FT : Market questions: will the respite for French bonds last?

Market questions: will the respite for French bonds last?
Why are analysts pondering ‘Brexit 2.0’ and what will Janet Yellen tell Congress?


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Here are the big questions facing investors ahead of a new trading week.

How long does a reprieve for French bonds last?

After a burst of selling early last week, French debt was granted a reprieve with the 10-year benchmark yield easing back below 1.10 per cent. In turn, the divergence over 10-year Bund yields also pulled back from a four-year plus high.

Traders remain nervous after they failed to predict the two biggest political shocks of 2016, the UK's Brexit vote and the election of Donald Trump.

In France, polls suggest the National Front leader Marine Le Pen will come second in the election in May, but investors have been pricing in the increased risk of an FN victory. The term redenomination risk has flared anew, with bond investors looking at the fine print of deals and whether euro-denominated sovereign debt could switch back into former national currencies.

Not helping ease worries over French debt, David Rachline, head of strategy for the National Front, said in an interview last week that only about 20 per cent of France’s total public debt “falls under international law [and would stay denominated in euros] . . . but for the rest we will have the right to change the currency”.

Such an outcome, say rating agencies, would probably amount to the largest sovereign default on record. No matter what the polls say, investors may look to reduce their exposure to France amid the uncertainty — although there are some who plan to look through the political clouds to focus on Europe’s broad economic recovery.

Rotation remains the name of the game — and perhaps for some time

Sector rotation remains a key aspect of trading, as investors await further developments that are mainly political in nature when they look at the US, UK and Europe. Waiting for more policy details from the Trump administration and the likelihood of them being passed by Congress, will keep investors on hold for some time. In the UK, the triggering of Article 50 looms, while Europe faces elections in Holland next month, followed by France in April.

Analysts at Bank of America Merrill Lynch note: “Although the markets are showing more concern, some analysts seem to be in a relatively sanguine mood going into the spring. By contrast, we see major risks looming, particularly around tax and trade policy.”

For all the doubts over how much policy stimulus will arrive via Congress, plenty are betting on the US economy picking up speed, hence a pronounced rally in junk-rated debt as investors anticipate stronger growth, deregulation and tax reforms. Junk bond funds collected $1bn in new money in the week to February 8, according to data from EPFR.

While US small-cap stocks as measured by the Russell 2000 index have lagged behind the record pace set of late by larger shares, the message from junk investors is very much one of keeping the faith in the Trump trade.

Why are UK analysts and investors talking about Brexit 2.0?

The new buzz term is Brexit 2.0. There is growing talk of the need for a more nuanced approach to trading UK shares that will become more important amid signs that the correlation between a weaker pound and stronger FTSE 100 could be facing changing dynamics.

Attention will focus on any parting of the ways for what has been a lock-step movement between the falling pound and rising stocks, led by companies with hefty foreign-based revenues. THE FTSE 100 has gained 18 per cent since June 24, while rising 7 per cent in US dollar terms.

After a strong performance for multinational blue-chips, investors are expected to take a more refined approach to identifying likely winners and losers as the UK’s divorce proceedings with the EU become clearer. Under that scenario, the current list of winners and losers could face a shake-up in the coming months.

Will UK inflation data worry London’s stock bulls?

Definitely. There are early signs that the correlation between a weaker pound and stronger UK stocks is facing pressure. The market’s reaction to Brexit is becoming more nuanced and has caught the eye of investors in UK assets.

Inflation data due on Tuesday will shed light on the extent to which the pound’s slide since the EU referendum has fed through into higher prices, raising the prospect of a squeeze on consumer spending that could start to make its presence felt on the stock market.

Signs of that came from Friday’s data showing a sharp year-on-year rise in the price of imported goods. That may have been why sterling failed to spark on the back of positive industrial and manufacturing figures and a cut in the trade deficit. With Brexit anxiety on hold and the UK economy in good shape, the pound looks ready to build on the modest uplift achieved so far this year. But inflation may be too big a hurdle for investors.

What can investors expect from Janet Yellen’s testimony to Congress?

Caution, with a tilt to hawkishness. Like the market, the Federal Reserve chair has begun the year in wait-and-see mode, unsure quite what impact President Trump will bring to bear on the robust US economy.

The January Fed meeting was as neutral as possible, but this week Ms Yellen will have to give voice to their thinking in her semi-annual appearance in front of the Senate banking committee. Not much has changed to bring the Fed off the fence on Trump, though the latest jobs data were a mixed bag. Still, the market correction that was the feature of January may have run its course, and the dollar is edging up again. Investors may be impatient, but there is little to divert them away from their end-of-2016 expectations on rates, tax cuts and fiscal stimulus. Ms Yellen will be careful not to stoke those expectations too far, but nor will she want to send the wrong signals to the market.

“ . . . She should be at worst neutral for a dollar into which 50 basis points of Fed hikes is priced the next 12 months,” say ING analysts. Valentin Marinov at Crédit Agricole is more bullish, saying her testimony along with a slew of data should shift the balance of risk in favour of a stronger dollar.

“Evidence of resilient domestic demand and inflation as well as indications that the Fed is on course to hike rates further should restore fading market confidence in the FX divergence trade,” he says.

Investors should lap up her every word — there won’t be too many more of these set-piece appearances from the outgoing Fed chair.

WSJ : Gary Cohn Has Emerged as an Economic-Policy Powerhouse in Trump Administra

Gary Cohn Has Emerged as an Economic-Policy Powerhouse in Trump Administration
Former Goldman executive, taking advantage of personnel vacuum, is pushing ahead on taxes, infrastructure, financial regulation and replacing health-care law

WASHINGTON—At Donald Trump’s first meeting with Gary Cohn in late November, he appeared so impressed with the then-president of Goldman Sachs Group Inc. that he joked about offering him the post of Treasury secretary, said a person who recalled the moment. Sitting nearby was the odds-on favorite for the job, Steven Mnuchin, who got the nod.

