James Saft

By James Saft

(Reuters) – With corporate profit margins at record levels, the stock market faces a challenge because the logical next move may well be down.

Economy-wide corporate profit margins are over 10 percent, not only the highest on record, but now fully 20 percent higher then they were at the most recent peak, before the onset of the great recession.

How we got here is pretty clear – technological innovation came alongside globalization, allowing for investment in processes and technology in combination with wage-lowering off-shoring of jobs.

We may now be seeing the first signs that profits are set to flag. With more than half of the S&P 500 companies having reported fourth-quarter earnings, 30 percent have recorded negative earnings surprises, according to Richard Bernstein of Richard Bernstein Advisors.

If that trend continues among the remaining companies, we’ll have experienced the worst reporting period since 2008.

By James Saft

(Reuters) – With corporate profit margins at record levels, the stock market faces a challenge because the logical next move may well be down.

Economy-wide corporate profit margins are over 10 percent, not only the highest on record, but now fully 20 percent higher than they were at the most recent peak, before the onset of the great recession.

How we got here is pretty clear – technological innovation came alongside globalization, allowing for investment in processes and technology in combination with wage-lowering off-shoring of jobs.

By James Saft

(Reuters) – If you think the advent of a common tongue in banking will solve the problems of finance, you are probably disappointed that Esperanto did not usher in a new age of world peace.

Just as Esperanto, born in the late 19th century and touted as increasing international understanding, failed to do much to stem the bloodiest century in human history, so the imposition of new codes to make clear who does what to whom in finance faces a huge hurdle: those who might use it won’t think it is in their best interest.

Andrew Haldane, the executive director of financial stability at the Bank of England, thinks that the use of new global codes to track counterparties and financial products in markets has the potential to transform banking, rendering it safer, more competitive and easier to regulate.

March 20 (Reuters) – The price of money is going up, but
it’s difficult to know if this signals a return to normality, a
step down inflation’s slippery slope or just a cunning head
fake.

Yields on 10-year U.S. Treasuries hit 2.38 percent on
Monday, the latest leg in a move that’s taken the borrowing rate
up by nearly 25 percent in just three weeks.

The yield on 10-year Treasuries is perhaps the world’s most
important financial indicator. Besides representing the cost of
money for the U.S. government, it helps to set the price of
money for all borrowers in dollars, and for many world-wide.

By James Saft

(Reuters) – An apparent economic recovery and a recent tumble in the price of gold has investors wondering if the precious metal has lost its place in a portfolio. Gold, having soared higher since the onset of the financial crisis, is down about 17 percent from its September peak, and has fallen 7.5 percent in less than a month. In large part, gold’s comeuppance is attributable to improving economic data and a sense that – terrible as things may be in Europe – the banking system will not implode. So, then, if the world’s not ending why own gold? Arguing the case against gold ownership is none other than Warren Buffett, who argues for equities and calls gold a non-productive asset. Why hold gold, which never innovates, never increases profit margins and never opens up new markets? “If you own one ounce of gold for an eternity, you will still own one ounce at its end,” Buffett wrote in his most recent annual letter to shareholders. here “This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future,” Buffett said. Gold, Buffett correctly points out, has benefited first from a fear trade, bought up by investors who worry that central banks and governments will engineer a raging inflation in order to erode away the debts they struggle under.

Secondly, as with all assets that rise sharply in price, gold has gotten a push higher by momentum buyers, those who add their money to the rush in hopes of getting out when the trend wanes. Remove those supports and gold should fall, sharply and rapidly.

THE BACKSIDE OF QE Buffett is surely right about gold’s inability to procreate or grow, but I think he presents the fear trade as too much of an all-or-nothing bargain. Gold is a kind of anti-investment, an insurance policy against the bad actions of other people.

By James Saft

(Reuters) – Nostalgia for the era when bankers were “long-term greedy” is a red herring, misdirecting our attention to how banks govern themselves when the true issue is how they are governed.

Greg Smith, until Wednesday a Goldman Sachs executive director in its derivatives business, dropped a bomb on his way out the door, publishing an op-ed piece in the New York Times in which he decried, as he describes it, the erosion of integrity at the firm and how the interests of clients take a back seat to short-term profits.

“It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you,” Smith writes.

By James Saft

(Reuters) – Nostalgia for the era when bankers were “long-term greedy” is a red herring, misdirecting our attention to how banks govern themselves when the true issue is how they are governed.

Greg Smith, until Wednesday a Goldman Sachs executive director in its derivatives business, dropped a bomb on his way out the door, publishing an op-ed piece in the New York Times in which he decried, as he describes it, the erosion of integrity at the firm and how the interests of clients take a back seat to short-term profits.

