NEWS

Where does the CAPE stand ?

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On February 2017 the indice stands at 28.44x.

Markets are chasing the highest valuations in history, will it continue ?

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Markets are chasing the highest valuations in history. And as usual, they are cheered on by an increasingly puerile mainstream media. Barron’s didn’t even wait for the ink to dry on the Dow Jones Industrial Average’s 20,000 print before declaring in a new cover story: “Next Stop Dow 30,000.” Barron’s argues that “[t]he Dow hitting 20,000 was no fluke. Today’s stock prices are well supported by corporate earnings and economic growth. In fact, if President Trump can avoid stumbling into a trade war – or a real war – the Dow could surpass 30,000 by the year 2025.” Leaving aside that this National Enquirer-style headline is a desperate attempt to pump up readership and is followed by an article lacking a modicum of analytical substance, let’s take a serious look at claims that corporate earnings and the economy are strong. The facts tell a different story than the one Barron’s tries to sell.

Corporate earnings have been weak for the last two years. According to Factset, estimated non- GAAP earnings growth for S&P companies in 2016 was a paltry +0.1% (and GAAP earnings growth was negative). Revenues were up roughly 2.0%, which is zero growth once you back out phony government inflation data and negative if you use real world prices. In 2015, S&P 500 earnings declined year-over- year on both a GAAP and non-GAAP basis. But even these figures really don’t tell how poorly businesses are performing because GAAP and non-GAAP earnings are inflated by low effective corporate tax rates, low interest rates on the money borrowed to buy back stock and pay higher dividends, and sluggish wage growth. US corporations are significantly more leveraged than they were on the cusp of the financial crisis in 2007, a condition disguised by record low interest rates that are now rising. So-called non-GAAP S&P 500 earnings (which are best considered “earni ngs as we would like them to be” rather than as they actually are) are more than $20 per share higher than GAAP earnings. With almost half of companies reporting so far for 4Q16, the full year estimate for 2016 S&P 500 non-GAAP earnings is $108.66 and GAAP earnings is $97.98 This puts the market multiple at 21.1x trailing non-GAAP earnings and 23.4x GAAP earnings.4 By way of comparison, this multiple was 24x non-GAAP earnings during the Internet Bubble. Other valuation metrics such as the Shiller Cyclically-Adjusted P/E at 28.4x (versus a mean of 16.7x) and the S&P Market Cap/GDP Ratio of 125% are also at extreme levels. There are other signs of excess as well such as margin debt running above $500 billion compared to $380 billion at the market top in 2007. Wall Street strategists trying to tempt investors into buying more stocks at these levels are playing with fire.

And Dow 20,000 isn’t what it seems. Drawing historical comparisons between index levels is an inexact science due to the fact that the composition of these indices changes over time. The composition of the Dow Jones Industrial Average has changed over time. As economist extraordinaire David Rosenberg points out, if the eight companies that were replaced in the Dow since April 2004 had remained in the index, we would be reading about Dow 12,886, not Dow 20,000.5 Also, as a price-weighted index, moves in certain stocks have an outsized impact on the Dow, creating false impressions about the overall strength of the market. For example, moves in Goldman Sachs Group (GS) have eight times the impact on the Dow as those of General Electric (GE), a factor that contributed to the index’s post-election rally. Tracking the Dow may make for good financial television (actually, nothing makes for good financial television today other than Realvision TV, bu t that’s a topic for another day), but it is comparing apples and oranges and means little analytically. All Dow 20,000 accomplishes is getting investors all stirred up that they are missing a rally. They should be careful what they wish for.

The chase to peak valuations is occurring in a weak economy. Barron’s claim that economic growth justifies not only Dow 20,000 today but Dow 30,000 in eight year is malarkey. Barron’s ignores the fact that fourth quarter GDP sputtered to 1.9% and kept full year 2016 growth at a disappointing 1.6%, the slowest since 2011 and down sharply from 2015’s 2.6% pace. Last year marked the 11th consecutive year that America failed to reach 3% growth, the longest period since the Bureau of Economic Analysis started reporting GDP. U.S. industrial production has declined on a year-over-year basis for 15 consecutive months and the capacity utilization rate is a disappointing 75% (a level considered contractionary). And let us not forget that this tepid growth was boosted by eight years of zero interest rates and trillions of dollars of QE; without that support, the economy likely would have shrunk. Claiming that robust economic growth supports hi gher stock prices is nonsense. Stock prices are primarily supported by cheap money and, as we will see in a moment, important structural forces in the markets.

