U.S. Airlines to Mortgage-Backed Debt Top List of Best ’14 Bets

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Following the Standard & Poor’s 500 Index’s record high in November, will stocks continue their ascent amid what’s likely to be lackluster global expansion in 2014? In September, the U.S. Federal Reserve’s unexpected delay in tapering its stimulus program whipsawed debt markets. Where should bond investors go for returns?

Dec. 5 (Bloomberg) — Bloomberg Markets interviewed top-ranked money managers and asked where they’re placing their bets in the U.S., Europe and emerging markets for 2014. In a departure from the past, they see more chances to make money in the developed economies than in some of the languishing emerging nations. This report in featured in the magazine’s January issue. Bloomberg’s Alexis Leondis reports. (Source: Bloomberg)

We asked eight of the world’s leading money managers where they’re placing their bets in the U.S., Europe and emerging markets for 2014. The mutual-fund investors have beaten at least 90 percent of their peers over three or five years. They see more chances to make money in the U.S. and Europe, if you avoid the land mines, than in languishing emerging markets.

U.S. health-care stocks, which outperformed the S&P 500’s 26 percent gain in 2013, may stumble as the Patient Protection and Affordable Care Act, aka Obamacare, reduces payments to hospitals, says John Burbank, founder of Passport Capital LLC. You should also be picky with biotech, which has gotten frothy after several years of gains, says Rajiv Kaul, a fund manager at Fidelity Investments.

Across the Atlantic, as the euro zone finally shakes off a recession, opportunities abound in Spanish banking and media industries after the post-crisis consolidation, says Dean Tenerelli, a fund manager at T. Rowe Price Group Inc. You’ll have to hunt through the wreckage in emerging markets, after local-currency debt plunged in 2013, to find sovereign-debt deals: Look for countries with strong balance sheets, such as Mexico. Our distinguished panel below also reveals why gold may be poised for a comeback and why small companies might see big gains in Asia.

Bill Miller

Fund manager, LLM, LLC, Baltimore Runs: $1.8 billion Legg Mason Opportunity Trust Returned: 74 percent in the year ended on Dec. 3

Homebuilders to Rise Many homebuilders doubled or tripled in 2012. Typically, after a year like that, homebuilders will go to sleep or down as valuations catch up and then outperform. I expectPulte Group to beat the market in 2014.

Fly With United Airlines did well in 2013. The industry historically has been a disaster. We likeUnited a little better than Delta because it has lower pension expenses. And United’s valuation is lower because its integration of Continental is about a year behind Delta, which bought Northwest in 2008.

Dean Tenerelli

Fund manager, T. Rowe Price Group Inc., London Runs: $1.3 billion T. Rowe Price European Stock Fund Returned: 14 percent annual average in three years ended on Dec. 3

No-Brainer in Spain There’s still a lot of value in European markets because earnings haven’t begun to recover yet. Spain is a no-brainer because it’s doing the right thing on a macro level. It had over 60 banks going into the crisis, and it will be down to a dozen. Spain will have a much better banking sector now. Bankia SA was one of the problem banks, but the bad properties were taken out.

Power to Sell Energy faces a challenge. There’s a big shift in demand, since the U.S. isn’t going to be importing much oil anymore. And shale is changing the supply equation as well. Oil-servicing companies are going to continue to struggle on pricing, margins and volume.

Dan Ivascyn

Fund manager, Pacific Investment Management Co., Newport Beach, California Runs: $29 billion Pimco Income Fund Returned: 11 percent annual average in three years ended on Dec. 3

Mexico Stands Out Emerging markets will likely fare better in 2014 than this year, but they’re still susceptible to negative shocks from global macroeconomic factors. Countries with strong balance sheets and ample policy flexibility, such as Mexico, should outperform.

Demystify MBS We expect mortgage-backed securities that are not guaranteed by the government to be a solid performer in 2014. Many of them are still trading at a significant discount because of how complex they are. While many investors don’t have the resources to adequately analyze the space, those who do can capitalize on the chance to profit. The U.S. nonguaranteed MBS market is the largest, has the most-complicated collateral and structures and also provides the greatest opportunities.

