Archives for August 2014

Options Trading Part II – The ‘Currency’ of Options

Options Trading Part II – The ‘Currency’ of Options

Courtesy of Michael Taylor, Bankers Anonymous


How Wall Street thinks about options trading

Non-professionals who engage in options typically do not understand the ‘currency’ in which they’re trading.

By ‘currency’, I don’t mean option-users remain unaware of their US dollars.

I mean that professional options traders use a mathematical valuation called ‘volatility’ which your average retail[1] options speculator does not even consider.

What is volatility?

Volatility – not the price of the stock or the price of the option – determines the value of an option. Volatility measures the underlying value of an option. Volatility also is how an options trader comes up with the price of an option in dollars.

In math terms, volatility is expressed as a single number describing the frequency and magnitude of price changes over any given amount of time.

The mathematics of volatility – the single comparable number that describes the frequency and magnitude of price changes over any year – involve assuming a standard model for the distribution of prices. Some traders may use a ‘normal’ bell curve distribution of probable prices, but others can use ‘non-normal’ probability curves in sophisticated options trading.

Technically, the “annual volatility” of a stock is the standard deviation of yearly logarithmic returns on that stock.

A high ‘volatility’ number means the stock price spends significant periods of time outside of your ‘normal’ expected distribution. If the stock price lands on the outside ‘tails’ of a normal bell curve, the ‘vol’ number will be high. If the stock price trades within the high-probability tight band of a bell curve, the ‘vol’ number will be low.

If you buy or sell an option with a  high ‘vol,’ the premium, or cost, of the option will be high, to reflect the expectation that the stock prices over time will land on the ‘tails’ of a normal bell curve. If you buy or sell an option with a low ‘vol,’ the premium or cost of the option will be low, reflecting its expected narrow trading band.

Did I lose you yet? That’s fine. You only need to remember one thing.

The important thing to remember is that if you don’t know how to calculate the mathematics of volatility then you have no idea what you are buying and selling when it comes to options. [2]

Please see related Posts:

Option Trading Part I – NFW edition

And upcoming post:

Options Trading Part III – Options from a Trader’s Perspective

[1] By ‘retail’ in this post I mean non-institutional investors. I mean: you and me.

[2] Trading options without understanding vol leaves you as blind as an individual who purchases stocks based on the ‘price’ of the stock, without modeling the underlying future cashflows of the company. Now wait, that would describe 99% of all individual stock investors. Hmmmmmm. What does that say about whether most of us should buy individual stocks? Let me think about that…

Stock World Weekly: All Clear Overhead?

Here’s the latest issue of Stock World Weekly: 9-1-2014 SWW PDF.

Click on this link and take a free trial to the weekly newsletter. 

Note: I have recently brought up the issue of whether selling puts is a safe enough trading method for retail investors. In this newsletter, there are some complex option strategies that should be considered in light of Michael Taylor’s article discussing selling puts.



Markets signaling return of economic weakness in China

Markets signaling return of economic weakness in China

Courtesy of

In addition to property market challenges and the unexpected slowdown in manufacturing expansion, we continue to see markets signaling a significant loss of momentum in China's economic growth. Earlier in the year the country's economic trajectory was quite uncertain. This was followed by a strong pickup in manufacturing activity early this summer and economists suggested that the worst is over. But it seems that China is once again facing significant headwinds.

Iron Ore 62% Fe, CFR China; Jan-2015 contract (barchart)


SHFE Steel Rebar January 2015; Jan-2015 contract (barchart)

Other commodities linked to construction, such as fiberboard, have been declining as well. Moreover, the recent stock market rally has stalled. Perhaps the most telling sign of weakening fundamentals in China has been the nation's rates market. Rates implied by SHIBOR-based interest rate swaps have declined materially over the past month. More importantly the yield curve has become inverted.

Swap rates by maturity (yrs)

As discussed before, economic weakness in China is reverberating globally – from Australia to the Eurozone – and is in part responsible for the bond yield compression across developed economies. We are likely to see the central government step in with more stimulus in order to stabilize the situation. However, as Beijing is beginning to realize, limited new stimulus directed at boosting growth is becoming less effective. A much larger effort may be required.

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TransTech Digest: Godzilla, Zombies, and Cultural Coping Mechanisms

TransTech Digest: Godzilla, Zombies, and Cultural Coping Mechanisms

By Patrick Cox

Godzilla, Zombies, and Cultural Coping Mechanisms

Before the Internet, there were libraries. We still have libraries, of course, but they were a lot more important a half century ago, before the Web brought the totality of human knowledge and art into our homes and phones. In my mind, at least, the now archaic libraries of the past century were a lot more fun than the sterile stripped down semi-electronic versions common today.

There are still some libraries with multistoried labyrinthine complexes of overcrowded shelves where you can get lost in knowledge, but they’re pretty rare. I hesitate to admit it but, prior to the Web, travel for me always involved searching out the most interesting and hopefully antiquated libraries whenever I traveled. I’ve spent a lot of hours wandering through bookshelves waiting for a book title to pull me into some subject that I didn’t even know existed.

The Japanese culture and history section often pulled me in so I was exposed to theories, at a very young age, about the cultural significance of Gojira, translated as Godzilla in English. Essentially, it’s proposed that Godzilla was Japan’s way of dealing with the combined and lasting emotional impact of the bombing of Hiroshima and Nagasaki.

Godzilla first appeared in full form in the 1954 movie, Gojira. I think there is truth to the belief that the giant monster that towered over and destroyed Japanese cities was a metaphor for nuclear weapons that could be psychologically compartmentalized. In the world Godzilla inhabits, a giant, destructive lizard would be the scariest thing possible. By dealing with Godzilla in art, the Japanese dealt with the reality of nuclear destruction. In fact, the plot of the original movie had it that Gojira was created by American nuclear weapons testing so the connection is direct.

When the Cold War brought the fear of nuclear weapons to the West, Godzilla crossed the Pacific and entered American theaters and televisions. The horror of nuclear weaponry resonated with humanity as a whole more poignantly than any other weapon has in the past. Prior to the advent of the bomb, the only weapon to have such a revolutionary impact on warfare was the gun.

The widespread adoption of gunpowder firearm technology was enormous. Quantification of the impact is probably impossible due to the ubiquity of the technology in the 14th and 15th centuries. It’s certain, however, that millions of bullets have been fired. In contrast, there have been precisely two uses of the atomic bomb in warfare. Despite widespread fears of complete nuclear destruction, that threat never arrived, except in Japan where Godzilla continues to play a major role in art and culture.

If Godzilla and other “kiaju” are, in fact, cultural coping mechanisms, it would stand to reason that there are other shared cultural tropes that symbolize and compartmentalize actual threats. There are, of course, vampires and werewolves, but they aren’t typically portrayed as civilizational threats. Often, in fact, they are portrayed sympathetically. There is only one modern monster of art and culture capable of destroying the world, possessing no redeeming qualities at all. That’s the zombie.

Zombies have been around since the 1932 movie, White Zombie. Those early zombies, however, were a different sort of creature. Basically, they were normal people who had been enslaved to serve some villain. The original concept apparently came out of Haitian myths.

The modern zombie, a person who transformed into a murderous cannibal through contact with other infected people, seems to have evolved from the 1954 novel, I Am Legend, by Richard Matheson. This was, as far as I know, the first time that we contemplated through art some sort of personality-destroying disease capable of ending civilization. Filmmaker George Romero brought the concept to movie theaters in 1968 with Night of the Living Dead. Though the word zombie doesn’t appear in the film, fans applied the term and it was used in the sequels.

Source: Wikipedia

Sociologists and psychologists have speculated about the cultural significance of modern zombies, but their theories usually reflect political biases. I think they miss the obvious. You probably have experienced, at least indirectly, an actual if metaphorical zombie incident with very real consequences.

Think. Have you known someone who seemingly lost their personality and mind, transforming into a husk with nothing left but an appetite, devastating the lives of those he or she once loved?

Obviously, I’m talking about dementia and particularly Alzheimer’s disease (AD). If you’ve been reading my work, you know that the singular transformation of the 20th century was the near doubling of life spans in the West. Longer life spans are, of course, a good thing, but there is a snake in the garden.

Diseases that were once deadly and common, such as tuberculosis, have nearly vanished. Vaccinations and antibiotics turned once fatal diseases into treatable maladies. People began to live much longer lives. As a result, diseases of the aged became far more common. The incidence of Alzheimer’s and other dementias increased dramatically, as did the horror they can inflict. Not only does a formerly healthy individual suffer the loss of memory and self, entire families may feel as if their own lives and brains are in danger of being consumed.

When Alzheimer’s disease affects someone, they first lose the ability to remember little things. Then, they forget those whom they love. Alzheimer’s patients lose motor function and the ability to take care of themselves, all the while, draining time and money away from those who care for them. In a very real way, the sufferers of Alzheimer’s disease turn into zombies, or at the very least, the closest thing to them.

If you chart the rise in popularity of the zombie myth, it correlates closely with the prevalence of Alzheimer’s. Moreover, AD does have the potential to destroy the world. Though it is only the sixth-leading cause of mortality, it is actually the most expensive disease due to the slow death of those with the disease. If treatments are not found, cost projections for an increasingly older population combined with dramatically reduced birth rates create a healthcare scenario that is simply untenable.

Fortunately, we are making dramatic progress. Scientists and companies are, right now, chipping away at this extraordinarily complex disease.

It’s also extremely interesting to me that, just as few of us actually are conscious of the AD threat, easily available therapeutics are being ignored. I’ve previously presented evidence from the Journal of Alzheimer’s Disease about the efficacy of coffee and caffeine. Still, I hear people say regularly that they are cutting coffee from their diets for health reason.

Additionally, more and more evidence is coming forth regarding the remarkable benefits of optimal vitamin D supplementation. Though I’ve pointed this out before, everybody should follow the work and advice of Grassroots Health, the combined effort by various California universities to educate the public about the benefits of vitamin D. Recently, in fact, new research from the University of Exeter Medical School shows that it’s possible to reduce the risk of AD by 50% by maintaining optimal vitamin D blood levels. Here’s a story about that research with a link to the paper in the journal Neurology.