Mr. Mnuchin’s confirmation has since been delayed. In the meantime, Mr. Cohn, in office as director of the National Economic Council since the start of the Trump administration, has emerged as the most powerful economic policy maker in its early days.

The White House has designated Mr. Cohn to play a central role on taxes, infrastructure, financial regulation and replacing the Affordable Care Act. He stood over the president’s shoulder as Mr. Trump signed executive orders on financial regulation. The White House says it is preparing a tax-overhaul plan for release within weeks, giving Mr. Cohn a prime role when several top economic posts remain vacant.

Though these will eventually be filled, Mr. Cohn is rapidly assembling a growing portfolio that could solidify his influence in the administration for the long term.

He met with senators who would shape tax policy two days before Mr. Mnuchin, his fellow Goldman alumnus, faced the same lawmakers for his confirmation hearing. Typically, the Treasury secretary and his senior staff spearhead those discussions. Mr. Trump began a recent meeting by referring to Mr. Cohn as one of “my geniuses.”

Mr. Trump rode to office taking hard-edge stands on trade and immigration. Mr. Cohn describes himself in nonideological terms and has signaled a softer edge on globalization. Candidate Trump also was often sparse on policy specifics, giving Mr. Cohn the potential to have greater influence than some of his predecessors in turning the president’s ideas into realities.

“When you’re dealing with the economy, which is my realm, you have to be pragmatic,” Mr. Cohn said in an interview Wednesday. “You have to be realistic to what’s going on in the world and you have to be willing to adapt. I think that’s my job, to advise the president on what is the right solution.”

Speaking about the Federal Reserve at a conference last fall, Mr. Cohn commented that “we have successfully globalized the world, whether we like that or not.” That leaves monetary policy, he said, trying to solve a “global growth issue…with domestic policy. It’s not going to work.”

A representative for Mr. Mnuchin, who is awaiting confirmation, didn’t respond to interview requests.

Mr. Trump’s selections of Messrs. Cohn and Mnuchin to run economic policy last fall struck a contrast with some of the president’s campaign rhetoric, including an ad in which he alleged a global plot to take wealth from workers that flashed an image of Goldman Chief Executive Lloyd Blankfein .

Mr. Trump’s critics are trying to turn Mr. Cohn’s background against the new administration. Sen. Bernie Sanders (I., Vt.), noting Mr. Trump sought to win over working-class voters through a rejection of big banks, said that now “he’s going to the billionaire class, he’s going to Mr. Cohn and Wall Street, who are the people who caused the financial crisis in the first place.”

On Friday, Sens. Elizabeth Warren (D., Mass.) and Tammy Baldwin (D., Wis.) sent a letter to Mr. Blankfein asking whether Goldman officials have been in contact with Mr. Cohn or other Goldman alumni in the White House and whether the firm expects to benefit from changes to financial regulation Mr. Cohn is pushing through executive orders.

A spokesman for Goldman said it had no involvement in drafting executive orders.

In an interview before the executive orders were signed, Mr. Cohn said the administration’s goal of deregulating financial markets “has nothing to do with Goldman Sachs” but was focused on maintaining the nation’s dominant position in global banking.


Several gaps remain in the administration’s policy team. There is still no Senate-confirmed Commerce secretary or U.S. Trade Representative. The White House hasn’t named any members to the three-person Council of Economic Advisers.

The vacancies and Mr. Cohn’s proximity to the Oval Office—the National Economic Council director works in the West Wing, unlike Cabinet secretaries—enhance his influence, both inside the White House and throughout Washington, several lawmakers and administration officials said.

The NEC post was created by President Bill Clinton in 1993 and has been inhabited by powerful figures such as Robert Rubin and Lawrence Summers. The job is traditionally one part adviser and one part broker negotiating policies that touch on more than one agency. Mr. Cohn is also operating as part congressional and corporate liaison.

Meanwhile, conservative economists, who have played prominent roles in previous Republican administrations, are mostly on the outside looking in.

“It’s a little odd that we’re in the third week of the administration and there is no Council of Economic Advisers,” said Stephen Moore, a former economic adviser to Mr. Trump and a onetime member of The Wall Street Journal editorial page. The CEA, which provides economic analysis to the president, as opposed to the policy-coordination role played by the NEC, has been downgraded to a subcabinet-level office.

On Feb. 3, Mr. Cohn went on cable television to pitch the president’s financial regulatory plan and huddled with Republicans on the House Financial Services Committee, promising to support their efforts to rewrite banking rules.

Lawmakers said Mr. Cohn briefed them on the executive orders and took questions, a contrast with the much-criticized immigration-order rollout that left elected GOP officials flat-footed.

“There’s no question in the early phases of the administration, he’s in the catbird seat. He’s going to play an outsize role,” said Jeb Mason, a Treasury policy adviser in the George W. Bush administration.

Mr. Cohn, 56 years old and a registered Democrat, grew up in Cleveland, the son of parents who didn’t go to college. He was diagnosed with dyslexia as a child, and his mother once thought he might aspire to a career as a truck driver, according to Malcolm Gladwell’s “David and Goliath,” a book about how what appear to be disadvantages may turn out not to be. In his first job after college at American University, Mr. Cohn sold window panels and aluminum siding.

During a business trip to the New York area, he visited the commodities exchange in the World Trade Center in lower Manhattan. Sharing a cab to the airport with a trader, he talked his way into a job offer.

Mr. Cohn is charming when dealing with clients, but also can be brusque, former Goldman colleagues say. “He’s rapid fire. Lots and lots of activity,” said one. A Republican lawmaker who has spoken to The Wall Street titan said he hasn’t yet adapted to Washington’s slower pace and myriad constituencies.

