Goldman on High Frequency Trading

There’s only one bank that’s come out publicly against high frequency trading, and that’s Goldman Sachs.

It’s not an easy thing to do. Banks work with high frequency trading firms to execute orders, they also have their own dark pools — private, anonymous exchanges that have become a part of the new market ecosystem synonymous with HFT. Goldman’s dark pool is called Sigma X.

So why would a bank take on HFT?

Because Goldman bank believes it’s hurting their equities trading business, which has been on the decline for some time now. And as the WSJ’s Justin Baer and Scott Patterson point out, the bank would rather have a healthy stock trading business that can make it billions of dollars than a dark pool that only brings in hundreds of millions of dollars.

Thursday morning’s first quarter earnings numbers say it all. Goldman is losing stock trading share to its rivals. In Q1 2014, the bank made $416 million trading equities for clients. That’s down 49% from the same time in 2013 when the bank made $809 million.

In 2013, a year when the price of stocks exploded, Goldman’s client stock trading revenue fell from $3.2 billion in 2012 to $2.6 billion.

Arch rival Morgan Stanley, on the other hand, has seen it’s equity sales and trading rise 16% over the last year, and 24% over the last quarter.

Obviously for the biggest baddest bank on Wall Street, this is worrisome. The bank is not only losing market share in equity sales, but also its dark pool has lost its share of the market as rivals from Barclays, Deutsche Bank and Morgan Stanley have entered the market.

So once big institutional clients — the mutual funds and hedge funds that HFT firms love to pick off when they notice the institutionals’ big block trades in the market — started complaining about HFT, Goldman knew it was time to change their strategy.

Patterson and Baer reported that at a meeting in London several weeks ago, Goldman’s institutional clients voiced concerns that are now familiar thanks to Michael Lewis’ book, ‘Flash Boys‘.  They said that they felt HFT firms were given an unfair advantage and that the market was too opaque, complicated and dangerous.

That’s when Goldman started sending around internal memos asking for commentary on market structure, and COO Gary Cohn wrote the anti-HFT op-ed that shocked people across the Street.

In the op-ed, he mentions one more issue that has Goldman worried about HFT. The bank is known for having some of the best technology in finance, but last August a glitch in its software sent erroneous quotes into the market and cost the bank $100 million. And Goldman doesn’t lose $100 million.

From Cohn’s op-ed:

The economic model of the exchanges, as shaped by regulation, is oriented around market volume. Volume generates price discovery and liquidity, which are clearly beneficial. But the industry must recognize how certain activities related to volume can place stress on a market infrastructure ill-equipped to deal with it.

In other words, exchange software is now so complicated that it is not something a firm can do as a side show — it has to be the main event. 

Read more:

AMP Hedge Fund : Great Day

Symbol   Last          Chg

PNE          1.08+0.08

DSX          10.32+0.18

FRO         2.26+0.12

DRYS     2.01+0.08

CKG        3.51+0.11

BTO        2.58+0.03

ORIG     17.46+0.005

AAPL      433.32+3.01

DGC             9.62+0.12

CPLP          9.88+0.2199

DCIX         4.53+0.03

Minimum Investment  $50,000

Return to date  30 %


Mosaic Capital Corporation

M : TSX-V : C$7.31
Target: C$9.75 

Mosaic Capital acquires majority stakes in small industrial companies in mature market niches. The company currently controls six industrial and one commercial real estate investment company, all located in Western Canada.