Stocks enjoyed quite a run since Election Day. But even before Donald Trump surprised the world and won the U.S. presidency, stocks were on an epic run that began in March 2009 at the depths of the Great Financial Crisis. The most impressive aspect of this bull market is that it defied the worst economic recovery in the last century and survived eight years of Obama administration policies that were hostile to economic growth and markets.6 As noted above, rather than based on a solid economic foundation, the bull market benefitted from zero interest rates, lower corporate tax payments, wage suppression and financial engineering in the form of epic levels of debt-funded M&A, stock buybacks and dividend increases. These factors have little to do with the fundamental financial condition of American corporations (in fact, some of these factors weaken their condition). Eight years later, this leaves the markets (and the individual companies comprising them) overva lued and overindebted.

But the important question for investors is not where the market has been but where it is going. Right now, it would be imprudent to fight the sentiment pushing stock prices higher. Donald Trump’s presidency represents a sharp break not only with the awful Obama years but the Bush II administration as well. The new president is laying waste to decades of failing domestic and foreign policies. It is hardly surprising that investors are willing to ignore serious structural impediments to growth in order to give the new president the benefit of the doubt. This sentiment will likely calm down once the realities of governing within the American constitutional system set in, but for the moment fighting the tape is a tough gig.

By Michael Lewitt
Excerpted from The Credit Strategist
February 1, 2017

Solar power is now cheaper than coal in some parts of the world

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Solar power is now cheaper than coal in some parts of the world. In less than a decade, it’s likely to be the lowest-cost option almost everywhere.

In 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sunshine for less than 3 cents a kilowatt-hour, half the average global cost of coal power. Now, Saudi Arabia, Jordan and Mexico are planning auctions and tenders for this year, aiming to drop prices even further. Taking advantage: Companies such as Italy’s Enel SpA and Dublin’s Mainstream Renewable Power, who gained experienced in Europe and now seek new markets abroad as subsidies dry up at home.

Since 2009, solar prices are down 62 percent, with every part of the supply chain trimming costs. That’s help cut risk premiums on bank loans, and pushed manufacturing capacity to record levels. By 2025, solar may be cheaper than using coal on average globally, according to Bloomberg New Energy Finance.

These are game-changing numbers, and it’s becoming normal in more and more markets," said Adnan Amin, International Renewable Energy Agency ’s director general, an Abu Dhabi-based intergovernmental group. "Every time you double capacity, you reduce the price by 20 percent.”

solar vs coal costs

Better technology has been key in boosting the industry, from the use of diamond-wire saws that more efficiently cut wafers to better cells that provide more spark from the same amount of sun. It’s also driven by economies of scale and manufacturing experience since the solar boom started more than a decade ago, giving the industry an increasing edge in the competition with fossil fuels. In China, the biggest solar market, will see costs falling below coal by 2030, according to New Energy Finance. The country has surpassed Germany as the nation with the most installed solar capacity as the government seeks to increase use to cut carbon emissions and boost home consumption of clean energy. Yet curtailment remains a problem, particularly in sunnier parts of the country as congestion on the grid forces some solar plants to switch off.

solar farm cost

Sunbelt countries are leading the way in cutting costs, though there’s more to it than just the weather. The use of auctions to award power-purchase contracts is forcing energy companies to compete with each other to lower costs.

An August auction in Chile yielded a contract for 2.91 cents a kilowatt-hour. In September, a United Arab Emirates auction grabbed headlines with a bid of 2.42 cents a kilowatt-hour. Developers have been emboldened to submit lower bids by expectations that the cost of the technology will continue to fall.

We’re seeing a new reality where solar is the lowest-cost source of energy, and I don’t see an end in sight in terms of the decline in costs,” said Enviromena’s Khoreibi.compared with $1.14 now, a 36 percent drop, said Jenny Chase, head of solar analysis for New Energy Finance.

That’s in step with other forecasts. 

  • GTM Research expects some parts of the U.S. Southwest approaching $1 a watt today, and may drop as low as 75 cents in 2021, according to its analyst MJ Shiao.

  • The U.S. Energy Department’s National Renewable Energy Lab expects costs of about $1.20 a watt now declining to $1 by 2020. By 2030, current technology will squeeze out most potential savings, said Donald Chung, a senior project leader.

  • The International Energy Agency expects utility-scale generation costs to fall by another 25 percent on average in the next five years. 

  • The International Renewable Energy Agency anticipates a further drop of 43 percent to 65 percent for solar costs by 2025. That would bring to 84 percent the cumulative decline since 2009.