Mr. Cohn bristles at the “brusque” description, suggesting his directness may be unusual in a city whose culture includes filibusters—endless talking to prevent any action.

“In D.C., no one when you meet them says, ‘Nice to meet you,’” Mr. Cohn said. “They say, ‘Good to see you.’ That’s because they pretend like they might have met you before.... Everyone says, ‘Good to see you.’ Well, I know you can see me.”

Among the ways he is amassing influence is interviewing candidates for a range of White House appointments, including top posts at the Fed and regulatory agencies. He sidelined some campaign advisers, including Larry Kudlow, the CNBC commentator who had been considered last year for the still-unfilled CEA post, according to people familiar with the matter.

Taking over at the NEC, in a role that didn’t need Senate confirmation, Mr. Cohn quickly staffed the agency with veterans of finance and government, making the council one of the most highly functioning power centers in the administration.

A potential rival influence on economic policy, the National Trade Council, has yet to clearly define its role. The trade council’s chairman is Peter Navarro, who is among the few economists in the administration but one with little experience navigating Washington.

In the first two weeks, Mr. Navarro has made some combative statements on trade and currency, such as accusing Germany of using an undervalued euro to seek a trade advantage that provoked concern from business leaders. Several called Mr. Cohn to find out what was happening, a person familiar with the matter said. Mr. Navarro declined to comment.

Washington and Wall Street are waiting to see how Mr. Cohn carves up the policy portfolio with the 54-year-old Mr. Mnuchin at Treasury. Both worked at Goldman in fixed income and made partner in 1994. Mr. Cohn became the head of the fixed-income division in 2002, the same year Mr. Mnuchin left the firm to work for hedge funds.

Mr. Cohn has deeper ties to lawmakers than Mr. Mnuchin, the son of a famed Goldman banker who followed his father’s footsteps at the firm before moving to California last decade. There he financed films and scored large returns purchasing a failed bank from the U.S. government, which he and other investors rehabilitated and sold. Mr. Mnuchin was spotted Feb. 4 at the Los Angeles premiere of “The Lego Batman Movie,” in which he has a credit as an executive producer.

White House officials dismiss talk of any budding rivalry, and the two men were seen lunching together last week in the White House’s mess hall.

“I’m talking to Steve two, three times a day,” Mr. Cohn said. “I’m working as well with him as I can in what he’s allowed to do under the statutes and not being sworn in yet. I’m convinced we’ll work even better when he’s sworn in.”

A person close to Mr. Mnuchin agreed with Mr. Cohn’s assessment, adding that Mr. Mnuchin sees no daylight between the two on policy.

Mr. Cohn didn’t have a relationship with Mr. Trump before the election but had met his son-in-law, Jared Kushner, last year. Mr. Kushner helped secure the first meeting with Mr. Trump in late November.

Though Mr. Cohn’s move to Washington surprised many on Wall Street, the timing seemed right to him. He had been second in command at Goldman for a decade, and Mr. Blankfein had signaled, in an August discussion, he wasn’t going to step down anytime soon. “I felt like it was time to move on,” Mr. Cohn said.

As part of his exit package, Mr. Cohn received more than $100 million in stock and cash that would have been locked up for years. He will be able to defer taxes on profits from the sale of his Goldman stock.

FT : Switzerland votes on corporate tax reform proposal

Switzerland votes on corporate tax reform proposal
Plan aimed at bringing country into line with internationally accepted standards

Switzerland is voting in a closely watched referendum on plans to abolish special tax rates for multinational companies and bring the country into line with internationally accepted standards

Opinion polls suggest the government in Bern could face defeat on Sunday, with opponents arguing that the proposed replacement tax system would be too generous towards business.

However, the Swiss have been warned that the country could face an international backlash if it is slow to dismantle practices considered harmful by other countries.

“Switzerland’s partners expect that it will implement its commitments in a reasonable timeframe,” Pascal Saint-Amans, head of tax at the Paris-based OECD, told the Financial Times.

While Switzerland would not necessarily be blacklisted if the proposals were rejected, “its partners may take measures to protect their tax base”, said Mr Saint-Amans. “Switzerland is sovereign in its decision-making, but other countries are also sovereign to protect their tax base.”

Since the second world war, Switzerland has boosted its attraction to multinationals by offering selected companies special low tax rates. Under the reform plans, the country’s 26 cantons would still compete to offer companies the most favourable tax rates but multinationals would pay the same rates as other businesses.

Rather than raising rates for multinationals, however, the cantons have announced plans to slash corporate tax rates for other companies.

In the canton of Geneva, for instance, all companies would pay a tax rate of 13.49 per cent. Today multinationals qualifying for special rates in Geneva pay an average of under 12 per cent, whereas other companies in the region pay an average of more than 24 per cent.

Cantons would also have options to offer companies tax breaks, for instance for research and development, from a “toolbox” of internationally-accepted reliefs.

Swiss companies have campaigned for the changes, arguing that they will end uncertainty.

“I’m a strong supporter of the tax reform,” Ulrich Spiesshofer, chief executive of ABB, the engineering company, told the Financial Times. “This is an opportunity to give enterprises long-term investment security . . . The tax reforms support enterprises which drive investment locally.”

The government in Bern will compensate cantons for some of the expected shortfalls in tax revenues. But opponents of the reforms argue they will result in cantons having to cut spending on public services. Critics also argue that the complexity of the reforms will simply boost fee income for tax advisers and lawyers.

In its campaign for a No vote on Sunday, the Swiss Social Democratic party argued that “instead of simply abolishing existing tax loopholes, new ones will be introduced and corporate taxes cut massively”.

The budget shortfalls would mean “we all pay with worse services and higher taxes and charges”, the party said.

Even critics of the reform agree, however, on the need to end the selective tax treatment of some companies. “It is our understanding that the need to dismantle harmful regimes is a largely consensual issue in Switzerland,” said Mr Saint-Amans. “This may, however, be impacted if the law is rejected for other reasons.”