Investment recommendation

We think Mosaic is an attractive investment opportunity for investors looking for an industrial acquisition story. The company has demonstrated an ability to acquire strong cash-generation firms at attractive prices. We believe the cash flows from the existing portfolio of companies supports the current share price, and Mosaic’s considerable “dry powder” capital provides the potential for $4.50/share additional growth. The story has the potential to grow considerably beyond that point as additional capital is deployed.
We are launching coverage with a BUY rating, given the strong 35.0% one-year potential rate of return to our C$9.75 one-year target (including a 1.6% dividend yield).
Investment highlights
We believe there are four good reasons to consider investing in Mosaic:
1. Solid track record – Mosaic roughly tripled its EBITDA from 2011 to 2012 while driving return on capital from 5.7% to 12.9%. Over the same period, the company returned more than $13 million to shareholders and has a trailing payout ratio of 63%.
2. Strong portfolio of niche businesses – Mosaic’s portfolio consists of small defensible niche businesses. The low capital requirements combined with strong, stable margins deliver solid (and we think growing) free cash flow.
3. Significant dry powder – We estimate Mosaic has $35 million of available capital to deploy towards future acquisitions. We estimate that the
deployment of this capital could add $4.50/share of value.
4. Aligned management – With 53% of the common stock held by management and insiders, we think the company’s interests are strongly aligned with investors.
Our target is based on low-single-digit organic growth and a premium 6.5x Q1/15E EV to Q2/15E – Q1/16E EBITDA multiple for potential acquired EBITDA.
We believe the bulk of the valuation upside potential lies in the deployment of Mosaic’s already-raised capital on accretive acquisitions.

John Kaiser says Junior Resource Stocks Will Disappear

Kaiser & sons  (LOC)

Kaiser & sons (LOC) (Photo credit: The Library of Congress)

John Kaiser is the high-profile editor of the Bottom- Fishing Report and he created a lot of interest as he pointed out that 500 companies in the junior mining field have less than $200,000 in the bank. And in this ugly market, are in danger of disappearing.

Interesting because finding cheap mining stocks was his specialty.
Fresh from the massive PDAC Conference, we ask him to turn on his crystal ball for the future and tell us what he sees of interest. We have a long and rambling conversation so we hope we have got this all right!
1. Kaiser points out that there was 527 booths at the massive PDAC Conference, the biggest mining show in the world this past week. There were over 30,000 people that showed up, but he said the mood was a bit of a touch of reality. Kaiser points out that 114 of those booths were on his list of the companies that have less than $200,000 in the bank and how will they be able to fund themselves in these tough markets and to survive
is very much in doubt.

This correction Kaiser suggests, will separate the weak from the strong and there won’t be many companies around shortly.

2. Most companies in the mining sector Kaiser suggests, are in metals with supplies roughly in demand with demand. It would take an event such as a sudden increase or decrease in world economies, to alter current metal prices. Mines are starting up all over the world he suggests, helped by the past decade of good commodity prices and will meet any increase in demand. He uses the example of nickel, and notes that new mines coming on stream in places like the Philippeans and Indonesia, will meet that demand. These are not necessarily countries known for being big players in the mining sector.
3. The big problem with so many miners and developers Kaiser suggests is that mining costs and building new mines is simply out of control. He suggests that is one of the big problems of the day and that yes, they are aware of it and one has to be, as an investor, aware of operating costs.


AFLAC Is Still a Solid Long Term Buy


aflac (Photo credit: debaird™)

fter the close last Tuesday, AFLAC (NYSE:AFL) reported fourth-quarter earnings of $1.48 per share. Make no mistake: this was a solid quarter for the duck stock, and it was squarely in line with what they told us to expect. Three months ago, AFLAC said Q4 EPS should range between $1.46 and $1.51.

But here’s the issue for us: Since most of AFLAC’s business comes from Japan, their bottom line can be adversely impacted (or helped) by fluctuations in the yen/dollar exchange rate. Lately, the government in Japan has aggressively stated its intention of pursuing a pro-inflation policy. That’s caused the yen to tank against the dollar. In response, the Nikkei Index has soared.

AFLAC as a business is fine and dandy and as strong as it’s ever been. I want to make it clear that I’m not overly worried about the exchange rate, but I have to say that it’s an issue for investors. AFLAC said the falling yen cost dinged their Q4 by four cents per share. Not fun, but not a disaster either. Bear in mind that AFLAC’s full-year earnings for 2012 were actually helped by one penny per share, thanks to the exchange rate. So it works in both directions.