Patrick Cox


From the TransTech Digest Research Team:

Recently, Patrick added a company to his Transformational Technology Alert portfolio, which we believe has the most compelling drug candidate currently in development for the treatment of Alzheimer’s disease.

This drug, for the first time, has shown in early testing the ability to not only treat the symptoms of Alzheimer’s but also the advance of the disease itself. If this disease-modifying candidate progresses through trials and begins to reach those who need it, it would be a revolution in Alzheimer’s care, would slow runaway healthcare expenditures, and would be a boon to societal stability.

We suggest this company’s Alzheimer’s candidate has blockbuster potential because, as Patrick mentions above, many of the plagues of the last century are now responsible for less deaths than ever. With Alzheimer’s, sadly, the search for effective treatments has thus far come up empty.

This is why the company Patrick recently profiled is so exciting. Their drug candidate, if proven effective, could dramatically alter the American economy while saving countless lives. As development stage biotech speculations go, you don’t get more potential than that.

And now, for the first time ever, you can read Patrick’s Transformational Technology Alert research in full at a new, lower price. This new subscription option gives you full access to all of Patrick’s issues, alerts, and reports, with no long-term obligation. Click here to learn more about this special offer and begin receiving Transformational Technology Alert today.

Obamacare Fine Print: Beware the Medicaid and Medi-Cal Clawbacks and Liens

Courtesy of Mish.

Obamacare greatly expanded Medicaid coverage, but there is a hidden gotcha that may come back and haunt your heirs for benefits you receive from age 55-64.

This is not new news, but few read and understand the “fine print”.

In a warning about the “fine print” and in response to Moral Dilemma: Should a Libertarian Who Does Not Need Food Stamps, but Qualifies for Them, Take Them? reader “TL” writes …

Hello Mish,

Your friend Steven may want to carefully research taking Medi-Cal benefits.

Medi-Cal, and many other state Medicaid programs include a ‘claw-back’ provision for recovery of costs incurred by the state to provide medical care.  While there is much variation in particulars from one state to another, the bottom line is these costs include a monthly ‘administrative fee’

The ‘claw-back’ mechanism functions via the state placing ‘liens’ on individual assets at the point the Medicaid recipient reaches age 55, then recovers the money at the point the Medicaid recipient dies by ‘seizing’ the money from the estate.

When first put into effect, these ‘claw-back’ provisions were primarily intended to recover costs to the state of providing long term nursing home care for older recipients. 

ObamaCare’s expanded Medicaid has, of course, now waived the assets portion of the ‘means test’.  But under current law, those assets are subject to ‘claw-back’. 

At the moment, the monthly ‘administrative fee’ amount for Medi-Cal is $611.  Those who sign up for Medicaid may not be doing themselves any favors.

Medi-Cal Clawbacks and Liens

The California Healthcare Foundation explains the rules in Estate Recovery Under Medi-Cal

Medi-Cal estate recovery refers to state action to reclaim certain Medi-Cal costs from the estates of beneficiaries after their death. This program, which has been in place for decades, has received renewed attention from policymakers because of reports that some individuals newly eligible for Medi-Cal as expanded under the Affordable Care Act (ACA) may not enroll for fear that their house and assets could later be seized.

Continue Here

Moral Dilemma: Should a Libertarian Who Does Not Need Food Stamps, but Qualifies for Them, Take Them?

Courtesy of Mish.

Here’s the moral dilemma of the day:

Suppose you are a staunch Libertarian, doing reasonably well and you don’t need food stamps. Yet, under perverse rules, you qualify for them. Should you take them?

Reader Steven faces that exact question. Steven writes …

Hi Mish

In response to your article 40% of U.S. on Welfare; Obamacare Expands Welfare by 23 Million; More on Welfare Than Full-Time-Employed I confess my own moral dilemma.

I am the beneficiary of trusts left to me by my parents. They are not huge, but they sustain me and my children. I prefer to spend time with my kids rather than pursue regular employment.

Until the beginning of this year, I was purchasing my own health insurance under a high deductible plan, that cost nearly $300 per month. It had risen steadily from $169 when I first obtained it two years ago. On December 31, my plan was essentially made illegal, with another plan costing nearly $600 put in its place.

I didn’t have that much of a medical budget so I cancelled the plan. Three months later and in desperation for coverage, I spoke with an insurance agent who was sure, based on what I was telling her, that I would not qualify for Obamacere subsidies, but I would qualify for Medicaid which was a “better’ program as it covers more services. She told me to march down to Medicaid with all my documentation and apply for coverage, which I did.

Because my trusts make all the money, my personal income is well below poverty line. Nevertheless I live quite comfortably. All the same, they eliminated the asset test for both Medicaid and food stamps, and am now receiving both.

I told my social worker the truth. I do not want to deal with a benefits fraud rap.

Because I have two dependent teens in my home, I now receive almost $500 per month for food in addition to the Medicaid coverage, which is pretty convenient. You should see the look on the cashiers’ faces when, after paying for my food with the EBT card, I then pay for the non-food items with an American Express card, or even my black Visa card.

On the minus side, there are very few doctors in San Francisco worth visiting who accept Medi-Cal. I have yet to choose a doctor or a plan, and have been on the phone with state assemblymen and the Medi-cal ombudsman seeking better healthcare alternatives. …

Continue Here

Options Trading Part I – NFW Edition

My first guess about what NFW stands for was 33.3% wrong. However, my friend Michael Taylor’s opinion of selling put options is clearly expressed by the title. Michael is adamantly opposed to retail investors selling puts as a means for generating income (in exchange for agreeing to buy a stock, typically at a lower price).

In the following article, Michael responded to a question I asked him recently after learning that he does not like put-selling. I was surprised at his disdain for this trading method and also curious because I know several traders who frequently sell puts as a proxy for going long a stock, including authors featured at this website. Along with other criticisms, Michael’s main problem with put selling is the huge “blow up” potential that results from a combination of leverage and a high level of risk.

 “Put sellers are like the lone teenager in the horror movie who says ‘Did you guys hear that noise? I’m just going to check that out with my dim flashlight, by myself. You guys stay here.'” Classic.

For more by Michael, visit his website Bankers Anonymous. He also writes a weekly column for the San Antonio Express News. ~ Ilene

Options Trading Part I – NFW Edition

By Michael Taylor, Bankers Anonymous

This is a highly speculative trade, not an investment, so run away, retail investor!

options just aheadA friend in the finance-writing space sent me a query not long ago about the idea of “selling puts” as an appropriate and lucrative investment activity.

Following my swift reply of “NFW[1],” she asked for an explanation. After all, a friend of hers had been writing a regular ‘investment newsletter’ describing all the clever money he made writing puts on stocks. The newsletter-writer described a ‘win-win,’ in which either the put seller pockets the option-premium, or manages to purchase stocks at a discount to current prices.

Selling puts, I should explain, involves giving your counterpart the option, for a limited amount of time (between one and three months, typically) of selling you shares at a set price. A ‘put seller’ often picks a price lower than current prices.

For giving someone else this option, the put-seller pockets some money, known as the option premium.

How about an example?

XYZ stock sells for $50 in the market today.

I sell 3-month puts, let’s say 1,000 of them, with a ‘strike price’ at $40. That gives the put-buyer the right to sell me up to 1,000 shares of XYZ at $40 anytime for the next 3 months. For that privilege the put-buyer pays me – I’ll make this number up – $3 per put. In this example, I pocket $3,000 in premium ($3 x 1,000 puts).

In my most optimistic moments, I can tell myself that I ‘win’ if I just pocket $3,000, and I also ‘win’ if the shares of XYZ drop and I end up buying up to 1,000 shares at a 20% discount to the current market price.

Run away

However, I’m here to tell you to run, not walk, away from put selling. Do not try this at home, for a few reasons.

I’ll list them in increasing order of importance.

First, options trading for non-institutional investors (you and me) are always speculative trades, not investments, because they are short-term in nature. “Investing” means that your time horizon spans more than 5 years, disqualifying all but the most exotic options, none of which are available to you and me.

Second, options for retail investors – because they are slightly exotic and opaque – involve costs that make them inappropriate for non-professionals, trading in small sizes.

Third – Most importantly for this particular ‘newsletter advisor’:

You’re telling individual investors to sell puts? Are you f-ing kidding me?

That’s you, when you sell puts. This is the kind of bull-market nonsense that only people who have been in the market for about 3 minutes would fall for. Do you know that phrase “bending over to pick up nickels before the oncoming bulldozer?

You make a little bit of money this week, you make a little bit of money next month, you collect a few more nickels for a couple of months, and then BAM! You are dead.

And you never even saw that bulldozer before you became part of the asphalt. Because the market will always, always (ALWAYS!) punish put sellers.

It’s a rule written down somewhere that they only show you AFTER your investment portfolio has been taken out on a white sheet and dumped into a shallow grave.

Put sellers are like the lone teenager in the horror movie who says “Did you guys hear that noise? I’m just going to check that out with my dim flashlight, by myself. You guys stay here.”

Screen Shot 2014-08-29 at 8.19.28 PM

I do not believe that markets have anthropomorphic personalities, or particularly recognizable patterns, or act as sentient beings, except in this one instance: put sellers always get killed. It’s just a rule.

Put-selling as a ‘synthtic long’ in the market

Prior to getting killed as a slaughter-house put-seller, you should understand that selling a portfolio of puts acts as a proxy for being long, or bullishly exposed, to a stock or set of stocks. Provided the stock goes sideways or up, put-selling provides a nice stream of income based on the non-exercised put options.

In addition, like many other derivatives, options give investors ‘leverage,’ by exposing an investor’s portfolio to larger movements in markets than would be otherwise available through regular stock purchasing.

Because put-selling resembles a synthetic long and leveraged position in the market, put sellers may briefly (all too briefly!) fool themselves into believing they’ve stumbled upon a neat and uniquely profitable way to ‘play’ the market. I think this is what the put-seller newsletter pushed, wittingly or not, on its audience. As long as the market basically goes up, put-selling appears even more profitable than buying ordinary stocks.