A No vote on Sunday would make “it urgent to abolish the dispute regimes” through other measures. “Whether the law is too generous or not is a matter of internal politics,” he added.

FT : Sexy and super bland: the rise of the office uniform

Sexy and super bland: the rise of the office uniform
Individualism is to be avoided at all costs

What people wear to work at investment banks, management consultancies and top law firms is ridiculous. So is how they talk.

This hit me last weekend when watching Toni Erdmann, a German comedy film in which a youngish management consultant is visited at work by her father, who turns up uninvited wearing a shaggy brown wig, a shiny suit and a set of joke-shop teeth.

As his vast unkempt figure lumbered through the gleaming office, it occurred to me the absurd one was not him, barely able to speak through his mouthful of snaggly gnashers. It was the consultants, all shiny and beautiful and looking the same as one another.

In the past decade, what people in the best paid jobs look like has got more uniform and more extreme. There is an unwritten dress code that everyone has to follow and which goes like this: 1. There is no such thing as too expensive; 2. There is no such thing as too toned; 3. There is no such thing as too bland.

No one dares look individual. The only way of standing out is by looking even sleeker and richer than everyone else. These rules apply equally to men and women, only the latter have an additional hurdle to clear. Women must look as sexy as possible without looking tasteless. Sheryl Sandberg has nailed it. Kim Kardashian has not.

The youngish management consultant in Toni Erdmann wore her uniform well. Her heels were high and the fabric of her dark suits showed the pleasing contour of her bottom, while her sleeveless dresses displayed the firmness of her arms.

This is exactly as it is in real life. Not long ago I gave a talk to a top US law firm at 11 in the morning. There were eight women lawyers in the room, five of whom were slavishly doing a Sandberg in tight, unforgiving dresses in block colours and crippling, towering heels. I am not sure at what point work became like this — a rigid cocktail party minus the cocktails — but it is vaguely troubling. We rightly make a fuss when receptionists wear heels because their employers demand it, but not about the women who feel obliged to dress this way because their colleagues do.

These industries employ ambitious, competitive people — and it is no surprise if dress becomes as competitive as everything else. The buildings they work in make it worse. Banking and consulting offices are competing with each other to be the shiniest, the smartest, the most blandly ostentatious — encouraging the people in them to do likewise. As the floral displays, the expanses of limestone, the modern art get more excessive, so do the shoes, the handbags and the tailoring of the people who work there.

The way people dress exposes two of the great lies of corporate life: diversity and authenticity. Not long ago I attended a women’s conference in Asia, sponsored by a global investment bank. On the screen, the words “The Power of Authenticity” were enormous, and staring at them sat 700 immaculate, high-heeled women swallowing unquestioningly a series of platitudes about the importance of being themselves. The only diversity in evidence was that while some were wearing Miu Miu, others were in Diane Von Furstenberg and Burberry.

Last week I turned up to a meeting at an investment bank in flat boots and a navy blue corduroy shirt-dress that came from Uniqlo and cost £29.99. It was more or less the right size, newish and cleanish. The only flesh on display was hands, neck and face. It was practical, demure and comfortable.


As I looked around at the other people, men in fabulously tailored suits and women in shapely jackets and discreet gold earrings, I felt as outlandish as Toni Erdmann. I was at a distinct disadvantage. I was a weirdo, a pauper, distinctly inferior.

I am not sure who benefits from the extravagant, super sleek, super bland dress code. Possibly clients are more likely to trust advisers who dress professionally, but only up to a point. Customers cannot enjoy being systematically out-dressed.

Unless the point is that by subtly humiliating their clients, bankers lawyers and consultants find it easier to lord it over them, making them less likely to protest at being charged the fees that make such extravagant wardrobes possible.

>>> Agent Provocateur potential bidders include Lion Capital, Etam, Endless

Agent Provocateur potential bidders include Lion Capital, Etam, Endless

Agent Provocateur, a UK-based lingerie retailer, has attracted takeover interest from the private equity firm Lion Capital, the investment firm Endless LLP and the French fashion retailer Etam Developpement [EPA:TAM], Sky News reported on Friday, 10 February. The report did not cite a source for the information.
There are about three potential bidders remaining in the auction of Agent Provocateur, the item said. The retailer has been put up for sale by its owner, the buyout group 3i [LON:III].
The deadline for offers was on Friday and the auction is expected to be concluded within days, the article said. 3i is looking to secure a sale price of more than GBP 30m (EUR 35.2m) for Agent Provocateur, according to the report.
Some insiders cited by the report think Agent Provocateur could be sold via a pre-pack administration, which would protect the company from its creditors.
Lion Capital would not comment, the item said.
Background:
The Financial Times reported on 3 January that 3i had hired the investment bank Rothschild to advise on a potential sale process for Agent Provocateur and that Alix Partners was advising 3i on options to improve the retailer’s performance.

Barron's : Magical Mystery Tax Plan

Magical Mystery Tax Plan
While tax reform is definitely coming, a final bill is still a long way off, and a 2017 effective date is looking less likely.

