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Big, Old and Ugly Stocks Look Pretty to Bank of America

Published: 08:10 21 May 2015 BST

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Big, Old and Ugly Stocks Look Pretty to Bank of America 

Here is the opening of this topical column from Bloomberg: Go after the ones “active” managers won’t touch

At best, you would hope the consultant you hired to help pick out mutual funds had your specific investment goals and risk tolerances in mind. Or at worst, you would hope the consultant had something more in mind than a raging desire not to get fired.

But that's the delightfully cynical theory being floated by Bank of America Merrill Lynch strategist Savita Subramanian. In her assessment, the key motivation by consultants may be to justify their existence by making clients believe they are getting something for their money when they invest in an active fund with way higher fees than passive funds that simply track benchmark indexes.  

"Signs of reluctance to take career risk in the financial services industry are popping up everywhere," Subramanian wrote in a report. The fear-of-firing could be driven by the last financial crisis, she wrote, or the difficulty of picking individual stocks in a macro-driven world,  "or the convergence of headwinds facing active equity investors over the last few years." 

Much has been written about those headwinds facing active managers, who have watched investors pull money from their funds for nine straight years while piling into passive funds. Only 21 percent of active U.S. stock funds beat their benchmark last year, the worst rate on record at Morningstar. 

David Fuller's view 

The first graph in Bloomberg’s article says it all in terms of investor preferences.  

 

The Weekly View: Trends and Counter-Trends 

My thanks to Rod Smyth for his ever-interesting letter, published by RiverFront Investment Group.  Here is a brief sample:

US bond yields bottoming: We have argued for a year (most recently in our March 2nd Weekly View) that US bond yields need to be understood in a global context and that the US yields were being held down by German yields.  The sharp rise in German yields (10-year yields have risen from ) to ).8% in just two weeks) has led to a rise in US yields despite the weaker economic data.  Reflecting on the chart below, which shows the yields on the highest quality US corporate bonds, we believe that the low in early 2015, which matched the low in mid-2012, could mark the bottom for this cycle.

David Fuller's view 

Subscribers will be able to see that chart in The Weekly View, but here are some government yields to keep an eye on: USA 30Yr, UK 30Yr, German 10Yr, Swiss 10Yr and Japan 30Yr.  My guess is that they have all bottomed for the cycle, but inevitably one never has confirmation of that until well after the event and yields are considerably higher. 

This item continues in the Subscribers’ Area, where The Weekly View is also posted.  

 

Email of the day 

On mean reversion towards the MA:

“Dear David, Thank you for your service. I note your recent decision to open a long in the H Shares index. You have consistently mentioned that the best time to enter longs is after mean reversion to the 200 day moving average, however the H Shares index is still considerably above the 200 DMA, and I wonder why you felt confident in opening the long here. Best wishes,”

David Fuller's view 

I am delighted that you appreciate the service and thank you for a very interesting question, certain to be of interest to a number of other subscribers.

This item continues in the Subscribers’ Area.

 

Good News America: Saudi Vies for Great Satan Status in Iran 

My thanks to a subscriber for this informative article by Roula Khalaf for The Financial Times.  Here is the opening:

It’s not quite the Great Satan — at least, not yet. But it’s an enemy that the Iranian regime and the people can unite against

Now that Iran’s Islamic government is close to a nuclear deal with the US and other world powers, the traditional “death to America” slogan is losing its lustre but the loathing of Saudi Arabia is gaining appeal.

Though this is happening by accident more than design, driven by a stand-off in Yemen between Iranian and Saudi proxies, it is blissfully convenient for Iran’s rulers.

Iranians never learnt to hate America despite their leaders’ best efforts to whip up resentment. It certainly won’t grow easier to convince them of devious American plots if a nuclear accord is signed.

When it comes to Saudi Arabia, however, Shia Iranians are happy to bash their Sunni neighbour. Persian-Arab enmity goes back centuries; Iranian-American hostility is only a few decades old. “People in Iran love Americans, and Saudi Arabia is the one country that everyone hates,” one political analyst tells me. “If it’s not the Great Satan it’s only because it’s not that important.”

Indeed, in my own meetings in Iran, there are sometimes awkward moments: someone casually drops a disparaging remark about Arabs then realises I come from Lebanon and reassures me Iranians love the Lebanese but less so Gulf countries. In Lebanon, of course, Iran has Hizbollah, its most prized proxy.

I heard Saudi leaders denounced as “immature children” who bomb fellow Muslims in Yemen and join hands with jihadi terrorists in Syria and Iraq. It’s impossible to convince anyone that the Islamic State of Iraq and the Levant (Isis), which threatens the Saudi regime possibly even more than it threatens Iran, is not a Saudi creation. The notion that Saudi Arabia should reject an Iranian role in the affairs of other Arab states also meets with incredulity. A common language (Arabic) doesn’t give one country the right to claim authority over another, say Iranian officials.

David Fuller's view 

Thanks to technology, the USA no longer has the same vital interests in the Middle East, although it would understandably like to prevent the region’s wars and terrorism from spreading westward.  If ongoing Sunni-Shia conflicts threaten the Middle East’s oil production, the USA can quickly ramp up its shale oil output, avoiding a repeat of recessions caused by earlier energy crises.  

Many other countries could do the same.  If they follow the USA’s energy policies, from shale oil and gas to solar-led renewables, in 20 to 30 years time the Middle will have the luxury of consuming all of its own oil and gas.

The FT article is posted in the Subscribers' Area.    