Then, as I mentioned, you’re financially wiped out. Because leverage goes both ways, and put sellers always get smushed.

Ok, now that I’ve told you my strongly held opinion of this guy’s garbage, I will spend the next two posts teaching interested folks a bit more about the options market.


Please see subsequent related posts:

Options Trading Part II – The “Currency” is Vol, not $

Options Trading Part III – Options from a Trader’s Perspective


[1] That stands for “No Flipping Way”.

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The “Real” Retail Story: The Consumer Economy Remains At A Recessionary Level

Courtesy of ZeroHedge. View original post here.

Earlier this month, Retail Sales missed expectations for the 3rd month in a row, essentially flat on the month. As Doug Short rhetorically asks 'how much insight into the US economy does the nominal retail sales report offer?' With the release of the CPI data, we can judge this in 'real' terms (adjusted for inflation and against the backdrop of our growing population)… and the picture is anything but healthy.

Via Advisor Perspectives,

The "Real" Retail Story: The Consumer Economy Remains at a Recessionary Level

How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 168.0% since the beginning of this series. Adjust for population growth and the cumulative number drops to 114.7%. And when we adjust for both population growth and inflation, retail sales are up only 24.8% over the past two-plus decades. With this adjustment, we're now at a level we first reached in September 2004.

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Let's continue in the same vein. The charts below give us a rather different view of the U.S. retail economy and the long-term behavior of the consumer. The sales numbers are adjusted for population growth and inflation. For the population data I've used the Bureau of Economic Analysis mid-month series available from the St. Louis FRED with a linear extrapolation for the latest month. Inflation is based on the latest Consumer Price Index. I've used the seasonally adjusted CPI as a best match for the seasonally adjusted retail sales data. The latest retail sales with the dual adjustment declined 0.1% month-over-month, and the adjusted data is only up 0.9% year-over-year.

Click to View
Click for a larger image

Consider: Since January 1992, the U.S. population has grown about 25% while the dollar has lost about 42% of its purchasing power to inflation. Retail sales have been recovering since the trough in 2009. But the "real" consumer economy, adjusted for population growth is 3.9% below its all-time high in January 2006.

As I mentioned at the outset, nominal month-over-month retail sales were up 0.04%. Let's now examine Core Retail Sales, a version that excludes auto purchases.

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By this analysis, adjusted Core Retail Sales were down 0.1% in July from the previous month, up only 0.4% year-over-year and down 1.9% from its record high in November 2007.

The Great Recession of the Financial Crisis is behind us, a close analysis of the adjusted data suggests that the recovery has been frustratingly slow. In "real" terms — adjusted for population growth and inflation — consumer sales remain below the level we saw at the peak before the last recession.

Dear Future American Generations, You Are Screwed

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Faith that the future will be better than the present is slipping, as despite President Obama's demands that Americans not be "cynics," a new report shows there is a major lack of confidence that the next generation will have it better than the last one. As WSJ reports, most strikingly, only 16% of respondents agree that job and career opportunities will be better for the next generation than for their own – a drop from the 56% who were optimistic about this measure in 1999 and down even from the 40% who agreed in November 2009, well into the recession.

As WSJ adds,

In addition, a majority of those surveyed believe the recession permanently altered economic conditions in the U.S.

The numbers, while measuring individuals’ feelings rather than more objective measures such as employment or income, paint a picture of a workforce scarred by personal experience with unemployment or close proximity to others who suffered.

And despite more than six consecutive months of companies adding 200,000 or more jobs, workers are still pessimistic about their prospects for finding decent work. “Only 20 percent of currently employed work­ers feel extremely or very confident they could find another job if they were laid off,” the researchers found.

*  *  *

Corporations Join Droves Renouncing US Citizenship

Corporations Join Droves Renouncing US Citizenship

By Nick Giambruno,

Don’t be surprised to lose if you don’t make an effort at being competitive. And if you go out of your way to make yourself less competitive, expect to lose. This is simply common sense.

But for years, the US has been enacting tax policies that sabotage its global economic competitiveness.

It’s like trying to get in shape for a marathon on a McDonald’s diet. (Speaking of McDonalds, check out this funny video spoof of what their commercials should really look like.)

Here are two major reasons why the US is lagging in the global economic marathon:

  1. The US has the highest effective corporate income tax rate in the developed world (see chart below).
  2. Unlike most other countries, which only tax domestic profits, the US taxes the earnings of foreign subsidiaries of US companies when the money is transferred back to the US. This has had the effect of US corporations keeping over $1.9 trillion in retained earnings offshore to avoid the crippling US corporate income tax.

These “worst in the developed world” tax policies are clearly hurting the global competitiveness of American companies.

Being deemed a “US Person” for tax purposes is like trying to swim with a lifejacket made of lead.

It should come as no surprise that an increasing number of productive people and companies are seeking to shed this burden so they can keep their heads above water.

At this point, it’s more than just a trickle—it’s an established trend in motion.

And I don’t see anything that would reverse it. On the contrary, given the political dynamics—ramped-up spending on welfare and warfare policies, as well as an “eat the rich” mood—taxes have nowhere to go but north. And that means the exodus will continue.

Three Cheers for Walgreens

Over the past couple of years, dozens of high-profile US companies have moved abroad (or seriously considered it) to lower their corporate income tax rate and to access their offshore retained earnings without triggering US taxes.

Among them are Medtronic, Liberty Global, Sara Lee, and Omnicom Group—the largest US advertising firm—to just name a few.

Earlier this year Pfizer, one of the world’s largest pharmaceutical companies, sought (but was ultimately rebuffed) to move abroad, which would have cut its tax bills by as much as $1 billion a year.

The strategy these companies are using is known as an inversion. It’s where a US company merges with a foreign company in a jurisdiction with lower taxes and then reincorporates there. Current US law allows for this if the foreign shareholders own at least 20% of the combined company (though some are trying to raise the minimum to 50%).

Now, despite the howls and shrieks from upset politicians and the mainstream media about these companies being “unpatriotic” and “un-American,” they’re doing absolutely nothing illegal. Inversions are totally acceptable within the current rules of the US Tax Code.

Chuck Grassley, a Republican senator from Iowa has said, “These expatriations aren’t illegal. But they’re sure immoral.”

I beg to differ. Why would anyone want to give the destructive bureaucrats in DC a penny more than is legally required? As far as I’m concerned, not only is there nothing wrong with going where you’re treated best, there's also an ethical and moral imperative to starve the Beast.

And now the latest high-profile company to consider putting the Beast on a diet is Walgreens.

Walgreens is considering reincorporating in Switzerland as part of a merger with Alliance Boots, a European rival. The net effect for would be to reduce Walgreens’ tax rate to 20%, down from around 31% now. The move is estimated to save around $4 billion over the next five years.

What really has the politicians scared is that inversions have started to snowball.

The New York Times quoted an international tax lawyer stating that “it takes one company with enough public recognition to start [a] domino effect.”

Walgreens could be the company that triggers a domino effect. If Walgreens were to move, it would gain a significant competitive advantage against its rivals. CVS, Walgreens’ main competitor, paid a 34% tax rate in recent years. Can CVS really compete with Walgreens if the latter is paying 20%?

Probably not. And that will only lead to more inversions.

Another Way to Starve the Beast

Remember, US companies are not globally competitive because of these two unique burdens:

  1. The US has the highest effective corporate tax rate in the developed world.
  2. Unlike most countries, which only tax domestic profits, the US taxes the earnings of foreign subsidiaries of US companies when the money is transferred back to the US.

We have already seen how inversions can reduce #1, but they also offer huge benefits in terms of #2.

Reincorporating abroad allows companies to permanently avoid paying US taxes on foreign earnings. It also allows companies to access their retained earnings offshore in ways they couldn’t before without triggering punishing US taxes.

Medtronic, for example, has accumulated $20.5 billion of untaxed earnings in foreign subsidiaries. By reincorporating abroad, Medtronic can access that money without getting slapped with US corporate income taxes, which would save it billions.

For companies like Medtronic and Walgreens, reincorporating abroad seems like a no-brainer.

Contrary to the government propaganda, the villains in this story aren’t the companies seeking to diversify abroad to remain globally competitive. The villains are clearly the spendthrift politicians who enact these “worst in the developed world” tax policies, which create very compelling incentives for these companies to leave the US.

It’s Not Just Companies Saying Sayonara

While the US should be enacting policies that make it attractive for productive people and companies to come to the US—rather than driving them away—don’t hold your breath for positive change. It’s more likely that nothing but more taxes and regulations are coming.

But as we have seen with companies like Medtronic and Walgreens, companies have options too.

And it’s not just multibillion-dollar corporate entities that have options. Individuals operating on a modest scale can also reap enormous benefits by diluting the amount of control the bureaucrats in DC (or any country) wield over them. International diversification is the solution.

You do this by moving some of your savings abroad with offshore bank and brokerage accounts, physical gold held abroad, owning foreign real estate, and establishing an offshore company or trust.

Obtaining a second passport is an important part of the mix as well.

You probably can’t take all of these steps, and that’s fine. Even taking just one will go a long way to reducing your political risk and giving you more options. In many cases, you don’t even have to leave your living room.

Think of it as your own personal insurance policy against an out-of-control government.

However, things can change quickly. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible when formulating your international diversification strategy. That’s where International Man comes in.

To keep up with the best strategies, you might want to check out our Going Global publication, where they are discussed in great actionable detail.

Has Ukraine Shot Itself In The Foot With Gas Pipeline Deal?

Courtesy of Igor Alexeev via

Last week, Ukrainian Prime Minister Yatsenyuk pushed a bill through the Verkhovna Rada that would see his country’s gas transportation system sold off to a group of international investors. The provisions of the law would permit the transit of natural gas to be blocked. This decision may hurt the fragile industrial recovery in Germany and finish off Ukraine’s potential as a gas transit route to Europe.