What’s a word worth? If the word is “phenomenal” and it’s uttered by Donald Trump, apparently $175 billion.
That’s how much the value of U.S. stocks increased on Thursday, according to Wilshire Associates’ calculations, after the president used that word to describe the tax plan that, he said, his administration would bring forth “ahead of schedule.” The ascent continued on Friday, adding another $100 billion to shareholders’ paper wealth and a total of $225 billion for the week, as the Standard & Poor’s 500 index, the Dow Jones Industrial Average, and the Nasdaq Composite all ended at records.
For the financial markets, the week’s swirl of bad news for the Trump administration, from the rejection of the reinstatement of its travel ban from seven mainly Muslim nations to Kellyanne Conway’s ethics gaffe in touting Ivanka Trump’s “stuff” afterNordstrom (ticker: JWN) decided to discontinue carrying the latter’s fashion items, hardly mattered.
The devil is, of course, in the details, and they involve some hellish trade-offs. “Will [the tax proposal] be the Ryan plan that includes a border adjustment tax, or will that be left out and we’ll get clean tax cuts at the expense of a much higher deficit?” wonders Peter Boockvar, chief market analyst at the Lindsey Group.
“That distinction is very important because if it’s the former, it won’t be so ‘phenomenal’ for those companies that import a large portion of the cost of goods sold if the dollar doesn’t rally by the same extent as the tax,” he continues. That would hit retailers especially hard, but the strength of those stocks suggest there won’t be a border adjustment tax, or BAT. However, Boockvar believes that Trump backs the plan from House Speaker Paul Ryan, with some tweaks.
Whatever the details, the president’s tax proposals face “a very long slog” on Capitol Hill, observes Greg Valliere, chief strategist at Horizon Investments. The House may move quickly, despite possible quibbles over the price tag, but “the problem, as usual, will be in the glacial Senate.”
Orrin Hatch, the octogenarian Finance Committee chairman, “has made it clear that there are huge unresolved issues,” says Valliere, including the BAT, debt deductibility, caps on individual exemptions, and abolishing the estate tax. While tax reform is definitely coming, a final bill is still a long way off, and a 2017 effective date is looking less likely, he concludes.
Yet, as the action late last week suggests, the equity markets are more than willing to give the new administration the benefit of the doubt. Something’s coming, even if we don’t know what or when. And that seems good enough to bid stocks higher, especially compared with the competition.
Particularly when part of that competition is what is called in polite company high-yield bonds—or junk bonds by anybody else. Last week, the iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (HYG) hovered near its 52-week high. At that price, the popular junk ETF yielded a hair under 5.25%, which, as I recall, is what my grandmother’s passbook savings account paid way back when (though without a free toaster).
While the markets mull the matter of future fiscal policy this week, they will ponder the course of monetary policy. Federal Reserve Chair Janet Yellen makes her semiannual trek to Capitol Hill to testify on the state of the economy, starting with the Senate on Tuesday, Valentine’s Day. There is little love lost between the Republican-led Congress and Yellen, whom Trump has said he’d like to replace when her term expires early next year. There already are two vacancies on the Fed’s Board of Governors, with a third opening looming, after Gov. Dan Tarullo on Friday announced plans to step down in April.
At the last “live” Federal Open Market Committee meeting in December, the Fed indicated that it expected three increases—each of one-quarter point—in its federal-funds target rate over the course of 2017. Assuming that the panel stands pat at the March 14-15 meeting, as the fed-funds futures market expects, that points to hikes at the June, September, and December confabs. But the futures market has priced in only two moves, the first in June and the second in December (unless the FOMC breaks precedent and imposes an increase at the November meeting, which isn’t supposed to be a “live” one with a scheduled press conference).
The Trump fiscal package surely will be a subject of the Capitol Hill inquisition this week, even though neither Yellen nor her questioners will know what’s in it or when it’s coming. The possible impact of the president’s proposals also enters into the formulation of monetary policy, even though it remains imponderable at this point.
A more esoteric matter for Fed watchers will be the central bank’s balance sheet, which has become the subject of increased discussion of late. The Fed’s assets ballooned to $4 trillion in the wake of the financial crisis, nearly five times its pre-crisis size. Critics had contended that this expansion would result in hyperinflation. Instead, it has mainly pumped up asset prices.
The Fed had planned to normalize its balance sheet whenever the crisis had passed, which it surely has, with the stock market setting records. And then the plan was to let maturing securities run off, rather than selling them outright.
“We believe that there is a sense of apprehension within the Fed with regard to moving too quickly to start reducing the size of the balance sheet, given that markets have shown much greater sensitivity to that process—judging by the infamous taper tantrum in the summer of 2013—than for the more orderly and tightly scripted process of gradual rate increases so far,” says Anthony Karydakis, chief economic strategist at Miller Tabak.
Markets are supposed to climb a wall of worry. Now, however, they continue to levitate on expectations of positive, pro-growth fiscal policies and continued accommodative monetary policies. As for the Fed, the uncertainties are relatively slight. But as “phenomenal” as the Trump tax plan may turn out to be, it’s a long way off at best.

Stop me if you’ve heard this one before. After a long spate of easy money, seemingly high-returning investments burgeon in popularity. Even if they’re rather opaque, their credulous but happy investors don’t mind, as long as the returns keep coming. Then, as the tide of easy money recedes, it’s apparent who has been swimming naked, to use Warren Buffett’s famous metaphor, and—to cite George Costanza’s equally famous observation—who has been subject to shrinkage.
It was after the financial crisis burst open that Bernie Madoff’s Ponzi scheme fell apart. Prior to that, many eminent financial institutions eagerly fed clients’ cash into Madoff’s funds without asking too many questions, as long as the returns came like clockwork. And those returns were just too regular to be true, coming without fail as the Fed steadily tightened policy from 2004 to 2007 and even after the mortgage bubble went bust afterward.
A similar scenario appears to be building again in China, according to J Capital Research’s Anne Stevenson-Yang. While there have been defaults of peer-to-peer lending and so-called wealth management products, the underpinning of these schemes—the property market—looks increasingly vulnerable, she writes in a report titled “Before the Deluge.”

