11/4/17: S&P 500 Concentration Risk

Concentration risk is a concept that comes from banking. In simple terms, concentration risk reflects the extent to which bank's assets (loans) are distributed across the borrowers. Take an example of a bank which has 10 large borrowers with equivalent size loans extended to them. In this case, each borrower accounts for 10 percent of the bank total assets and bank's concentration ratio is 10% or 0.1. Now, suppose that another bank has 5 borrowers with equivalent loans. For the second bank, the concentration ratio is 0.2 or 20%. Concentration risk (exposure to a limited number of borrowers) is obviously higher in the latter bank than in the former.

Despite coming from banking, the concept of concentration risk applies to other organisations and sectors. For example, take suppliers of components to large companies, like Apple. For many of these suppliers, Apple represents the source of much of their revenues and, thus, they are exposed to the concentration risk. See this recent article for examples.

For sectors, as opposed to individual organisations, concentration risk relates to the distribution of sector earnings. And the latest FactSet report from April 7, 2017 shows just how concentrated the geographical distributions of earnings for S&P 500 are:

In summary:

• With exception of Information Technology, not a single sector in the S&P 500 has aggregate revenues exposure to the U.S. market that is below 50%;
• Seven out of 11 sectors covered within S&P 500 have exposure concentration to the U.S. market in excess of 70%; and
• On the aggregate, 70% of revenues for the entire S&P 500 arise from within the U.S. markets.

In simple terms, S&P 500 is extremely vulnerable to the fortunes of the U.S. economy. Or put differently, there is a woeful lack of economic / revenue sources diversification in the S&P 500 companies.

11/4/17: Euro Area Growth Conditions Remain Robust in 1Q 17

Eurocoin, Banca d'Italia and CEPR's leading indicator of economic growth in the euro area has slipped in March to 0.72 from 0.75 in February, with indicator remaining at its second highest reading since 2Q 2010.

Combined 1Q 2017 growth indictor is now signalling approximately 0.7% quarterly GDP growth rates, carrying the breakout momentum from previous quarters (see chart above). This brings most recent growth forecast over the 2001-2007 average.

From growth dynamics perspective, the pressure is now on ECB to start tightening monetary policy:

Inflationary pressures are still relatively moderate, but rising:

10/4/17: BRIC Composite PMIs 1Q 17: Not Keeping Up With Global Growth

In two previous posts, I have covered the 1Q 2017 data for Manufacturing PMIs and Services PMIs for BRIC economies. Both indicators provided little hope that world's largest emerging economies are generating a positive growth momentum consistent with stronger global economic growth.

The same is confirmed by the Composite PMIs:

Brazil's 1Q 2017 Composite PMI came in at 46.7, up on 46.1 in 4Q 2016, but still below the stagnation line. In simple terms, Brazil's Composite PMIs have now signalled negative growth for 12 consecutive quarters. Improved 1Q 2017 reading is consistent with continued and strong contraction in the economy, albeit a contraction that is less pronounced than in previous quarters.

Russia's Composite PMI posted a reading of 56.7, marking the strongest growth performance for the economy since 4Q 2006. Predictably, given both Manufacturing and Services PMIs as discussed in above-linked posts, Russian economy has outperformed in 1Q 2017 global economic growth momentum and is currently the strongest BRIC economy for the fourth consecutive quarter.

India's Composite PMI came in at 50.8, up marginally on 50.7 in 4Q 2016. This marks the second consecutive quarter of Composite PMI readings for India that are statistically indistinguishable from the stagnation line of 50.0. There is little good news in the data from India, where the fallout from the disastrous de-monetisation campaign by the government has been taking its toll.

Chinese Composite PMI stood at 52.3 in 1Q 2017, down from 53.1, but still the second highest since 1Q 2013. In simple terms, this means that the Chinese economic growth is not accelerating off 4Q 2016 dynamics, suggesting that the economy has now exhausted any momentum gained on foot of a massive credit bubble expansion in modern history.

Chart below illustrates the dynamics:

As shown above, Russia is the only BRIC economy currently generating upward supports for global growth.