For all of 2012, AFLAC made $6.60 per share in operating earnings. The company said it sees operating earnings growth of 4% to 7% for this year. On a currency-neutral basis, that means operating earnings of $6.86 to $7.06 per share.

Now here’s the tricky part (warning: math ahead). Each move in the exchange rate of one yen from 78.5 will cost AFLAC 4.3 cents per share for the year. So if the exchange rate averages 90 for the entire year, that will cost AFLAC 49.45 cents per share (11.5 times 4.3).

That stings, but it’s roughly 50 cents per share out of $7 of earnings. It’s not enough for me to change my opinion that AFLAC is a very solid stock to own. And of course, I have no idea what the exchange rate will do this year. However, I suspect that most of the damage to the yen has already been done.

Shares of AFL pulled back after the earnings report, and stand right around $50 per share as of mid-day Friday,  but the stock is basically where it was three months ago.

AFLAC remains an excellent company. Due to the recent pullback, I’m going to lower my Buy Below to $54 per share.

The Debt Ceiling End Game

Citi FX guru Steven Englander has a new note out this evening titled: No coin + temporary debt ceiling extension + sequester = USD negative.


In it he notes that the rejection of the trillion dollar coin idea to avert the debt ceiling is not alone a market moving event, but that the hard language taken by the White House that the choices boil down to clean lift or default raises the odds of a debt ceiling breach.

His take:

So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in. Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens.  However, it also occurred in an environment of slowing EM growth and intensifying euro zone sovereign risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets. The more likely scenario of sequester plus grudging debt ceiling rise is USD negative.

It will put more pressure on the Fed to keep pumping liquidity into the US economy without giving any reassurance to investors that long-term fiscal issues are close to resolution.

That seems reasonable. A debt ceiling hike + a full sequester, which would equal a weaker economy and more pumping.

With Europe healing and China rebounding, USD would be the big loser.

Bank of Nova Scotia BUY Target $62

English: The Bank of Nova-Scotia at 125, Spark...

English: The Bank of Nova-Scotia at 125, Sparks St. in Ottawa. Français : La Banque de Nouvelle-Écosse au 125, rue Sparks à Ottawa. (Photo credit: Wikipedia)

Bank of Nova Scotia 
BNS : TSX : C$55.53
BUY Target: C$62.00

BNS reported Q4/12 core cash EPS of $1.21 (up 24% YoY) versus our estimate and consensus of $1.17 and $1.19, respectively.
We estimate that tax recoveries and a credit adjustment in the International segment added $0.03-0.04 to EPS, suggesting that run rate EPS for the quarter should be closer to where consensus stood this quarter.
International earnings of $401 million were up 11% YoY, reflecting the benefit of acquisitions, particularly in Colombia, and solid loan growth. Retail loans were up 21.6% YoY and 3.5% QoQ. Commercial loans were up 12.7% YoY and down a disappointing 1.1% QoQ (up 1% on a constant currency basis). Management pointed to declines in Asia and softer growth in the
Caribbean as the reasons for the weaker commercial growth.

This was the second consecutive quarter of disappointing commercial loan growth in this segment. Management guided to high single-digit, low double-digit loan growth in International in 2013. To accomplish this growth range, retail loans will likely have to grow in the low- to mid-double-digit range.
Domestic P&C earnings were up 15% YoY on 6% revenue growth and operating leverage of 3.0%. On a YoY basis, NIM in Q4/12 was flat and up 1 bp QoQ. The bank’s domestic P&C business reported industry leading earnings growth and operating leverage in 2012. Strong loan growth and surprisingly stable NIMs drove particularly good domestic retail earnings.
The acquisition of ING Direct should allow BNS to outpace its peers in 2013 and importantly, narrow the funding gap.
Over the last five years, the bank’s better earnings stability and momentum has earned Scotia an average premium of 5-7%. On our estimates, the stock currently trades at a 5% premium to the group.

For the reasons outlined below, we set our target price on BNS based on the stock trading at a 6% premium. Our target P/E premium drives a target P/E of 12.2x appliedagainst our 2013E EPS. This compares to TD at a 2% premium and RY at a
4% premium.

