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Are Equity Yields A Screaming Buy – Or Reversion To Reality?

In many countries around the world the main equity market has a dividend yield above its 10 year bond yield and in many cases its average IG credit yield. Although this isn’t the first time that such an outcome has been seen through history, at a minimum it’s reversing what has been a 50-year-plus trend where equity dividends were below bond yields. Currently, the US, UK, Germany, and France all have equity dividend yields above their 10 year govvie. However, before the world and their pet snake Sebastian decide this is the buying opportunity of a lifetime, a little more context shows that this was the normal from the start of the 20th century to around the end of World War II. In fact – if we replace government bond yields with corporate bond yields the picture appears to be a huge mean-reversion back to pre-World-War II relative valuations (where dividend yields were consistently higher than corporate bond yields). As Deutsche’s Jim Reid notes though – it is more likely that it might be that fixed income and equities are both expensive as central banks have artificially elevated prices in everything in an attempt to keep the financial system solventand furthermore this is not the time for epic asset allocation switches.


Quite clearly, there have been two very significant regimes with regard the relative valuation of government bonds and equities. We suspect few have seen the full history as all too often the argument of high relative equity yields is only considered in the last 50 years…


and looked at on the more apples to apples basis of corporate bond financing vs equity capital (corporate bond yield vs equity dividend yield) – it is clear that we have seen two huge phases (red and green) and perhaps where we currently sit is a reversion to the pre-WWII spendathon era relative value perspective of stocks and bonds…

Charts: Deutsche Bank

Via Deutsche Bank:

There is little doubt that on the dividend vs. bond yield measure, equities look as good relative value as they have done for at least half a century. However it’s fair to say that both yields are low in absolute terms, but that bonds are at extreme levels relative to history.


Are the more competitive equity yields a threat to bond markets as funds look to switch out of fixed income for better value? It’s easy to conclude that the answer is yes but fixed income yields still need to be as low as the authorities can make them to ensure that the debt mountain that virtually all developed countries have across public and private sectors are funded smoothly. With this in mind it’s unlikely that regulatory flows will move substantially away from fixed income in the near future. We also may still see risk aversion regularly hit markets which will generally keep the bid for perceived safe havens high.


So while equities may out-perform bonds over any sensible medium-term horizon from this starting point, we’re not sure it will be through a conscious asset allocation switch. It will be more through dividend accumulation and re-investment against ultra low bond yield competition.

US Treasury Moves To 'Sell' Recommendation On AIG

In a move that we can only presume is to provide more room in their book for some GM Fleet purchases or Twinkie benefits, the US Treasury just announced (via Bloomberg):




AIG’s share price is sliding (-3.5% AH) – surprise – as the decision to liquidate 234 million shares (10x the recent daily average) into such a highly liquid market will, we are sure, be spun as nothing but positive (and a great success for Geithner et al.). Of course, unwinding the even more illiquid warrants was not on the cards. Interesting timing following the sale of AIG’s ILFC unit so close behind to the Chinese.


WASHINGTON – Today, the U.S. Department of the Treasury announced that it has launched an underwritten public offering for all of its remaining 234,169,156 shares of American International Group, Inc. (AIG) common stock.


If the offering is completed, Treasury would continue to hold warrants to purchase AIG’s common stock that were also issued as part of AIG’s participation in Treasury programs.


AAPL Slides As The Dow Abides

UPDATE: In the last few seconds of trading ES jumped 3 points on Buffet comments about Dimon for Treasury and WSJ chatter about Fiscal Cliff progress (ES +4.25pts on day) – and just like that… the gains were gone – the Kaiser Soze market continues…


We have officially run out of expletives to describe the volumelessness of the equity trading markets. Today’s S&P futures volume was dismal – among the lowest volume days of the year (even including holidays and half-days). Today’s range was relatively narrow and while risk-assets in general were highly correlated, there was noise and the liquidity was simply not there. AAPL continued its VWAP-based slide – holding NASDAQ back overall – but with MCD’s gains accounting for around half of the Dow’s gains on the day (and the S&P getting lifted with every VWAP-driven jerk lower in AAPL), it seems the ‘buying’ interest was largely absent. Treasury yields ended lower, VIX higher (though well off its highs of the day), high-yield credit practically unchanged, and the USD very modestly lower providing just enough impetus to keep the S&P green on the day (and the month +0.15%). The Industrials and Transports have recoupled at +1.2% on the month while the NASDAQ languishes -0.77% since 11/30. Oil was probably the mover of the day with WTI -0.3% – notably awry of the +0.5% gains in Silver and Oil and +1.1% in Copper. Financials lagged and Materials led as the day came to a quiet end around VWAP with the machines well and truly in charge.

