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Andrew Ross Sorkin: No Way U.S. Would Allow Debt Default? Don't Bet on It -

Andrew Ross Sorkin: No Way U.S. Would Allow Debt Default? Don't Bet on It - Here is the opening for this interesting and controversial column published by The New York Times (subscription registration is required but a PDF version is in the Subscriber's Area):

"The United States government is not going to default, ever."

That's what Vincent Reinhart, former head of the Federal Reserve's monetary division and now managing director and chief United States economist for Morgan Stanley, said late last week.

"As political theater," he said, "the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default."

Mr. Reinhart's view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: "We'll go right up to the point of extreme idiocy, but we won't cross it."

Nobody believes the country will actually exceed the debt limit - which is exactly why it might.

Oddly enough, despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.

Here's the perversity of Wall Street's psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn't reached.

John Podesta, the former chief of staff for President Bill Clinton, said that while only weeks ago he thought it was almost impossible that Congress wouldn't reach a deal, he now questions whether it will be reached in time.

What happens when the government exceeds the debt limit? It is often forgotten, but it actually did default once, in 1979 - but this was by accident.

My view - I agree with Vincent Reinhart but Andrew Ross Sorkin makes an interesting point. Moreover, the polarised positions of many Republicans and Democrats during this political impasse can easily lead to brinkmanship, especially if Wall Street is not overreacting.

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How Investors Lose 89 Percent of Gains from Futures Funds; 'License to Steal' -
Here is the opening of this important article from Bloomberg:

Investors in the $337 billion managed-futures market, expecting returns that will defy stock market slumps, instead find most of their gains gobbled up by commissions.

The pitch was enticing. At a time when the Standard & Poor's 500 Index had suffered a decline of 41 percent in the previous three years, Morgan Stanley (MS) was offering its clients the possibility of some relief.

In a prospectus, the New York securities firm invited its customers to put their money into a little-known area of alternative investing called managed futures.

"If you've never diversified your portfolio beyond stocks and bonds, you should know about the powerful argument for managed futures," the bank wrote. "Managed futures may potentially profit at times when traditional markets are experiencing losses."

Morgan Stanley presented a chart telling investors that over 23 years, people who put 10 percent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds, Bloomberg Markets magazine will report in its November issue.

Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

No Gain

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley. After all of that was deducted, investors ended up losing $8.3 million over 10 years.

My view - This is a long article but it is certainly worth reading because the charges are outrageous, including incentive fees for brokers of up to 4 percent of assets invested and investors paying up to 9 percent in total first year fees.

This item continues in the Subscriber's Area.

A controversial report on Japan -
This item is in the Subscriber's Area.

Email of the day - On The Browning Newsletter:

"Browning is a superb rational analysis-a tonic after the near hysterical ravings at the IPCC (PERSONAL VIEW-A BUNCH of massively vested interest fruitcakes. Of course I could be wrong)."

My comment - The trouble is, mankind cannot afford to be seriously wrong on this subject. However, if we focus on scientific rather than draconian 'solutions', I think we could begin to reduce pollution already in the atmosphere. Moreover, that effort might even become self-financing.

Additional commentary by Eoin Treacy

Investing in global megatrends: Stop digging for gold, sell shovels instead - Thanks to a subscriber for this heavyweight 236-page report from Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section:

The European companies with the highest share of sales to Asia are mostly from Industrial Goods & Services, Basic Resources, Personal Goods/Luxury Goods and Technology sectors (see Figure 305 for details). The top-ranked company DKSH has 97% sales exposure to Asia and derives only 3% of its sales from Europe. Dialog Semiconductor, CSR, Aixtron and ASML are the Technology companies among the top 10 European companies with the highest exposure to Asia. Also, the two large Mining players Vedanta Resources and BHP Billiton are among the top 10 European companies with exposure to Asia. For investors with a specific sector/country focus, Figure 306 and Figure 307 provide the top five companies by sales exposure to the Asia/Pacific region for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively.

3.2 Highest sales exposure to the Americas
The European companies with the highest share of sales to the Americas include Industrial Goods & Services, Healthcare, Food & Beverage and Media sectors (see Figure 308 for details). Healthcare companies with high sales share to the Americas include BTG plc. (87% of sales), Elan (74%) and Shire Plc (68%). Industrial Goods & Services companies with a high sales share to the Americas include Ashtead Group (83% of sales), Experian (69%) and MTU (66%). For investors with a specific sector/country focus, Figure 309 and Figure 310 provide the top five companies by sales exposure to the Americas for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively

3.3 Highest sales exposure outside of Europe
The European companies with significant share of sales from outside Europe in 2012 are given in Figure 311. Again, Industrial Goods & Services, Technology and Healthcare companies dominate. As many as four Technology companies (CSR, ASML, Aixtron and Dialog Semiconductor) feature in the top 10 companies with significant sales exposure outside Europe. For investors with a specific sector/country focus, Figure 312 and Figure 313 list the top five companies with highest sales exposure outside of Europe for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively.

