Sturgeon threatens second referendum vote if UK goes for hard Brexit
Scotland to appoint its own trade and investment officials across Europe
Nicola Sturgeon has closed her Scottish National party's conference with a speech balancing pressure for another independence push with pledges to act on more down-to-earth issues such as health and childcare.
The three-day conference in Glasgow has laid bare differences within the SNP on whether to seek an early second referendum that could allow Scotland to become independent before the UK leaves the EU.
In her closing speech, Ms Sturgeon won cheers by suggesting that another plebiscite could come soon if the UK government continues to push for a hard Brexit that would take Scotland out of the EU single market.
"The time is coming to put Scotland’s future in Scotland’s hands," the first minister said.
Ms Sturgeon also drew applause by unveiling a de facto diplomatic push that would see Edinburgh appoint new trade and investment officials across Europe. Scotland could not trust UK ministers to tell EU partners that it was open for business, she said.
But aides said the tough language did not mean Ms Sturgeon was committed to a second referendum, which more cautious members fear would lead to a defeat that would be disastrous for the independence cause.
The SNP leader herself sought to shift some of the political spotlight away from constitutional issues, telling members the key word of her address was "inclusion" rather than “independence”.
She announced a shift of funding in Scotland's National Health Service toward primary care provided by general practitioners that would leave them with 11 per cent of the frontline NHS budget from under 10 per cent now.
In a move intended to improve access to childcare for pre-school children, Ms Sturgeon said the Scottish government would adopt a new approach of allowing parents to choose a qualified nursery or childminder and then ask the local authority to fund it.
She also announced a "root and branch review" of policy on children in state care, saying that only 6 per cent of those who came out of the care system went to university, nearly half would suffer mental health issues.
"Worst of all, and this breaks my heart, young person who has been in care is twenty times — twenty times — more likely to be dead by the time they are 25 than a young person who hasn't," she said.
Such pledges alongside Ms Sturgeon's promise of a major rethink of primary and secondary education mark an implicit recognition of shortcomings in the SNP's near decade in power.
The first minister said her "defining mission" was to improve attainment in primary and secondary education and to close the gap between richer and poorer pupils. In pursuit of that goal, her government has announced plans to reintroduce standardised testing, give headteachers more control over their schools and direct funding toward pupils from deprived backgrounds.
The CBI big employers' lobby hailed Ms Sturgeon's focus on educational attainment and childcare as "vital ingredients" for the economy’s long-term health.
"Placing inclusive growth at the centre of the Scottish government’s domestic agenda will be welcomed by businesses," said Hugh Aitken, CBI Scotland director.
Fed's Dudley (dove, FOMC voter): expects Fed's next rate rise this year; expects rate rise relatively soon - press interview
- Fed has not faced urgency to raise rates
- a rate rise is not aimed at slowing the economy
- there's big uncertainty over outlook limits guidance the Fed can give
- US likely to grow 2-2.5%; inflation to 2% within 2 years
- the job market still has slack; remains unsure how far jobless rate will drop
- the 10-year Treasury yield seems a little low given the economy
PBoC held a Oct 12th meeting with senior officials at SOEs and commercial banks to discuss rising risks of mortgage loan growth deemed to be too fast - Chinese press
- PBoC officials have warned that the overheated property market could affect economic stability.
- Report notes mortgage loan growth in certain areas has doubled since the end of last year.
- In some areas, mortgages account for 90% of new lending.
Natural Gas: The Casino Is Open
With winter approaching, now is the time to bet on gas prices.
Sometimes, purchasing a lottery ticket isn’t such a bad idea.
If you have some spare cash, and betting on a moonshot doesn’t make you nervous, buy natural gas before the winter. This could produce a big jackpot, if nature cooperates. Prices are still not far above historic lows, and winter is the time of year when demand can surge.
Nearly half of all U.S. households use natural gas for heating, which has sent gas futures soaring during many winters. The highest price of nearly the past eight years—$6.149 per million British thermal units—came during the polar-vortex winter of 2014, which brought record-low temperatures across much of North America. That winter, prices climbed nearly 80% from early November to the mid-February peak.
Natural gas spent two years after that on a killer ride lower, but the market has changed tremendously in that time. Low prices are already starting to cure low prices. Natural-gas producers have fewer active drilling rigs heading into this winter than in any other in the 29-year history of the Baker Hughes (ticker: BHI) rig count. Producers have been cutting back for years, but the oil boom had helped them keep output high during those cutbacks by producing natural gas as a byproduct. Now, lower oil prices have reduced oil drilling, too. This has cut the supply of so-called associated gas by 2.5 billion cubic feet a day—about 3% of total U.S. supply—according to Platts Analytics, the forecasting and analytics unit of S&P Global Platts.