NASDAQ remains anchored by AAPL as the Dow Industrials and Transports recouple on the month. S&P remains buoyed by AAPL hedge unwinds… NOTE: The Dow closed above its 50DMA and 100DMA – but – the 50DMA crossed below the 100DMA in a mini-death-cross


For the month, there appears three sector cohorts: Underweight Tech, Discretionary, Materials; Overweight Financials, Industrials; and Marketweight Energy, Utes, and Staples.


AAPL dominates the entire trading day as every fund tries to cling to its YTD gains without destroying the market with its unwind – as game theoretical fun continues (we suspect sooner rather than later, the realization of a first mover advantage will take hold and there’ll be no looking back)…


A shocking lack of stop-runs and dumps in precious metals today as the afternoon appeared dead – for all but WTI which slid from the European close…


All-in-all, a pretty quiet day with some noise around the models which reflected a notable lack of liquidity out there. But in general risk all played along sideways today…


Charts: Bloomberg and Capital Context


Bonus Chart: After-hours chatter from Buffett on Dimon for Treasury and WSJ comments on Fiscal Cliff progress pushed SPY up through S&P 500 futures’ close – but there appeared to be no follow-through…

Guest Post: Nearing The End of Serfdom’s Road

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada

Nearing The End of Serfdom’s Road

In France, Minister for Energy and Environment Delphine Batho recently proposed a light curfew to pertain to “in and outside shops, offices, and public buildings” between 1 a.m. and 7 a.m. beginning next July. Some merchants are up in arms as the rule adds to existing bans such as the forced closing of stores on Sunday and night shopping in general. If enacted, the illumination ban will quickly disperse Paris’s reputation as the “City of Light.”

France’s Commercial Council is criticizing the decision as being anti-business and economically damaging. However, the fact that these assumed defenders of free enterprise are surprised at such a proposal is the real puzzle. In a country run by a government that is happily bloodletting the productive capacity of the people through a hike on the income tax and a tax on financial transactions, this latest nanny-state resolve should be fully expected. It is not a power grab but a mere reassertion of the authority the central state has over the private affairs of society.

The “lights out” edict is just another piece of evidence of a disturbing truth: the road to serfdom is not ahead of the West; we have already reached its end.

Such a statement may be objected to as private property and a certain degree of freedom still exist in the West.  But this is these just a mirage. The property tax effectively nullifies the notion of private property. In many places, police brutes allow themselves into your home and on your land with little recourse possible. Billions of electronic correspondences are collected daily by the Federal Bureau of Investigation of the United States. In 1961, the United Nations released the Single Convention on Narcotic Drugs which has since served as a framework for drug prohibition in all major countries.

As William Grigg points out,

Drug prohibition is a subset of slavery – in both its philosophical premise (the denial of individual self-ownership) and its role in creating a huge and growing population of people in chains.

Ownership of one’s body and those resources to which it appropriates itself is no longer a respected law in Western society. Through years of indoctrination, it is accepted by the greater public that the individual is beholden to the state- not vice versa. Personal identity is now followed by a reference to the government. And blind patriotism is seen as a virtue instead of a demeaning attribute.

Radical individualism isn’t the only thing the nation-state has successfully crushed. The industries which have elevated man above subsistence living have all been co-opted the political machinery.

Today, there is no industry untouched by government. Each and every business must adhere to an innumerable list of erroneous, arbitrary, and contradicting regulations that makes it impossible to run in accordance with personal preference. At any given moment, entrepreneurs run the risk of being shut-down either through the breaking of a rule or at the behest of a politically-savvy competitor. The idea of “pursuing happiness” that was written so eloquently by Thomas Jefferson is no longer present in America or the West. Before happiness is pursued, the criminal class at each level of government must be paid off. If not, then a hefty fine or a jail sentence is applied. Because man’s only means of survival is production, the state holds hostage the very permission to engage. From a power-hungry perspective, the scheme is ingenious. From the perspective of natural law, the predation through which the political class coerces society is worthy of disgust and contempt.

As Albert Jay Nock so rightly put it,

In a spirit of sheer conscious fraud, the State will at any time offer its people “four freedoms,” or six, or any number; but it will never let them have economic freedom. If it did, it would be signing its own death-warrant…

It is now best to think of business as having the ever-present shadow of government lurking behind it. There isn’t a shred of legal free market capitalism to be had anywhere in the Western world. The only freedom that exists has been suppressed to the black market.  For every inspired mind that wishes to build an empire serving customers, there stands an equal number of burglars, thugs, and cheats ready to take from whatever success may be had. These practitioners of theft heartily announce their intentions as being “for fairness” when in reality they are serving their own interests.