Economic Bears Turn Positive

English: Mohamed A. El-Erian, Managing Directo...

English: Mohamed A. El-Erian, Managing Director of the Pacific Investment Management Company, speaking at the World Economic Forum Summit on the Global Agenda 2008 in Dubai, United Arab Emirates. (Photo credit: Wikipedia)

Three prominent bears — David Rosenberg, chief economist at Gluskin Sheff & Associates, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., and David Levy, chairman of the Jerome Levy Forecasting Center — separately see some hopeful signs. These include a housing market that is healing, a more competitive manufacturing industry and technological breakthroughs that could boost productivity.

“More so than at any time in the past three years, I’m doing whatever I can to identify silver linings in the clouds,” Rosenberg said.

None of the three is ready to declare the all-clear. While the chances the economy could perform better than expected are “somewhat” higher than before, the downside risks are bigger, said El-Erian, who oversees $1.9 trillion at Pimco in Newport Beach, California. These include the so-called fiscal cliff, which all three agree would trigger a recession if nothing is done to avert its spending cuts and tax increases.

The continued caution of the three economists is reflected in advice they are giving investors. Rosenberg recommends gold- mining stocks and shares of utility companies, the latter as part of a strategy he’s dubbed “Safety and Income at a Reasonable Price.”

‘Be Defensive’

“This is a time to be defensive,” said Levy of the Mount Kisco, New York-based economic forecaster. “We are still in a rocky period.” He has been bullish on Treasury bonds for more than five years and eventually sees yields falling even further. The yield on the 30-year bond was 2.78 percent as of 5 p.m. yesterday in New York, according to Bloomberg Bond Trader data.

El-Erian suggests investors look outside the U.S. for economies that are growing faster and put money in companies and nations with strong balance sheets, includingBrazil’s and Mexico’s local bonds. He said investors also should “actively” manage their portfolios to protect against downside risks and take advantage of upside surprises that might materialize through the use of puts, calls and other trading strategies.

El-Erian and Rosenberg recommended a defensive stance on financial markets about a year ago in separate interviews on Bloomberg Television. Toronto-based Rosenberg said investors should look at dividend-paying health-care, utility and consumer-staples stocks, which are least-tied to changes in economic growth.

Worst Performance

Drugmakers in the Standard & Poor’s 500 Index are up 16 percent and producers of household goods have risen 9.7 percent in 2012. Utilities have fallen about 2 percent for the worst performance among the 10 major industries in the gauge.

El-Erian said Dec. 19 that the first part of 2012 would be “risk off” as Europe’s sovereign-debt crisis encouraged demand for safety. Yields on 10-year U.S. Treasuries rose to 2.21 percenton March 30 from 1.88 percent at the start of the year, while theStandard & Poor’s 500 Index (SPXL1) jumped 12 percent. For the year to date, the stock index also is up 12 percent.

The U.S. economy will grow 2 percent next year and 2.8 percent in 2014, the Paris-based Organization for Economic Cooperation and Development said last month. That is faster than the average for the OECD’s 34 members of 1.4 percent in 2013 and 2.3 percent in 2014.

Both Rosenberg and Levy foresaw the bursting of the housing bubble in 2007, the former when he was chief economist for North America at Merrill Lynch & Co. in New York. They’ve generally been more pessimistic than the consensus of economists since then, with Levy saying the U.S. is experiencing a “contained depression,” and Rosenberg incorrectly forecasting the U.S. would relapse into recession at the start of this year. The previous slump began in December 2007 and lasted 18 months.

More Downbeat

El-Erian and his colleagues at Pimco also have tended to be more downbeat. The 54-year-old former International Monetary Fund economist first used the term “new normal” in May 2009 to describe the probable medium-term path of the global economy. For the U.S., that meant annual growth of about 2 percent.

Since the recovery began in the middle of 2009, GDP has expanded by an average of 2.2 percent, in line with the Pimco forecast and short of repeated projections for faster growth by the Federal Reserve and the White House.

