Friday, 27 February 2015

Major Firms Are Saying the Stage Is Set for Another Crisis in the Bond Market

An accident could be on its way.
Operations At The Mint As Mexico Sells Most Peso Debt In A Decade
Silver coins are melted in order to be re-used again at the Mexican 
Mint, or Casa de Moneda, in San Luis Potosi, Mexico, on Thursday, 
Feb. 5, 2015. Companies in Mexico are on pace to sell the most 
peso-denominated debt in 14 years as they capitalize on a tumble
 in benchmark borrowing costs.
Susana Gonzalez/Bloomberg
by Lisa Abramowicz | 8:38 AM PST | February 26, 2015

(Bloomberg) -- The stage is set for another financial crisis to unravel years of relative calm in debt markets.

At least that’s how firms from UBS Group AG to Invesco Ltd. see it. Here’s why: Prices in the world’s biggest bond market are swinging and the plunge in oil is sinking the economies of nations from Venezuela to Nigeria.

To top all that off, the fundamental structure of the bond market has changed in a way that makes it difficult for regulators to gauge exactly where risks are building.

As stresses grow, “we believe the probability of an ‘accident’ increases,” Invesco analysts including Rob Waldner wrote in the $786.5 billion manager’s February fixed-income outlook. “The overall environment for risky assets, and particularly for credit, is deteriorating.”

Oil, which has plunged to below $50 per barrel from $107 in June, may cause more energy companies to default on their billions of dollars of debt than many investors are expecting, according to UBS analysts.

Then there’s government bonds.

While the Federal Reserve considers raising overnight borrowing costs from about zero, where they’ve been since 2008, central banks in Europe are dropping deposit rates into negative territory.
Rising Volatility

This backdrop has pushed a measure of expected Treasury price swings to levels that are about 40 percent higher this year than in the same period in 2014, according to Bank of America Merrill Lynch’s Option Volatility Estimate MOVE index.

“The risk in bonds has gone up,” Francesco Garzarelli, London-based co-head of macro and markets research at Goldman Sachs Group Inc., said in a Bloomberg Television interview Thursday. “The sensitivity to small changes in yield expectations from here will command very sizable price swings, and I just think that makes fixed income a very dangerous asset class.”

That all sounds pretty bad already. And in fairness, it may be premature or just wrong, with yields staying stable and low for longer than most analysts are predicting.

But there’s more that’s adding to the concern.

UBS analysts are also nervous about the changing composition of who owns the trillions of dollars of debt that’s been sold in the past six years.

While the biggest banks have cut back on their positions in risky, speculative-grade debt, it’s steadily migrated to large institutions, insurance companies and mutual funds. Such firms have boosted their holdings of corporate and foreign bonds to $5.1 trillion, a 65 percent increase since the end of 2008, according to data compiled by UBS.
Risk Transfer

This has more than offset the $800 billion decline in holdings at banks and securities firms in the period, a regulator-prompted retrenchment that was intended to reinforce the financial system, UBS analysts Matthew Mish and Stephen Caprio wrote in a Feb. 26 report.

What we’re left with instead -- ballooning bond funds that own more and more risky debt -- may be a less bad option, but one that still threatens to wreak havoc in credit markets.

“Our understanding of the institutional asset management industry is rather nascent,” the UBS analysts wrote. “The contribution of institutional investors to financial stability is positive in good times, but their impact is less certain in bad times – particularly very bad times.”

To contact the reporter on this story: Lisa Abramowicz in New York at

To contact the editors responsible for this story: Caroline Salas Gage at David Papadopoulos

Tsipras Reversal Draws Greek Sympathy as Party Rumblings Rise

Alexis Tsipras, Greece's prime minister.
Photographer: Kostas Tsironis/Bloomberg
by Maria Petrakis | 3:01 PM PST | February 26, 2015

(Bloomberg) -- “A Day with Yanis Varoufakis,” a satirical post doing the rounds on social media, shows the Greek finance minister spending his waking hours feted by adoring fans. He goes to sleep and is jolted awake by a nightmare of German Finance Minister Wolfgang Schaeuble cackling.

In what’s turning that nightmare into reality, Greece’s month-old anti-austerity government led by Prime Minister Alexis Tsipras had a rude awakening last Friday when German-led pressure forced it to pedal back on most election pledges in the face of national insolvency. On the streets of Athens, Greeks used to political flip-flops in the five years of their odyssey to financial health are taking what has been a capitulation in their stride.

“When you have your hand outstretched and they say there’s no money, that’s when you put your hands up in the air,” said Alexandra Dimopulos, 60, a retired civil servant. “You may have all the good intentions in the world but that means nothing when you have no money for them.”

Tsipras huddled with his lawmakers in the parliament on Feb. 25 for more than 10 hours after euro-area partners signed off on a Greek commitment to a four-month loan extension based on promises the government would stick closely to the bailout plan it had pledged to the country’s citizens it would tear up.

While ordinary Greeks say they appreciate the government’s efforts to argue their case, albeit unsuccessfully, the reversal may test the unity of the ruling party, which teamed up with a smaller anti-austerity group to win the majority it needed to govern. Manolis Glezos, a 92-year-old Syriza European Parliament lawmaker and World War II resistance veteran, has already criticized the agreement.
Challenge Within

“The biggest challenge for the government right now is not the rather tame opposition in parliament, it is the opposition inside the senior party Syriza itself,” said Jens Bastian, a former member of the European Commission’s Greek task force, in a Bloomberg TV interview. “How you manage expectations among that constituency, that will be the real challenge.”