MAYBE MORE IMPORTANTLY, the demand trends that helped cause the polar-vortex highs have only gotten stronger. A generation of coal-fired power plants is closing, and electricity companies are replacing them with successors that use cleaner-burning gas, now that it comes at a lower price. They are consuming a record amount. In fact, 2016 is likely to be the first year in which the U.S. uses more gas than coal to produce electricity, the federal Energy Information Administration predicts.
In extreme cold, both gas utilities and power plants will need a wave of supply at once, and power plants can’t store as much gas as coal, which they can pile up outside their generators. Even though gas producers can ramp up quickly, it isn’t clear that they can do so as rapidly as cold weather can boost demand. One reason: a shortage of pipelines.
Exports are rising, too, and with all that demand, there just isn’t enough drilling to keep supplies as high as they are now, Bernstein Research said in a recent note to investors. As storage levels diminish by mid-2017, prices could spike, possibly above $4 per million BTU, the investment firm adds. Buying shares of producers is one way to play the possibility. Bernstein rates Range Resources (RRC), Southwestern Energy (SWN), andCabot Oil & Gas (COG) Outperform.
Just be careful, and don’t be afraid to rip up that ticket if the winter turns warm and against the trade. Both gas futures—which settled down 1.7% at $3.285 per million BTU on Friday—and producers’ shares have rallied sharply this year, making further gains tricky to come by. If the weather forecasts coming in early to mid-November show a lot of mild weather ahead, gas futures may not even be able to hold above $3.25 per million BTU, warns Gene McGillian, research manager at Tradition Energy. But if the winter looks cold, gas could get hot.
The next time the stock market crashes, we will all step forward and buy stocks boldly — at least in our imaginations.
But buying stocks when the market collapses is far harder to do than to imagine. New research looks at how the great economist — and equally great investor — John Maynard Keynes waded into the wake of the Great Crash of 1929, when U.S. stocks fell by more than 80% from peak to trough. His experience should teach all investors the importance of preparation, courage and patience.
Between the early 1920s and his death in 1946, Keynes wrote several books, revolutionized economic policy and helped devise the modern global monetary system. In his spare time, he managed the endowment of King’s College at the University of Cambridge. From 1922 through 1946, Keynes’ stock portfolio outperformed the U.K. stock market by an average of nearly six percentage points annually — over a period covering the worst market crash, the worst economic depression and the worst war in modern history.
Keynes didn’t look like a great investor all the time. As what we today call a value investor, focused on buying stocks at bargain prices, he got left behind in the torrid bull market of the 1920s. Keynes didn’t see the Great Depression coming; he went into the Crash of 1929 with roughly 90% of the college’s funds in stocks even though, at the time, most other endowments overwhelmingly preferred bonds.
By late 1929 Keynes had cumulatively underperformed the British stock market by 40 percentage points over the preceding five years.
But he was already turning his performance around.
In a new research paper in Business History Review, an academic journal, finance professor David Chambers of Cambridge’s Judge Business School and economist Ali Kabiri of the University of Buckingham analyze how Keynes mustered the courage to invest heavily in U.S. stocks devastated by the crash and the ensuing depression.
Keynes had almost entirely ignored U.S. stocks in the college’s endowment until September 1930. What a time to get interested! The U.S. stock market had fallen 38.4% over the preceding 12 months. But Keynes was so excited by the bargains he saw opening up in the U.S. that he worked with a small New York brokerage, Case Pomeroy & Co., to research the market and his own stock ideas. In 1931, when U.S. stocks fell a bloodcurdling 47.1%, and again in 1934, when they dropped another 5.9%, Keynes traveled to the U.S., spending much of his time meeting people on Wall Street, in government and in business who could help him research his investment ideas.
He bought U.S. stocks throughout the depression. When they fell another 38.6% in 1937, Keynes, undaunted, bought still more. By 1939, he had put half his main portfolio for the college in U.S. companies, favoring high-dividend-paying preferred stocks, investment trusts (diversified stock portfolios similar to today’s mutual funds) and, later on, public utilities. He focused on a small number of stocks trading at low multiples of their value as businesses, often hanging on for eight years or more until their stock prices finally rose to reflect those asset values.
Chapter 12 of Keynes’ book “The General Theory of Employment, Interest and Money,” which he wrote 80 years ago, remains one of the most concentrated bursts of brilliance anyone has ever brought to bear on investing. His words still ring with the resolve it must have taken to buy when blood was running in the streets:
“The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.”
Keynes understood, as did his contemporary, the American value investor Benjamin Graham, that bear markets are so unpredictable that reliably sidestepping them is nearly impossible — and that the pain of losing money is nearly unbearable.
