[ISSUE 47] - Interesting Things...

The markets have given us one hell of a welcome back! Here are some resolutions for 2016.

@GSElevator – #1: Letting employees cherry pick sale items the day after Christmas is like insider trading for the lower classes.

1. Quote Of The Week / 2. Avoiding The Pain Trade This Year / 3. Mind The GAAP: This Is How Alcoa Just "Beat" Consensus EPS / 4. Interesting Links / 5. Joke Of The Week


Kyle Bass appeared on the rebooted version of Wall Street Week and made the following comments…

On China:

"China's currency has appreciated 60% versus the rest of the world since 2005 and it's killing them … we think the currency will devalue materially over the next 12-18 months."

…and on Oil:

"…incremental supply as a percentage of [demand] is the lowest it's ever been. We're going to go from a glut [of oil] to a deficit all of a sudden, and the world's not ready for a deficit."

Watch the full episode here.


It would be remiss of me to begin the year without some predictions. However rather than enter the crowded market of picking winners for 2016, here's what to avoid.

There are many possibilities. Given the free money that's led too much capital to chase too few ideas, backed by swathes of clever people chasing those ideas, the best opportunities are few and quickly become crowded with unsustainable valuations. The conventional wisdom that leads to crowded trades can be dangerous and there is no trade out there with more universal conviction than the US Fed tightening, rates rising and the dollar heading higher.

A weak US dollar benefits almost everyone – except those on the trade – while a strengthening dollar would be a disaster. Some indications are already there: the fed has been tightening since QE3 ended in October 2014 has resulted in several equity and credit market blow-ups. The core of the problem is debt, which in a deflationary (reduced purchasing power) environment becomes increasingly burdensome and would force the Fed to drop rates and resume stimulus.

China, now an equal economic power, has its own set of problems. Slowing growth as it stumbles its way from an export-led to service and consumption driven economy is a major concern for the region. As mentioned in the quote from Kyle Bass, their "currency has appreciated 60% versus the rest of the world since 2005 and it's killing them". As was the case with Europe in 2014, devaluation would be an easy win for the industrial sector which is pressured from international competitors. Now that the yuan has been included in the IMF's SDR basket, and the government's declining foreign reserves, there is little reason for Beijing to resist the temptation of bailing out the economy by printing money.

Unlike the strengthening USD, the weakening Yuan is not a crowded trade. In a recent survey by Bloomberg only 1 in 39 analysts saw the CNYUSD moving beyond 7 by the end of 2016.

A major devaluation of the Yuan of 10% or more would have major deflationary implications for the rest of the world, and particularly the economies who've become dependent on China as a destination for their exports; namely Australia, Taiwan and Korea.

There is no obvious direction for where the money will go if there is a race to the bottom between the US and China. Europe and Emerging Asia seem like alternatives but both of these countries are heavily dependent on demand or exports to the US and China. It seems like 2016 will be the year that stock picking returns to the forefront – where the themes will be structural market growth (anything non-GDP related) and margin resilience (eg. currency, rates, competition or oversupply).


Some companies are notorious for buying back stock in order to mask the decline in their earnings by reducing the number of outstanding shares. Alcoa, which still has a major debt overhang from the last financial crisis, is unable to do that as it simply does not have the free cash flow. Instead, Klaus Kleinfeld's company is forced to resort to an even more primitive form of EPS fudging: quarterly EPS addbacks.

Earlier this week Alcoa reported adjusted EPS of $0.04, or $65 million in adjusted net income, beating consensus expectations of $0.02 handily (despite missing consensus revenues of $5.3 billion by $50 million, an 18% decline from the $64 billion a year ago). The problem with these adjusted "earnings" is that on a GAAP basis, Alcoa actually reported a $500 million loss.

How did they do it? Simple: with an unprecedented $534 million in "one-time" charges, which they have actually done many times, although in Q4 the company outdid itself. More than 100% of Alcoa's "EPS" in the quarter was due to what management thought was another quarter of recurring "non-recurring", non-one time "one-time" charges. Despite adding back all the charges incurred over the past 12 months, the net income, on a non-GAAP Basis of $787 million is still down 30% lower than the previous year.

And here's how they got to that beat of $0.04. Within the preceding 12 months EPS was adjusted down from $0.31!


The economics behind the Birkin [npr]; Benchmarking against random portfolios [Predictive Alpha]; Avoiding value traps [Institutional Investor]; Habits to boost creativity [Quartz]; Electrifying India [NY Times]; Most used words in the state of the union [Quartz]; Evidence of Syrian genocide [Human Rights Watch]; Bowie the securitisation pioneer [ft.com/2016/01/11/2149761/a-short-history-of-the-bowie-bond/">FT Alphaville]; World's safest airlines [The Economist]; The dubious logic of market circuit breakers [The New Yorker].


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