Pimco’s Total Return Fund, the world’s largest mutual fund, is up 10.3 percent this year, beating 95 percent of similarly run mutual funds, according to data compiled by Bloomberg.

‘A Stinker’

It has attracted about $17 billion in net new money in 2012, according to Chicago-based research firm Morningstar Inc., after losing $5 billion to withdrawals in 2011, when it suffered what William Gross, the company’s co-chief investment officer with El-Erian, called “a stinker.” It eliminated U.S. Treasuries early in the year and missed a rally when investors rushed to the safety of government-backed debt.

One reason Rosenberg, 52, is trying to look on the bright side is because many other economists have turned more bearish.

“That’s raised my contrarian antenna,” he said.

GDP probably will grow 2 percent in 2013, down from a projected 2.2 percent this year, according to the median forecast of 74 economists surveyed by Bloomberg last month.

Among the more hopeful signs, Rosenberg said, is the bottoming out of the housing market. New-home construction rose 3.6 percent to a four-year high in October, according to the Commerce Department.

‘Strong Phase’

“We’re in a strong phase of the recovery,” Martin Connor, chief financial officer of Toll Brothers Inc. (TOL), a Horsham, Pennsylvania-based luxury homebuilder, said during a conference presentation on Nov. 15. “It’s a function of five years of pent-up demand being released.” Affordability and rising prices also are “spurring people to buy.”

The banking industry also is on the mend, Rosenberg said. “The banks are certainly in better position and more willing to lend money than they have been for years,” after buttressing their balance sheets.

JPMorgan Chase & Co., the biggest U.S. bank by assets, provided $15 billion of credit for small businesses in the third quarter, up 21 percent from a year earlier, Chief Executive Officer Jamie Dimon said in an Oct. 12 press release.

Rosenberg also is encouraged by what he calls a “secular renaissance” of the U.S. manufacturing industry — with output rising 16 percent during the recovery, according to the Fed — and a surge in American energy production.

Net Exporter

U.S. oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s largest fuel consumer almost self-reliant and putting it on track to become a net exporter, the International Energy Agency said last month.

Even so, problems remain. Rosenberg said he is particularly worried about continued high unemployment – 7.9 percent in October, up from 4.7 percent five years ago — and its impact on worker earnings.

“This will go down as a wageless recovery,” the Canadian economist said.

Average hourly earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since Labor Department records began in 1965.

The bottom line for Rosenberg: The economy still is “stuck in the mud.”

Pimco’s El-Erian predicts GDP probably will grow 1.5 percent to 2 percent during the next year as President Barack Obama and Congress strike a “mini-bargain” to avoid the fiscal cliff and moderately reduce the budget deficit.

‘Sputnik Moment’

The economy could do better if policy makers can pull off what El-Erian calls a “Sputnik moment” — a critical mass of reforms that restores corporate confidence and unleashes pent-up investment, hiring and demand. Such steps might include measures to tackle youth and long-term unemployment, as well as cutting the deficit.

“There’s tremendous cash on the sidelines,” he said.

David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), says a budget deal alone could do wonders for the U.S.

“There is a prospect for a robust recovery, something bigger than I think most economists are forecasting,” if the White House and Congress can reach a credible agreement to reduce the deficit by $4 trillion over 10 years, he told Bloomberg Television on Nov. 28.

El-Erian, who re-joined Pimco in 2007 after being in charge of managing Harvard University’s endowment, also sees a chance that technological breakthroughs could give the U.S. a productivity-driven boost. At the top of the list is digitalization: the conversion of pictures, sound and other information into a form computers can process.

Economic Impact

“The whole trend is having an impact on very many sectors of the economy,” he said.

The trouble is that while the potential for such pleasant surprises is bigger than before, it isn’t “meaningfully” bigger, according to El-Erian. And the downside dangers are greater, he said. Besides the fiscal cliff, they include the debt crisis in EuropeChina’s challenge in overhauling its export-driven economy and the risk of continued instability in the Middle East.

