test but similar results...the similarity is interesting. Thanks for doing that! Seems to often happen; a similar percentage of stocks will qualify under different scenarios across different markets. I can't remember off the top of my head, but I've looked at stuff before where I'll end up with (say) 30 out of 3000 US stocks and 5 out of 500 ASX stocks or some similar percentage.
 
sinner said:
Oh yeah, also the deposits must be in one of the following instos:

http://www.apra.gov.au/adi/Pages/adilist.aspx

Don't put money into St George or BankWest expecting a guarantee
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I think you are guaranteed if you have savings with St George or BankWest as they are sub-brands of WBC and CBA which are ADIs. There is a 'one-bank' concept which applies. So you will only receive the guarantee over the aggregate of your deposits with the one ADI even if your deposits are with different sub-brands within the ADI.
 
shouldaindex said:
Anyone have an opinion on Deutsche Bank or Glencore?

Seems whichever way they go, the world will follow.
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Had a quick look at DBK-DE

Market is pricing nearly 10% of the loan book wiped out over and above provisions.

Do some math with fingers in the air:
- Loan book has LVR of 70%
- Assets halve in value
- 50% of loans go into outright default.
This is the scenario which creates such an outcome. It's incredibly extreme short of a systemic event which also takes down its investments on balance sheet. Or it might be an allowance for outright misrepresentation of the books...which seems less likely to be extreme following relatively recent banking reviews heading into the ECB becoming the EU regulator. Balance sheet P&L is passed through the income statement.

There is further buffer between that and senior credit bail in via Tier 1 eligible capital and some Tier 2. The Cocos (Tier 1, Contingent Convertible) are where the heat is at present. I suspect that the losses on these are causing short selling and CDS spikes to hedge it. Neg Gamma in action rather than outright fundamental.

At this time, it does not appear that DB would be a source for acute systemic credit risk concern. It is a risk for the CoCo holders and I think their hedging activity is pulling the markets away and making an outcome more fait accompli. The Q4 2015 result was tainted by weak outcomes in trading style businesses. The prior quarter saw a major writedown. If you don't perpetuate these, things are alright.

Second order considerations are where the CoCos get converted. This may make funding conditions tighter and impact bank profits further. The ECB can respond to assist with this.

DB needs to raise more capital in general. I do not know the quality of its investment book, but it is marked to market for the accounts. It should be alright...if you think government bonds are actually riskless and the book is properly hedged.
 
CanOz said:
DS, apparently the big trade has been short the EU banks, but aside from DB, the China syndrome and junk bonds related to oil in the US, do you think there are other shoes to drop?
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Notice how so much of this has credit at the heart of it as the key threshold issue. In the GFC, shoes were dropping all over the place as the credit markets did all sorts of weird things. Even the people in the middle of it didn't know what would happen in a few hours hence. Further to your questions about deposit insurance, I recall seriously wondering whether my at call deposits were at risk in the middle of the GFC. We took out extra cash because you couldn't know if the ATMs would be shut (as happened in Greece). When credit stops suddenly in a highly levered environment, my extensive experience in investment leads me to confidently predict that it would not be good for growth.

If any of these break, it sets of downstream effects whose complexity is pretty much impossible to map and maintain. All the shoes are tied together. They drop together. Sinner's post provides a comprehensive list of the stuff I am concerned about...although the migration issue seems to have less immediate concern for credit markets.
 
I thought one big one is uncertainty over future CB response/role - the strong market response to BOJ negative rates was a big ? over CB efficacy. I think there is big uncertainty over what the CBs will do next and what the market will do in return. What some point down the line the CBs go coordinated and more drastic (perceived to be all in?) and the market doesnt respond in kind ? If global CBs all lose credibility (as a group) - then what ?

Is there even a precedent or playbook for something like this ?

I am not a market historian (too much reading on my plate at present) so I am not sure.
 

Yes. I agree.

