Wednesday, October 26, 2016

Pssst! -- the best trade in the world; an insider's track

First off the title is a bit of a lie (ok one huge lie).

Yesterday the oil market was at a flutter because draws against reserve where higher than anticipated.  Guess what happened today, oil prices crashed right back down to the $48.99 level -- when they had been as high as $50 yesterday.

You ask:  What's going on?
The answer:  No body knows!

The oil markets are nearly fungible; there is a bit of a spread between Brent and WTI but the difference in price is more cause by technical issues (when the spread is substantive) than anything else.  In fact, as reserves rise the cost of adding to reserves rises exponentially, hence the prices of crude drops (its a zero sum game).


Now look at the price of oil -- yesterday there was a panic because the draw from reserves was about 2MM bbl higher than anticipated.  Today, well today the market took stock and realized that it meant nothing.  Because it was the same issue that I mentioned above about Brent Vs. WTI -- oil was at the wrong place; it was a location blip that cause the market to overreact.

Some would say that this overreaction is how brokers make money, but in fact its not how brokers make money, because you cannot time or analyze these movements, you may be lucky as you may be unlucky.  The draw occurred because although there TOTAL amount of reserves is unchanged, the location of these reserves gave a false signal -- that took traders and analysts a few hours to figure out.

So there you go, a bit more market mystery revealed.  Because of the elections and the possible move by the Feds to raise interest rates the market is somewhat jittery and looking for reason to "go the other way"  yesterday's announcements that specific reserves were below a certain level that would show renewed economic activity (beyond what was expected) led to yesterday's price spike.

Now you know a 4% price movement in the WTI was caused by incorrect information!

No position in Brent, WTI or S&P500


Monday, October 24, 2016

November 9th: The state of America's democracy!

It seems increasingly clear that Clinton will be elected president on November 8th and as soon as the partying has stopped some hard questions will need to be asked by both parties.  The Republican will probably face the hardest review:  How can the GOP continue when its policy seem to be aimed at uneducated white males?  The rejection of all others and the spectacle that was DJT is certain to force the party to have another difficult review.

Another aspect of the review is the marriage that the GOP made with talk radio and groups such as Fox.  This has led the party to more and more extreme positions, not based on any specific drive but as a rating driver for talk radio and FOX.  On the other hand the shine seems to have come off FOX over this election cycle -- it may save the network!

We can already see some important changes:

The monolithic Christian right is no longer a sure thing for the GOP.  Granted the the break could be temporary should Cruz come back in 2020 (or Paul Ryan) then they may go back into the fold. Although its far from certain...once other options have been examined and considered!

Freedom Caucus could breakaway from the GOP, this ultra conservative group is becoming unmanageable within the GOP caucus, where a group of 42 Congressmen (out of 435) seem to block all legislation that doesn't meet their exacting standards.  Should the Senate return to the Democrats (something that is increasingly possible -- probability in the 65% range) then their position would become untenable, without a majority (GOP) the power of the Freedom Caucus is seriously eroded. Other Republicans can vote with the Democrats to get things done (since they will not be blocked in the Senate).  Anyway, the FC represent the kernel of a new political entity within the framework of the American electoral system.  it would also follow a pattern of more extreme right wing views as mainstream in other countries.

Dichotomy between party members and the beltway intelligencia: In both parties there is a breach between Beltway and "Core" party members; the strength of Bernie Sanders' vote (still substantially behind Clinton, but this is a Senator from Vermont -- and a socialist to boot and until two weeks prior to the primary was an independent -- not a Democrat).  This dichotomy between "core"  and "beltway" party members is troublesome for both parties -- more so for the GOP that has been playing dog whistle with nativist (or plainly racists) policies for decades. The Southern strategy was driven by a desire to turn back the clock of desegregation -- The South that had been Democrat for nearly a century became republican.  