The solar supply chain is experiencing “a Wal-Mart effect” from higher volumes and lower margins, according to Sami Khoreibi, founder and chief executive officer of Enviromena Power Systems, an Abu Dhabi-based developer.

The speed at which the price of solar will drop below coal varies in each country. Places that import coal or tax polluters with a carbon price, such as Europe and Brazil, will see a crossover in the 2020s, if not before. Countries with large domestic coal reserves such as India and China will probably take longer.

Coal’s Rebuttal

Coal industry officials point out that cost comparisons involving renewables don’t take into account the need to maintain backup supplies that can work when the sun doesn’t shine or wind doesn’t blow. When those other expenses are included, coal looks more economical, even around 2035, said Benjamin Sporton, chief executive officer of the World Coal Association.

All advanced economies demand full-time electricity,” Sporton said. “Wind and solar can only generate part-time, intermittent electricity. While some renewable technologies have achieved significant cost reductions in recent years, it’s important to look at total system costs.”

Even so, solar’s plunge in price is starting to make the technology a plausible competitor.

In China, the biggest solar market, will see costs falling below coal by 2030, according to New Energy Finance. The country has surpassed Germany as the nation with the most installed solar capacity as the government seeks to increase use to cut carbon emissions and boost home consumption of clean energy. Yet curtailment remains a problem, particularly in sunnier parts of the country as congestion on the grid forces some solar plants to switch off.

Article From Bloomberg 

London, New York, Hong Kong, Singapore and Tokyo remain the five leading global financial centres

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London, New York, Hong Kong, Singapore and Tokyo remain the five leading global financial centres. London is one point ahead of New York (on a scale of 1,000 points this is insignificant). Singapore is 42 points behind New York in third place. Tokyo, in fifth place, is 60 points behind New York. The UK ‘Brexit’ referendum result is not reflected in the GFCI 20 results so far.  

GFCI 20 was calculated based on data collected up to the end of June 2016 – a few days after the referendum result on 24 June. Looking ahead to GFCI 21, assessments given to London in July and August are significantly down from previous levels. GFCI 21 may show some significant changes...

Western Europe remains a region in flux. Luxembourg and Dublin show strong rises in the ratings whilst Geneva and Amsterdam fall. Early indications following the Brexit referendum result are that decision-makers are looking around and considering Luxembourg and Dublin as potential locations if they need to leave the UK.

Wealth management in Geneva may be suffering from increased transparency requirements of international regulators.  

 

The Global Financial Centres Index (GFCI) provides ratings, rankings and profiles for financial centres.

PIMCO : Hopes and fears of what the Trump presidency might bring over the secular horizon

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...
The first principle is that the distinction we normally make between secular (three to five years) and cyclical (six to 12 months) forces and timeframes is fuzzier than usual in this new macro environment. Both hopes and fears of what the Trump presidency might bring over the secular horizon
are driving current market moves, which in turn might create powerful feedback loops between markets, the economy and actual policies over our cyclical horizon, both in the U.S. and abroad. And so we spent more time than usual at a Cyclical Forum discussing secular forces and their interaction with cyclical trends, aided by the presence and insights of several of PIMCO’s advisors, including Ben Bernanke, Michael Spence, Gene Sperling and Ng Kok Song.

The second principle, agreed by a majority but not unanimously after a heated debate, is that while markets are romancing a “New Paradigm” of permanently higher U.S. growth, inflation and equilibrium interest rates, we believe that our secular New Normal / New Neutral theme remains intact, at least for now. Many of the secular drivers of low New Neutral interest rates – demographics, inequality, the global savings glut, elevated debt levels and technology – are unlikely to change anytime soon.

...

Investment conclusions

Against the backdrop of a highly uncertain outlook and fatter than usual tails, we expect to be cautious in overall portfolio construction, sticking closely to our secular framework that emphasizes these key factors:

  • A focus on capital preservation and a focus on tail risks, not just the most likely baseline

  • De-emphasizing trades that rely on a high level of central bank support

  • Guarding against the asymmetric risk of rising yields and especially against negative yields

  • Focusing on bottom-up security selection

  • Utilizing our teams across the world to find the best investment opportunities

  • A very selective approach on the eurozone

  • Careful overall portfolio positioning combined with active management to take advantage of periods of volatility and market dislocation

The experience of the past year has highlighted political risk and central bank policy exhaustion. At a time of fair to expensive valuations and less liquid financial markets, we have seen that it does not take much to prompt bouts of market volatility. By keeping portfolios lighter on risk and by being tactical and flexible as active managers, we can prepare for and look to benefit from market turning points. We think that patience will be rewarded.

