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

    U.K. Consumers Get No Relief Just Yet From Inflation Squeeze

    This article by David Goodman and Harumi Ichikura for Bloomberg may be of interest to subscribers. Here is a section: 

    U.K. shoppers are in the “teeth” of a squeeze on their pockets and they’re going to have to ride it out for the rest of the year.

    That’s the view of Bank of England Governor Mark Carney, who said this month that consumers may have to wait a bit longer to see real wage growth again. Data next week will reinforce that view, with inflation continuing to outpace incomes, leaving retail sales struggling to build momentum.

    U.K. consumers, whose resilience was a key buttress of the U.K.’s initial performance after the Brexit referendum last year, have lost some of their muscle in 2017. With the pound’s drop fueling higher prices, they’ve been feeling the pinch, and a report earlier this week showed households cut back on spending for a third month in July.

    “It will continue to feel like this, but then as we move into the new year we see inflation start to come down and household income start to go up so that we move out of this,” Carney said after presenting the bank’s Inflation Report on Aug. 3. “I’m not saying roaring out of this real income squeeze, but we move out of this real income squeeze.”

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    Why Are Stock Market Prices So High?

    Thanks to a subscriber for this report from Jeremy Grantham which may be of interest. Here is a section quoting Ben Graham that particularly piqued my attention:

    “In early 1955 when I testified before the Fulbright Committee the stock market was then about 400, my central value was also around 400 and the valuation of other ‘experts’ using other methods all seemed to come to about that level. The action of the stock market since then would appear to demonstrate that these methods of valuations are ultra-conservative and much too low, although they did work out extremely well through the stock market fluctuations from 1871 to about 1954, which is an exceptionally long period of time for a test. Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement just then new conditions supersede and the measurement is no longer dependable for the future.” [Emphasis added. By the way, the deliberate total return from the S&P 500 from the end of 1963 until today has been 5.75% real, exactly what we at GMO assume to be the long-term, normal return.] 

    “My reason for thinking that we shall have these wide fluctuations – of which we had a taste in 1962, in May particularly – is that I don’t see any change in human nature vis-à-vis the stock market which is sufficient to establish more restraints in the public behavior than it showed over so many decades in the past.” 

    “But let me point out ‘for the record’ that it is not impossible in theory that the market’s high level alone could sooner or later precipitate a collapse without the necessity for these technical weaknesses [described above, Ed.] to show themselves. The collapse might be triggered by some untoward economic or political development. But if things do happen that way it will be the first time in market history, I believe, that we would have the end of a bull market without the excesses and abuses of the sort I have mentioned.” [Emphasis added.] 

    “The main need here is for the investor to select some rule which seems to be suitable for his point of view, one which will keep him out of mischief, and one, I insist, which will always maintain some interest in common stocks regardless of how high the market level goes. For if you had followed one of these older formulas which took you out of common stocks entirely at some level of the market, your disappointment would have been so great because of the ensuing advance as probably to ruin you from the standpoint of intelligent investing for the rest of your life.”

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    J.C. Penney Plummets After Loss Renews Concerns About Retail

    This article by Lindsey Rupp for Bloomberg may be of interest to subscribers. Here is a section:

    J.C. Penney is the bearer of more bad news for department-store investors.

    On Friday morning, the company followed Macy’s Inc., Kohl’s Corp. and Dillard’s Inc. in reporting declining sales in the second quarter. J.C. Penney also posted a deeper loss than analysts expected -- hurt by clearance sales -- sending the shares on their worst decline in more than four years.

    The results renewed fears that there’s no end in sight for the department-store industry’s drought. J.C. Penney Chief Executive Officer Marvin Ellison is trying to win back customers by expanding the company’s partnership with cosmetic retailer Sephora and bolstering the assortment of high-price items, like appliances. The company is also pushing services like salons that require shoppers to come into stores. But progress has been slow.

    The company also is closing about 140 underperforming stores. And the liquidation of inventory in 127 of those locations hurt profit in the period, Ellison said in a statement.

    “These events were isolated to the second quarter,” he said, adding that the company expects to “deliver improved results in the back half of the year.”

