Wednesday, March 26, 2014

Today's Links

1---The Risk of Stock-Market Vertigo , Testosterone Pit

Under ZIRP as the law of the land, corporations have loaded up their balance sheets with cheap debt to fund anything from payroll to M&A and buy back their own shares. This debt will have to be rolled over at higher rates, and the ballooning interest expense will hit their earnings. Highly leveraged companies with junk credit ratings will have trouble rolling over their debt at rates they can live with. There will be defaults.

These things will blow up one at a time, here and there. But the impact of higher rates on share buybacks will hit the market as a whole, and in a big way: In 2013, the companies in the Russell 3000 stock index bought back $567.6 billion of their own shares, up 21% from 2012. That unrelenting corporate buying helped drive up the index 33.5%. So far this year, buybacks are on a similar trajectory.

Since 2005, share buybacks totaled $4.2 trillion, nearly a fifth of the total value of all US stocks today, the Wall Street Journal reported. And companies were buying at peak prices: during the third quarter in 2007, just before the bubble blew up, share buybacks hit $214.3 billion. For the year, buybacks set an all-time high of $728.9 billion “when banks binged on buying back their own shares right before they collapsed....”

Conversely, in Q4 of 2008 and Q1 of 2009, during the worst of the crash when prices were way down, buybacks for both quarters combined dropped to a measly $97.3 billion. Massive share buybacks are part of the self-reinforcing loop that drives stocks to dizzying heights. And when buybacks fizzle, that lack of demand pulls the rug out from under the already teetering market.

If the Fed pulls through, buybacks will get more expensive. The risky game of loading up the balance sheet with cheap debt to buy back shares, rather than invest in productive assets, will balloon interest expenses that will hit iffy earnings. That’s when the appetite for buybacks turns into nausea and a bout of stock-market vertigo. These are among the “unintended consequences” of the Fed’s ingenious QE and ZIRP policies.

2---Will Stock Buybacks Bite Back? , Wall Street Journal

Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares—a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.

There has been a lot of talk in the past few years about how index funds, which buy and hold stocks regardless of whether they are cheap or expensive, might be contributing to an overvaluation of the U.S. stock market. But the companies that make up the U.S. stock market might be contributing even more. And, if you wanted a signal of when to get in and out of the market, doing the opposite of whatever companies themselves are doing would serve you pretty well.

The Russell 3000 returned 33.5% last year, including dividends. At the end of 2012, the stocks in the index were trading at an average of 16.7 times their net earnings; by year-end 2013, the index was at a multiple of 20.6 times.

So, even as stock prices rose by a third and became a quarter more expensive relative to underlying profits, companies bought their own shares back more aggressively than the year before.
To be sure, corporations should favor a buyback when shares are trading below the total value of their future cash flows and when capital expenditures or acquisitions don’t appear likely to offer a higher rate of return. And investors ought to welcome a repurchase, since it should increase earnings per share—so long as the company isn’t overvalued and can finance the buyback cheaply.

Yet companies tend to exhibit the same perverse timing—buying high and selling low—as individual and institutional investors. As the market hit a then-record high in the third quarter of 2007, corporations bought back more than twice as much of their shares—$214.3 billion worth—as they did in the depths of the bear market. In the final quarter of 2008 and first quarter of 2009 combined, repurchases totaled only $97.3 billion.

“At the bottom, everybody sits on their hands,” says Michael Mauboussin, head of global financial strategies at Credit Suisse. “They don’t do anything when stocks appear to be cheap. But when stocks are expensive, then they buy back shares hand over fist.” The managers of companies might sometimes seek to offset the issuance of new shares when stock options are exercised; often, they are subject to the same fear and greed as anyone else....

Moreover, it appears that buybacks aren’t about to revisit the peaks of 2007. So far this year, all U.S. companies have bought back a total of $15.4 billion, according to Birinyi—about the same level as this time last year, implying that 2014’s pace will roughly match that of 2013.

And last year’s total was well below the all-time high of $728.9 billion in 2007, when banks binged on buying back their own shares right before they collapsed in the financial crisis.
“Over the past couple of years, the thinking has been that once people got secure with the market, they’d open the coffers and spend willy-nilly to buy back shares and we’d return to the levels of 2007,” Mr. Leiphart says. “But companies haven’t opened the floodgates like that.”