Article written by Pimco. December 2016

Source : https://global.pimco.com/insights/economic-and-market-commentary/cyclical-outlook/into-the-unknown

ACTELION's takeover by Johnson & Johnson

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Do you own ACTELION ?

I remember the stock was traded at CHF 30 in the late-nineties, before split ! It was at that time I began to follow the company.

After twenty years, the company has decided today to accept the takeover price per share of CHF 280, from Johnson & Johnson equivalent to a $ 30 billion transaction value.

Built on one drug sales (Pulmonary Arterial Hypertension), the company expanded its turnover through the search and development of innovative drugs for diseases with significant unmet medical needs.

This is a great story thanks to Mrs and Mr Clozel with a happy end for shareholders.

Now, what can we do with cash ?

Please meet one of our Partners to be informed of the latest investment opportunities. 

 

Click on iThis email address is being protected from spambots. You need JavaScript enabled to view it.

Per Jansson: Time to scrap the inflation target?

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To avoid keeping you on tenterhooks, I shall begin by answering the question in the title of my speech. No, it is not time to scrap the inflation target, in case any of you thought I wanted to. The question is of course rhetorical. The reason I ask the question is that I think it has been the focal point of the recent debate in Sweden, although it is not usually expressed so directly. Following the financial crisis the foundations of monetary policy certainly have been discussed and questioned around the world. But my feeling is that the debate has been driven further in Sweden than in most other countries.

Monetary policy in Sweden has often attracted interest from other countries. One reason is that we have often been among the first to implement changes in the monetary policy framework and thus become an interesting object of study. As is well-known, Sweden was one of the very first countries to introduce inflation targeting in the early 1990s, and we have in many respects remained at the front edge since then. For instance, the Riksbank is one of few central banks to publish its own forecast for the policy rate and possibly the only central bank where the minutes state which Board member has said what during the monetary policy meetings.

Speech by Mr Per Jansson, Deputy Governor of the Sveriges Riksbank, at Swedbank, Stockholm, 7 December 2016.

Norway sovereign-wealth oil fund return-on-investment, up to 4 %

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usine petrochimique

Norway's sovereign-wealth fund return on investments rose to 4% in the third quarter of this year. In the second quarter the fund achieved a gain of 1.3% on its investments.

The world's biggest sovereign-owned fund had a total value of $880.26 billion on September 30. The quarterly return was $29.67 billion, according to Norges Bank Investment Management, a body of Norway's central bank that manages the fund.

Equity investments returned 6% for the fund, fixed income investments generated 0.9% returns, while real estate provided 2.4%.

The fund had 60.6% of its reserves invested in equities, 36.3% in fixed income and 3.1% in real estate on September 30.

TeleTrader Newsroom / RV 10/07

Interview with Mr Peter Praet : how optimistic are you about the European economy

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How optimistic or pessimistic are you about the European economy?

We see moderate but strengthening growth; that is better than it was a while ago. The main welcome surprise is the increase in employment, which is boosting people's disposable income.

How can you call this a surprise? We have had to wait for more jobs for so many years.

Of course, that is a fair point. But that is because of the excessively high growth expectations before the crisis. In Europe, there was a wide gap between overly optimistic expectations and reality. As a result, people were spending borrowed money. Governments were not overly concerned about the sustainability of their debts. The cause of this expectation gap was a decline in productivity. Sectors that had borrowed on the basis of excessive growth expectations ran into difficulties.

And it then takes a long time to recover from the crisis?

Indeed. Everyone needs time to bring their balance sheet back into shape.

Year after year, the ECB and the European Commission's projections were far too optimistic. You always thought that things would be better in the coming year. Did that not fuel scepticism?

Perhaps. In 2011 the European economy found itself in a second recession. We did not see that coming, as most analysts didn't. Italy has even undergone three recessions. That explains why, eight years after the outset of the crisis, citizens are becoming impatient. But there is now a danger that they will be tempted by simplistic solutions.

How much progress have governments made in restoring their economies?

Not enough. Some countries have undertaken a number of reforms, Greece being a case in point. But it had to make up so much lost ground that it is by no means finished yet. But there are also countries that are showing signs of reform fatigue.

Which countries are those?

You see that everywhere. We will have to see what happens in 2017, but 2016 was not a good year as regards economic reforms.