Still, Keynes knew, barging into bear markets to buy, rather than trying to sidestep them, is the way to prevail. Since, over the long run, stocks tend to go up more than they go down, one of the greatest advantages an investor can have is the gumption to buy stocks aggressively in falling markets.
That requires both cash and courage.
With stocks still not far from their record highs today, sitting on some cash is a better idea than ever.
And — unless you’re in or near retirement, in which case you should probably be scaling back on stocks already — steel your courage. Write a binding contract with yourself, witnessed by a friend or family member, committing you to buy more stocks when they fall 25%, 50% or more. Years from now, you’ll be glad you did.
Top Small-Cap Quant Fund Takes a Scientific Approach
The PNC Multi-Factor Small Core is up an average of 16.6% a year over the past five years.
Hitesh Patel had just finished his Ph.D. thesis in medicinal chemistry at the University of Illinois at Chicago when he took his career in a completely different direction: finance. The decision was driven largely by logistics. Staying in his field would have meant leaving the Windy City, where his wife worked as an assistant professor, so he accepted an offer from GE Capital and put his predictive analytics expertise to work forecasting risk. The clincher, he says with a laugh, was getting his own laptop; for a graduate student, in 1995, it seemed like a big deal.
“That led to what my mentor called my random walk,” says Patel, now 53 and the head of PNC Capital Advisors’ structured equity team and co-manager of the $233 million PNC Multi-Factor Small Cap Core fund (ticker: PLOAX). The fund, which Patel helped launch in 2005, won the Lipper award for small-cap core funds for 2015 and 2016, and has handily beaten the Russell 2000 index over the three-, five-, and 10-year trailing periods. It’s up an average of 16.6% a year over the past five years.
Turns out, using computer modeling to predict consumer behavior and investment outcomes isn’t all that different from the molecular modeling that was a staple of Patel’s doctoral research. The main difference, he says, is that the inputs and outcomes are infinite in science. In finance, while it may not always seem the case, there are only so many variables that affect the direction of a stock.
In 1998, Patel put that theory to practice at Harris Investment Management as part of a quantitative team working on the early iterations of multifactor investing, which combines old-school stock-picking techniques with sophisticated computer modeling. It was there he started working with Paul Kleinaitis, a private-equity investor turned small-cap portfolio manager, and Jonathan Toerber Jr., a quantitative systems analyst who “plays bass guitar in the evenings and knows virtually every computer language,” says Patel. In 2005, the trio moved over to PNC Capital Advisors, where they had the opportunity to start their own structured equities team. They recruited Chen Chen, a Ph.D. in business statistics, to join them in developing a multifactor approach for small-cap investing.
Small companies continue to be their focus. “The lack of information and the lack of coverage gives us more room to be active in this space,” says Patel. But while traditional active managers are limited by the number of companies they can analyze, “we can look at the entire universe of small companies,” he adds. “It’s a scientific approach to investing.”
The fund, which typically owns more than 100 stocks, uses the Russell 2000 to develop its market-capitalization target—recently $200 million to $3.8 billion. Industry weightings, however, can deviate by plus or minus three percentage points. From there, they rank companies daily using a model that includes about a dozen factors in three main categories: valuation relative to a stock’s history, peer group, and the market; increases in profitability and positive earnings revisions; and price momentum.
“Our portfolio companies are always at a discount to the market, but they have to have improving fundamentals,” says Patel, whose team runs the model daily but rebalances only monthly. Recent annualized turnover was 77%, which is in line with the fund’s buy-and-hold peers.
The largest holding as of the end of August, Universal Forest Products (UFPI), first came into the fund in April 2015 after a positive earnings-estimate revision, solid cash-flow metrics, and favorable price momentum put it on the board. The Grand Rapids, Mich., company designs, manufactures, and markets wood and wood-alternative products for the retail, construction, and industrial markets. “This is a stock that we might have failed to identify [without the model] because people weren’t looking at the materials sector,” says Patel. The stock has since nearly doubled, to $98.
Similarly, Cantel Medical (CMN) scored high in the spring of 2012 because of fundamentals and valuation, but analysts’ outlooks diverged widely, something the managers consider a positive. In this case, uncertainty was an opportunity for investors in the Little Falls, N.J., company. Founded in the 1960s, it’s a leader in developing and manufacturing infection-prevention equipment and control products used in medical and dental offices. Products include disposable face masks, germicidal wipes, and disinfectants used on endoscopes. The stock has gone from the midteens to $75.
EACH MONTH, THE TEAM analyzes eight stocks—four buys and four sells—to understand if the data are intuitively correct. If they turn up a name they don’t agree on, they typically wait and watch. If they turn up several names that seem off, they rerun the models and look for explanations.