Rajiv Kaul

Fund manager, Fidelity Investments, Boston Runs: $7.4 billion Fidelity Select Biotechnology Portfolio Returned: 40 percent annual average in three years ended on Dec. 3

Beware a Biotech Bubble After five years of great returns, it’s important not to lose touch with reality. Biotech has a historical tendency of bubbles and busts, so thinking about risk is really important now. I’m not saying we’re in a bubble; we really could go either way. There’s been a frenzy for issuing stock, and the market doesn’t discount between quality and quantity when that happens. On the flip side, we’re in this golden age of science with diagnosing genetic makeups. So you really have to pick the right stocks now. You can’t just buy the biotech sector. There’s going to be more differentiation, more winners and losers.

Seek Targeted Drugs Today, everyone can get a diagnostic of their genetic makeup for a few thousand dollars instead of $5 million only about a decade ago. More drugs will be produced to cater to diseases unearthed by diagnostics. There is a drug, Kalydeco, produced by Vertex, for people with a specific kind of mutation that causes cystic fibrosis. Companies that produce drugs for defined patient populations have an advantage over makers of drugs for the general population like Lipitor, which treats high cholesterol. For patients who need targeted drugs, there’s usually no alternative. With a drug for cholesterol or diabetes, the cost of development is very high, since the Food and Drug Administration has very high safety hurdles for therapies given to millions of people who are generally healthy.

Ride the Innovators The companies that are first to market with drugs can produce tremendous cash flow and high margins because there’s such a high barrier to entry for others. Genentech developed a drug in the early 2000s for colon cancer called Avastin. There were about 10 other companies developing similar therapies at the time. They had a hard time being developed after patients were given Avastin because it was very difficult to show the benefits over Avastin.

Profit From Generics The world of biotech will eventually divide into two different categories. One is low-cost distribution catering to a global market where everyone needs a cheap pill such as a generic Lipitor. It’s a totally different business model because it isn’t research-and-development-centric; it’s more focused on distribution and volume. If you can find the winners in the next five or 10 years among generic companies, you’ll do really well. And the other is a world where companies that are the most innovative will be rewarded the most as Western societies demand better outcomes.

Steve Cao

Fund manager, Invesco Ltd., Houston Runs: $768 million Invesco Asia Pacific Growth Fund Returned: 7.1 percent annual average in three years ended on Dec. 3

Embrace Small in Asia Some emerging markets in Asia such as Indonesia and India are having a dilemma with deficits and weak currencies. While growth is weakening, they have to respond to currency depreciation by raising interest rates. We see opportunities, especially in the small- and mid-cap areas. We own Lee & Man Paper Manufacturing, which makes packaging materials. It’s the lowest-cost producer in the sector because it runs an integrated operation and has access to cheaper borrowing costs in Hong Kong relative to peers who borrow from inside China. Supply is also improving because capacity expansion has slowed and the government is shutting inefficient players on pollution concerns.

Shun Commodities Commodities are still vulnerable to the growth deceleration in China as it rebalances its economy to domestic consumption from investment. That will reduce consumption for commodities such as iron and copper.

Kathleen Gaffney

Fund manager, Eaton Vance Corp., Boston Co-managed: $22 billion Loomis Sayles Bond Fund Returned: 11 percent annual average in three years ended on Oct. 1, 2012

Connect With Telecom There isn’t any fixed-income sector that’s a table-pounding buy. You’ll find opportunities in investment-grade credit and high-yield bonds. The strategic actions companies are beginning to take, like consolidation in the telecom area, create good opportunities in investment-grade telecom bonds as the global industry has matured and price competition has reached its limits. Going forward, market share will be the primary driver.

Avoid Treasuries The least attractive area is where you have the most sensitivity to interest-rate risk, like Treasuries. Prices are still too high for Treasuries, and I don’t think short-term interest rates are going up soon. I would wait for a better opportunity to return to Treasuries when 10-year notes yield more than 5 percent.