The soul searching will be more immediate for the Republicans; first in 2012 they tried (driven by Beltway Republicans) to draft a new way forward, just to have Trump go the exact opposite direction. For both the establishment was attacked successfully by outsiders; Clinton was forced more to the left, and the GOP went to the far right (anti-Semitic, racist and xenophobic positions).  This was never the intention of beltway Republicans -- and yet the base (which I call the Core) saw things differently -- they saw a different way driven in large part by more than 8 years of aggressive anti-democratic (and anti Democrat) statement.  It is truly difficult to change the mind of people that believe that UFO exist (nearly 20% of Trump's supporters believe in UFOs).


Finally, there is WWDJTD (what will Donald J Trump Do?).  The end game has to be something else than winning the elections, his behavior in the third debate was that of a man who was trying to reassure his base -- not of a candidate that was trying to expand his appeal.  Considering his ratings its strange behavior if winning elections is the objective.  One has to wonder if the stories of new Trump network are true o just more BS.  Trump is running a strange champagne, declaring that if he is not the winner then the results were fabricated, that people are out to get him (although that may be true…).  He sounds more unhinged the closer we get to Election Day.  Very strange behavior, unless winning the election was only a byproduct of his real strategy. 

Friday, October 21, 2016

Did he really say that?

This is priceless:


Clinton was discussing nuclear proliferation, and Trump interrupted to talk about Start-Up.  No one understood, apparently he was talking about the START negotiations on non proliferation of nuclear arms.

No wonder Clinton looked surprised:  Probably wondering why Trump was talking Start-Ups during a conversation on non-proliferation of nuclear weapons.

Truly priceless

Tuesday, October 18, 2016

ETFs the Future of investing? -- yes to a certain extent

EDIT:  The private comments I got from people is what's an ETF.  So from Wikipedia we have the following definition:
An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.
In 2002 when I returned to Montreal from Asia, the ETF phenomenon was really only starting -- with a couple of hundred billion of assets that were invested in the product.

For years there was a huge dichotomy between the North American and the European version of ETFs. In America ETFs where effectively shares in an open ended fund -- in Europe they were an investment in a Financial institution that was then hedge in the market via derivatives.  After 2008 the distinction disappeared because investors were not willing to take the bank exposure risk (despite the slight fiscal inefficiency).

ETFs, or Exchange Tradable Funds are essentially open ended funds (total assets can rise and fall) that invest in specific shares; you can buy an ETF that will give you the performance of the TSX60 (exactly), you can also buy a ETF that will give you two or three times the performance of the TSX60 -- this is simply an example.

ETFs are attractive for the very low costs (as an example one of the TSX60 ETF has fees of 2 bps (0.02%) per annum).  The killer is always the same in investing -- transaction costs, and ETFs are by any definition very efficient.  That's a good thing.  yesterday I was reading up on "what's up in finance and is not a depression review of the banking world" when I saw a DB study (usually the best in the industry) about the growth of ETF -- replacing fund managers.  However, these products can easily be misunderstood; as an example the 2x TSX60 has a hold period calculated in hours -- not days.  So a neophyte can easily get killed by a 2x TSX60 if he doesn't understand the product's use (and risks). Years ago, if you lived in Canada and wanted to buy shares in Daimler it was very expensive -- some companies would have dual listing -- but in general is what very expensive.  Today, you simply buy an ETF for Daimler on your local stock market.

One of my favorite fund manager is Fidelity -- I've got some really good friends who work there, but with their increasing success the Canadian Fidelity Fund (eg the Fidelity fund that invests in Canadian shares) increasingly mimics the TSX60 -- after all, that's their benchmark, transaction costs became an thorny issue since the cost of investing in a Fidelity Fund is much higher than 2 bps. Fidelity's Canadian strategy fund was being killed by its own success and rising AUM.  Increasingly, you could compare the performance of FCSF with the equivalent TSX60 ETF and would get a correlation of 95% -- but the transaction costs were three orders of magnitude greater.  (in the region of 0.5% and 1.0%) -- these fees have since declined!

As can be seen above the impact for fund managers of investors' ability to reduce transaction costs are very important.   Fund managers realized that this was a long term problem some years ago, they knew they were bound by the law of large numbers.  If for example Fidelity's Canadian strategy fund is $200 million then it can diverge from the index, but when the Fidelity Canadian strategy fund is $20 billion...fewer options are opened.