Levy said the U.S. private sector is in the middle of a prolonged period of cleaning up its balance sheet after decades in which debt grew faster than income.

“We’ve been at this for five years,” he said. “If we’re lucky, it might take a tiny bit less than a decade.” He added he’d be surprised if the U.S. is able to avoid a recession in the next few years.

More Progress

America, though, has made more progress than Europe and Japan in dealing with its debts, Levy said.

“The U.S. will do generally better in this rocky period than much of the rest of the world, because the risks are higher and the problems are bigger in many places overseas,” the 57- year-old economist said. That includes China, where new leaders face decisions on how — and whether — to curb state enterprises, boost access to credit for private companies and raise consumption.

Levy, who served on the board of the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York, from 1986 to 2001, said America also will benefit from a “secular improvement” in its trade balance. Driving that improvement: the manufacturing revival, boom in domestic energy output and increased demand for U.S. agricultural exports as developing nations grow richer.

“By the end of this decade, we might be looking at trade surpluses,” he said. The U.S. ran a$415.5 billion trade deficit through the first nine months of this year.

Future business investment also is being stored up as companies put off capital expenditures because of depressed demand for their products, he said. Eventually, such spending will surge, boosting productivity and profits.

“While the U.S. is going through a long-term, rough adjustment period,” Levy told Bloomberg Radio Nov. 13, “we are weathering it.

‘‘We are going to come out the other side,’’ he added. ‘‘And there is a very bright long-term.’

Der Spiegel on The Euro Zone Debt Crisis

Nov. 20

Interview with Economist Hans-Werner Sinn

                  ‘Temporary Euro-Zone Exit Would Stabilize Greece

In a SPIEGEL interview, pugnacious German economist Hans-Werner Sinn warns of the huge dangers associated with a continuation of current bailout policies, why he believes Greece and Portugal should temporarily leave the euro zone and why financial markets are anything but irrational.

SPIEGEL: Mr. Sinn, Chancellor Angela Merkel feels as though economists have left her in the lurch. She once said that the advice that she receives from economists is “about as diverse as it gets.” Can you see where she is coming from?

Sinn: No.


Hans-Werner Sinn, sitzend

Hans-Werner Sinn, sitzend (Photo credit: Wikipedia)

SPIEGEL: Excuse me? Economists have completely different ideas about how the euro can be saved. You suggest, for example, that countries should temporarily leave the euro zone until they have re-established their competitiveness. Others, by contrast, recommend collectivizing debt across the euro zone. How should politicians deal with such contradictory advice?

Sinn: There are differences in the recommended therapies, but fewer divergences in the analysis. There is considerable agreement today on the euro’s defects.

SPIEGEL: But not on how the euro can be saved, or even whether it should be.

Sinn: I hope that it can be fixed. The euro crisis proceeds in phases, and we are always told that there is no alternative to the next phase, because otherwise the euro would crumble. So there was supposedly no alternative when the European Central Bank (ECB) granted its TARGET loans, when it forced the German central bank, the Bundesbank, to purchase sovereign bonds from Southern European countries against its will, and when increasingly larger rescue funds were approved. Now, they are planning to create a banking union to socialize the debts of banks in Southern Europe. The next step will be the introduction of euro bonds …

SPIEGEL: … which the German government vehemently rejects.

Sinn: By the time France is hit by the crisis, as everyone fears will happen, the German government will no longer be able to refuse this demand. This development will ultimately lead to a system that has little in common with a market economy. The ECB and the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, will then direct the flow of capital — with the approval of euro-zone governments — into countries where it no longer wants to go. This will result in growth losses throughout Europe, and money will continue to be thrown out the window in Southern Europe. Furthermore, it will create considerable discord because it makes closely allied countries into creditors and debtors.

SPIEGEL: The alternative that you are pushing for, in which individual countries would withdraw from the monetary union, would cause enormous turmoil: Companies and banks would go bankrupt and Europe could possibly plunge into a deep recession for years to come. Doesn’t that alarm you?