Scott Minerd

Global chief investment officer, Guggenheim Partners LLC, Los Angeles Runs: Core-fixed-income private accounts, mutual funds that include leveraged loans Returned: 6.4 percent annual average from inception of strategies in January 1999 to Sept. 30

Play the Aircraft Cycle We like bonds that are collateralized by aircraft. The airline industry has reduced itself down to an oligopoly, and you’re not going to see the same vicious price cutting we saw in the past.

Bond With Bermuda I would stay away from sovereign debt because there is little upside. Bermuda looks interesting because its debt trades at attractive yields relative to risk and its total debt to GDP is much lower than European counterparts.

John Burbank

Founder, Passport Capital LLC, San Francisco Runs: $1.3 billion Global Strategy hedge fund Returned: 19 percent annual average from inception in August 2000 to Sept. 30

Appreciate Tech Tech and other areas of greatest innovation were underappreciated in 2013 and will gain more respect over time. The only things causing growth are demographics, innovation, and major changes in adoption driven by tech and consumer behavior. We like leading Internet firms in the U.S., China and Japan: U.S. because it’s the center of innovation and the largest market, China because it won’t let Western firms be leaders and Japan because of the peculiarities of the culture and language.

Examine Health Care The health-care sector isn’t yet accounting for the part of Obamacare that kicks in in 2014. It will result in less-generous payments to hospitals under plans sold on exchanges. People think that Obamacare is about the loading of uninsured people into the insured arena. But the far more significant part over the longer term is the limitations in benefits to providers. As a result, many things in health care are overpriced and should be looked at with more scrutiny. The end goal of Obamacare is a massive long-term change of incentives across the health-care payer and provider universes where they no longer simply pass on inflated fees for their services but manage down costs per patient and reap profit with accountable care.

Return to Gold Since QE3, gold has been avoided by Western investors. After several declines, the price could rally 20 to 30 percent in 2014. Chinese buying has increased dramatically at the same time Indian demand has decreased due to a high tax to help the rupee. There’s essentially flat or declining gold production around the world, and gold at some point will again be viewed as a valuable currency.

(Source: Bloomberg)

Number of the Day-12/04/2013

By Number of the Day No Comments

40

For an investor who bought shares in American Airlines parent AMR Corp. at their lowest closing price two years ago, the increase of more than 40 times to their current level is the best return over that period of any U.S.-listed company with a market value today of at least $300 million.

(Source: Wall Street Journal)

What are Bitcoins?

By General

For instance, the British paper The Guardian, which was involved in breaking the Snowden scandal, had this to say: “Bitcoins are an anonymous, decentralised, peer-to-peer digital currency.”

If you take Bitcoin for what it really is, it’s very easy to understand why it continues to rise in value; why the government is so seemingly willing to let it slide and even leans toward supporting it; and why its widespread adoption would ultimately lead to exactly the opposite of the libertarian utopia that many of its proponents believe it will usher in.

It all starts with Ross Ulbricht, a smart and driven University of Pennsylvania alumnus better known to his customers as Dread Pirate Roberts. Roberts, er, Ulbricht, ran the infamous Silk Road website, which dealt predominantly in the trafficking of illegal drugs around the world.

An eBay clone run on the peer-to-peer “darknet” Tor, designed to give users true anonymity on the Web, Silk Road was as far from the mainstream as a website can get. Despite the hurdles to be jumped to gain access, the site’s main products drew thousands of users, eager to take advantage of the ease of ecommerce in a traditionally back-alley kind of business.

The site used the breakaway digital currency, Bitcoin, for its transactions, since it was going to be hard to accept Visa for that kind of business.

However, early in October, the website was seized by the US government, and Ulbricht was arrested. FBI agents then proceeded to take control of the hundreds of thousands of bitcoins that Ulbricht had collected as transaction fees on Silk Road.

Those “coins” are highly likely to lead the FBI to a long list of additional people to prosecute—namely the buyers and sellers who frequented Silk Road.