It is possible, Mr. Mauboussin says, that “maybe they’re painted into a corner and that’s all they have to do.” If the prospects for the growth of a business look dim, managers might not want to shell out for capital expenditures or research and development that won’t pay off for years—preferring instead the instant gratification of buying back stock.

Taken to extremes, that wouldn’t be healthy. In 1924, the pioneering investment theorist Edgar Lawrence Smith pointed out in his book “Common Stocks as Long Term Investments” that the ability of companies to plow earnings back into developing the future growth of their businesses is “a practical demonstration of the principle of compound interest.”
If share repurchases consume too much of companies’ excess profits, the underlying businesses might end up starved, which could lower future returns.

So the surge in buybacks is worth watching closely. If companies end up chasing their own shares as high as they did in 2007, a fall to earth might not be far behind.

3---Krugman and DeLong on Avoiding Secular Stagnation, Dean Baker

The basic story going into the crash was that we had an economy that was being driven by the housing bubble. This was both directly through residential construction and indirectly through the consumption that followed from $8 trillion of bubble generated housing equity. Residential construction expanded to a record high of more than 6 percent of GDP at a time when demographics would have implied its share would be shrinking. This led to enormous overbuilding, which is why construction hit record lows following the crash. (There was a smaller bubble in non-residential real estate that also burst in the crash.)

Consumption also predictably plummeted. This is known as the housing wealth effect. (I learned about this in grad school, didn't anyone else?) Anyhow, when people saw their homes soar in value many spent in part based on this wealth. This might have meant doing cash out refinancing, a story that obsessed Alan Greenspan during the bubble years. It might mean a home equity loan, or it might just mean not putting money into a retirement account because your house is saving for you.

In any case, when the $8 trillion in bubble generated equity disappeared so did the consumption that it was driving. You can't borrow against equity that isn't there. This cost the economy between $400 billion and $600 billion (@ 3-4 percent of GDP) in annual consumption expenditures. Between the lost construction and lost consumption, it was necessary to replace close to 8 percent of GDP. The effect of lost tax revenue in forcing cutbacks at the state and local level raised the demand loss by another percentage point or so.

4---Showdown in Ukraine: Putin’s Quest for Ports, Oil, Pipelines and Gas, oil price

There is also another reason for Putin’s intervention in Ukraine and that has to do with Russia elbowing for dominance of the very lucrative and strategically important “energy corridors.”
That is very likely to be the major reason why Putin is willing to risk going to war with the West over Crimea, the pipelines that traverses the Caucasus and the oil and natural gas these pipelines carry westwards to Europe.

Given the geography of the region there are only so many lanes where the pipelines can be laid; and most of them transit through Ukraine. Others travel across Azerbaijan and Turkey. Most of Western Europe’s gas and much of Eastern Europe’s gas travels through Ukraine.

If Russia has vested interest in “recolonizing” Ukraine, the United States on the other hand has its own interests in Ukraine and other former Soviet areas.
What is going on today is nothing short of a race for control of what’s going to dominate the energy markets over the next two or three decades: the energy corridors from Central Asia, the Caucuses and through Russia and Ukraine.

As stated in a report published by the Woodrow Wilson International Center for Scholars, “the proclamation of independence, the adoption of state symbols and a national anthem, the establishment of armed forces and even the presence on Ukrainian territory of nuclear missiles—all important elements of independent statehood—amount little if another power, Russia, controls access to fuel without which Ukraine cannot survive economically..

That same report denotes that "Ukraine's strategic location between the main energy producers (Russia and the Caspian Sea area) and consumers in the Eurasian region, its large transit network, and its available underground gas storage capacities," make the country "a potentially crucial player in European energy transit" - a position that will "grow as Western European demands for Russian and Caspian gas and oil continue to increase."

Ukraine's dependence on Russian energy imports has had "negative implications for US strategy in the region."
As long as Russia controls the flow of oil and gas it has the upper hand. Russia's Gazprom currently controls almost a fifth of the world's gas reserves.

More than half of Ukraine’s and nearly 30% of Europe's gas comes from Russia.  Moscow wants to try and keep things going its way; Washington and Brussels find it in their interests to try and alter that by creating multiple channels for central Asian and Caspian oil to flow westwards.
Ukraine today finds itself in the center of the new East-West dispute.

Ironically, the very assets that make Ukraine an important player in the new geopolitical game being played out between Washington and Moscow is also its greatest disadvantage.