Sinn: I don’t agree with the prognosis. If Greece exited the monetary union, the Greeks would purchase their own goods again, and wealthy Greeks would return to invest. And if Portugal leaves, it will have similar positive experiences. The Ifo Institute has studied some 70 currency devaluations and found that recovery begins after one to two years. We are, of course, also suggesting just a temporary exit. Greece and Portugal have to become 30 to 40 percent less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won’t work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.

SPIEGEL: But who knows what would happen to the population in the event of an exit?

Sinn: We should stop proclaiming the end of the world in the event of an exit. Instead, we should shape the exit as an orderly process with relevant aid for the banks of the country in question and for the purchase of sensitive imports. What we are currently witnessing in Greece is a disaster — and it’s not a disaster caused by an exit, but rather by remaining in the euro zone.

SPIEGEL: How do you intend to ensure that one country’s withdrawal won’t automatically precipitate a wave of speculation targeting the next potential candidate?

Sinn: The markets aren’t stupid — they don’t lump the countries together. We clearly see this with Ireland. Since the end of last year, Ireland’s interest rates have fallen more significantly compared to other crisis-ridden countries because Ireland has reduced its prices by 15 percent, allowing it once again to generate current account surpluses.

SPIEGEL: Portugal and Spain are not Ireland.

Sinn: Such countries are in a position to convince investors. Spain only has to devalue by 20 percent. That’s achievable within the euro zone. Greece and Portugal are in a separate category. These are the only two countries that consume more than they produce.

SPIEGEL: Now you are appealing to the financial markets to be reasonable. Yet they often overreact and behave irrationally.

Sinn: Where have you seen that?

SPIEGEL: Minor events are often enough to spark sharp increases in sovereign bond interest rates for countries in Southern Europe.

Sinn: But the markets are reacting rationally when they get cold feet and pull out of bad investments in Southern Europe. Last winter, interest rates rose in some cases to over 6.5 percent. Before the introduction of the euro, these countries had to pay interest rates of between 10 and 15 percent. The interest rate reflects the risk that investors will never see their money again. What’s irrational about that?

SPIEGEL: If investors are afraid that the monetary union is collapsing, they will pull out their money. And that will, in fact, cause the euro-zone to fall apart.

Sinn: Not if countries change their budgetary policy. If they offer investors collateral in exchange for loans and plausibly argue that they don’t intend to take on any new debt, then there will be no discrepancies in interest rates.

SPIEGEL: You say that the long-term consequences of the current rescue policy are more dangerous than the risks associated with changing course now. Is that science — or a matter of faith?

Sinn: On the basis of sound analysis, I am pointing to a danger that that many do not perceive, and I am weighing things up. Euro-zone member states have made available €1,400 billion ($1,780 billion) in bailout loans, €700 billion of which has been contributed by the Bundesbank through its TARGET loans. On top of this, there is the ESM with €700 billion, which is to be leveraged to €2,000 billion with the help of private investors. This stabilizes the capital markets, but it also destabilizes the remaining stable European states and wipes out the savings of retirees and taxpayers. We are gradually sliding into a trap from which we will no longer be able to escape. This risk is, in my opinion, the greatest risk of all.

SPIEGEL: But other economists arrive at different conclusions when they analyze the situation. Honestly, if you were the chancellor, wouldn’t you also take the safest apparent route forward, just as she is doing?

Sinn: I understand very well that politicians always have to bridge the gap until the next election, even if long-term dangers increase as a result. But as an economist, my time horizon is longer.

SPIEGEL: Isn’t it perfectly reasonable to be extremely cautious in this situation?

Sinn: You can’t convince me that it makes sense to stand by idly and watch as we take on increasingly greater risks. We are destabilizing our political system with this excessive rescue policy …

SPIEGEL: … but not if the rescue succeeds.

Sinn: I think that is rather unlikely because it would give us the wrong prices and thus result in a lack of competitiveness in the countries that are receiving public loans. I can’t save drug addicts by meeting their demands for more drugs.