“It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you,” Smith writes.

By James Saft

(Reuters) – Official funding has a nasty habit of driving away free market money, as Europe’s banks may yet discover.

Struck last year by a lenders strike, Europe’s banks have seen their immediate funding fears eased in recent months by a host of measures, such as cheap funding from the European Central Bank and a related boom in the issuance of “covered” bonds, those secured by bank assets.

These forces have eased fears of bank failures but ironically have made banks less and less attractive institutions to which to lend.

By James Saft

(Reuters) – Ireland’s decision to hold a popular vote on Europe’s new fiscal treaty adds some unpredictable and much-needed risk to the seemingly inevitable course of the euro bailout steamroller.

While turkeys have on occasion voted for Thanksgiving, especially if told a “no” vote will only bring the feast day forward, Irish voters have reason to be furious and also have a strong track record of rejecting euro zone initiatives.

Ireland can’t by itself block the treaty, which will come into force if adopted by a quorum of 12 European Union states, but a rejection can, and just might, serve as a rallying point for those disaffected by the crisis resolution process.

By James Saft

(Reuters) – It may be the biggest thing to hit the global economy since the assembly line, and how you play it might just determine your success as an investor in the coming decades. Additive manufacturing, or 3-D printing, has the potential to radically change how products are designed, where they are built and what labor and material inputs are used. If it takes off, it could radically change global trade flows, delivering a huge boost to the indebted and aging developed world, while threatening the fundamentals which underpin manufacturing success in China and some other emerging markets. 3-D printing is a process under which highly customizable products are literally sprayed into existence using something not too dissimilar from an ink-jet printer. Originally used mostly to provide build prototypes, it is now being used for actual production, notably by a unit of EADS which is working on developing 3-D printing-produced aircraft parts. The advantages are huge: easier customization, lower labor costs and, potentially, a severing of the reliance on a supply chain, a feature of manufacturing since the days of Henry Ford.

WHO BENEFITS – GEOGRAPHICS The global supply chain system, with parts of a product built in Asia or Europe for final assembly in the U.S., for example, has built up in response to the huge economies of scale needed in old-fashioned manufacturing. Build a factory in high-wage Germany, for example, and make it work through excellence and with huge investment in equipment to make production economic. Or build in low-wage China or Vietnam and arbitrage low wages Since 3-D printing may not need these economies of scale, look for production to move closer to the end consumer. Also, because so much of the value a 3-D printing operation is in its intellectual property, look for companies to favor places that offer better legal protection of IP rights. That makes this great news for the U.S. and terrible for China. And though Germany and Japan offer better IP rights, they may well suffer because both have such huge sunk costs in the existing global supply chain system. So broadly, this is dollar and U.S. asset positive, while being a negative for the emerging markets and other places that have done well out of the existing system. “America’s dominance in this field will be a feature for a very, very long time,” George Magnus, senior economic adviser at UBS in London said. “If not the end of outsourcing, it is a big shock to the outsourcing system.” A U.S. manufacturing renaissance based on 3-D printing would also, of course, be hugely positive U.S. debt, which would benefit from the improved fiscal position this implies. It really is hard to over-state what a lucky break this could be for the U.S., playing to its strengths and compensating for its weaknesses. It may also not be all bad news for China, Japan and Germany, all of which face tough demographics in coming years. As 3-D printing requires less labor it may offer a way to pay for all of those retirement benefits and retire all of the debt that now looks worrisome.

SECTORAL WINNERS Playing the sectoral winner and losers is even more speculative, as this is going to be a long process rather than simply an event. That said, the rule of thumb is that successful implementation of 3-D printing in a given industrial space will be a threat to incumbents with a strong franchise. Those existing manufacturers and component makers will have huge sunk investments that they needed to achieve economies of scale, and will have to decide if they will switch, and adapt new techniques, or accept managed decline. This implies a lot more volatility in the value of manufacturing shares, with big winners and big losers. That may actually be an argument for investing broadly in sectors that implement 3-D techniques, on the theory that profitability will rise in the sector and that returns will rise overall to compensate for volatility and a temporary increase in the need for capital. On this view, trying to pick winners and losers within a sector may be too risky, with the big call being how well a given sector is to using 3-D techniques. Again though the ability to customize and to innovate that is engendered by 3-D techniques means that a there will presumably be Apple-like category-busters, with new products at high price points, which arise. Finally, one group that will undoubtedly be hurt by the rise of additive manufacturing are those companies that provide logistics and shipping to the existing supply chain. Why pay to ship a fly a part around the world when you can spray one on site? I have to emphasize, again, that this is all highly speculative and will play out over a huge distance of time and space. It will be a long road, and there will be a lot of money made, and lost.