Germany, which is the industrial heart of the European Union and a major creditor for its debtor nations, is facing the challenge of the double-edged consequences of its inverted Ostpolitik as it pertains to the trade in natural gas. Even the temporary transit risks ensuing from Kiev’s decision to block the pipeline may cause a business slump.

The Nobel laureate Joseph Stiglitz offered an unnerving forecast for the German economy. The Columbia University professor, speaking at the conference in the southern German city of Lindau, described economic growth in the Eurozone as “sluggish.” The German economy in particular failed to grow during the second quarter, threatening the EU’s fragile industrial recovery.

In the years to come, coping with Kiev’s attempts to jeopardize the gas-transit system and cut off Europe from its quintessential energy source in the east could become a real headache for Germany’s foreign minister, Frank-Walter Steinmeier. The most vivid example of Ukraine’s self-destructive policy that has the potential to affect European taxpayers is the recent sale of its gas transportation system.

The imminent agreement, with many conflicting political overtones, will allow sales of 49 percent of Ukraine’s gas transportation system to a cobbled-together coalition of foreign shareholders.

First, the non-transparent deal — sponsored by high-ranking government officials — is a textbook case of restrictive practices that violate World Trade Organization rules. Secondly, the pipeline itself is anything but an attractive offer.

The major players in the European energy market are very well aware of the quality of the asset. They know that the pipeline is sorely in need of repair and is dependent on gas from a third party. According to some provisions of the law, the transit of natural gas through Ukraine can be blocked. If it really happens, the pipeline’s price will immediately plummet to $2 to $3 billion.

Who would buy a broken-down car that can only run using your neighbor’s gas?

That’s why, in July, Prime Minister Yatsenyuk was so interested in pushing the bill through the Verkhovna Rada that he threatened deputies with his resignation. Last week Mr. Yatsenyuk finally succeeded in passing the buck.

For many years, Ukraine has argued that its gas transportation system is an asset of national importance that wasn’t for sale. But the Euromaidan protests changed everything. Ukraine’s new media reported that Chevron wants to buy into the country’s transit company. While the official representatives of the corporation declined to comment on the “rumors,” last year Chevron co-sponsored a conference, “Ukraine in Washington 2013,” which starred the U.S. Assistant Secretary of State Victoria Nuland. Her deep involvement in Ukrainian politics, along with her unorthodox but honest vision of the EU, is generally well known.

In passing the new law, government officials in Kiev and the Verkhovna Rada (now dissolved) ignored the fact that the majority of business-savvy Ukrainian voters would never approve the all-Ukrainian referendum on the summertime sale of the country’s last reasonably valuable asset. After all, the industrial region of Donbass has been irrevocably lost and the country needs to collect taxes.

The situation surrounding the pipeline deal is reminiscent of the tactics of the United Fruit Company in the mid and late 1960s. Radically right-wing governments were installed in Central and Latin America and that corporation gained control over those countries’ main export, bananas.

In Eastern Europe, many countries are not ready to follow Ukraine’s footsteps and renounce energy sovereignty. It’s no longer fashionable to be a banana republic. The deep-seated crisis in Ukraine and the success story of Nord Stream have encouraged other EU countries, such as Hungary, to diversify their natural-gas supply routes. Hungary’s secretary of state for public diplomacy and relations, Zoltán Kovács, recently quoted a statement from his country’s prime minister, Viktor Orbán: “No one can question our sovereign right to guarantee our natural gas supplies.” The leaders in Budapest are sure that no economic recovery is possible in Germany and EU without long-term natural-gas contracts. All EU members will benefit from stable regional trade patterns.

Events in Ukraine should not dominate the agenda of the whole continent. That would simply be dangerous. It has already become a cliché to compare the Ukrainian crisis with the Spanish Civil War. A couple of years ago, the total “Ukrainization” of EU policy would have been perceived as a bad joke. Today 300,000 jobs are at stake in Germany and it is high time for Berlin to step in and prevent the nationalist frenzy in Kiev from ruining decades of successful business cooperation. Heiko Lohmann, a German natural-gas expert, believes that a fundamental prerequisite for normalization is the continuity of energy relations.

Viewed from this perspective, Hungary’s position looks much more “pro-European.” Interestingly, the EU’s official energy policy papers (the European Ten-Year Network Development Plan (TYNDP 2011-2020) and Energy Infrastructure Priorities for 2020 and Beyond) contradict the hardline political statements of the acting members of the European Commission. According to the published data, Brussels expects to increase natural gas imports from Russia up to 40 percent. Time will tell whether Ukraine’s problem-plagued gas transportation system will play any role in these plans.

Benefit From the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Energy Intelligence Report gives you this and much more. Click here to find out more.

Three Things Worth Thinking About

Courtesy of Lance Roberts of STA Wealth Management

The Missing Ingredient

I have been in the "money game" for a long time starting with a bank just prior to the crash of 1987. I have seen several full market cycles in my life, and my perspectives are based on experience rather than theory.

In 1999, there was a media personality who berated investors for paying fees to investment advisors/stock brokers when it was clear that ETF's were the only way to go. His mantra was "why pay someone to underperform the indexes?" After the subsequent crash, he was no longer on the air.

By the time the markets began to soar in 2007, there was a whole universe of ETF's from which to choose. Once again, the mainstream media pounced on indexing and that "buy and hold" strategies were the only logical way for individuals to invest. Why pay someone to underperform the indexes when they are rising. Then came the crash in 2008.

Today, we are once again becoming inundated with articles bashing financial advisors, money managers, etc. for underperforming the major indexes during the Fed-induced market surge. It is once again becoming "apparent" that individuals should only be using low-cost indexing strategies and holding for the "long term." Of course, the next crash hasn't happened yet.

My point: There is a "cost" to chasing "low costs." I do not disagree that costs are an important component of long-term returns. However there are two missing ingredients to all of these articles promoting "buy and hold" index investing: 1) time; and, 2) psychology.

As I have discussed, the most important commodity to all investors is "time." It is the one thing we cannot manufacture more of. Individuals who experienced the last two bear markets should understand the importance of "time" relating to their investment goals. Individuals that were close to retirement in either 2000, or 2007, and failed to navigate the subsequent market drawdowns, have had to postpone their retirement plans, potentially indefinitely. While the media cheers the rise of the markets to new all-time highs, the reality is that most investors have still not financially recovered due to "psychology."

Despite the logic of mainstream arguments that "buy and hold" investing will work, given a long enough time frame, the reality is that investors generally don't invest logically. Almost all investors are driven by "psychology" in their decision-making which results in the age-old pattern of "buying high" and "selling low." This is shown in the 2013 Dalbar Investor Study, which stated "psychological factors" accounted for between 45-55% of underperformance. 

From the study:

"Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows."




What the mainstream media misses with respect to the "buy and hold, low-cost indexing" theory is that individuals do not invest rationally. If you are paying an investment advisor to index your portfolio with a "buy and hold" strategy, then "yes" you should absolutely opt for buying a portfolio of low-cost ETF's and improve your performance by the delta of the fees.

However, the real goal of any investment advisor should not be to "beat the index" on the way up, but to protect capital on the "way down." It is capital destruction that leads to poor investment decision making, emotionally-based financial mistakes and destruction of financial goals. It is also what advisors should be hired for and ultimately paid for–their real job should be to remove emotional biases from your portfolio management.

Biggest Support Of Bull Run Is Fading

No, I am not talking about the inflow of liquidity from the Federal Reserve's ongoing QE program, although it too has been a major source of support for asset prices, but rather the decline in corporate share buybacks. 

According to a recent Financial Times article:

"The boom in buybacks also owes much to the Federal Reserve’s suppression of long-term interest rates via quantitative easing and stagnant growth in Europe, an important foreign market for many S&P 500 global companies. 

Record low interest rates in the corporate bond market have helped fund large buybacks, but with the central bank on course to conclude buying bonds under QE in October, fuel for buybacks is ebbing and non-financial debt issuance has slowed.

Andrew Lapthorne at Société Générale says companies have exploited the generosity of financial markets to fund their share buybacks and as that fades, the equity bull market faces losing a key source of support."

Share buybacks have grown by $1.56 Trillion since 2011, but those repurchases peaked during the first quarter of this year at 159.28 billion before sliding back to $120.21 billion in Q2.  The risk for the markets here is that with the Federal Reserve reducing the flow of cheap liquidity, and potentially raising borrowing costs in 2015, two of the major supports of the markets will be removed.

This will leave the markets depending on the underlying fundamental drivers of the markets which are by no means cheap.


This Won't Last

While stocks have risen to new all-time highs in recent days, bond yields have fallen toward the lows of the year. As shown in the chart below, there has historically been a correlation between interest rates and the financial market from a risk on/risk off indication.


It makes some sense given that when the markets have a preference for risk, asset allocations are shifted from bonds to equities and vice versa. As the demand for bonds falls, and the demand for stocks rise, yields rise. However, the current decline in yields, amidst a very low volume ramp-up in stock prices, suggests that the demand for safety is outweighing the demand for risk.

If historical correlations reassert themselves, the deviation between stock prices and bond yields will be corrected and not in the the favor of bulls. 

Art Cashin summed this concern up well noting that this week is historically a very light trading week with a mild-upward bias. He also noted that the 1929 high was made the day after Labor Day.

"Thin markets can be tricky..stay wary, alert and very, very nimble."

“Economic Pilot in Reverse”: US Consumer Spending Unexpectedly Dips; Zero for 79

Courtesy of Mish.

Mainstream media headlines in the last two days offer an amusing look at GDP forecasts.

GDP Stronger Than Expected

Yesterday, the Financial Times reported US Rebound Stronger than First Thought.

The US economy’s second quarter bounce was stronger than previously thought, with the official annualised growth estimate increased from 4 per cent to 4.2 per cent.

The revision is more evidence of robust underlying growth in the world’s biggest economy as it swung back from a weather affected 2.1 per cent fall in the first quarter.

“Economic Pilot in Reverse”

Today, the Wall Street Journal reported U.S. Consumer Spending Declines 0.1% in July.