SPIEGEL: Proposals by economists also meet with skepticism because their field’s reputation has been severely tarnished in recent years. Very few economists predicted the financial crisis, so it’s no wonder that politicians no longer place much value in their advice.

Sinn: Only very few economists correctly predicted the time of the crash, that’s true. But many had warned of dangerous developments on the financial markets. In 2003, for instance, I dedicated an entire chapter of my book, which deals with systems competition, to the lack of banking regulation — and sparked a debate in which I favored stronger banking regulation. There were also American economists such as Martin Feldstein and Robert Shiller who repeatedly warned that the bubble on the US financial markets would eventually burst.

SPIEGEL: But surely you don’t deny that up until the last decade the vast majority of economists were of the opinion that the financial markets should be liberalized as much as possible.

Sinn: Not in Germany. Leading German proponents of financial market theory such as Martin Hellwig have, like me, always emphatically urged stronger regulation of the financial markets.

SPIEGEL: In the United States, economists are characterized by their unrestrained faith in the markets, whereas here in Germany they are known for their argumentativeness. Last summer, two groups of economists, with two completely contradictory positions, went public on the euro issue: One group, which you belong to, strictly opposes a European banking union, while the other favors this move. Was this a successful initiative?

Sinn: You speak of contradictions where there were none whatsoever. Both groups were against collectivizing bank debts in Europe. The second spoke out in favor of a joint European banking regulatory agency, but the first group has yet to comment on this. The truth is different than how you perceive it: 495 German economists are warning the German government against bailing out Southern European banks with German tax money.

SPIEGEL: This raises the question of why

you didn’t formulate a joint appeal in the first place.

Sinn: I didn’t write the appeal, but I signed it. The author was Walter Krämer from the University of Dortmund. A few days later, Krämer und I wrote an article for theFrankfurter Allgemeine Zeitung, in which we both came out in favor of a joint banking regulation regime. This could have admittedly also been part of the first public appeal.

SPIEGEL: Doesn’t this show that the appeal may have been the wrong way to launch an economic debate?

Sinn: The idea was not to launch an economic debate, but rather to rouse the public. We saw a threat that the decisions made at the EU summit in June could pave the way for a collectivization of the debts of Southern European banks. The debts of the banks in crisis-ridden countries, however, are three times as high as the national debts. Who, aside from the banks’ creditors, should assume these burdens?

SPIEGEL: Still, it should be noted that economists’ recommendations are fraught with considerable uncertainty, particularly when it comes to a complex issue like the euro crisis. Your colleague Gert Wagner, president of the German Institute of Economic Research (DIW), says: “Everyone who says that they know precisely what to do is guilty of making the pretence of knowledge in a historically unique situation.” Are you not being somewhat presumptuous?

Sinn: Economics professors are not paid to slink away during a crisis.

Bankrate Target $ 16

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Nov. 14



RATE : NYSE : US$10.26
BUY Target: US$16.00

Bankrate is the leading online personal finance site on the web. The company boasts providing coverage on nearly 600 local markets in all 50 US states and generating 172,000 rate tables capturing over three million pieces of information daily. The company distributes its content and rate information through three main channels: the company’s owned and operated websites, online co-brands, and print partners.

Investor meeting with Bankrate CFO Ed DiMaria in New York – the tone of questions and commentary to be constructive. Management remains cautiously optimistic about the future while recognizing near-term challenges. We continue to believe that while the near term holds palpable uncertainty, the medium- to long-term possibility of an upside scenario around insurance and credit cards makes the risk/reward interesting at current levels.
Key Points
 We believe the company is seeing some signs of improvement in credit cards, with some renewed activity from issuers that have not been spending recently. We believe Credit Card CPA revenue may grow sequentially in Q4.
 We believe Insurance CPL will likely shrink sequentially in Q4. Management believes that is likely to be the bottom, although the business may not return to y/y growth until the second half of 2013.
Our price target remains $16 and is based on 20x our unchanged 2013 EPS estimate of $0.82.


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