Highest positive and negative changes in the absolute level year-on-year
Companies that increased their sales exposure outside Europe the most from 2011 to 2012 are given in Figure 314. Industrial Goods & Services companies increased their sales share outside of Europe the most with 8 companies in the top 25 list, followed by Oil & Gas and Healthcare companies. Large caps on this top 10 list include Aggreko and Kering.

My view - This report helps to highlight the extent to which companies are outgrowing their respective domestic markets, which is a point we have emphasised at Fullermoney through our Autonomies theme for several years. Subscribers interested in this way of viewing markets are likely to find value in the numerous tables of companies posted.

Mario Draghi is using every opportunity to reiterate that the ECB is willing to do whatever is necessary to ensure the survival of the banking sector, the currency and the smooth operation of the economy. Therefore with the Eurozone economy back on a modest growth trajectory, the direst predictions have been proved wrong. As a result, Europe is likely to pose less of a headwind for its globally oriented companies.

Some of the more interesting chart patterns include:

This section continues in the Subscriber's Area.

Trading Strategies - Thanks to a subscriber for this edition of Pictet’s daily brief dated October 4th. The full report is posted in the Subscriber's Area but here is a section on gold:

Bearish for Two Reasons - We are bearish on gold and silver shares for two reasons. Firstly, we are bearish on the metals. Secondly, we note that equity valuations contracted sharply after the last big mega market in the seventies and we do not think that valuations have completed enough of that post-peak phase yet in the current bear market.

Gold Remains in a Bear Market - We believe that gold peaked in 2011 and that it is still in a bear market. Only the occasional rally will provide some optimism and we believe that the recent bear-market rally is drawing to a close. In February 2013 we downgraded two UK gold/silver shares to Sell, in March we downgraded another to Sell and in April another 3 such that all of our UK-covered gold-silver stocks were Sell-Rated at that time. In early July we upgraded 3 of the better quality names to Neutral on the assumption that gold could have a meaningful rally within an ongoing bear market. We are downgrading gold shares once more.

Valuations Cheaper than 2011/12 but Expensive vs. Longer History - We show in this document how that gold equity valuations contracted sharply after the previous mega bull market in the seventies. We compare that to events in the early stages of the current bull market and conclude that valuations have not yet contracted enough.

High - All-In - Costs - We estimate that ~98% of the global gold industry (based on production on our cost curve) is currently cash-burning on an ‘all-in’ cost basis. This is mainly as the gold producers are failing to cut capex, exploration and corporate costs quickly enough to keep up with a 12% fall in the gold price.

Reducing our Valuations - For reasons explained in this document, we have reduced the P/NPV ratio which we use to set our target price on Fresnillo, Randgold and Polyus from 1.4x P/NPV to 1.25x P/NPV. The outcome is that we now downgrade Polyus from Buy to Neutral and we downgrade Fresnillo and Randgold from Neutral to Sell. All that we have done is to review the premium between the better quality golds and the poorer quality golds (where we use 1.1x P/NPV) and have decided to close the gap based on what is on offer from competing miners. (Citi)

My view - In currencies the challenge is always to trade the strongest against the weakest. Over the last decade gold has become remonetised in the eyes of investors and as a result has become increasingly sensitive to the perceptions of value in the currency markets. The recent weakness of the US Dollar stemming from continued anxiety on the government shutdown and approaching deadline on new borrowing has seen a range of currencies rally against it.

This section continues in the Subscriber's Area.

Email of the day (1) - on autographed copies of Crowd Money:

“Firstly, congratulations on the launch of your book, Crowd Money. I have no doubt it’ll be a hit not only with your subscribers, but also the general investing public. I have done my bit by passing the word to my many like-minded friends and associates (e.g., the ATAA), both within Australia and S-E Asia.

Since I have been a loyal Fuller Money subscriber and ‘family member’ since the late ‘80’s, I am wondering if I could purchase an autographed copy of the book direct from you. I hope this is possible. If not, I’ll understand.”

My comment - Thank you for your kind words, long-term support, interest in Crowd Money and for spreading the word. I had a similar inquiry while in Vermont last week and my publisher is sending me bookplates to sign, so that they will be able to ship signed copies directly, probably by early November.

Email of the day (2&3) - on additions to the Chart Library:

"Could you add this fund to the chart library? Thanks!"


"Please could you add:
" Ocean Rig UDW Inc. (ORIG) to the library.
ING Information Technology Fund Inc (ISIN NL0006311821)
ING Europe Small Caps Fund (ISIN NL0006311730)
ING Premium Dividend Fund (ISIN NL0006311748)
BlackRock Global Funds - Latin American A2 EUR (ISIN LU0171289498)"



My comment - Thank you for these suggestions which have been added to the Chart Library. 

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