Consumer spending fell in July and income growth was weak, signs that cautious consumers could restrain economic growth in the second half of the year.

Personal spending, which measures what Americans pay for everything from sneakers to doctor visits, declined a seasonally adjusted 0.1% in July from a month earlier, the Commerce Department said Friday. It was the first time spending fell in a month since January.

Personal income, reflecting income from wages, investment, and government aid, rose 0.2% in July—the smallest monthly increase of the year.

“Looks like the pilot threw the economy’s engines into reverse at the start of the third quarter,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Forecasts that the economy would grow at a strong 3% clip in the third quarter “look increasingly unrealistic if consumers don’t return to the shops and malls.”

Economists surveyed by The Wall Street Journal had predicted personal spending would increase 0.1% and incomes would rise 0.3% in July.

Barclays lowered its forecast for third-quarter growth by a half-percentage point to a 2.2% pace. Goldman Sachs economists lowered their estimate to a 3.1% annual rate from a 3.3% pace.

Diving Into the Numbers

Please consider Personal Income and Outlays: July 2014 by the BEA.

Personal income increased $28.6 billion, or 0.2 percent, and disposable personal income (DPI) increased $17.7 billion, or 0.1 percent, in July, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) decreased $13.6 billion, or 0.1 percent. In June, personal income increased $67.1 billion, or 0.5 percent, DPI increased $62.9 billion, or 0.5 percent, and PCE increased $50.5 billion, or 0.4 percent, based on revised estimates.

Real PCE Highlights

Continue Here

“Economic Pilot in Reverse:” US Consumer Spending Unexpectedly Dips; Zero for 79

Courtesy of Mish.

Mainstream media headlines in the last two days offer an amusing look at GDP forecasts.

GDP Stronger Than Expected

Yesterday, the Financial Times reported US Rebound Stronger than First Thought.

The US economy’s second quarter bounce was stronger than previously thought, with the official annualised growth estimate increased from 4 per cent to 4.2 per cent.

The revision is more evidence of robust underlying growth in the world’s biggest economy as it swung back from a weather affected 2.1 per cent fall in the first quarter.

"Economic Pilot in Reverse"

Today, the Wall Street Journal reported U.S. Consumer Spending Declines 0.1% in July.

Consumer spending fell in July and income growth was weak, signs that cautious consumers could restrain economic growth in the second half of the year.

Personal spending, which measures what Americans pay for everything from sneakers to doctor visits, declined a seasonally adjusted 0.1% in July from a month earlier, the Commerce Department said Friday. It was the first time spending fell in a month since January.

Personal income, reflecting income from wages, investment, and government aid, rose 0.2% in July—the smallest monthly increase of the year.

"Looks like the pilot threw the economy's engines into reverse at the start of the third quarter," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Forecasts that the economy would grow at a strong 3% clip in the third quarter "look increasingly unrealistic if consumers don't return to the shops and malls."

Economists surveyed by The Wall Street Journal had predicted personal spending would increase 0.1% and incomes would rise 0.3% in July.

Barclays lowered its forecast for third-quarter growth by a half-percentage point to a 2.2% pace. Goldman Sachs economists lowered their estimate to a 3.1% annual rate from a 3.3% pace.

Diving Into the Numbers

Please consider Personal Income and Outlays: July 2014 by the BEA.

Personal income increased $28.6 billion, or 0.2 percent, and disposable personal income (DPI) increased $17.7 billion, or 0.1 percent, in July, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) decreased $13.6 billion, or 0.1 percent. In June, personal income increased $67.1 billion, or 0.5 percent, DPI increased $62.9 billion, or 0.5 percent, and PCE increased $50.5 billion, or 0.4 percent, based on revised estimates.

Real PCE Highlights

Continue here


Debt Rattle Aug 29 2014: This Is Why The Fed Will Raise Interest Rates

Courtesy of The Automatic Earth.

Esther Bubley Greyhound bus driver off duty, Columbus, Ohio Sep 1943

Given recent developments in Ukraine, and the accompanying PR, spin and accusations, the whole by now familiar shebang, I’m sure you would expect me to address the Kiyv vs Moscow vs the land of the brave issue today. Unfortunately, there are more important issues to talk about today.

Suffice it for me to say that the west is losing, and can therefore be expected to grab onto ever more desperate handles as we progress. Nothing new here: nothing proven, but plenty insinuated. We really should stop relying on our own news channels, for Ukraine, and for the economy, but those of you who’ve visited the Automatic Earth before, know that. And know why.

One prediction as per Ukraine: Angela Merkel will make sure Ukraine won’t be a member of NATO. Or she’s going to regret it something awful. My bet is she’s too smart to let things meander that far and too long.

What I do think should stand out from all of what we’ve seen recently is that there’s not a single news source in the Anglo Saxon world, or in what I read in the German, French and Dutch press, that’s even remotely trustworthy. And that’s still, no matter how long this has been going on, a pretty scary conclusion to draw.

The more important issues of the day for us are those that bubble under the surface. And maybe that’s not a coincidence. Maybe, just maybe, the whole warmongering thing serves to take your eyes of the failing economies in Europe and the US. And Japan.

I’m sure many people wonder why the Fed would cut QE and raise interest rates at the very moment Tokyo and Brussels are either preparing to or thinking about launch(ing) more stimulus, not less. You might think that US unemployment numbers, and GDP data, are behind the decisions, but then those are merely fabrications dutifully repeated by the news/politics system.

The US economy is in just as poor a shape as all other formerly rich economies are. And raising rates now risks blowing up very large segments of the global economy. Such as emerging economies, western mortgage holders, and all the millions in Europe and the US who’ve had to switch from well-paid jobs to a burger flipping standard of living. They may make stats look sort of OK (Mary’s got a job!), but both the people and the stats will topple over en masse when interest rates rise.

Why then should Janet Yellen raise those rates regardless? It’s very simple, and I don’t see why or how everybody has missed out on this, and how the vast majority still are.

Because anything and everything the Fed has done since Wall Street caused the crisis, and well before (ask Alan Greenspan), has been about protecting Wall Street. And protecting Wall Street, or rather enhancing Wall Street’s profits, is exactly why Janet Yellen is about to raise US interest rates.

Not that I think it’s necessarily a bad move, ultra low rates have been a scourge on our economies for far too long – and they have been around only because Wall Street could profit from them -, but because the act of raising them is once more being executed solely to benefit the TBTF banks. Certainly not to benefit the American people, millions more of whom will be forced out of their homes when the Fed funds rate moves to 3% or 4%, or bend over backwards just to stay put.

Don’t count or Yellen, or the rest of the Fed crew, to take that into account, though. That’s not what they do. That’s not their MO. They’re not thre for you. The whole storyline about the central bank looking out for the American people, for full employment and price stability, is just that: a storyline. No different from the one about how America is busy saving Kiev from Putin: a convenient storyboard that lures in enough people to stand on its own.

Reality resides in for instance this Philip Van Doorn article for MarketWatch:

Big US Banks Prepare To Make Even More Money

An expected rise in interest rates over the next year will help the largest U.S. banks earn billions of dollars in additional net interest income, setting up their cheap stocks for what could be a stellar run. [..]

The Federal Reserve has kept the short-term federal funds rate locked in a range of zero to 0.25% since late 2008, in an effort to increase loan demand and jump-start the economy. This policy and the “QE3” bond purchases that will end this year seem to have worked, with the U.S. economy expanding at a 4% annual rate during the second quarter and continuing to add over 200,000 jobs a month. But the debate at the Federal Reserve has now shifted to the timing of interest rate increases. Most economists expect the federal funds rate to begin climbing in the second half of 2015, but it could well happen sooner than that.

For most banks, the extended period of low interest rates has become quite a drag on earnings.

Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago, while their assets continue to reprice downward.

A 1% rise (from zero) in interest rates will grow BoA profits by 8.4%. That’s all you need to know, right there. What else do you need? How about a 3% rise? Low rates have brought down bank earnings for a couple years, and they’ve all bled that cashcow dry by now. The next big thing for Wall Street will by higher rates. Which they can pass on to you, Joe and Jill Main Street. Make sure you have your checkbooks ready.

When rates are low, banks can borrow on the cheap. But they can’t charge you high rates either. They’ve now borrowed all they want, and can, at zero percent (there’s a limit to profits even there). And the banks want to move to 3-4-5+%, so they can squeeze their customers for the difference.

The Fed is only too happy to comply. And it will use the argument of an improving US economy to do so. Because (some of) the – handpicked – stats say there’s improvement. Yellen is still dutifully hesitating, because they all know there really is no great US economy that would justify a rate hike, but all the pieces are in place.

And that’s why US interest rates will go up. And create chaos in global markets. And push millions of Americans and Europeans into servitude. It’s because the banks want it. Because they stand to profit greatly from the ensuing mayhem.

Can A National Quasi-Religion (Pro Sports) Go Broke?

Courtesy of Charles Hugh-Smith of OfTwoMinds

Attending costly games is on the margins of the household budget. When the credit card gets maxed out, attending is no longer an option.

I'm not suggesting professional sports isn't the greatest thing since sliced bread. I'm simply asking if attending pro sports games has become unaffordable to the average American.

Who cares as long as we can watch the games for free on television, right? That raises another issue: in the next recession, will advertisers still pay billions of dollars for broadcast TV ads on sports channels when ads on mobile devices distributed via Big Data analysis can directly target the (shrinking) populace who still has disposable income to spend?

Before we look at the money side of pro sports, let's note the glorious shared experience of "our team" winning and hated rivals losing. Sports is one of the few experiences that unites a remarkably diverse populace, and one of the few spheres of life that isn't politicized to ruination.

We all get to live vicariously through sports, and the stranger cheering beside us is suddenly "friendly" in a largely hostile world.

With apologies to Dallas Cowboys fans: Joe Montana to Dwight Clark–The Catch in January 1982: Cowboys fans have many memorable moments to savor, including a number in this game.