    But investors saw little reason for optimism. The shares tumbled as much as 18 percent to $3.85 after the report was released, the biggest intraday drop since February 2013. That followed a 43 percent decline this year through Thursday’s close, bringing the stock to a record low.

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    Biohackers Encoded Malware In A Strand of DNA

    This article by Andy Greenberg for Wired.com may be of interest to subscribers. Here is a section:

    When biologists synthesize DNA, they take pains not to create or spread a dangerous stretch of genetic code that could be used to create a toxin or, worse, an infectious disease. But one group of biohackers has demonstrated how DNA can carry a less expected threat—one designed to infect not humans nor animals but computers.

    In new research they plan to present at the USENIX Security conference on Thursday, a group of researchers from the University of Washington has shown for the first time that it’s possible to encode malicious software into physical strands of DNA, so that when a gene sequencer analyzes it the resulting data becomes a program that corrupts gene-sequencing software and takes control of the underlying computer. While that attack is far from practical for any real spy or criminal, it's one the researchers argue could become more likely over time, as DNA sequencing becomes more commonplace, powerful, and performed by third-party services on sensitive computer systems. And, perhaps more to the point for the cybersecurity community, it also represents an impressive, sci-fi feat of sheer hacker ingenuity.

    “We know that if an adversary has control over the data a computer is processing, it can potentially take over that computer,” says Tadayoshi Kohno, the University of Washington computer science professor who led the project, comparing the technique to traditional hacker attacks that package malicious code in web pages or an email attachment. “That means when you’re looking at the security of computational biology systems, you’re not only thinking about the network connectivity and the USB drive and the user at the keyboard but also the information stored in the DNA they’re sequencing. It’s about considering a different class of threat.

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    Wall Street's "fear gauge" nears 3-month high as "fire and fury" sparked stock-market slump

    This article from MarketWatch covers most of the relevant points on the uptick in volatility in response to heightening brinksmanship with North Korea. Here is a section:

    The downdraft for the equity market comes amid rising geopolitical tensions, after a North Korean army commander said “sound dialogue” isn’t possible with U.S. President Donald Trump and “only absolute force can work on him,” according to state media. North Korea also laid out detailed plans of how it would launch a missile strike on U.S. military bases in Guam.

    The recent testy exchange underlines mounting tensions between Pyongyang and Washington that Wall Street investors are fretting could risk an all-out nuclear war between the nations.

    Against that backdrop, the VIX has been steadily rising over the past three sessions coinciding with a pullback in stocks and a jump in demand for assets perceived as havens including gold GCZ7, +1.03%   which was trading around a two-month high and 10-year benchmark Treasurys TMUBMUSD10Y, -0.47%, which were hovering at yearly yield lows around 2.22%. Bond prices move inversely to yields.

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    Glencore Slashes Debt as It Positions for M&A in Commodities

    This article by Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

    "These results indicate the strong position Glencore has built in the recent past and we expect the momentum to continue," said Heath Jansen, a mining analyst at Citigroup Inc. Glencore shares slipped 1.8 percent to 333.55 pence as of 8:56 a.m. in London.

    Glasenberg, 60, said in February that the "time is right" to reward shareholders after difficult years in 2015 and 2016, when the company suspended dividends and sold shares to raise cash.

    Glasenberg, the pugnacious South African CEO, now appears to be strengthening Glencore’s balance sheet first, a sign the company is looking at deals, rather than immediately returning more money to shareholders.

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    This could be 'the scariest chart in the financial markets right now'

    This is an example of one of the articles I have received from subscribers quoting the same data point. Here is a section: 

    “As investors go ‘kookoo’ for risk assets, they have pushed (with the help of ECB) the yield of European junk bonds towards that of the U.S. Treasury yield. Honestly… I’m speechless,” Brkan adds.

    Another one worried about low yields for European junk bonds is Wolf Street blogger Wolf Richter, who notes they offer around 2.42%, while the U.S. 10-year pays out about 2.24%. And Bank of America Merrill Lynch’s credit strategists are concerned, highlighting the “eye-watering levels that European high-yield has now reached.”

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