Just how did the FBI—known for having the technical might of a 1987 elementary-school computer lab—manage to not only track down Ulbricht, but to seize his supposedly anonymous and highly secure digital fortune?

It didn’t call in the NSA to start cracking codes and dig through its sweeping communications logs.

The former part—finding Ulbricht—was easy. It just took some good old-fashioned detective work. Ulbricht spent much of his time in the months before launching Silk Road working on public Internet forums to understand Bitcoin and recruit helpers. Once that trail was untangled, the FBI was able find and arrest him, seizing the equipment used to run the illegal enterprise in the process.

The latter is a little more complex… but not by much. You see, thanks to the very design of the Bitcoin currency, it’s almost as vulnerable as cash held in a home safe. The safe might take sophisticated and expensive tools to crack it or it might not, depending on its quality. Similarly, with a Bitcoin “wallet”—i.e., the computer program that stores the digital coins a user has amassed and communicates with other users to send them—it can be easier or harder to get at them.

By default, a wallet is just a simple program that can be opened with a password. Give someone else that password, and that person can simply transfer the coins to him- or herself. Though there are stronger ways to secure a wallet—such as by hiding a key file on a different device and only connecting them when needed (called two-factor authentication)—it can still be compromised.

Of course, once you’ve been arrested, you can bet federal prosecutors will be hard at work trying to crack that digital safe. Stronger-quality encryption might take longer to crack—months, even years. But if they want in badly enough, they’ll get in eventually. Besides, at the same time they’ll be working on the shortcut: pressing on you to give away the combination. The threat of a long stay in federal prison usually loosens up lips on subjects like that.

Nearly as easily as cash or a bank account is grabbed, bitcoins can be too, if the authorities know where you keep them.

If you don’t encrypt the device that holds them, then they’re about as secure as cash in a wallet or a duffle bag. Once the police get their hands on it, it’s theirs. Plain and simple.

However, even if you’re encrypted and they cannot open the wallet in which you keep your bitcoins to transfer them away, so long as they control the device where the coins are stored, then you cannot spend them, either—those coins are effectively out of circulation.

This is how the FBI seized something like $10 million to $50 million in bitcoins (depending on what exchange rate you use to value them) from Ulbricht. It just took his computer, and the coins on it came along.

That’s because from the beginning, bitcoins were meant to serve a similar role to cash in a digital society. In other words, they could be exchanged from person to person without having to put a processor like Visa or American Express in the middle. This, for obvious reasons, made them attractive to those dealing in alternative products and services… the kind that remain cash businesses today.

But there’s a subtle difference between cash and bitcoins still. In order to make a digital form of cash, it needs to have some protection against being copied. In other words, I cannot just hit copy and paste and thereby turn one “coin” into two, like I can with a PDF. So each bitcoin contains a record of how it was created and when it was exchanged, which creates a digital audit trail to ensure a coin is valid.

Each individual user adds bits and bytes to the coin, passing it along with encrypted data that spells out who he got it from, where he is sending it to, and when.

It’s sort of like a transfer between two safe deposit boxes. I use my key to open my safe, hand my money to you, then you use your key to lock it safely away. However, Bitcoin must certify that what you pass along later is the actual coin I gave you. Thus, every time it changes hands, it is marked with a signature (a “hash,” in technical terms) of both the previous transaction and the future owner. This is like if every paper bill handed from me to you, across the table in the safe deposit vault, could not be exchanged without first adding a permanent, non-removable copy of both our fingerprints to each one.

That is a gross oversimplification, of course. But the system’s value lies largely in its simplicity. The original paper describing how Bitcoin works is remarkable in that regard. It outlines just how to provide a system where digital money can be used like cash, sans central intermediary, without losing trust that a coin is genuine—by making the transaction log public but anonymous.

But even the authors find fault in the method (emphasis added):

“As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.”

In other words, despite the fact that a bitcoin’s embedded audit trail is anonymized and nothing more than a seemingly random set of numbers, those numbers can theoretically be traced back to a common account if coalesced from more than one recipient.

