David Fuller and Eoin Treacy's Comment of the Day
Category - General

    The hardest Post to Write

    This blogpost by Kevin Muir may be of interest to subscribers. Here is a section:

    Last October there was a full hike priced in, but now those expectations have completely collapsed to the point where there is two cuts already embedded into the Eurodollar futures curve.

    Although it’s not quite this simple, to make money at the short end, the Fed will have to cut more than twice in the next year and a bit. Could that happen? For sure. No doubt about it. Maybe the economy hits a real air pocket and the Fed cuts aggressively. Or there is some geopolitical event and the Fed is forced to slash rates.

    But the point to ask yourself is whether that is a good bet? I contend that with everyone leaning so heavily one way, the surprise will not be how much money they make, but instead if things don’t play out exactly as ominously as forecasted, how quickly the trade goes sour.

    There is little room for error. Or put it another way, the global economy better collapse as quickly as these bears believe as even a lengthening of the process will make their trade unprofitable.

    And in case you are bullish the long end of the curve and believe a slow-to-cut Fed is your best friend, don’t forget what Tariff Man has done to inflation. Next year should see a rise of 50 basis points across the board to core inflation. Sure commodities are falling hard, but that helps more with China’s inflation situation than with America’s.

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    Email of the day on Yes Bank

    The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

    When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

    I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

    Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

    The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

    Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

    I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

    The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

    Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

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    As May Steps Aside, Rival Boris Johnson Makes His Brexit Pitch

    This article by Tim Ross and Fergal O'Brien for Bloomberg may be of interest to subscribers. Here is a section:

    Johnson said he would prepare for no-deal, go back to Brussels to renegotiate the toxic Irish backstop, and make clear that he’s prepared to leave without a deal if the EU says no. He said he believes the U.K. will leave the EU on Oct. 31 -- the latest deadline -- with or without a deal.

    He has long indicated that he’d be willing to pull the U.K. out of the bloc without a deal and has criticized May for surrendering to the EU. That has spooked markets, and the pound has weakened on concerns that a hardliner would pursue a no-deal exit.

    Johnson’s other tactic is to get Parliament to rule out the possibility of canceling Brexit --- an option the U.K. legally has. That would make the threat of no-deal more credible, and could concentrate minds in the EU, where some officials continue to hope that the U.K. might change its mind.

    The EU has repeatedly said it won’t reopen the divorce deal and won’t change the Irish backstop. It’s the most contentious part of the agreement as it potentially keeps the U.K. bound to the EU rules indefinitely and treats Northern Ireland differently to the rest of the country. Johnson noted that a majority in the Parliament has voted to renegotiate the backstop.

    As for a second referendum, Johnson thinks it’s a very bad idea. “Put Brexit to bed, pacify this bawling that’s been going on for so long,” he said.

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    Modi and B.J.P. Make History in India. Gandhi Concedes.

    This article from the New York Times may be of interest to subscribers. Here is a section:

    “If someone is victorious, it is India,” he said. “If someone is victorious, it is democracy. If someone is victorious, it is the electorate.”

    Striking a populist tone and evoking mythical Hindu figures engaged in war, Mr. Modi framed the elections as a victory by and for ordinary Indians, over those who write off the poor and downtrodden. At the end of the battle, he said, was “the guarantee of a bright future for India.”

    “Some are saying, ‘Modi, Modi, Modi.’” he said. “This is not Modi’s victory. This is the victory of the expectations of the honest citizen of this country.”

    “This is the victory of the mother who was longing for a toilet,” he continued. “This victory is of the farmers who sweat to fill the stomachs of others. This is the victory of the 400 million unorganized laborers.”

    Exceeding all predictions, Modi’s party is winning a majority of seats.

    Mr. Modi, one of the most powerful and divisive leaders India has produced in decades, appeared easily headed for another five-year term, according to election returns.

    With most votes counted, the Election Commission reported that Mr. Modi’s Bharatiya Janata Party, or B.J.P., was ahead in about 299 parliamentary districts, far beyond the 272 seats it would need for a majority in the 543-seat Parliament. At this pace, the party would actually expand on its current majority — a development no one was predicting in recent months. And its actual majority will be larger, as its established coalition partners have won at least a few dozen more seats.

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    Email of the day on the impact of currency on global investment decisions:

    Again, very grateful thanks for the very interesting and thoughtful comments you post each day. They are helpful to both newer investors and the more experienced who may get locked into their way of thinking. I count myself in that category! One factor that does not get mentioned perhaps as often as it should is the impact of currency movements on investment portfolios. Those of us using pound sterling as our home currency may feel particularly sensitive to this at this time. Those of us that assess gold as a possible investment often check gold in different currencies to determine whether a broad-based uptrend is evolving (eg compare gold in USD, Euro where the pattern looks quite different.) But I suspect fewer investors factor in currency movements when buying stocks in the USA, Europe, India, Japan and China. What are your thoughts on this?  

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    Bad News for Markets Offers Little Help to Gold as Metal Dithers

    This article by Joe Richter and Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

    With an equities rally wavering, trade relations between world’s two largest economies deteriorating and U.S. borrowing costs slipping, the commodity often seen as a haven in times of turbulence is encountering troubles of its own. Gold prices are headed for a fourth straight monthly drop, and have seesawed between weekly gains and losses since late April.

    Bullion, which hasn’t posted more than three straight daily gains since March, has been stuck in a fits-and-starts pattern as signs of resilient growth and a rising dollar counter concern that the world economy is set to slow. Even increased wagers that the Federal Reserve will ease monetary policy this year haven’t been enough to sustain rallies in bullion, which can benefit from low rates because it doesn’t pay interest.

    “Prices are kind of range bound, nobody is making any money, so on the margin, people are just disinterested,’’ said John Laforge, the head of real asset strategy at Wells Fargo Investment Institute, which oversees 1.9 trillion. “You really need something fearful out there, which is the scary part. You really need something that rattles markets for gold to take off.’’

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