When we consider individual sectoral indices, as shown in the chart below, BRIC Manufacturing sector is now pushing global growth momentum down, while BRIC Services sector is co-moving with the global growth, but provides no positive momentum to global economic expansion:

Finally, using monthly data (100=zero growth) for the BRIC economies index of economic activity (computed by me based on Markit and IMF data), the chart below shows just to what extent does Russian growth momentum dominates rest of the BRIC economies dynamics:

In summary, BRIC economies remain negative contributors to the global economic growth, with BRIC economies posting overall positive, but weak growth across the two key sectors.

10/4/17: BRIC Services PMI 1Q 2017: Another Weak Quarter

Yesterday, in my analysis of BRIC Manufacturing PMIs for 1Q 2017, I showed that 51.1 for 1Q 2017, BRIC Manufacturing PMI average came down marginally on 51.2 in 4Q 2016, although up on 49.2 reading for 1Q 2016. Russia was the only economy posting Q1 2017 Manufacturing activity in line with Global Manufacturing dynamics and BRIC as a group were exerting downward pressure on global manufacturing sector.

The news, therefore, were not great for the global manufacturing economy (stalled growth momentum in 1Q 2017), and for the BRIC economies.

Looking at Services PMIs next:

Brazil's Services PMI for 1Q 2017 averaged at 46.4, which is somewhat better than 44.5 average for 3Q 2016 and 4Q 2016 and stronger than 40.0 average for 1Q 2016. In simple terms, Brazil's Services activity continued to shrink and shrink rapidly in 1Q 2017, although the rate of contraction moderated. All in, Brazil's Services PMIs have now been in sub-50 territory for 10 consecutive quarters, two quarters shorter than Brazil's Manufacturing sector. The long-running and deep recession in Latin America's largest economy is continuing, although there are some very fragile signs that it might come to an end in the foreseeable future, as both Manufacturing PMI (at 49.6 in March) and Services PMI (at 47.7 in March) are showing signs of recovery.

Russia Services PMI for 1Q 2017 came in at a blistering pace of 56.8, up on already significant growth in 4Q 2016 at 54.6 and significantly above 1Q 2016 reading of 50.0. All in, this is the fourth consecutive quarter of Services PMIs above 50.0, with all four quarters reading statistically significant for positive growth. Russia is leading BRIC contribution to global growth in both Manufacturing and Services sectors, judging by PMIs.

Indian Services PMI was at 50.2 in 1Q 2017, which not statistically distinct from zero growth marker of 50.0, but up on 49.3 in 4Q 2016. In 1Q 2016 the Services PMI averaged 53.6 which was positive for growth. Indian economy has been hitting some trouble waters for the last two quarters, something I remarked upon in the post covering Manufacturing PMIs linked above. While Services are showing signs of stabilisation, the recovery is not yet evident in the data and is lagging Manufacturing sector performance.

China's Services PMI reading in 1Q 2017 disappointed those who hoped that 2016 credit explosion would set stage for a robust economic growth recovery. With Manufacturing PMI growth signal stuck at the same level in 1Q 2017 as in 4Q 2016, Services PMI reading for 1Q 2017 was actually below the 4Q 2016 reading (52.6 vs 53.0). Given that the index never once slipped below 50 in the history of the series, as well as given the moments of the underlying distribution, 52.6 reading is statistically indistinguishable from zero growth conditions. Thus, although posting the second strongest, amongst the BRIC economies, PMI reading for 1Q 2017 after Russia, Chinese Services sector was a relative negative for global growth momentum.

Chart and table below summarise some of the dynamics discussed earlier:

In summary, as shown above, global PMIs are supported to the upside only by Russian Services PMI dynamics, with Chinese Services PMIs providing virtually no momentum to global Growth, and both India and Brazil contributing negatively. Overall, thus, BRIC economies remain weak and under-perform global growth.

9/4/17: JTCI Article on Cybercrime & Financial Markets Contagion

Our paper on cybersecurity risks spillovers across financial markets was published in the JTCI: http://www.terrorismcyberinsurance.com/. You can access full paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2892842.