Unlike what The Guardian wrote, Bitcoin is not anonymous by default. It is pseudonymous. If you use the same pseudonym (in this case, a key pair from your Bitcoin digital wallet) in multiple locations, then all that activity can be traced back to the same place. Like a street thug with an “AKA,” it only works until you find one person who knows the alias and can say, “Yes, that guy is ‘Fat Tony’.”

Unless the user takes explicit steps when using his bitcoins to generate a new pair of keys with every transaction—something some wallets can do automatically, granted—then your activity on a site like Silk Road could theoretically be tied back to you, once the FBI pinpoints just what wallet identifiers the site’s owner used to take in and pay out the funds.

Silk Road, while trying to provide its users with anonymity from each other (and ensure it got its cut—probably far more of the motivating factor), introduced a centralized point to an otherwise decentralized system, poking yet another hole in the process.

Bitcoins themselves are both anonymous and decentralized in how they are created and exchanged, yes. But when you begin introducing online wallets, sites acting as escrow providers, and similar such intermediaries, the system loses a little of both. Then you have the equivalent of a currency where the criminals almost volunteer to start using the digital equivalent of “marked bills” from those old FBI sting movies.

Internally, Silk Road used a mathematical process called a “tumbler” to try to make sure that never happened. It rolled the encrypted codes on each coin collected through lots of accounts before sending them on to the seller, making sure the input coin could never be matched to the seller or product. That also made it hard to determine just who was depositing funds to buy illegal things, and who was innocently picking up one of the (few) legal items for sale.

The theory was: it’s not illegal to deposit money with someone like Silk Road if it cannot be traced to an illegal purchase. But that’s easily dealt with. All it would take is a zealous federal prosecutor who rebrands Silk Road as a terrorist site (a small leap given that you could buy heroin on the site, and that’s a drug often linked to Afghani groups that wear the terrorist tag, justly or not). Then all activity on the site immediately becomes illegal.

That’s not what happened. But in spite of those extra measures put into place by Silk Road, academic researchers have been able to show how transactions could be traced back to Silk Road with relative ease. Forbes presented an excellent analysis of this problem in an article published just weeks before Silk Road’s founder was nabbed by the feds.

The question, then, is whether or not the FBI used all of the computer records on the Silk Road system to start sniffing out buyers, or (more likely, since the buyers have no good information to snitch with in an anonymous marketplace) focused on sellers who transacted on Bitcoin. Even if they don’t show up on particular doorsteps this time around, you can be pretty sure they’ve already used those records to build a list of whom to keep close tabs on.

If receiving large payments from Silk Road isn’t probable cause enough for a wiretapping warrant, I don’t know what is.

Which is probably a large part of why Congress is holding hearings on Bitcoin, and Ben Bernanke gave it a nod of the beard in light support.

It’s not easy to trace or monitor bitcoins. And a careful user can definitely stay close to anonymous within the system—using a combination of an Internet anonymizer, new key pairs with every transaction, and a bit of tumbling to prevent patterns, for example.

But bitcoins are much more susceptible to tracking than either cash or gold, the current off-the-radar transaction tools most used to evade authorities.

The use of bitcoins, especially by most users—who tend to choose the very popular online wallet services that store your account info in a nice, easy-to-access, easy-to-subpoena, online vault—is exactly the kind of traceable activity that investigators froth over.

So from the perspective of law enforcement, there’s enormous benefit—even from a marginal improvement—in allowing Bitcoin to prosper. It just doesn’t make sense to shut it down quite yet, and may not ever.

Plus, why close down what you can tax?

How long, for instance, do you think it’ll be before Congress starts demanding that exchange and online wallet providers submit tax statements to the IRS?

Maybe they want a piece of the gains made when you bought some bitcoins at the start of this year, then sold them as the price went parabolic under the demand driven by C-SPAN’s telecast of Washington’s recent hearings on the subject:

Of course, that the price went so high with such low volume underscores why maybe, just maybe, Bitcoin will be here to stay.