The investments involve perhaps thousands of boiler-room companies, bombarding anybody with a Chinese mobile phone with cold calls, as well as pitching on online platforms. “Both high levels of liquidity and the credibility of these investments—up until now—are keys to their success,” she writes. But this is a “greater-fool business in which new money raised covers returns to earlier investors or simply losses from previous fund investments.”
In one case she cites, rising defaults are obscured by increasing loan volumes, in a manner reminiscent of LendingClub (LC), whose plunge followed presciently negative stories in Barron’s in 2015. Stevenson-Yang calls another a “straight-up loan-sharking company.”
Meanwhile, the biggest and best-run of the lot features all kinds of curious accounting, including earnings up just 2.9% in the third quarter while assets soared 49% from a year earlier. Its business includes sales of bundles of real estate loans, with 40% to 50% going to related entities, which typically raises red flags. Disclosure is vague and shifting, and the luxury property ventures aren’t selling, but relationships matter more—as was the case with many of Madoff’s investors.
The Wild West atmosphere of Chinese investing is nothing new, of course. What’s different now is that the People’s Bank of China has been tightening its monetary policy, including engineering an uptick in its key money-market rate.
Research firm BCA notes that repurchase-agreement transaction volumes in the interbank market also have dropped since late last year. Along with regulators’ curbing of banks’ wealth management products and off-balance-sheet items, these actions “underscore the determination to rein in excesses in the banking sector,” BCA adds.
That could be viewed as the domestic counterpart to the PBOC’s actions to prop up the yuan in the face of capital flight. As Kopin Tan writes in the Streetwise column, that has drained China’s foreign-exchange reserves to below the $3 trillion mark. The capital outflow has slowed as Chinese authorities have stiffened restrictions on taking money out of the country. But it seems that rich Chinese want to move their funds before the deluge, as the title of Stevenson-Yang’s report suggests.

Barron's : Best Fund Families of 2016 (Natixis)

Best Fund Families of 2016
Natixis, Pimco, State Street, and American Funds top Barron’s latest list of mutual-fund-family winners. A year marked by change.