Montana to Clark – The Catch (2:24)

But attending a game is prohibitively expensive. A seat in the nosebleed section might only be $15, but there's parking (or train fare), and the $10 beer and the $10 hotdog. That's $40 – $50 for one fan or $80 for two people.

Given that the average wage is $44,000, $80 for "cheap seats at the game" is not inconsequential. Given that many clubs are now pricing tickets by demand, it's easy for two people to spend $200 to attend a game.

How many people can afford to attend games on a regular basis without maxing out a credit card or drawing on a home equity line of credit (assuming there's home equity to tap)?

Cities desperate to retain pro franchises are on the hook for hundreds of millions of dollars spent building $1+ billion stadiums. Many claim that they'll recoup the money from hotels and shopping malls built adjacent to the stadium, but this gargantuan cash flow has yet to actually materialize.

The winner take all dynamic of our pop culture has driven salaries and team overhead costs into the stratosphere. This pushes costs so high that teams literally can't afford a losing season. Alas, not every team can win the conference, much less the championship.

The assumption that TV ad revenues will continue to support the enormous costs of the system is rarely questioned. The ads have to work to make sense. In an economy in which the average wage earner is making less money every year (measured by purchasing power rather than nominal dollars), and more and more of the dwindling income is devoted to healthcare, taxes, debt service and essentials, I have two questions:

1. What good is an ad if the viewers have no disposable money to spend?

2. Rather than pay to broadcast an ad to every viewer, few of whom are in the market for whatever item you're selling, why not target the core audience directly with mobile ads?

If an advertiser is marketing beer that (in Mike Royko's memorable phrase) tastes like it's been strained through a horse, where's the most bang for the ad buck–a broadcast ad to sports fans who have seen hundreds of beer ads and are either already fans of the swill or consumers who will never buy the product, regardless of ads, pricing, etc.?

The typical ad-industry justification is that if Swill A can capture 1% of market share from Swill B, spending tens of millions of dollars on TV network ads is a wise investment.

But does this argument hold up when advertisers can target beer buyers with a history of buying Swill A and B directly via their mobile phones as they enter the supermarket? Which ad do you reckon has a higher probability of modifying consumer choice, another beer ad that viewers mute/ignore, or a coupon delivered to the beer buyer at the point of purchase?

The mobile ad revolution has barely begun, and while broadcast ads on TV, radio and the Internet will all still attract advert money, it seems highly likely we've reached Peak Broadcast TV Advertising income.

This chart of household income shows that there is less money for every sector from wealthy to low-income. 



Based on anecdotal evidence submitted by readers and correspondents, it seems that much of the discretionary spending on things like attending sports events and concerts is being funded with debt or drawdowns of savings/equity. In other words, people are charging big-bucks tickets on their credit card, not paying for them out of weekly earnings.

There may be a generational component as well. Most of the people in the top 10% of household income are Baby Boomers in their peak earning years. On the face of it, they can easily afford to pay for costly tickets, parking, beer, etc. at one of the sports industry's new secular cathedrals (i.e. stadiums).

But these same people are often also paying for kids' college and funding care for their aging parents. $200,000 a year looks great until you subtract taxes, college costs, assisted living costs for a parent, a big mortgage and rising costs for essentials.

My point is: going to games is now like going to concerts or a fancy restaurant: each consumes a major chunk of dwindling discretionary income. As credit and income tighten, it's getting easier to decide to forego the concert, game or high-end dining experience.

In other words, attending costly games is on the margins of the household budget. When the credit card gets maxed out, attending is no longer an option.

I haven't found any studies on this question, but I also wonder if Gen Y is as committed to the idea of investing so much time and money in sports as their elders. If they are indeed less invested, this adds additional weight to the idea that we've reached Peak Pro Sports.

I confess I'm jaded. I don't have the time or emotional surplus to invest in following sports, and I tend to see the sports industry as just another bloated cartel that rips off its customers because it can, enriching a handful of super-wealthy owners who bask in the reflected glory of a secular religion.

Put the trends together and it certainly looks like the sports cartel has already sucked up all the oxygen in the room. In the next recession, we may find that pro sports will no longer be able to support the sky-high costs of its overhead and secular cathedrals.

Expect Another Strong Employment Report Next Week

Courtesy of EconMatters

Sleepy August Closes Out

Lost in what is one of the lowest trading volume weeks of the year, and a really sleepy August month in general where many folks are getting to use some vacation time before markets start getting serious again in September after the Labor Day Holiday was another week of better than average economic data. 

Initial Jobless Claims

I will avoid the minor revisions, and stick with the reported numbers but Jobless claims had a stellar month of August. First on 8/7 we had 289k Initial jobless claims, then on 8/14 we had 311k jobless claims, and on 8/21 we had 298k, and we close out the month with another 298k Initial jobless claims. The 4-week average is 299,750 for the month of August.



The underlying fundamentals in the job market keep getting better each month, and the manufacturing reports and other economic surveys all showed strong employment components which likewise support the strong showing this month for Initial Jobless claims.

ADP Employment Report

We will get a first look at private payrolls next Wednesday with the ADP Employment Report which will set the tone for next Friday`s Employment report, and the jobless claims data for August suggests another plus 200k employment gain for the month, but just how robust is the question.

While much of the market focus for the month was on Fed Policy and Geo-Politics, the economic data has been coming in better than expected for the entire month; shoot even housing data on the whole has been coming in better than expected, so I am leaning towards a 250k plus Employment Report for next Friday.

Important FOMC Forecast Meeting in 3 Weeks

If we get another strong employment report next Friday, this will really up the ante for the rest of the September economic data moving into the all-important Wednesday September 17th Quarterly FOMC Meeting Announcement, FOMC Forecasts and Chair Press Conference where many market participants have noted will potentially be when Janet Yellen signals to financial markets the Rate Hiking Timeline.

Ergo expect participants coming back from vacation to watch the ADP Employment Report real carefully, and early positioning to begin ahead of the Friday Employment Report, and if we get another strong employment report next Friday, expect some major positioning in front of the critical quarterly Fed Meeting on the 17th, with all hell breaking loose from a portfolio reallocation standpoint for the fourth quarter if Janet Yellen signals the Rate Hike Timeline for financial markets, and it is sooner than currently priced into financial markets. 

Moreover, even though the mid-summer timeline for the first rate hike is theoretically priced into financial markets, in actuality as JamesBullard has stated several times, the market is severely complacent with actually positioning itself for even this mid-summer rate hike, procrastination at its finest! And if the Timeline gets moved up to March, or hinted at in the FOMC Meeting, Forecast or Press Conference this will trigger the start gun for some serious ‘portfolio rebalancing’ in many asset classes.

September Fireworks

Therefore, September is not going to be nearly as sleepy as August from a trading standpoint, and probably everything that worked in August will get “taken out to the woodshed” in September. Expect a ramp up in volatility (for real this month), and traders better bring their seatbelts this month as I expect major market moves in many asset classes like currencies, precious metals, credit markets, stocks and bonds as the economic data is just too good for the Fed not to move the first rate hike up to March of 2015. It all gets started next Friday with the highly anticipated Employment Report for August!


Putin Says Everything U.S. Touches Turns Out Like Libya Or Iraq

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Having been quiet for a few days, comfortable sitting back and watching NATO, Europe, and the US escalate each other's talking points to a frenzy of populist revolt, Russia's Vladimir Putin has come out swinging this morning:


In addition to discussions of The Bolsheviks, agreeing Stalin was a tyrant, and slamming liberal economic models for creating crises, Putin notes his approval rating is high because "he is confident he's right."

Some more fun soundbites:


And perhaps of most note… just as Obama pronounced yesterday that US would not engage militarily:




*  *  *

So – just like the Cold War – military build-up on either side and constant escalation in tensions…

Japanese Household Spending Slumps 5.9%; Cries for More Monetary Stimulus

Courtesy of Mish.

Consumer spending in Japan slumped in June because of a tax hike pushed through by Prime Minister Shinzo Abe. Economists claimed it would be temporary and spending would quickly recover thanks to inflation.

Let’s take a look at what actually happened.

Japanese Household Spending Slumps 5.9%

Yahoo!Finance reports Japan Household Spending Slumps, Output Flat as Tax Pain Persists

Japanese household spending fell much more than expected and factory output remained weak in July after plunging in June, government data showed, suggesting that soft exports and a sales tax hike in April may drag on the economy longer than expected.

Household spending fell 5.9 percent in July from a year earlier, nearly double the drop forecast in a Reuters poll, as the higher levy and bad weather kept consumers at home instead of going out shopping.

Weak exports left companies with a huge pile of inventories, forcing them to continue cutting back on factory output, separate data showed.

Industrial output rose 0.2 percent in July, much less than a 1.0 percent increase projected in a Reuters poll, data by the Ministry of Economy, Industry and Trade showed. That was a tepid rebound from a 3.4 percent fall in June, the fastest drop since the March 2011 earthquake.

Japan’s economy shrank at an annualized 6.8 percent in the second quarter from the previous three months, more than erasing the 6.1 percent first-quarter surge in the run-up to the sales tax hike.

Analysts generally expect Abe to approve another tax hike in December, but that decision promises to be politically divisive, coming just as the government hammers out details of a promised corporate tax cut.

Amusing Details

The Financial Times has some amusing details in Japanese Economy Flounders After Sales Tax Rise

Consumer prices rose 3.4 per cent in July compared with a year earlier, including the added tax. Stripping out the tax effect as well as the impact of volatile fresh-food prices – the formula favoured by the Bank of Japan – showed underlying inflation was 1.3 per cent, a level unchanged from June.

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Pump And Dump VC Style: Kleiner Perkins’ Gambit To Shear The IPO Sheep

Courtesy of David Stockman via Contra Corner

That was quick! Last November Snapchat was valued at $2 billion in the private VC market; by Q1 that had risen to $7 billion; and yesterday it soared to $10 billion. Gaining $8 billion in market value in just nine months is quite a feat under any circumstance – but that’s especially notable if you’re are a company with no profits, no revenues and no business model.