9/4/17: BRIC Manufacturing PMIs 1Q 2017: Stalling Momentum

1Q 2017 PMIs for Manufacturing are painting a mixed picture for the world's largest emerging economies, the BRIC group.

Brazil's Manufacturing PMIs averaged 46.8 in 1Q 2017, compared to 45.9 in 4Q 2016 and 46.0 in 1Q 2016. All in, 1Q 2017 marked 12th consecutive quarter of Manufacturing PMIs signalling contraction in activity. Although 1Q 2017 reading was the highest since 1Q 2015, current indicator simply implies that the rate of Brazilian manufacturing sector contraction has abated somewhat, even though the downward momentum remains in place. This means that Brazil remains the worst performing BRIC Manufacturing sector for the eighth consecutive quarter. One relatively brighter spot is that March Manufacturing PMI for Brazil came in at 49.6 - the highest monthly reading since February 2015 and relatively close to zero growth line of 50.0. It is worth watching in months to come if there is a sustained momentum in Manufacturing activity up, and if Brazil finally starts showing signs of an economic recovery from what has proven to be a horrific recession so far.

Russian Manufacturing PMIs averaged 53.2 in 1Q 2017, unchanged in 4Q 2016 and up on 49.1 average for 1Q 2016. This marks the third consecutive quarterly PMI reading for Manufacturing that sits above 50.0 marker. As Russian economy gained significant recovery momentum in 4Q 2016 and into 1Q 2017, Russia now leads BRIC Manufacturing PMIs for the second consecutive quarter, providing solid upward support for global manufacturing growth. Still, despite robust numbers and despite three consecutive quarters of growth, Russian manufacturing sector and the economy at larger remain relatively exposed to the downside risks, including risks relating to energy and commodities prices, as well as to the lack of structural reforms within Russia. We have been awaiting for some time now for the long promised Government plans for achieving sustainable growth in the economy into the early 2020s, and the plan is still lacking.

Indian Manufacturing PMIs averaged 51.2 in 1Q 2017, down from 52.1 in 4Q 2016 and worse than 51.5 reading for 1Q 2016. 1Q 2017 was the weakest of three consecutive quarters, suggesting that the economy is having difficulty recovering from the botched de-monetization experiment by the Indian Government. Few outside India are willing to call the experiment botched, primarily because it involved advice and partial funding from the U.S. agencies, but the process was a disaster for the Indian economy.

Chinese Manufacturing PMIs also came with a disappointing whimper. PMIs averaged 51.3 in 1Q 2017 on par with 4Q 2016, quashing the hopes that the credit stimulus of the 2H 2016 will translate into domestic demand uplift. Current index reading for China is not statistically significantly different from 50.0, implying a general lack of growth momentum in the Chinese manufacturing. So far, Manufacturing PMIs managed to stay above 50.0 marker (nominally, not statistically) for three consecutive quarters, but the total average for these quarters is coming in at only 51.0.

Table and charts below summarise BRIC Manufacturing PMIs dynamics through 1Q 2017:

Overall, BRIC Manufacturing PMI Average (a metric computed by me using Markit data) came in at 51.1 in 1Q 2017, down marginally on 51.2 in 4Q 2016, although up on 49.2 reading for 1Q 2016. As the chart above clearly shows, of all BRIC economies, only Russia is posting Q1 2017 Manufacturing activity in line with Global Manufacturing growth and dynamically, BRIC as a group is exerting downward pressure on global manufacturing sector.

The news, therefore, are not great for the global manufacturing economy (stalled growth momentum in 1Q 2017), and for the BRIC economies.

Stay tuned for analysis of Services and Composite figures.

9/4/17: Nama's Missed Opportunities

My Sunday Business Post article on Nama and the 'value-destruction' : https://www.businesspost.ie/opinion/nama-missed-opportunity-profits-paying-price-384584.

9/4/17: Oil's Bucking Bull

My recent article for Sunday Business Post covering oil price dynamics and forecasts: https://www.businesspost.ie/business/oils-bucking-bull-382323.