If there was ever a time when the wisdom that one year’s laggards can be next year’s leaders held true, it was in 2016. Last year was a story of disruptions, and not just because of the United Kingdom’s surprise exit from the European Union or Donald Trump’s successful bid for the White House. In 2016, the U.S. economy began to defy predictions of stagflation, promising real growth. Value investing came back with a vengeance, led by the hard-hit energy sector and—at long last—financials. And after three consecutive years of losses, emerging-market stocks and bonds ended the year with double-digit gains.
Tables:
Among the fund families that Barron’s tracks in its annual Fund Families ranking, it was also a year marked by change. This year’s top-ranked fund family, Natixis Global Asset Management, rebounded from second-to-last in 2015. Second-ranked Pimco made an equally dramatic move up the charts, from 62nd (out of 67 firms) in our previous ranking. State Street Global Advisors advanced from the middle of the pack to third for 2016; fourth-place finisher Capital Group, which runs American Funds, moved up from No. 13 last year; and the top five is rounded out with First Trust Advisors, up from 45th.
The top five firms are themselves a study in contrasts and a reflection of how the fund industry is evolving. For starters, not one is a “Wall Street” firm: American Funds and Pimco are based in Southern California; State Street and Natixis are Boston-based; First Trust is located outside Chicago. The products they are best known for are also indicative of the conflicting trends seen today. American Funds and Natixis are pure active-management shops. American sells its broad, successful, but hardly innovative funds through advisors, while Natixis is the manager of affiliate firms such as Harris Associates, whose Oakmark Funds are known for top stockpickers Bill Nygren and David Herro. State Street and First Trust are in the top five primarily because of their exchange-traded funds. Pimco, of course, is best known as an actively managed bond shop, but the firm has made some innovative forays into the ETF industry, as well.
Unlike most investment stories in Barron’s, the emphasis of this ranking is on one-year returns. It is a snapshot in time, one that reflects, this year in particular, a pivotal point in both the fund industry and the markets. “The season didn’t play out like people thought it would,” says head of Natixis Global Asset Management John Hailer, a Boston native and ardent sports fan. “We ended up with a winning record, but nobody would have predicted how we got there,” he adds, referring not to his home team’s Super Bowl victory, but to the Standard & Poor’s 500 index’s own late-in-the-game rally to end 2016 up nearly 12%.
As for Natixis’ own swift move to the front of this year’s ranking, “what hindered our performance in 2015 is what helped us in 2016,” says Hailer, who oversees a collection of more than 25 affiliated asset managers running $897 billion globally.
Case in point: The firm’s largest fund, the $27 billion Oakmark International (ticker: OAKIX), beat 97% of its Lipper peers last year, posting a 7.9% return, adjusted for 12b-1 marketing and distribution fees. Herro proved his patience with deep value when he built a hefty stake in financials, consumer cyclicals, and industrial stocks at a time when investors had left them for dead. This was also the case for Switzerland-based mega-miner Glencore (GLEN.UK), which was the fund’s biggest laggard in 2015—but ended 2016 up more than 200%. Another top holding, France’s BNP Paribas (BNP.France), enjoyed a similar turn of fate. After closing in October 2013, the fund reopened to new investors last summer.
It was a similar turnaround for the second-largest Natixis family fund, the $17 billion Oakmark fund (OAKMX). Led by value veteran Nygren, the fund outdid 99% of its Lipper peers in 2016 thanks to its allocation to financials and choice calls in energy—including Apache (APA), up 43% last year—and industrials, such as Cummins (CMI), and Caterpillar (CAT).
Another heavy hitter and contributor to Natixis’ overall ranking was Boston-based Loomis Sayles. After trailing their peers in 2015, the $13.8 billion Loomis Sayles Bondfund (LSBRX) and the $10.7 billion Loomis Sayles Strategic Income fund (NEFZX), both co-managed by Dan Fuss, did well by making out-of-benchmark allocations to such areas as high yield, convertibles, and common stocks. Both funds ended 2016 up more than 8%.
BECAUSE THE Barron’s/Lipper Fund Families Ranking is asset-weighted, the results are heavily influenced by the size and category of a firm’s best- and worst-performing funds. That worked in favor of Minneapolis-based Sit Investment Associates in 2015—when the firm took the No. 1 spot—but worked against it in 2016. The main detractor is Sit’s largest fund, the $998 million Sit Dividend Growth (SDVSX), which slid to the lowest quartile of its Lipper peer group, despite ending 2016 up more than 10%. We would be remiss not to mention that the fund’s 10-year track record is still very solid, with a 7.7% average annual return.
The importance of long-term returns is a message that bond powerhouse Pimco has long preached. The firm credits its macro-driven approach with helping it find opportunities throughout a tumultuous year—and powering its move to the second-place slot from 62nd place in 2015. “Looking back at 2016, the strategies that did the best were ones that were able to take advantage of volatility and dislocation around key events,” says the firm’s chief investment officer, Dan Ivascyn.
Two standouts were the $73 billion Pimco Income fund (PONAX), up 8.7%—and co-managed by Ivascyn—and the $18.4 billion Pimco All Asset fund (PASAX), up 13.3%. While investors associate Pimco with the $76 billion Pimco Total Return fund (PTTAX), its underwhelming relative performance in 2016—up 2.6% but behind 88% of its Lipper peers—is proof that there’s more to the firm than its flagship fund. In fact, no one fund drove Pimco’s overall ranking.
So much the better, says Emmanuel Roman, who joined the Newport Beach, Calif., firm as CEO last fall. A native of France, Roman favors soccer over baseball, but the latter sport’s analogies fit his philosophy for Pimco. “We like hitting singles,” he says.
The results add up. Pimco’s five-year and 10-year weighted results are better than any fund family that Barron’s tracks over those periods. Although Pimco is best known for bonds, it outranked all other fund families on U.S. equity funds and world equity funds, thanks to its partnership with Research Affiliates, which sits across the street from Pimco’s headquarters. The firm’s founder and chairman, Rob Arnott, manages the Pimco All Asset fund and is a pioneer in fundamental indexing.
Long before smart beta was all the rage, Arnott began looking at how to combine the efficiency, discipline, and cost-effectiveness of indexing with key tenets of investing, such as price and quality. Last year, the $1.8 billion Pimco RAE Fundamental Plus(PIXAX) ended the year up 19%, leading its large-cap core Lipper category. The $1.5 billion Pimco RAE Fundamental Emerging Markets (PEAFX) soared 32.5%.
LAST YEAR’S VOLATILITY and change in leadership—both in politics and in markets—was some affirmation for believers in active management and smart beta. Yet for State Street Global Advisors, or SSGA, the year’s third-place finisher, passive paid off. In 2016, U.S. SPDR ETFs had their best year in terms of inflows since 2008, with nearly $50 billion in net new money. “There are an awful lot of people who, to borrow from Al Gore’s quote [of Upton Sinclair] in An Inconvenient Truth, find it ‘difficult to get a man to understand something if his salary depends upon his not understanding it,’ ” says Nick Good, co-head of SSGA’s Global SPDR Business, which accounts for 21% of its $2.4 trillion under management. “We don’t have that concern because we’re in both spaces.”
While our ranking excludes some notable SPDR funds—including the original, the $225 billion SPDR S&P 500 (SPY)—the firm’s strength across everything from diversified ETFs to regional funds buoyed its overall ranking from 28th last year.
To qualify for our fund-family ranking, now in its 22nd year, firms must offer a wide range of funds with a minimum track record of one year. This includes at least three mutual funds or ETFs in Lipper’s general U.S. equity category, one in world equity, and one in mixed-asset, as well as two taxable bond funds and one tax-exempt bond fund. Rankings are based on a firm’s funds within those respective categories. (See “How We Rank the Fund Families,” below, for a more detailed explanation of the methodology.)
Early in the rankings, Barron’s editors opted to exclude S&P 500 index funds, which, at the time, were by far the most prevalent kind and represented the primary form of indexing. We’ve continued to keep them out of the ranking, but as indexing has evolved, fund families have added new index products that look less and less like the broad market and represent some “active” decision-making in their development. So we have included them, inasmuch as they fit into our primary categories. Of the 15,828 distinct share classes that collectively contributed to this ranking, 138 are ETFs.
ALL TOLD, JUST 61 asset managers out of a total of 883 in Lipper’s database had the diversified menu of equity and fixed-income funds to meet the criteria for this ranking. As in the past, there are several notable fund shops that don’t make this list, including the $197 billion Janus Capital Group (JNS), which doesn’t have a municipal-bond fund, small-company stock specialist Baron Funds, which doesn’t offer fixed-income funds, and Dodge & Cox, which doesn’t have a tax-exempt bond fund.
This year, six funds dropped off the list. In July, SSGA acquired GE Asset Management, and in December, Eaton Vance (EV) acquired Calvert Investments. Four other families—Frost, Madison, Schroder, and Thornburg—no longer meet the minimum portfolio requirements.
Among the largest fund complexes, Vanguard Group guided its $3.5 trillion in total assets under management through another year of solid returns. The suburban Philadelphia firm ranked 14th overall this year, down just slightly from 2015, when it landed at ninth.
COMING IN FOURTH FOR 2016 is Capital Group, parent of the American Funds. American is best characterized by its steadfast commitment to team management, active investing, and low costs; average expense ratios hover around 0.3%, on par with even the cheapest ETFs.