And, yes, that’s not to mention the “product” either. Apparently, Snapchat’s 100 million teenage and college users mostly swap pics of their private parts which vanish after 15 seconds – or so they think. In that respect, Snapchat’s business challenge may not be lack of “demand”, but whether its exhibitionist “customers” will be copasetic with sharing their 15 seconds of fame with advertisers.

Time will tell, unfortunately. In the meantime, however, its evident that Snapchat’s spectacular valuation rise is not about how to discount the potential value stream from monetizing dirty pictures. Instead, it reflects the crazy dynamics of late stage financial bubbles. And on that score, Wolf Richter has hit the nail squarely on the head, as usual.

As he explains in today’s post, Snapchat’s spectacular valuation run-up is just a new and more sophisticated form of “pump and dump”. In this instance, the venture capital firms involved have apparently invested trivial amounts of chump change in the two recent funding rounds in order to peg dramatically higher paper valuations in preparation for an imminent IPO. In numeric terms they have invested less than $30 million since last November, meaning that they have been able to leverage an $8 billion valuation gain at a ratio of 266:1.

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

To be sure, Wall Street has sponsored such market-rigging ploys since time immemorial. However, the true evil of rampant central bank money printing is that it vastly enables and amplifies such speculative ventures, while at the same time eviscerating the natural checks and balances against speculative manias which are embedded in honest financial markets.

Specifically, zero money market rates (ZIRP) for 68 months running have unleashed carry trade gambling in the financial markets like never before. That’s because professional Wall Street speculators can acquire risk assets and “fund” them on high leverage— through margin accounts, options trades or specifically crafted “structured finance” deals from their prime brokers—- at tiny interest rates. The resulting “spread” is bubblicious—especially when the Fed’s implicit “put” under the stock averages fuels a rambunctious “buy the dips” psychology among traders.

Under those circumstances—which are rampant at the moment—a gambler’s wildest dream comes true. The carry cost side of a leveraged gamble is pinned at close to zero by the solemn commitment of the central bank, while the asset value side of the trade ratchets ever higher owing to the endless bid of the dip buyers.

And its actually even better. The obvious effect of the Fed’s incessant market coddling since at least the days of the LTCM bailout in September 1998, but especially since Bernanke went all-in September 2008, is that the natural short interest in the stock market has been punished, bloodied, and destroyed. Consequently, downside insurance on speculative portfolios (i.e. puts on the S&P 500) is dirt cheap, meaning aggressive traders can protect themselves against an unexpected (and unlikely) plunge in the broad market while barely denting their gains from high flying momo stocks in favored sectors like social media or whatever happens to be the flavor of the week.

Needless to say, cheap downside insurance only enlarges and strengthens the bid for high flyers—-a dynamic that works wonders in the IPO market, especially. Accordingly, lunatic valuations have once again flourished in the new issues market as if its 1999-2000 all over again.

And like then, the resulting devil’s workshop environment incentivizes the smart money to concoct schemes to exploit the bubble—like yesterday’s 266:1 leveraging of Snapchat’s valuation. That this will end in tears for the “slow money” IPO sheep who show up for the shearing, goes without saying.

What needs remark, however, is the enormous damage that these kinds of financial deformations and distortions do to the real economy and the capitalist machinery of invention and enterprise. By all the historic evidence, Kleiner Perkins has been one of the greatest incubators of technological progress and business innovation in modern times.  Surely it has better things to do, therefore, than run a  crude 1920s style pump and dump scheme that will contribute nothing to society except painful losses for the retail investors who take the bait.

So here’s the thing. Free central bank money corrupts free markets absolutely—-that should be more than evident by now. But owing to the dense economic fog on her Keynesian windshield, Janet Yellen and her band on money printers in the Eccles Building remain clueless as to the  monumental corruption that is being injected into financial markets by Fed policy.

Would that Yellen should at least read Wolf Richter’s excellent post on the present moment’s most spectacular example of that. Better still, perhaps a trip back to San Francisco  where bubble opulence ricochets thru the entire economy would be in order. She might discover that the median housing price has soared to more than $1 million; and that none of the inhabitants of the “labor market” that she is so vainly attempting to revive even qualifies for a standard mortgage.

By Wolf Richter At Wolf Street

How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!

It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off.

But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.

But the investment was an ingenious move.

For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.

Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.

To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.

Inflating Snapchat’s valuation by $8 billion with a few millions dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.

The hope is that the IPO market remains “healthy” long enough for investors to be able to unload hundreds of these companies at crazy valuations. The hype surrounding these valuations is creating more enthusiasm about IPOs in a self-reinforcing loop. The hope is also that the broader stock market continues to soar so that potential acquirers can print more overvalued shares to acquire more overvalued startups so that the exists can come about. Under the motto: after us the deluge.

The deluge will wash over retail investors.

While it’s possible that one or the other startup might become the next Facebook or Google, there are only a few Facebooks and Googles, but there are many startups whose business model and permanent lack of profits will eventually bring them down to reality, either in the portfolios of retail investors, or as a write-off by the acquirers, whose shares are also stuffed into the nest eggs of retail investors. Along the way, Wall Street extracts fees from all directions. That’s the Wall Street money transfer machine. It smells like a rose when all stocks go up, but when the tide turns…. OK, that won’t ever happen.

With fundamentals and economic realities having become totally irrelevant these days, economists are reassigned to tout stocks. Read…. Economist: Stocks No Longer Risky, Will Go Up ‘Steadily’

The Committee to Blow Up the World!

The Committee to Blow Up the World!


Source: Clipart.

Dear Diary,

All over the world stocks are rising. In the US, the S&P 500 rose over the 2,000 mark for the first time in history. The Dow is over 17,000.

And if you want to buy a share of online TV network Netflix, Inc. (NASDAQ:NFLX), you will pay $144 for every dollar the company earned over the last 12 months.

If you bought the company outright, in other words, you’d have to wait until 2158 to earn your money back.

But this story is playing out from Timbuktu to Taiwan to Texas. Here’s the latest from Bloomberg:

Shares worldwide added more than $2.2 trillion in value since Aug. 7, according to data compiled by Bloomberg. Optimism that central banks will support economic growth sent the MSCI All-Country World Index up 3.8 percent from its low this month. The S&P 500 has risen for 10 of the last 13 days and the Nasdaq Composite Index is about 10 percent from an all-time high.Global markets are surmounting crises in Ukraine, the Gaza Strip and Iraq as investors renew bets that stimulus will revive growth. The Stoxx Europe 600 Index posted its biggest two-day gain since April after European Central Bank President Mario Draghi signaled policy makers may consider introducing an asset-buying plan. Japan’s Topix index is near its highest level since January, rebounding from losses earlier this year.

Put them all together, and publicly traded equities are now worth more than $66 trillion – just shy of total world GDP. That’s $12 trillion more than they were worth in the beginning of 2013… and it’s $30 trillion more than they were worth 10 years ago.

Stocks Up… Growth Down

What has happened during the last 10 years to make stocks so much more valuable?

We remind readers that shares are titles to ownership of real assets and the earnings they produce. And in a competitive economy, they shouldn’t be able to diverge too far from the cost of creating those assets.

Typically, investors have paid from 10 to 20 times annual earnings for shares. But when they are bearish, as they were in 1982 and again in 2009, they will want to pay less than 10 times earnings. And when they are bullish, the sky’s the limit… but seldom more than 20 times.

Currently – except for China and Russia – almost all major country stock markets are closer to the top of the range than the bottom. With the S&P 500 now trading on a Shiller P/E (which looks at the average of 10 years of inflation-adjusted earnings) of 26.5.

What would make investors so bullish? And why would this bullishness extend to practically the entire globe?

After all, corporate incomes depend on corporate sales. And one corporation’s sales can only increase if a) it takes business from other corporations (which would mean no net increase for the world’s sales) or b) the world economy is growing.

But that’s the curious thing. As stocks have gone up… growth rates have come down, from a high of nearly 5% in 2009 to just 2% last year.
Last year, in the US, stocks rose 10 times faster than the economy beneath them.

Go figure.

The old-timers tell us that “the stock market always knows more than we do.” If that is so, what is it that the market knows that we don’t? Is there another Industrial Revolution coming? Are birth rates exploding?

Not as far as we can tell.

Ready for Mischief

So, what’s behind the big run-up in asset prices?

Here’s our guess: Janet Yellen, Mario Draghi and Shinzo Abe.

As Chris wrote yesterday: At the recent central bank meeting in Jackson Hole, Wyoming, Janet Yellen let it be known she was in no particular hurry to let markets discover prices on their own again. Instead, she’ll put prices where she wants them.

And that means setting interest rates at vanishingly low levels… and asset prices at in-your-face new highs.

Mario Draghi, meanwhile, is faced with a triple-dip recession in Italy, a flat economy in France and negative growth in Germany. From Bloomberg:

[S]aid Patrick Spencer, head of US equity sales at Robert W. Baird & Co. in London. “Draghi gave clear indication that he’s standing ready with further measures to stimulate growth and that’s helping overall sentiment.”

As for Shinzo Abe, the Japanese prime minister, he seems ready for any sort of mischief in the name of increasing inflation and GDP – including encouraging women to cut down trees!

Shhh…. No need to accuse us of male chauvinism, as though we had something against women doing hard labor. We don’t. In fact, we’re in favor of it. But if you could raise prosperity by increasing the number of female lumberjacks, half the world’s women would already be wearing plaid shirts.

Shinzo, Janet, Mario…

Surely there is a clever magazine somewhere readying a cover story…

“The Committee to Blow Up the World,” is the headline we propose.



Further Reading: The mischief-making we’re seeing from the likes of Yellen, Draghi and Abe never ends well. In fact, the catastrophic consequences of such wrongheaded central planning is the subject Bill’s new book, Hormegeddon. To pick up your copy… and start receiving The Bill Bonner Letter, go here.

Venezuelan Bolivar Plunges to Record Low on Black Market; Bond Default Coming Up in October?

Courtesy of Mish.

Please consider the “official” exchange rate of the Bolivar to the USD.