The currency is finite. Only so many bitcoins can be “mined” from the digital ether, and each is harder to extract than the previous one. When the government seized Ulbricht’s accounts, by some accounts it eliminated as much as 3-5% of the total bitcoins in existence (about 12 million today), thus initiating a supply crunch which would send any commodity upward a bit.

Whether the government can crack Ulbricht’s encryptions and lay its hands on his actual coins remains unknown, but since it has his computer, they are effectively withdrawn from circulation no matter what. And how it intends to process such an unusual asset seizure is another intriguing question.

Add the current notoriety to the supply shortfall, and demand for the coins has predictably risen (albeit far more than anyone expected), largely among a group new to the asset. Those already holding it weren’t off selling while the price was still rising, like they did last April during those big red spikes on the volume indicator. Instead, as during the housing bubble before it, and the dot-com bubble before that, the paper gains that result from outsized demand and tight supply are pushing the currency ever upward in a self-reinforcing trend.

Each $100 the price rises is another 467 news stories in USA Today, Forbes, the Economist, and here at Casey Research of course, as I obviously gave in to the temptation to write. All that publicity helps create another pile of investors looking to buy the 20K to 50K coins that exchange for fiat currencies each day on the largest outlet, the Mt. Gox exchange.

Even when not getting bubblicious, as they are today, bitcoins will naturally rise in price so long as they are readily convertible to other forms of money. If that ever ends, through government intervention or for some other reason, they will quickly go to zero.

For now though, Bitcoin is flourishing. And thanks to exchanges like Mt. Gox and sites like Gyft that allow you to spend bitcoins on dollar-denominated gift cards, using bitcoins to freely move digital money between persons will likely remain in demand for some time to come. It’s especially advantageous across borders and along other avenues where it might be difficult or impossible to make such transfers without raising eyebrows, finding oneself in a room with an interrogator, or being blocked altogether.

Check out the following links for more information on developments related to Bitcoins:

China Bans Financial Companies From Bitcoin Transactions

Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value

Bitcoin Market Gets a Lift From China

Bankers Balking at Bitcoin in U.S. as Real-World Obstacles Mount

Bitcoin: its future as a platform and protocol

http://versiononeventures.com/bitcoin-observations-thoughts/

Prices of Different Digital Currencies

http://coinmarketcap.com/

How Much Does that Burger Cost in Bitcoins?

https://www.mtgox.com/

Bitcoin drops 50 overnight as chinas biggest btc exchange stops deposits in chinese yuan

Bitcoin Tops $1,000 Again as Zynga Accepts Virtual Money

Bitcoin’s Future Foretold By Developer Momentum

Beware Bitcoin: US Brokerage Regulator

 

Morgan Stanley’s 10 Big Macro Investment Ideas For 2014

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Morgan Stanley’s Global Strategy team is out with its 2014 outlook titled: Fertile Soils, Rising Divergences.

In it, Morgan Stanley says that they generally favor stocks over bonds, but that we’re now in the second half of this big boom, and that future gains will now depend more on growth, as opposed to liquidity.

This is a similar idea as that expressed by Nomura, which argued that the end of “end of the world risk” would require a search for real growth, rather than just gains brought on by climbing out of the gutter.

Here are Morgan Stanley’s 10 big macro strategy ideas:

— European Equities: Long Financials (SX7P, SXIP); Short Cyclicals (SXNP, SXPP, SX4P)

— Asia Equities: Long Nikkei, HSCEI, Kospi, Taiex; Short CNX Nifty, JCI, SET, FBMKLCI, FSSTI

— US equities: Healthcare over Staples; Tech over Discretionary; Chemicals over Industrials and Energy

— Long US credit versus European Credit (Long US CDX HY versus Short iTraxx XOver)

— Long USD interest rate volatility (Long 2y10y swaption straddles)

— Long Spain over Italy sovereign bonds (10y Bonos versus BTPs)

— Long US IG long-duration discount bonds versus UST

— Short EM sovereign credit (Short EM CDX)

— Long new-issue CLO equity

— Long USDJPY, Long USDRUB