13/3/17: Bitcoin v Gold: Volatilities and Correlation

On foot of the previous post, a reader asked me for some analysis of comparatives between Bitcoin volatility and Gold price volatility. It took some time to get to the answer. One of the reasons is that Bitcoin is traded continuously, while gold prices are listed for specific markets trading dates. So it takes some time to reconcile two data sets.

Here is the analysis. Starting with daily returns volatilities for log-log returns:

Several things are obvious from the above chart:

1. Overall Bitcoin price volatility is magnitudes greater than volatility of gold prices almost always. Historical standard deviation in daily returns is 2.663% and Gold price (log daily returns) volatility is 0.466%, which means that historically, gold daily returns are less volatile than Bitcoin daily returns by a more than a factor of 5. 
2. There are, broadly speaking three key periods of Bitcoin volatility: the period from September 2011 through December 2012, when volatility was extreme and declining, the period from January 2013 through February 2015, when volatility in Bitcoin was characterised by severe spikes and elevated base, and the period from March 2015 on, when both the spikes in volatility and the base of volatility abated. These three periods are associated with the following comparatives between gold volatility and Bitcoin volatility: period through December 2012: gold daily returns volatility 0.520% against Bitcoin daily returns volatility of almost 6 times that at 3.00%; period from January 2013 through February 2015, when Bitcoin returns volatility (3.27%) was almost 7.5 times gold returns volatility (0.479%), and the current period from March 2015, where Bitcoin daily returns volatility (1.421%) was over 3 times daily returns volatility for gold (0.412%). Note: these are log-log returns, so much of extreme volatility is smoothed out and this benefits the Bitcoin.
3. There is a long-term trend difference between gold returns volatility and Bitcoin returns volatility, as shown by polynomial (power 6) trend lines for both. In fact, even in terms of trend, Bitcoin is much more volatile than gold and Bitcoin's volatility is less stable than volatility of gold. 

In very simple terms, Bitcoin volatility is vastly in excess of Gold's volatility, albeit the former is starting to moderate in more recent years.

Now, for the last bit of observations. I also mentioned that Bitcoin is distinct from Gold in terms of its financial properties. And guess what, I did not provide any evidence. Well, here it is. Bitcoin returns and Gold returns are not correlated, or in other words, they neither co-move with each other nor countermove against each other. Here's a chart to prove this:

Average 30-days running correlation for Bitcoin and gold in terms of daily log-log returns is 0.03025 historically, which is statistically indifferent from zero. Across the three periods of Bitcoin volatility structure (defined above), average correlation between Bitcoin and gold log-log returns was 0.0147, 0.0182 and 0.0529 respectively. All of these are statistically indifferent from zero. In history of the Bitcoin, there were only 7 occasions on which daily returns were correlated positively with gold price with correlation in excess of 0.5. and 5 with negative correlation in excess of -0.5 in absolute value None with correlation in excess of 0.65 in absolute value for either positive or negative correlations. 

Bitcoin comparatives to gold hold about as much water as a colander hit by a shrapnel shot.

12/3/17: Bitcoin Pop: Nothing too Dramatic by Historical Comparatives

Few days back, I posted a quick note about the erroneous nature of Bitcoin-Gold comparatives. And yesterday, we had one of those events that highlights the same.

In summary of the event, SEC rejected an application for a Bitcoin ETF.  And Bitcoin crashed. Inter-day volatility shot up through the roof. Which would have been bad enough, except it is the norm for Bitcoin

You can see just how unsurprising the current volatility is for the BTC, consider the following charts:

Pretty much by every metric of volatility, Bitcoin's latests wobble is minor, despite it being dramatic enough to set @Reuters and @Bloomberg folks all hopping with excitement. Thing is, folks, Bitcoin's volatility is in the league of financial widow-makers.

3/3/17: BRIC Manufacturing PMI: Weaker Support for Global Growth in 1Q

The latest BRIC Manufacturing sector PMIs for February are continuing to signal support for global growth albeit at weaker rates than in 4Q 2016.