Are you referring to Italy and France?

Yes, but not only. Some reforms have been made there in respect of pensions and the labour market, but there is still a large backlog. Citizens are now displaying anger and resistance. They are disappointed in their expectations. We also see a deterioration in income distribution. For many people, the rise in income is lower than the growth in the economy.

Do you understand why voters are angry?

Yes, of course I do. And there is a strong temptation to opt for simplistic and national solutions, which in my view could be disastrous. Protectionism leads to chain reactions. That game quickly results in shrinking prosperity.

All these voters underwent austerity measures, their taxes were raised, they saw European politicians simply muddling through the crisis. And as a reward for all this misery, they also have to face painful pension and labour market reforms. Do you think it's any wonder that voters are saying "no"?

Of course, quick solutions to make reality meet expectations would be great. But, unfortunately, that is not possible. Easy answers are an illusion, because the gap between growth expectations and outcomes is real. The austerity measures are responses to this problem. If you set up your social security, your government expenditure on the basis of economic growth of 4%, while only 1% or less is realised for many years, then you enter into a vicious circle. That is why we need a comprehensive approach.

Even if anti-euro parties do not win a majority, they will still have strong support.

Confidence in the euro has remained high, also in the Netherlands, as the Eurobarometer survey shows. However, confidence in the ECB has declined sharply, especially during the crisis years. The situation in which the ECB was the only player that was still solving problems did it no favours, because people expected too much from us.

Is the monetary union not a part of the problem?

It was not only monetary union that led to a fall in risk premiums and interest rates, it was a global development that started well before the euro. Countries joining the euro saw their interest rates fall very quickly. That contributed to a real estate bubble in some countries. In other countries, it gave an overly favourable picture of public finances. At those low rates, the government debt suddenly appeared sustainable. The euro was born during that period, but it is difficult to determine what would have happened in twenty years without the euro.

Has the euro contributed to the divergence of the economies?

No, but I think there was an illusion of convergence. The real convergence of economies that was expected did not come about.

Maybe even the opposite.

No. When the crisis arrived, it made the divergence visible, but that does not make it the only reason.

What does the single currency still need?

I am not yet satisfied with the banking union. We are still in transition: supervision is European, but the consequences of potential bank failures are still largely borne at national level. But before you can solve that at the European level, you have first to deal with legacy problems in the banking sector. Banking union really has to be completed in five years, much faster than politicians think.

Are the biggest problems confined to Italian and German banks, or is it a wider issue?

It is fortunately limited to a few banks in a few countries. But there is another problem and that is the cost level of banks. It is still too high in many countries and it is the reason why banks' profitability remains weak. You need profitable banks to have a resilient banking sector that helps the real economy. There is hence a need for consolidation in the banking sector.

You would like to see larger banks?

We need to have diversity, large and small-sized banks. But I definitely think that we must have pan-European banks. That means that, in the event of a national economic shock, banks are not overexposed to any one country.

Are you not afraid that banks would then emerge which are too big to fail?

No, because at the scale of the euro area, they will not be too big. The basis is a European backstop.

But if you had two or three Deutsche Banks, wouldn't that be far too much for the euro area?

You can have large banks in small countries, if supervision and resolution are completely European. We are not there yet and 
we still have to complete the banking union in full.

The whole euro area is a fragile balance.

It is a balance that we are gradually making more stable by setting up the right institutions. We are on the right path. But there has to be a not too distant deadline for completing banking union.

Have other crisis measures, such as purchasing hundreds of billions of sovereign bonds, had the impact you hoped for?

Yes. It has stabilised the euro area and has resulted in better financing conditions. I think there have been a number of episodes with major risks, even for strong countries like Germany, risks, which we managed to fend off.

But banks, pension funds and savers are now weighed down by the low interest rates.

We keep a close watch on whether interest rates are not so low as to interfere with transmission, i.e. whether banks are still passing on the low interest rates to the real economy. As regards pension funds, one also needs to acknowledge that the performance of pension funds and their investments depends on many other factors and not only on interest rates.

Many savers feel as if they are now paying the price for the crisis.

I understand it can feel like that for savers. Borrowers benefit from favourable interest rates. But the costs for savers could have been much higher. Inaction would have led to a severe economic and financial crisis. They would probably have lost much of their wealth during the crisis.

Interview with Mr Peter Praet, Member of the Executive Board of the European Central Bank, in the Telegraaf, conducted by Mr Martin Visser and Ms Dorinde Meuzelaar on 12 December, and published on 20 December 2016.

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