Now this table is somewhat interesting -- its a bit of a mixed metaphor insofar as the coincidence of the number of internet users and the growth of ETFs AUM.

However, its also easy to oversimplify the risks.  Case and point was Sprott's Gold Bullion ETF   -- the product invests directly into gold bars.  Net asset value is easy to calculated -- take the number of gold bar and multiply by the price of gold.  Voila!  There have been many instances when the price of Sprott's Gold Bullion ETF exceeded its net asset value.  Yet there was no reason for higher value than the NAV, since you could go to your friendly post office and buy gold coins cheaper than the ETF (These things happen, sometimes it makes sense other times it doesn't) -- last occurrence was in April 2013.

The bigger fund managers have begun to pay attention and so they are shifting their focus from being a "be all" platform to offering more to investors so fund managers are working to expand their activities in areas where ETFs don't work -- where liquidity is low; so the pink sheet and other less favored sectors, they also expanded their alternative asset management activities (direct investments, hedge fund, real estate and private equity).  Hedge funds and PE funds have done poorly of late -- extremely low volatility is hard for these players.

For investors there are now thousands of ETF to choose from -- granted some are not accessible in your market, but increasingly with globalisation these ETFs are available and they are very very easy to use.  The reality is that the liquidity is almost always very high -- you can sell the ETF in a few minutes, and transaction costs are low.  One caveat emptor, you need to understand what you are buying.  It pays to read the ETFs prospectus (yes they are hard to read), but there is no escaping the reality that ETFs are structured products and they can have strange features that you need to know about.  Generally, the bigger providers are relatively transparent on their features, but not always!

Buyer Beware!

I  have no position with Fidelity or Sprott or the TSX60 ETF (of any kind)





Monday, October 17, 2016

What is Trump's End Game?

For the past three weeks Trump has been playing to his base, he's selling to people who already drink the cool aid.  It begs the question what his plan?  What is he doing?

Over the past few months (eg the Primary period) he was selling to the die hards of the party -- the party activists that voted in the primaries.  In many instances these voters are not very representative of the nation as a whole or for that mater of the GOP, although with the GOP's action over the past 20 years (if not more) the attractiveness of the party to non whites has been lets say less than strong. Bluntly, by speaking to the already converted he is not growing his base!

In fact, he's become even more aggressive; doubling down on "Clinton in jail" and adding a new twist -- if we don't win then the election has been stolen!  That the Jewish media/banking (no joke here) are taking over!  He's also been making promises that are impossible to fulfill.

Take coal -- Trump has gone anti-green (eg no solar) to "re-create" an American coal industry.  Of course the problem is that solar is now cheaper (as is natural gas -- also produced in America) than coal, there would be the idea to scrap the EPA and allow energy producer to pump as much CO2 as they want -- sure that would make coal cheaper -- but ask anyone who has lived in Pittsburgh how much fun that was in the 1980s...

In fact, by temperament ,Trump has no interest in public policy.  He cares about winners, and they are not the coal miners in the Carolinas.  However, Trump does speak to a real anxiety faced by million of Americans -- that the NAFTA trade agreement has been a disaster for ordinary blue collar workers. Ask trump he's off-shored tons of job to Asia to reduce his operating costs and increase profits, because the true problem of NAFTA is that the winners have been the capital owners (EG Trump) and the losers have been America's blue collar workers that today find the median wages lower than it was 30 years ago! I cannot think for one second that this is a problem that Trump really wants to fix.  He's on the side of the winners.

Clinton's mistake to name Trump's "deplorable" gave the tribe an identity that it could use to cement its future; whether we are talking about the racist or the ignorant (and by the way that's not a very good description of Trump supporters that have $72k median family income -- not that bad).  The truth is that his supporters while not racist like a good "black joke" from time to time -- and they are mad because they feel the got cheated by the great American dream.  Trump for all his faults did a few times speak to power ("I give to everybody, and when I need something I get the gold treatment...").

But still what's his plan?