Here's my scenario. It's just a guess and essentially a fictional future-history plot line:
  • China devalues the yuan twice by 5% as it cannot sustain the reserve drain and cannot stop capital flight.
  • PBOC drops RRR and does other targeted lending to keep things going.
  • But...it doesn't work. Credit slows, asset prices can not be sustained and China does weird stuff without necessarily having to completely go into the abyss.
  • Lower Yuan means lower prices exports to the RoW at a time when disinflation could do without it.
  • Asian based exporters find their economies drained of some exports.
  • Oil takes another leg down as China is the second biggest consumer. EM oil exporters go broke and there is an EM crisis that requires IMF intervention. EM's sell off and this sets off credit issues because of EM debt and also because lower EM growth means lower DM growth.
  • CBs cut and print....but the market doesn't respond. In Japan's case, it did the complete opposite.
  • Financial conditions tighten.
  • A nascent recovery is squashed. We have a recession where monetary policy is ineffective. Where fiscal balance sheets are already stretched. Even at 0 real rates, there is an aversion to increasing debt levels. We move to a free market. A free market would not trade where we are.
  • Micro economic reform is called for again and again. Not much happens. What does happen is slow to take effect.
  • Meanwhile, debt levels climb again and the European periphery (let alone Italy and France) does weird stuff.


Then it depends on how disorderly it becomes. We are in the world of animal spirits. Markets can create fait accompli outcomes.
I would have thought that endless QE was supposed to lead to the abandonment of a currency and price inflation. In today's world, you don't see that. Japan tells you how extreme this can get and still function.
Who knows?
 
Here is an article to put some flesh on your point about CBs cutting

http://ftalphaville.ft.com/2016/02/11/2153029/how-negative-is-negative-try-4-5-per-cent-negative/

Good discussion, based on the few existing European -ve rate experiences, on how far the CBs expect they can take it down without adverse effects (in their view anyway).


 
One of the key questions in front of the Fed...and the rest of the world market...is the extent of tension in the labour market. Unemployment and underemployment have all come down a lot. The official unemployment rate is not far off what is regarded as full employment. However, there is thought to be a store of people who would return to work, but are not registered as being part of the workforce. An examination of participation rate data suggests this figure might be around an additional 1% of adult population.

I was looking in to real wage growth today, amongst other things. I came across something interesting. When the jobs market started to heal, jobs growth occurred in retail and food & hospitality. Former middle income workers became waiters and retail shop assistants to make ends meet. Other than that, there has been growth in health care. Most other job types decreased or stayed pretty flat.

One great sign that things are turning around is that people are chucking in their jobs with greater frequency in food & hospitality. The quit rate is very nearly back to pre-GFC levels again. This suggests that these people are seeing better prospects elsewhere. Wage tension is returning.

 
I spotted this today and thought a few observers here would find it interesting:

http://wolfstreet.com/2016/02/17/junk-rated-companies-biggest-refinancing-cliff-moodys/

Summarising some research from Moodys over the last yearish.


Everyone agrees there is too much debt. The disagreement is that over how it will play out. The majority consensus seems to be that of credit deflation, while those who feel that the debt will necessarily be written off in one form or another are in the minority.
 
Iron Ore

Two of the most heavily shorted stocks in the market are FMG and WOR. Looks like a major short squeeze was in play in the last couple of days.



 
The ECB announcement reaction is akin to the weak BoJ outcome (Equities drop and currency rises). Gold is rising. The lower bound for the short end has been reached. Innovative elements include adding investment grade corps to the eligible monetary purchases and targeted lending initiatives. Big question: is lack of economic activity the result of credit being priced too high in real terms (Secular Stagnation) or because there is no/limited demand for credit at any price (Debt Overhang)? It is worse for the EZ because there is no way the EZ can launch fiscal stimulus to offset a weak monetary response or monetise debt (helicopter money). Central banks are running out of room. The ECB looks spent. On a broad read, the market is positioning accordingly.

The Draghi Put is being replaced with the Yellen Call.
 
DS,

What are your thoughts on infrastructure? Do you think it is a separate "asset class" in terms of an investment strategy? Do you account for it separately in your investment strategy, and if so, do you have any thoughts for exposure for retail investors?

I understand that options are quite limited in Australia, as it's either government owned, or held by a number of managed funds or private equity. Access to a very wide range of assets would seem to be either impossible, or too expensive, for a small investor IMO, which is probably why most Australian investment literature doesn't mention it.
 
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