The 4-week average of the purchase index is now down about 19% from a year ago.
5---Yikes!  The 4 week average of the purchase index is now down 19% from a year ago. , calculated risk

6---A Chart That Spells Trouble for Abenomics , WSJ
One of Japan’s economic problems is the tendency of companies to sit on cash instead of putting it to productive use, and new data from the Bank of Japan8301.TO +0.40% show the problem isn’t getting better.
As this chart shows, cash and deposits held by private-sector companies stood at about 222 trillion yen, or $2.17 trillion, as of Dec. 31, up 6.4% from a year earlier, just after Prime Minister Shinzo Abe took office.

It was natural for companies to stay cautious after the global financial crisis. But now Mr. Abe wants them to step up investment and raise workers’ paychecks using their cash holdings, now equal to nearly half Japan’s annual economic output by this measure. Will it work? The shape of this chart a year from now may give the answer.

7---Abenomics: Deposits exceed expansion,---The Failure Of Abenomics In One Chart... When Even The Japanese Press Admits "Easing Is Not Working" (archive), zero hedge

We will however, show the one chart summary which captures all the major failures of the BOJ quite succinctly.

BOJ’s money mountain growing but debt may explode

by Reiji Yoshida

Haruhiko Kuroda hit the ground running when he was appointed by Prime Minister Shinzo Abe in March to take charge of the Bank of Japan.

Out of the blue, the central bank’s new governor unveiled a super-aggressive easing policy the next month to double the nation’s monetary base in just two years. He said the BOJ would buy more than ¥7 trillion in long-term Japanese government bonds per month to flood the financial system with money to end more than a decade of deflation.

The BOJ’s nine-member Policy Board unanimously supported Kuroda’s goal of stoking 2 percent inflation in two years — a surprise about-face from its stance under his predecessor, Masaaki Shirakawa, who was concerned about the potential side effects of embracing such radical quantitative easing.

More than six months have passed. How has the BOJ’s strategy changed Japan’s financial markets and the real economy?

Critics say Kuroda’s monetary easing scheme isn’t working, although most of the public apparently believes otherwise.

More than six months have passed. How has the BOJ’s strategy changed Japan’s financial markets and the real economy?

Critics say Kuroda’s monetary easing scheme isn’t working, although most of the public apparently believes otherwise.

There are growing signs of inflation, but not the sort heralding the start of Abe’s much-advertised recovery and rising wages. Instead, imported fuel and other products have become more expensive because of the weak yen ushered in by Kuroda and Abe, and this bodes ill for the public’s living standards.

Meanwhile, Kuroda’s aggressive plan is allowing the debt-ridden government to issue fresh bonds continuously, further increasing the likelihood of a fiscal crisis, they said.

People have been deceived by ‘Abenomics,’ ” Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies, told The Japan Times in a recent interview.

Monetary easing is not working, and it’s going nowhere,” Noguchi said.

Since April, the BOJ has been gobbling up JGBs from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued.

But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.

“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working,” Noguchi said.

Japan’s monetary base — the sum of cash in circulation plus banks’ current account balances at the BOJ — surged from 23.1 percent in April to 45.8 percent in October, thanks to the BOJ’s aggressive operations.

But its money stock — the total amount of monetary assets available in an economy including credit created by bank loans, but excluding deposits held by financial institutions and the central government — only rose to 3.3 percent from 2.3 percent in the period.

This means banks are just depositing the massive funds provided by the BOJ in their own accounts at the central bank. The unloaned cash is thus having little affect on the real economy.

Japan’s trade balance has turned into a deficit and the current account surplus has shrunk. Japan posted a surplus of ¥3.05 trillion in the current account for the April-September half, the second-lowest level since 1985, when comparable data became available.

8---Meet the Americans Who Put Together the Coup in Kiev, rsn

The State Department controls the prime funding sources for non-military intervention, including the controversial National Endowment for Democracy (NED), which Washington created to fund covert and clandestine action after Ramparts magazine and others exposed how the CIA channeled money through private foundations, including the Ford Foundation. State also controls the far-better-funded Agency for International Development (USAID), along with a growing network of front groups, cut-outs, and private contractors. State coordinates with like-minded governments and their parallel institutions, mostly in Canada and Western Europe. State's "democracy bureaucracy" oversees nominally private but largely government funded groups like Freedom House. And through Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland, State had Geoff Pyatt coordinate the coup in Kiev.