I think there are two ways of looking at this:

(a)  Vengeance

(b)  Making money

(c)  Incompetent buffoon

Realistically Trump is not a real republican, I don't think he cares that much about abortion (it doesn't concern him -- he will always have access).  He certainly doesn't like the ACA -- he would rather have a universal health care system (not GOP stuff rather Bernie Sanders stuff).  The GOP tried to screw him over repeatedly and failed as such he probably feels little empathy for the party or its leaders, and his advisors despise the GOP's leadership.  So over the past few weeks he has gone out of his way to make their life miserable and insure that their losses are simply so substantial that the entire leadership of the party will have to resign -- and the modern GOP may not survive the fall.  But then he doesn't care -- he's not a member of the tribe.

Trump is an interesting business man; he manages to make money even when his investors face bankruptcy.  There have been so many failure over the years -- even his golf course seem to lose lots of money -- although I am certain that he receives healthy management fees.  Again, if he is trying to build a brand (or shall I say a firebrand) then he seems to be doing the right thing.  Roger Ailes one of his advisor who was kicked out for sexual misconduct is certain to be looking for revenge, and new business opportunity.  There is no doubt that for all his terrible behavior he is a master at building communication companies.

Of course there are rumors that his son is looking for investors to start a new news network -- think of a more rabid version of Fox News & Breitbart.  Now I have no idea how true these things are, in fact a lot of what Trump says makes sense, but the man's reputation is such that there is no way in hell that he will address these issues as President -- and in some case there is nothing to be done.

The last possibility is that Trump is delusional that he's living in his echo chamber and is unable to hear what the world is saying.  I find that hard to believe!   If the man is tweeting at 3 am he's certain to be surfing the net.  He knows that his numbers are very bad and the past 3 weeks must make him happy that all this will be over on November 8th (and not November 28th).

Overall, I think that his brand of crazy conspiracy theory -- still uses brackets when talking of "president Obama" will have a audience in America -- and that's what Trump is building -- the new king maker for a reformed/reforged GOP.  The MSM (which apparently now includes Fox) will steal the election from all right thinking Americans.  I've heard stories that the 19th amendment should be revoked (giving the vote to women), that armed insurrection is the answer should Clinton win.  This is all wonderful stuff if you are thinking of starting a far right news network -- don't laugh we could see a TNN better know as Trump News.

The only killer for Trump is if he loses by a very wide margin, then his "stolen election" theory will not fly, if Clinton wins the vote with 55% of the popular vote -- which would mean millions of vote then the whole story falls apart, and that's the problem with Trump's latest game -- by now he should be reaching out to mainstream voters.  If his partisan will vote for him no matter what -- he should feel free to move to the middle -- the next debate could be interesting.

JP Morgan best 3rd quarter performance ever -- DB and Commerzbank cut 20% of staff

Banks are often the bellwether of an economy.  When the economy hums along the performance is great and when the economy is in trouble...well IB and DCM revenues are down and loan loss provisions are up.

The divergence between North American banks and European banks could not be starker.  I mentioned some weeks ago that Commerzbank (COBA) was cutting 20% of its labor force, turns out DB is doing the same.  I am relatively certain that the French banks will do the same, because they all work in the same pond.

First off, the North American economy, while not on fire, is humming along.  The big change in North America (read US here) is the shrinkage of the government portion of the pie.  The US government (Federal and state) have been slashing expenses right and left for the entire term of Obama's presidency.  Lets be clear the intent by the state legislators was to harm the Obama presidency, but also to cut cut and cut income tax for the the better off.  Some states have racked up huge deficits in the process and are cutting expenses to the bone (read schools and social programs).  There is no need to point out that America's conservatives are generally mean and as such cutting the "fat" is a good thing, it remains that the overall impact is that government portion as a percentage of GDP has been shrinking.

Yet unemployment in the US is very low, inflation is inexistent, and the labor force is growing again, a sign that things are not as dire as some would suggest (e.g ME).  There is no doubt that quantitative easing has been a strange pill, there is a mass of problems going forward, ZIRP is not a long term solution, but then again, with inflation in the sub 1% range interest rates would not be that much higher -- instead of 1.5% you may be at 3% -- not earth shattering levels.