Bolivar vs. US Dollar

  • From 2005 to 2009 the official exchange rate was 2 bolivars to one US dollar.
  • In 2009 the official exchange rate soared to 4.3 to the dollar.
  • In 2013 the official exchange rate soared to 6.3 to the dollar.

Venezuela allows “very limited” trading at 50 to the US dollar in a parallel exchange called Sicad II.

On the black market today, it takes 89 bolivars to buy 1 US dollar. That is a 95% loss in value vs. the official exchange rate since 2013.

Black Market Record Low

Bloomberg reports Venezuela’s Black Market Bolivar Slides to Record Low.

Venezuela’s bolivar fell to a record low against the U.S. dollar on the black market today as the government tightens currency rationing to pay maturing debt.

A dollar fetched 89 bolivars on the Colombian border today, compared with the official exchange rate of 6.3 bolivars, according to, a rate-tracking website. Two black market traders in Caracas, who asked not to be named because the trading isn’t legal, confirmed the record-low rate.

Inflation reached 60.9 percent in May, the last month for which figures are available, while according to economists surveyed by Bloomberg gross domestic product shrank 2.1 percent in the second quarter. The economic decline is pushing people to seek out dollars to protect the value of their savings, at the same time that the government tightens supply, Henkel Garcia, director of Caracas-based consulting firm Econometrica, said by telephone.

“The government has reduced disbursements of dollars at the secondary markets in recent weeks,” said Garcia, citing non-public data from the Venezuelan Banking Association. “They are trying to save up as many dollars as possible to meet obligations to bondholders.”

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Market reaction to weakening fundamentals in Germany

Market reaction to weakening fundamentals in Germany

Courtesy of

The German business climate index tracked by the Ifo Institute declined more than expected this month, making it the 4th drop in a row.

The Guardian: – German business sentiment dropped for a fourth straight month in August as concerns about the Ukraine crisis and the effect of sanctions against Russia swept through corporate boardrooms in Europe's largest economy. 

The Munich-based Ifo thinktank's business climate index, based on a monthly survey of about 7,000 companies, fell to 106.3 from 108, below the Reuters consensus forecast of 107.

A large part of the decline was of course due to the Ukraine crisis, but that was not the only cause of Germany's deteriorating private sector growth. Slowing exports to the rest of the euro area nations due to weaker demand as well as persistent economic headwinds in China (see discussion) have contributed as well. 

This means that Germany is unlikely to support any further sanctions on Russia and will make a concerted effort to stabilize the situation (in spite of any pressure from the US).

The market reaction was swift, with the 10-year Bund yield hitting another record low.

Investors also piled into the three-year government notes, sending those yields into negative territory for the first time since 2012. The German government is now getting paid to hold your euros for three years.

In fact the nominal yield curve is in the negative territory all the way through the three-year point and showing signs of inversion – with the 1-year yield higher than the 3-year.

The euro dropped below 1.32, with rising expectations of diverging monetary policies between the US and the Eurozone. This was fueled in part by the Jackson Hole conference where Janet Yellen's speech was not as dovish as some had expected. The currency weakness will deliver some much needed relief for the euro area by helping the exporters and by providing some support to import prices. Currency weakness is one way to arrest deflationary pressures – the Japanese way.


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How You Can Play to Win When Market Makers Are Calling the Shots

How You Can Play to Win When Market Makers Are Calling the Shots

By Dennis Miller

The American Legion sponsored a carnival every summer when I was a young lad. My dad was a legionnaire, so each year I had a job. Beginning at age 12, I hauled soft drinks and food to the various concession booths well into the night, which probably violated some labor laws.

Dad warned me about the carnival barkers, telling me to never play games where you try to win a giant teddy bear. They were rigged, he said, and no one ever wins—“So don’t waste your money.”

I questioned Dad’s advice when I saw other boys carrying giant teddy bears to the delight of cute teenage girls. So I quietly watched some of the games. Some people won silly goldfish, but few won the giant teddy bear.

Then I befriended some of the carnival workers and told them what my dad had said. To my surprise, they took his remarks personally. Each one stepped outside his booth to demonstrate just how easy it was to win by pinging ducks or knocking over little stuffed clowns with ease. The guy who shot the BBs told me to ignore the rear sights because they were off center. He also told me exactly where to hit the moving duck to make it go down. Ping, ping, ping! He knocked them down one after another.

He argued that the game was not rigged; if it were, eventually no one would play. But the odds were tilted toward those who practiced. I tried it, lost a dollar (one hour’s pay), and realized it was cheaper to buy the teddy bear than to spend the money to learn how to win consistently.

I think about those carnival games often, when friends and readers ask about market makers, brokers who help keep markets liquid and profit in the process. Do they just hold a unique position, or is something fishy going on?

24 Men Make History Under a Buttonwood Tree

Let’s take a step back to answer that question. The history of what would later become the New York Stock Exchange began in 1792, when 24 brokers and merchants signed the Buttonwood Agreement outside 68 Wall Street—under a buttonwood tree, of course.

The securities market grew, particularly in the aftermath of the War of 1812, and in 1817, a group of brokers established the New York Stock & Exchange Board (NYS&EB) at 40 Wall Street. At that time, stocks were traded in a “call market” during one morning and one afternoon trading session each day. A call market is exactly what it sounds like: a list of stocks was read aloud as brokers traded each in turn.

Whatever the benefits of this seemingly orderly system, it did not foster liquidity, and in 1871 the exchange, which had been rechristened as the New York Stock Exchange (NYSE) in 1863, began trading stocks continually throughout the day. Under the new system, brokers dealing in one stock stayed put at a set location on the trading floor. This was the birth of the specialist.

Designated Market Makers (DMMs), who are assigned to various securities listed on the exchange, have since replaced specialists. DMMs are one type of market marker, which are broker-dealers who streamline trading and make markets more liquid by posting bid and ask prices and maintaining inventories of specific shares.

Since the NYSE is an auction-based market, where traders meet in-person on the floor of the exchange, the DMMs, who represent firms, maintain a physical presence on the floor. Unlike the NYSE, the National Association of Securities Dealers Automated Quotations (NASDAQ) is an exclusively electronic exchange. Plus, it has approximately 300 competing market makers (not physically present at the exchange). Stocks listed on the Nasdaq have an average of 14 market makers per stock, and they are all required to post firm bid and ask prices.

Why Market Makers Matter to Retail Investors

You may be thinking, “That’s great, but why should any of this matter to me?” Well, because the existence of market makers should affect a few of your trading habits—for thinly traded stocks in particular.

Trades are not automatically executed via magical computer elves. When you place a buy or sell order (likely via the Internet), your broker can choose how to execute your trade.

When you place an order for a stock listed on the NYSE or some other exchange, your broker can pass that order on to that particular exchange, or it can send it to another exchange, such as a regional exchange. However, your broker also has the option of sending your order to a third market maker, a firm ready to buy and sell at a publicly quoted price. It’s worthwhile to note that some market makers actually pay brokers to route orders their way—say, a about penny or so per share.

On the other hand, your broker will likely send your order for a stock traded on the Nasdaq, an over-the-counter market, to one of the competing Nasdaq market makers.

And of course, your broker can always fill your order out of its own inventory in order to make money on the spread—the difference between the purchase and sale prices. Or it can send your order (limit orders in particular), to an electronic communications network (ENC), where buy and sell orders of the same price are automatically matched.

With that in mind, there are two steps you should take to make the most of your trades:

  • Always place orders at limit prices, as opposed to market prices. As of Tuesday, the price for Coca-Cola is a bid of $41.23, and the ask price is $41.24; the spread is a penny.


    If you put in an order to buy at $41.24, a market maker could buy at $41.23 and sell it to you for $41.24, pocketing a penny per share. If you buy 100 shares, they make $1.00. That is their profit for making the market.

    If you put an order in at “market,” it can cost you a lot more. The depth of the current bids goes all the way down to buy at $34.01 (there are a couple of orders to buy KO for $22.12 and even one as low as $3.00, but the probability they will be filled is negligible), and the sell side goes up to $53.68 (again, there is one order to sell KO at $88 but this investor won’t find a counterparty in his right mind that would take it). That means there are currently orders sitting with the market maker to be executed at those respective prices.

    If the market maker sees a market order, he would buy the stock at $41.23 and sell it at a much higher price. A market order is basically a license for the market maker to steal. You want the best price for any stock you’re trading; entering a market order will ensure you don’t get it.

    The spreads for thinly traded stocks are generally larger. If you want to buy, you can offer a lower price than the bid, or perhaps a penny higher. If you want to trade several thousand shares, consider doing so in small tranches, so you don’t show your full hand to the market maker.

  • Know the role market makers play when executing stop losses. For the Miller's Money Forever portfolio we generally set a trailing stop loss when we buy a stock. Entering a stop loss order with your broker will automatically generate a sell order should the stock drop to that number. A market maker can see that number and may drop down to buy your stock at the low price and then resell it for a profit.


    As a practical matter, I set stop losses for big companies like Coca-Cola that trade millions of shares per day. The stop loss was there for a reason, and I don’t want to risk the price dropping further before I can sell it.

    Some pundits think you should never enter a stop loss with your broker. They prefer another method: a stop loss alert, which many brokerage firms offer. They notify you through an email or text message if the stock drops to the stop loss price, and then you can go to your computer and enter the sell order. We always use the alert for thinly traded stocks, so we’re less vulnerable to an aggressive market maker.

    If you are concerned about showing your hand to the market maker, by all means, use a stop loss alert. If you think the risk associated with stop losses is minimal for high-volume stocks, you may want to use both stop losses and stop loss alerts, depending on the stock.

Whether any of this means the market is “rigged,” I’ll leave to those $500-per-hour lawyers to hash out. This is the game we’re playing, so it’s critical to understand the rules, whether we like them or not.

Whether you’re a retail investor or just a guy shooting at moving ducks at a carnival, you need knowledge and skills to succeed. My free weekly missive, Miller’s Money Weekly, exists for that very reason. We provide retirement investors with the education and tools essential for a rich retirement. Receive your complimentary copy each Thursday by signing up here.