When it comes to industries deemed valuable for the functions of a complex industrial economy, the state has all but nationalized them. Banking, health care, roads, bridges, and education are completely under government control; or in the very least, heavily regulated. The degree of competition in each of these fields is humorously low. The inevitable result has been a decrease in quality, the persistent heightening of price, and the creation of an elite class that lobbies for even greater protection.

This can be observed in the instance of radio waves. While media conglomerates broadcast over the medium, the medium itself is entirely state-owned. Austere standards must be adhered to less the privilege of broadcasting over the government-controlled medium be revoked. The so-called “private” radio broadcasting companies are, in actuality, leashed to the state and forced to do its bidding.

The news industry is more of the same. It is a sad but amusing truth that the press makes a mockery out of its own profession. To differentiate themselves from being mouthpieces for the state, it is understood that reporters and commentators should provide, not an unbiased view of government happenings, but a challenge to those in positions of power. Instead, most major news outlets are one within the ruling class and make no effort to hide it. Recently, MSNBC commentators Ed Schultz, Rachel Maddow, Lawrence O’Donnel, and Al Sharpton met with President Obama for what was deemed a “messaging session.” No one questions that the purpose of the meeting was to round up the attack dogs, pamper them accordingly and send them out to television cameras to feed the President’s nonsensical propaganda to the masses. Such a practice was once done in secret. Not anymore now that the press serves the central government instead of the people.

With law, the state has not only claimed absolute command over its authority but has also perverted its meaning to the point of being useless and hollow. Through the outlawing of non-crimes, the locking up of millions of individuals followed. Again, this was easily anticipated. Without a law based on the natural organization of mankind, society devolves into shambles. Today’s rule of law isn’t defined by reason but simply the whims of the political class. There is no longer a concrete method to determine if one of the hundreds of thousands of state-issued edicts becomes broken. This is especially so in America. As former National Security Agency employee William Binney describes it, most Americans,

…think they are not doing anything that’s wrong, they don’t get to define that. The central government does, the central government defines what is right and wrong and whether or not they target you. So, it’s not up to the individuals. Even if they think they aren’t doing something wrong, if their position on something is against what the administration has, then they could easily become a target.”

This is not the rule of law; it is the absence of law. When government reaches a point where it unilaterally decides what is legal and illegal outside the constraints of basic decency, there no longer exists a check on its propensity to expand. In other words, it is the final sign of supreme state rule and the unstoppable degeneration of civilization.

The West has reached the point of full state dominance. Whether this continues to be accepted or is blessedly defied remains to be seen. This writer finds little hope in the latter. Humanity appears to be adept at two things: protecting itself while simultaneously working toward its own demise. Its self-imposed destruction is almost fascinating to watch unfold. As the Roman Emperor Marcus Aurelius once observed, “in the ripe olives the very circumstances of their being near to rottenness adds a peculiar beauty to the fruit.”

Many people still believe they are free even though virtually every movement they make is affected in some fashion by the state. Sooner or later, it will be realized that in return for the feedings at the government trough, the West has thrown away what promise it had in constructing a free society. The freedom most think about in modern times is typically in reference to the right to voice an opinion or work for whomever they wish. This is false. Freedom today is represented only by the distance between skin and chain.

In the end, knowing full well the challenges which stand between man and liberty can be comforting. It means that the ills of society are easily diagnosed and it is accompanied by a feeling of predictability. The state will continue to swallow up large swaths of civilization until it can’t anymore. Then perhaps, God-willing, a free society will show its face.

The fact remains that liberty is far behind us. There is hardly a soul left on Earth that experienced life without the gargantuan state. The prospect of changing the impeding course is not impossible but increasingly slim. Fooling yourself into believing otherwise is an exercise in futility. A reminder of the central government’s endless reach will eventually cross your path.

As Garet Garrett wrote in his great polemic “The Revolution Was

There are those who still think they are holding the pass against a revolution that may be coming up the road. But they are gazing in the wrong direction. The revolution is behind them. It went by in the Night of Depression, singing songs to freedom.

Investor Sentiment: More Issues

Add extreme selling by corporate insiders to last week’s list of worries. This “smart money” is selling to a degree last seen February 18, 2011. Following this signal, the SP500 spent the next 6 months going sideways before falling 18% over a 4 week period in August. Of course, the market was “saved” by Operation Twist. Last week’s issues included: 1) only modest extremes in investor sentiment at the recent bottom; 2) lack of consensus amongst the various sentiment data; 3) the lack of both bulls and bears in this market; in essence and by our measures, investors are just moving to the sidelines. The problem with this market is that it can’t seem to sell off enough to produce a sustainable rally.

Continue reading Investor Sentiment: More Issues