   

The Markets Now 

Monday 15th June, at the East India Club, 16 St. James’s Square, London SW1Y 4LH

David Fuller's view 

Here is the new brochure listing some of our topics and the important questions most investors face.  I think all investors will benefit from guest speaker David Brown’s new presentation. I learned from it, not least how to assess some familiar data more clinically.  In other words, he shows us how to think a little more clearly, particularly in terms of identifying bear markets near their tops.  This is never easy given all the emotions involved.  Many people jump the gun, as you will have seen over the last few years, which can leave them susceptible to overstaying when the important and often overlooked warning signs are flashing.  Note also Iain Little’s challenging topic summarised in the penultimate question.  I look forward to their presentations and also to hearing the views of friends and subscribers.  

 

Chart Library Filter System Release 

Eoin Treacy's view 

We’d like to thank subscribers for their patience in waiting for the release of the Chart Library Filter System. We introduced it last night and you will find the Filter button next to the Search in the black menu stripe across the top of the Chart Library homepage.

 

PayPal Will Pay $25 Million to Resolve CFPB Bill Me Later Claims 

This article by Carter Dougherty for Bloomberg may be of interest to subscribers. Here it is in full: 

PayPal Inc., a unit of EBay Inc., will forfeit $25 million in restitution and fines to settle Consumer Financial Protection Bureau claims that it illegally enrolled customers in an online credit product.

“PayPal illegally signed up consumers for its online credit product without their permission and failed to address disputes when they complained,” CFPB Director Richard Cordray said in a statement Tuesday. “Online shopping has become a way of life for many Americans and it’s important that they are treated fairly.”

PayPal, which announced plans to split from EBay last year after activist investor Carl Icahn said the parent firm was slowing its growth, often signed up customers for its credit product without their consent, CFPB said. The company also failed to post payments properly, lost payment checks and didn’t resolve billing disputes.

In particular, CFPB said, PayPal used deferred-interest promotions, which push off payments to a later date, to rope in customers. The company then made it difficult to avoid the deferred fees, which customers can typically do by paying off a loan before a specified date, the agency said.

Amanda Miller, a spokeswoman for PayPal, said the company “takes consumer protection very seriously.”

“We continually improve our products and enhance our communications to ensure a superior customer experience,”

Miller said in an e-mail. “Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws.”

PayPal agreed to refund $15 million to consumers who were unjustly charged and pay $10 million in penalties.

Eoin Treacy's view 

When the Treacy family were signed up for a PayPal credit account with a $1000 limit it came as a surprise since we were not consulted in any way and only found out about it when the first bill arrived. It struck us as an aggressive marketing strategy but since we pay the balance on our credit accounts at the end of every month anyway, it did not discomfort us in any measurable way. Online forum comments suggest that other people did not have the same experience. 

 

Los Angeles Lifts Its Minimum Wage to $15 Per Hour 

This article by Jennifer Medina and Noam Scheiber for the New York Times may be of interest to subscribers. Here is a section: 

The increase, which the City Council passed in a 14-to-1 vote, comes as workers across the country are rallying for higher wages and several large companies, including Facebook and Walmart, have moved to raise their lowest wages. Several other cities, including San Francisco, Chicago, Seattle and Oakland, Calif., have already approved increases, and dozens more are considering doing the same. In 2014, a number of Republican-leaning states like Alaska and South Dakota also raised their state-level minimum wages by ballot initiative.

The effect is likely to be particularly strong in Los Angeles, where, according to some estimates, almost 50 percent of the city’s work force earns less than $15 an hour. Under the plan approved Tuesday, the minimum wage will rise over five years.

Mayor Eric Garcetti of Los Angeles, right, on Monday. He said in an interview on Tuesday that “we’re leading the country.” Credit Nick Ut/Associated Press

“The effects here will be the biggest by far,” said Michael Reich, an economist at the University of California, Berkeley, who was commissioned by city leaders to conduct several studies on the potential effects of a minimum-wage increase.

“The proposal will bring wages up in a way we haven’t seen since the 1960s. There’s a sense spreading that this is the new norm, especially in areas that have high costs of housing.”

Eoin Treacy's view 

One might argue that California’s low tax on property, at 1% of value, has done more to inflate the cost of housing than any other single factor. However that is not up for conversation since real estate is one of the primary avenues for family wealth accumulation. It is more politically expedient to push for higher wages and not just a little higher. $15 is among the highest minimums in the world.

Restaurants have been experimenting with drones for delivery, iPads for ordering and slimming down the number of waiting staff. A doubling of the wage base over the next five years will act as a major incentive to reduce headcount and to maximise productivity per worker. We can expect to see a lot more robots in the customer service sector not least in the food preparation sector. 

 

Email of the day on adjusting BHP Billiton price chart after the demerger 

I trade BHP Billiton (BLT) from time to time. This morning, as I was looking at trade setups, I noticed that the historical prices for BLT provided by your service (and the Daily Telegraph, which has as its source AJ Bell), compared to prices provided by Bloomberg (and the Financial Times), are very different. For example, as shown in the attachment, your service has the December and January lows at just below 1300, whilst Bloomberg have them below 1200. Also, the March and April 2015 lows in BB are at approximately 1300 compared to your 1400. In fact, all the numbers seem to out by about 100. The current price is the same, so perhaps there is an historical adjustment made as a result of the demerger of South32 in one data service and not another. Could I ask you to look into it and let me know whether that is in fact the case, or if there is another reason at work?

Eoin Treacy's view 

Thank you for your detailed email and I can confirm that the price charts have now be rebased to alleviate the step which occurred as a result of the demerger. 

 

Speaking Engagement 

Eoin Treacy's view 

I’ve agreed to give at talk for the upcoming Round-the-Clock-Trader webinar event on Thursday. The topic of my talk will be currency volatility and its role in equity market returns which I anticipate taking 35mins. Since I’ll be the last speaker, starting at 8:00pm British Summer Time, we’ll have plenty of time to talk about whatever it is delegates are interested in. It’s free to sign up just follow this link.  

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