No we are seeing a divergence between the North American model (yes it has its problems) and the European model.  Right now, aside from Germany, Europe is in trouble; from France to Italy with our friends in Greece and Portugal, things are difficult.  The upcoming departure of Britain from the EU may be significant, dependent on how painful Europe wants the experience to be!  This uncertainty will cause additional medium term problems to Europe's economy.

Note:  No position in any banks...


Monday, October 10, 2016

Non American Republicans -- Why they love Trump!

Its twice now that I have had to face pro-Trump non Americans.  The first was a French philosopher who apparently has the ear of French power.  My reaction was completely over the top and unacceptable -- I told him that he peddled complete bullshit and not even worth discussing, because his premise were false and based on the Alt- right crazy narrative.  I cannot remember all the crazies he pulled but here are the highlights:


  • Chelsea Clinton is not Bill' daughter
  • Hillary Clinton is gay
  • That Clinton hid/destroyed 30,000 emails
  • Clinton planned Benghazi
  • Clinton Foundation is a front
  • etc etc
Now I came across the same crap just yesterday, my reaction was different.  I ignored it!  The second guy, also a French man by birth, but who lived most of his adult life in Texas, made some good points:  Hey if Trump was able to not pay taxes for 20 years  -- good for him, paying tax is not a right its an obligation and as such reducing your tax bill is a good thing.  I don't want to be bogged down in details, but the only way Trump could do this is if most of his revenues was considered capital gains (you only set-off your capital gains losses against capital gains).  Anyway, I decided that there was nothing that I could say to convince him, and decided to change the topic.

Needless to say that he's smart enough to figure out what I did, and called me on it.  I simply said that I completely disagree with his reading of the US system, that he bough the BS from the Alt right, which he is free to do, that many of the stuff he pulled was true but out of context -- the whole Benghazi thing is a case and point, if after 9 different investigation the GOP could find no wrong doing, the same with the emails.  They spend months and huge resources  and still found (almost) nothing.  

The two aspects I noted in both my conversations was that both speakers had little if any respect for women, the philosopher was this Ivory tower blowhard that I generally find despicable, and continue to prove his point.  The second one who lived most of his adult life in Texas -- Texas the state that Trump is 99% certain to win!  Texas a state where if you paint a pig in red they will vote for him (BTW red is the color of Republicans).  Was less of a blowhard, but had bough the exact same bullshit that Philosopher was peddling

In a sense, its a problem we all have, and with the internet its easier today than ever before, we can disregard the information we find objectionable and read only on what we agree.  If you are pro Trump you read Breitbart and some Fox News -- although they too have cooled their jets.  You see all the 'crimes" of Clinton and you read that "the bitch should be in jail"  of course its not entirely clear why she should be in jail what offense she had committed (maybe being married to Bill...).  On the pro-Clinton side there are a number (a very large number) of web writings that shows how brilliant she is and how well she will do. 

I must say that I am happier with my second interaction with a Trump supporter.  I was calm and pleasant, still though he is a moron, and picks his winners badly (I am starting to think that Trump is going to get "bitch" slapped (yeah I know it was on purpose)).  The greater Trump's failure the more likely the GOP will walk back from the abyss.  One can only hope!


The big winner of Brexit: Probably not Frankfurt, rather New York

Since the UK announced that the Brexit vote will move ahead in early 2017 -- BTW we are still assuming that the vote will be for exit.  Popular support for Brexit was diminished considerably over the past few months, yes the world has not ended, but everyone can see the writing on the wall, little chance of getting trade agreements signed before the end of 2019 (if a country as insignificant as Canada has told the UK that they will not be ready to hold talks before 2020...).  Overall, the battle are for the high paying jobs of the city.

There is a strong feeling that something will have to be done, that several banks will move certain core operations within the Eurozone, but when thinking about it there are a number of issues that made the City attractive:  First they speak a form of English...not entirely understandable by the colonies, but we tend to get most of it, see the chart below

But you get the idea.  Second aspect that is very attractive: English law -- very similar to New York law but with some interesting variations.  Finally as an AngloSaxon country many of the labor "rules" are similar.