For example, during the financial crises, they made the call to drop their minimum stock-price threshold from $5 to $3.50. Even with the lower threshold, the fund missed out on the rally in low-priced stocks that started in March 2009. The fund’s relative performance suffered that year. While it was up 17%, it ranked at the bottom of its small-growth category. “We like U-shaped spikes, not V-shaped spikes,” Patel says. “Our performance is built over quarters.”
The fund has owned one of its current top holdings, Churchill Downs (CHDN), since 2011. “Its cash-flow metrics were in the top 10% of the entire universe at the time we bought it,” says Patel. The company is best known for its flagship property, the historic Churchill Downs Racetrack in Louisville, Ky., but it owns a wide range of gaming properties, including mobile- and online-gaming giant Big Fish Games.
While the stock has been a holding for more than five years, its weighting fluctuates each month depending on how it scores against its peers. “If the ranking improves, we buy more; if it deteriorates, we sell,” Patel says. “This is very different from the fundamental investor. A fundamental investor will ride the horse until it dies. I will not.” So far, the stock has kept its pace, edging up from $45 a share when the fund first bought it to $142 today.
Busted Convertibles’ Allure
The Trader puts forth income-yielding security ideas among preferred stocks.
As we’ve noted regularly this year, investors’ search for yield goes on inexorably, given extraordinarily low global interest rates. Even if the Fed hikes rates in December, as expected, it won’t be by very much, and fixed-income yields will remain near all-time lows. It’s likely to stay a low-rate world for some time.
For that reason, the Trader regularly puts forth income-yielding security ideas among preferred stocks. On that score, we checked in with Jeff Bahl, a principal at Bahl & Gaynor Investment Counsel, a Cincinnati money manager whose mantra is income growth and yield. He came up with two bank convertible preferred securities that each yield about 6%, both of which the firm has purchased recently for clients.
He likes the Bank of America Convertible 7.25% Preferred Series L (BAC.L), which finished Friday at about $1,205.00. The other is the Wells Fargo 7.50% Convertible Preferred Series L (WFC.L), which ended the week at $1,282.95. Both are above par of $1,000.
Both are “busted converts,” or issues born of the 2008-09 financial crisis. The securities are tied to equities that have fallen so far below the stated conversion price that a forced conversion into stock is doubtful. Convertible preferred stocks typically are callable, that is, can be called away from the holder in five or 10 years. That’s a risk for an investor seeking a steady yield.
The two identified by Bahl are technically callable, but effectively are not—short of an incredible rise in the underlying stock price. In the case of Bank of America (BAC), its shares would have to soar to about $65 from $16.00 now. At that price, the bank could convert the preferreds into stock. The Wells Fargo (WFC) issue would have to reach about $203 from $44.71 before the bank could force conversion.
Most other preferreds from these two banks yield 5% or less, and are callable. Traditionally, callable preferreds offer a higher yield to reflect the risk that they could be called away from the investor, Bahl notes. With these two, the investor is getting paid around one percentage point or more in higher yield, without the danger of a forced call.
Why? Bahl says that busted converts don’t always show up on trading screens, and, moreover, are less widely followed by Wall Street.
Both issues are trading significantly higher than their par values, but there is price support. The banks must pay out more than 7% in dividends, using after-tax dollars, to preferred holders, so they are relatively expensive issues for both Bank of America and Wells Fargo.
Given that newly minted preferreds from these two banks yield significantly less, it would make sense for the banks to repurchase these old issues at some point, he says. That provides price support.
There are several billion dollars of each issue outstanding, and trading is liquid and done on the New York Stock Exchange.
Our Hain Pain
In a short space of time, our April 2 bullish call in this column on Hain Celestial Group(HAIN) went from heavenly to hellish. At the time of our article, Hain shares were $41.88. They rose to $55 by early August. We should have quit then.
But in mid-August, the provider of natural and organic beverages and foods announced a couple of nasty surprises that have cut its share price by a third. It closed Friday at $35.11.
Hain said it would delay the release of its June-ended fourth-quarter and 2016 fiscal-year financial results as it evaluates its internal control over financial reporting. The company said the total amount of revenue recognized should not be affected, but also warned it didn’t expect to achieve its guidance for fiscal 2016.
This was not comforting. And since then, those results have yet to come out. Our angst has increased.
There’s been some insider buying recently, but we fear things could get worse before they get better. Ultimately, Hain could be bought by a big food company looking to up its organic game, but that could be a long time coming—or fetch an even lower price. We’re not waiting around to find out. We’re closing this trade and stanching the Hain pain.
See Trader “Weak Earnings Cause Stocks to Drop Again”