The CIA, NSA, and Pentagon likely provided their specialized services, while some of the private contractors exhibited shadowy skill sets. But if McGovern knows the score, as he should, diplomats ran the campaign to destabilize Ukraine and did the hands-on dirty work.

Harder for some people to grasp, Ambassador Pyatt and his team did not create the foreign policy, which was – and is – only minimally about overthrowing Ukraine's duly elected government to "promote democracy." Ever since Bill Clinton sat in the Oval Office, Washington and its European allies have worked openly and covertly to extend NATO to the Russian border and Black Sea Fleet, provoking a badly wounded Russian bear. They have also worked to bring Ukraine and its Eastern European neighbors into the neoliberal economy of the West, isolating the Russians rather than trying to bring them into the fold. Except for sporadic resets, anti-Russian has become the new anti-Soviet, and "strategic containment" has been the wonky word for encircling Russia with our military and economic power....

Tensions will also grow as the US-picked interim prime minister Arseniy Yatsenyuk – our man "Yats" – joins with the IMF to impose a Greek, Spanish, or Italian style austerity. Hard-pressed Ukranians will undoubtedly fight back, especially in the predominantly Russian-speaking east. According to Der Spiegel, a whopping three quarters of the people there do not support the coup or government. What a tar patch! A domestic conflict that could split Ukraine in two will inevitably become even further embroiled in the geo-strategic struggle between Russia and the West.....

Revolution on Demand
Arriving in the Ukrainian capital on August 3, Pyatt almost immediately authorized a grant for an online television outlet called Hromadske.TV, which would prove essential to building the Euromaidan street demonstrations against Yanukovych. The grant was only $43,737, with an additional $4,796 by November 13. Just enough to buy the modest equipment the project needed.

Many of Hromadske's journalists had worked in the past with American benefactors. Editor-in-chief Roman Skrypin was a frequent contributor to Washington's Radio Free Europe / Radio Liberty and the US-funded Ukrayinska Pravda. In 2004, he had helped create Channel 5 television, which played a major role in the Orange Revolution that the US and its European allies masterminded in 2004.
Skrypin had already gotten $10,560 from George Soros's International Renaissance Foundation (IRF), which came as a recommendation to Pyatt. Sometime between December and the following April, IRF would give Hromadske another $19,183.

Snyder fails to mention that Pyatt, Soros, and the Dutch had put Web TV at the uprising's disposal. Without their joint funding of Hromadske and its streaming video from the Euromaidan, the revolution might never have been televised and Yanukovych might have crushed the entire effort before it gained traction.

For better or for worse, popular uprisings have changed history long before radio, television, or the Internet. The new technologies only speed up the game. Pyatt and his team understood that and masterfully turned soft power and the exercise of free speech, press, and assembly into a televised revolution on demand, complete with an instant overdub in English. Soros then funded a Ukrainian Crisis Media Center "to inform the international community about events in Ukraine," and I'm still trying to track down who paid for Euromaidan PR, the website of the Official Public Relations Secretariat for the Headquarters of the National Resistance....

Weingarten visited Kiev not on behalf of Ukrainian teachers—who will face devastating cuts as the new Western-backed regime imposes a Greek-style IMF austerity plan—but as an operative of the US State Department.

These efforts are not new. The AFT and AFL-CIO were deeply involved in the so-called Orange Revolution, the first effort by US-backed forces to install an anti-Russian regime in Ukraine. The AFL-CIO, through its State Department-funded American Center for International Labor Solidarity (Solidarity Center), cultivated close ties with Mikhail Volynets, the president of the Confederation of Free Trade Unions of Ukraine (KVPU), who was elected to parliament in 2005 as a deputy of the Fatherland Party of energy oligarch Yulia Tymoshenko. The AFL-CIO awarded “Brother Volynets” the 2004 George Meany & Lane Kirkland Human Rights Award.

This reactionary activity in Ukraine is part of a broader foreign policy pursued by the AFT and the AFL-CIO. Over the course of many decades, the American trade union federation has funded and promoted far-right and fascistic forces against left-wing and Communist trade unions around the world. The former long-time president of the AFT, Albert Shanker, was a particularly rabid anti-communist, who supported the Vietnam War and CIA subversion campaigns around the world.