Brazil Manufacturing PMI for February came in at 46.9, slightly less sharp of a rate of contraction than 44.0 in January 2017. This marks 25th consecutive month of Brazil’s Manufacturing PMIs at below 50.0 - the point of zero growth. The rate of decline in Brazil’s case is shallowest since January 2016, but the series are quite volatile and at 46.9, the index is statistically significantly below 50.

Russian Manufacturing PMI moderated from 54.7 in January to 52.5 in February, but the index remained statistically above 50.0, signalling robust growth. This marks 7th consecutive month above with PMI above 50 and the 5th consecutive month that Manufacturing PMI exceeded 50.0 by a statistically significant margin, as the Russian economy continued on its expansion trend.

Chinese Manufacturing PMI cam in at 51.7, still below statistically significant growth line, but above 50.0 nominally, marking 8th consecutive month of above 50 readings (none of these readings were statistically significant, however). 51.7 marks a slight improvement on January’s 51.0.

India’s Manufacturing PMI rose to 50.7 in February from 50.4 in January. This marks the second consecutive month with above 50.0 nominal readings, but the index remains statistically indistinguishable from 50.0 zero growth mark.

Table below uses January-February average PMI for 1Q 2017 reading and compares it against full quarter averages for Manufacturing PMIs for previous quarters.

Chart below illustrates quarterly averages trends:

As shown in the chart above, 1Q 2017 results to-date indicate slightly weaker growth support from the BRIC economies overall, based on Manufacturing sector activity alone. Global growth in manufacturing continued to accelerate in the first two months of 2017, while BRIC Manufacturing posted slightly weaker growth in 1Q so far. The downward momentum in BRIC Manufacturing growth was driven by 

• Brazil (experiencing accelerated contraction in 1Q to-date compared to 4Q 2016)
• India (experiencing sharply slower growth in 1Q 2017 to-date compared to 4Q 2016)

Offsetting these trends,

• Russian growth in manufacturing sector accelerated in the first two months of 2017 compared to 4Q 2016; and
• Chinese growth in the sector remained roughly unchanged in January-February 2017 compared to 4Q 2016.

I will be posting on Services sector PMIs and Composite PMIs once we have data for Brazil.

3/3/17: Sovereign & Corporate Credit Ratings: Slow Motion Disaster Spectacle

Recently, I wrote about the latest Fitch Ratings data showing a dramatic decline in the number of AAA-rated sovereigns over 2016 (see: http://trueeconomics.blogspot.com/2017/02/10217-sovereign-debt-bubble-methane.html). Now, take a look at the Fitch's latest analysis of the trends in A and better rated sovereigns:

Per Fitch: "The proportion of 'A-' and higher ratings in Fitch's global portfolio of sovereigns, corporates and banks remains well below the pre financial-crisis level and could fall further over the next couple of years as the balance of ratings outlooks has deteriorated."

Some numbers:

• In sovereign ratings, the proportion of 'AAA' sovereigns was down to below 10% at the end of 2016, marking its lowest-ever level. "Around 36% of the portfolio is rated in the 'A' to 'AAA' categories, down from 48% at the end of 2006 while 27% is rated 'B+' or below, compared to 20% in 2006."
• Fitch's sovereign ratings also "have the greatest share of negative outlooks on a net basis, at 21%. This suggests downgrades could outnumber upgrades by a wide margin" going forward.
• In corporate ratings, "the proportion of corporate ratings in the 'A' to 'AAA' categories has dropped to 20% from 30% over the last decade, but unlike sovereigns the proportion rated 'B+' and below has only ticked up by 1 percentage point. Instead ratings have become increasingly compressed in the 'BB' and 'BBB' categories."
• "Financial institutions, which have historically had a bigger share of high investment grade ratings, have seen the proportion of 'A' to 'AAA' category ratings slip to 39% from 53%."
• "The trend seems set to worsen, as a net 11% of financial institution ratings outlooks were negative at end-2016, driven largely by outlooks on emerging-market banks, which themselves often reflect the outlooks of their sovereign."