Price alone doesn’t explain the firm’s showing. Out of the more than 800 American funds scored for this ranking (including individual share classes), just 17 fell into the bottom decile of their Lipper peer groups. Again, because the largest funds carry the most weight, strong performance from some of its largest funds went a long way in 2016. The $152 billion American Funds Growth Fund of America (AGTHX) was up 8.7% last year, ahead of 98% of funds in its category. The $103 billion American Funds Income Fund of America (AMECX) was up 10.8%, beating 91%. The $83 billion American Funds Investment Company of America (AIVSX) rose 14.9%, beating 92%.
“It was a fascinating year,” says Tim Armour, who in addition to his role as chairman of Capital Group is a manager of two portfolios. Though every fund had its own successes and challenges, collectively, he says, “we did well in oil, and we got into banking and industrials ahead of those areas taking off.” It also helped to lighten up on the high-dividend defensive stocks that worked well over the past six or seven years until they didn’t. This rotation, Armour says, probably isn’t fleeting—nor is real economic growth—but investors should brace for a bumpy ride. “With a new president and a lot on his agenda, we may be in a period of greater volatility,” he adds. “Expectations are up, and usually not everything pans out exactly as the optimists would hope.”
Coming in fifth is First Trust Advisors. The Wheaton, Ill., firm—which declined to speak with Barron’s—manages four mutual funds, but its real success has been in ETFs. The firm has $100 billion in assets and offers 114 ETFs. Among its diversified offerings, notable performers last year included the $1.8 billion First Trust Morningstar Dividend Leaders Index (FDL), up 21%. The firm’s largest fund, the $3 billion First Trust Value Line Dividend Index (FVD), also contributed to its overall ranking. It gained 20% in 2016, putting it in the top 20th percentile of its Lipper peers. Both funds sit in the general-equity category, which carries the most weight in our ranking.

How We Rank the Fund Families
All mutual and exchange-traded Funds are required to report their returns (to regulators as well as in advertising and marketing material) after fees are deducted, to better reflect what investors would actually experience. But our aim is to measure manager skill, independent of expenses beyond annual management fees. That’s why we calculate returns before any 12b-1 fees are deducted. Similarly, fund loads, or sales charges, aren’t included in our calculation of returns.
Each fund’s performance is measured against all of the other funds in its Lipper category, with a percentile ranking of 100 being the highest and one the lowest. This result is then weighted by asset size, relative to the fund family’s other assets in its general classification. If a family’s biggest funds do well, that boosts its overall ranking; poor performance in its biggest funds hurts a firm’s ranking.
To be included in the ranking, a firm must have at least three funds in the general equity category, one world equity, one mixed equity (such as a balanced or target-date fund), two taxable bonds, and one tax-exempt bond fund. Single-sector, country, and state-specific municipal-bond funds are not factored into the score; nor are Standard & Poor’s 500 index funds.
Finally, the score is multiplied by the weighting of its general classification, as determined by the entire Lipper universe of funds. The category weightings for the one-year results in 2016 were general equity, 39.6%; mixed asset, 17.4%; world equity, 17.2%; taxable bond, 22.3%; tax-exempt bond, 3.5%.
The category weightings for the five-year results were general equity, 40%; world equity, 17.1%; mixed asset, 17.1%; taxable bond, 22.1%; tax-exempt bond, 3.7%. For the 10-year list, they were general equity, 45.4%; world equity, 15.4%; mixed asset, 16.5%; taxable bond, 18.7%; tax-exempt bond, 4%.
The scoring: Say a fund in the general U.S. equity category has $500 million in assets, accounting for half of the firm’s assets in that category, and its performance lands it in the 75th percentile for the category. The first calculation would be 75 times 0.5, which comes to 37.5. That score is then multiplied by 39.6%, general equity’s overall weighting in Lipper’s universe. So it would be 37.5 times 0.396, which equals 14.85. Similar calculations are done for each fund in our study. Then the numbers are added for each category and overall. The shop with the highest total score wins. The same process is repeated to determine the five- and 10-year rankings.

FT : Tsipras warns IMF and Germany over bailout talks

Tsipras warns IMF and Germany over bailout talks
Greek prime minister says negotiators ‘playing with fire’ for domestic gain

Greece’s prime minister Alexis Tsipras has warned the IMF and Germany to “stop playing with fire” at the expense of the Greek people, saying he is confident a bailout deal is within reach.

Markets were hit this week by concerns that a deal might not be reached before July, when Greece is due to make a €7bn debt repayment. European negotiators are trying to seal a new agreement so Greece can release another tranche of funds from its most recent €86bn bailout to make the payment.

Representatives of Greece’s lenders are set to return to Athens this week to check whether Greece has complied with a second batch of reforms agreed under the current bailout.

“We will not allow our allies in Europe to play with fire on the cohesion and the future of Europe,” Mr Tsipras told a meeting of the leftwing Syriza party. 

“The second review will conclude and it will conclude positively,” he added. 

Mr Tsipras said it was unclear if the IMF, which he accused of “playing poker” with Greece, would have a central funding role.

European Commission President Jean-Claude Juncker on Saturday said the bailout could yet fall apart as the IMF had not yet made up its mind whether to participate in providing more aid.

“Yes, it is on a shaky ground in the sense that we don’t see how the International Monetary Fund could manage this problem,” Juncker told German radio station Deutschlandfunk in an interview to be aired on Sunday.

Mr Tsipras said his country would not allow its European allies to use Greece’s plight for their own domestic agendas ahead of elections in France, Germany and the Netherlands this year. “Whoever is playing games for a two-speed eurozone, with splits and divisions, they are playing with fire.” 

He said he was confident the German government “would not let an arsonist playing with the matches in the ammunition warehouse” and appealed to German chancellor Angela Merkel to stop “this constant aggression against Greece”.

Greece’s creditors tried to bridge differences over Athens’ bailout programme on Friday to keep it on track to make July’s debt payment. Eurogroup chief Jeroen Dijsselbloem said after Friday’s talks: “We made substantial progress today and are close to common ground for the mission to return to Athens in the coming week.”

Mr Tsipras accused the IMF of being cowardly and inventing new absurd demands for Greece. “The IMF does not seem to have the courage of its opinion, and some of its executives prefer to play personal games,” he said.

On Friday, yields on Greek two-year bonds fell back from an eight-month high, falling from close to 10 per cent on Thursday to 8.4 per cent on Friday, amid hopes of a breakthrough.