Organizations such as the Inter-American Regional Labor Organization (ORIT) and the American Institute for Free Labor Development (AIFLD), the predecessors of the AFL-CIO Solidarity Center, functioned as labor fronts for CIA-organized coups in Guatemala (1954), British Guiana (1963), Brazil (1964), the Dominican Republic (1965) and Chile (1973). Solidarity Center was a conduit for money from the National Endowment for Democracy to right-wing trade unions active in the failed attempt to overthrow Venezuela’s Hugo Chavez in 2002.

In the protests that led to the February coup in Kiev, the Solidarity Center’s Ukrainian “partner,” the Volynets-led KVPU, collaborated with leading oligarchs to call an “All-Ukrainian strike” to destabilize the Yanukovych regime. (See: The US State Department’s “labor man” in Ukraine). The effort, however, failed to garner any significant support in the working class, given that the opposition parties were committed to implementing an IMF-dictated austerity plan and provoking a confrontation with Russia that threatened a catastrophic war.

The support for American imperialist interests in Ukraine and around the world is closely linked to the policies the AFT and Randi Weingarten pursue in the United States. The AFT has collaborated with the Obama administration and billionaires such as Bill Gates to implement a corporate-driven “school reform” agenda. This has led to the destruction of hundreds of thousands of teachers’ jobs, the abolition of long-standing rights such as teacher tenure, and an explosive growth of privately run charter schools. The main role of the AFT has been to suppress opposition among teachers, parents and students to the destruction of public education.

Teachers cannot defend their interests through an organization that is a tool of the US State Department and corporate America

The junta has murdered thousands and is about to hang hundreds of its opponents, and the European Union has the gall to still talk about Egypt’s “transition towards democracy.”

Not wishing to be outdone, the US State Department, in a declaration that might have been penned by a master of black comedy, called upon “all parties and groups in Egypt to make sure that as their democratic transition moves forward, it’s done so in an inclusive manner.” The 529 condemned must await further instructions from Secretary of State John Kerry as to how they should “move forward” to democracy as they stand on the gallows with their hands tied and ropes around their necks.

The military would not have dared hand down the death sentences were it not confident that it is acting with the support of the Obama administration. Field Marshall Abdel-Fattah al-Sisi is nothing other than a modern Egyptian version of the late Chilean dictator, General Augusto Pinochet. Like the former Chilean dictator, al-Sisi came to power in a US-backed military coup and has the support of the imperialist powers in erecting a fascistic military dictatorship and declaring war against the working class....

The death sentences and the junta’s preparations for an ever more direct fascistic dictatorship is a warning. It confirms that the ruling elite will stop at nothing and is ready to defend its class interests with the bloodiest measures against any challenge by the working class.

12---CBS poll found that 65 percent of Americans did not think the United States should provide military aid to the Kiev regime, wsws

There is deep opposition in the American and European working class to further military escalation against Russia in support of the far-right regime in Kiev. A recent CBS poll found that 65 percent of Americans did not think the United States should provide military aid to the Kiev regime. Only 26 percent called for the provision of such aid.
The poll also found that 61 percent of the population did not think the United States has any “responsibility to get involved” in the conflict between Russia and Ukraine.

13---24% of all purchase loans have a debt-to-income ratio greater than the CFPB’s Qualified Mortgage rule limit of 43%, a new series high.

Mortgage Risk Index-March 2014 Release

March 21, 2014 Edward Pinto AIE---
To put the February level of 11.6% in perspective, the NMRI for loans originated in 1990, when prudent underwriting standards predominated, was about 6%.  In contrast, the NMRI for the exceptionally risky 2007 vintage of loans was about 19%.  Consequently, the January level indicates that housing risk is substantially higher today than in 1990, but does not approach the level in 2007 when credit standards were the loosest in many decades....

reasons for caution

Half of all purchase loans and a quarter of F and F purchase loans have a minimal down payment of 5 percent or less.

BRICS countries express concern over Australian foreign minister’s comment that Putin could be barred from attending the G-20 Summit in Nov

16---More specifically, 65 percent of Americans do not think the U.S. should provide military aid and equipment to Ukraine in response to Russia's actions, while only 26 percent think the U.S. should. Majorities of Republicans (59 percent), Democrats (67 percent), and independents (69 percent) are opposed to providing military aid and equipment to Ukraine.

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