The last one is why New York will be the big winner from Brexit.  Again New Yorker speak a form of English that most of us understand.  Looking at the "real contenders in Europe we have:


  1. Franfurt
  2. Luxemburg
  3. Paris


Let take care of Paris first, no "Wall Streeter" in his right mind will consider France, their labour system, and taxation make it prohibitive, plus their labor laws are "interesting" insofar as firing an employee is very difficult -- how would banks function in that environment?  Luxembourg is attractive but since it is the size of a pocket handkerchief with a population of 1/2 a million its simply not serious.  Already many of the Brits tried Zurich a few years back -- the country's infrastructure is simply not able to support bankers in any number (eg education).  That leaves Frankfurt -- and there they speak a very different English -- its called German, and Germans are very much like Americans; the vast majority only speak German (its not a fault its a feature).  Then there's German labor laws that are both expensive and Byzantine.

My best guess is that sales team will move to the continent (often in locations that are advantageous for the sales teams efforts), but that trading activities and all support activities will move to the US.  That's the most logical outcome.

Noise is coming out of Germany that they will reform their labor laws so that the rules only apply to salaries of less than Euro 150,000 thereby making Frankfurt more attractive, but how do you think the French will react to that shift.  My guess are screams of protest.  No overall, New York will benefits the most from Brexit!

As a side note things in Greece continue on their own rotten way.  Greece is expecting the release of the last tranche (Euro 2.8 billion) of the state aid that was given to Greece two years ago (for a total of around Euro 11 billion).  Big question, what will happen to Greece at the end of 2016, when the new cash (to repay the European investor's loans) run out?

I lost my bet so I am far less invested than I was before, still things in Greece are rotten (granted they are not that great in Italy or France for that matter).  What's the next step?



Wednesday, October 5, 2016

Investors: What is better Democrats or Republicans

Off the top, you have to say that the past three administration are a case and point that a Democratic president are better than a republicans for investors; During Clinton's 8 years and during Obama's 8 years the S&P 500 has been a very very strong performer, no su much for both Bushs

In 2015 DILJ did a study, their conclusion was:

There really shouldn't be any debate; on a historical basis, Democratic presidents are better for the stock market. The saying that Republican Presidents are better than Democrats for investors continues to be one of the bigger misconceptions there is in the investment world.
Yet, most investors (and a good portion of Wall Street) is for the Republican?  So there has to be something that the GOP offers that the Dems don't.  One thing for sure, GOP has been a big tax cutter for the richer parts of the electorate.  Again and again you see GOP elected at the state level lowering taxes on the wealthiest (often creating massive fiscal imbalance), but all that these "rich folks" gain from lower taxation they seem to lose from the market.

An excellent example is the impact of ACA (aka Obamacare) granted there are still massive problem with the law as it is written, with the GOP in congress doing everything to block it  (instead of amending) or even in some case making it even more difficult to function, there is no doubt that for the country as a whole it has been a very good thing, it has reduce medical expenses growth rate dramatically.   However, it is very far from being perfect.  Unfortunately the GOP's decision to delegitimize the White House and its occupant make any reasonable reform impossible.  Yet it has been very good for the US economy -- it has absolutely reduced medical costs as a percentage of GDP.  That is good for overall economic wellbeing and for the markets.

So what's up now with the options of Trump and Clinton.  To say that Trump had a bad two weeks would be an understatement of massive proportion.  The right tried, and failed, to imply that Clinton had done the same thing -- except she had not.  Yes she took a US$ 700,000 hit on her portfolio, but the tax reduction is only in her capital gains which was apparently $3,000 -- in 2015 her and her husband paid almost US$ 3 million in taxes.  This scandal is different because Trump has not paid taxes for 20 years -- he has not yet said that he actually paid taxes -- he was very careful to not imply that he did!!!

Clinton is doing well, sure she's not liked but then she was associated with Bill so has no ability to make any Republican happy.  Moreover, as Secretary of State she made mistakes -- it comes with the job.

Aside from all that its all good, it would see that Clinton will win the elections.  

We can only hope,