Varoufakis evoked the Odyssey, the ancient Greek poem by Homer that former Prime Minister George Papandreou referred to in 2010 when he accepted cuts to wages and pensions in return for what would become 240 billion euros ($269 billion) in loans from euro-area partners and the International Monetary Fund.

“Sometimes like Ulysses you need to tie yourself to a mast in order to get to where you’re going and to avoid the sirens,” said Varoufakis. “We intend to do this.”

Papandreou’s support and ability to pass austerity measures demanded by the country’s creditors was whittled down one seat at a time amid violence and riots and protests by tens of thousands of Athenians camped in front of Parliament until he lost power at the end of 2011.

Greeks don’t want to see a return to those days.
‘Good Easter’

“There are always reactions within parties, in all parties when things don’t go according to plan,” Paraskevi Psyhidou, 50, who owns a souvenir store in the old neighborhood of Plaka. “I am hoping for a good Easter, no problems, no upheaval.”

Polls show support for Tsipras surging since he won elections, providing a wellspring of support among the public even amid rumblings from his party cadres.

A Feb. 22 Public Issue survey of 1,008 people questioned between Feb. 12 and Feb. 17, before the agreement was reached in Brussels, showed 64 percent believed the country to be on the right path, a finding that was the highest in at least 20 years, according to the pollster. Three times as many people supported the direction the country was taking after the election as did before the vote.

Feelings of hope and optimism soared to 29 percent from 10 percent before the election. Tsipras has a personal approval rating of 87 percent, climbing 42 percentage points after his election.
Not Over

“At least they’re trying to negotiate,” said Konstantinos Velounakis, 55, who owns a jewelry store in central Athens, and didn’t vote for Tsipras. “I hadn’t seen that before. They’ve put the word out that we’re not all in the same boat, north and south, and that’s good.”

The public support may be critical to Tsipras’s ability to stick to the agreement reached with euro-area partners.

While the main sentiment in Greece is hope, in Brussels the word being bandied about is “trust”. The euro-area finance ministers had barely approved the Greek outline of plans to appease creditors, when European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde heaped on more pressure.

Draghi said the key to Greece winning more funding were “commitments” on legislation. Lagarde pressed for specifics and “clear assurances” that reforms will happen.

For some Greeks, that kind of pressure means the government will be forced to put in place measures they have been opposed to.

“They said one thing and are doing something different -- this is to be expected,” said Psyhidou. “We don’t have the money. The Odyssey is not finished yet. We have a way to go.”

To contact the reporter on this story: Maria Petrakis in Athens at

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.netVidya Root, John Simpson

Thursday, 26 February 2015

This Could Be the Most Interesting U.K. Election Ever

Image result for This Could Be the Most Interesting U.K. Election Ever.

by Robert Hutton | 4:00 PM PST  | February 25, 2015

British democracy: It’s a stable, boring affair with brief, polite election campaigns and swift handovers. Or that’s how it used to be. On May 7, all of that could change. Not only is it hard to predict the result, but there could be a number of surprising consequences. Here are seven scenarios that will worry anyone who likes a soothing cup of tea and a quiet life.
Months Without a Government

The 2010 election result left one obvious combination that would produce a stable government: a Conservative-Liberal Democrat coalition. It took just five days to agree on the details. The markets, reassured by a series of deliberately reassuring statements, took it in their stride. Predictions of May’s result suggest neither Labour nor the Tories will be clearly ahead, each needing at least two partners for a parliamentary majority. But apart from the Liberal Democrats, who face losing half their seats, every smaller party has ruled out a coalition. Instead, they propose selling limited support in exchange for specific demands. Britain faces the prospect of two sets of three- or four-way talks as the Tories and Labour seek a deal to let them form a government. In the meantime, the current administration will stay in office, but unable to get very much legislation through Parliament. The only time limit on negotiations is the next general election — in May 2020.
The Government You Get May Not Be Very Stable

While the theoretical threshold for a House of Commons majority is the support of 326 lawmakers, in reality that’s not nearly enough. Both Labour and the Tories have plenty of lawmakers whose support can’t be relied on — as many as 50 each, according to Philip Cowley, professor of politics at Nottingham University. That means lots of tight votes — and lots of defeats for the government. And the new Fixed-Term Parliaments Act, which makes it hard to call an early election, means rebels aren’t constrained by concerns they might bring down the government. The result will be a constant cycle of instability, according to Rob Ford of Manchester University. “Imagine the reaction of the public to a government that can’t even tie its shoelaces,” he says. “All the parties involved are going to lose support, at which point the smaller parties will start to wonder about the wisdom of carrying on.”

Ministers Too Tired to Govern

Those tight votes will take their toll, especially on those at the top of government. Senior British politicians effectively have two more than full-time jobs: running a government department and representing their district. When the government is stable, their load can be eased, by excusing them from votes that aren’t close and by ensuring a family-friendly parliamentary schedule. When the government has a tiny or nonexistent majority, these niceties go out of the window. The opposition runs guerrilla operations, arranging ambushes to win votes. These have the side effect of putting huge strain on ministers, constantly forced to return to London for votes, many late at night. The last minority government in the late 1970s was marked by a series of deaths among Labour lawmakers.
A Referendum on Leaving the EU — Under Labour

Labour’s pitch to businesses that want stability is that, unlike the Conservatives, it won’t hold a referendum on leaving the European Union after an attempt to renegotiate membership terms. But a Labour government with a small or nonexistent majority might be forced into holding a vote, either as the result of reform of the EU as it deals with the debt crisis, or by internal pressure from Labour lawmakers spooked by the threat from the U.K. Independence Party to their own seats. A YouGov Plc poll in September showed more Labour supporters backing a referendum — 45 percent — than opposed — 36 percent. “It’s a fairly unlikely scenario,” says Tom Mludzinski, head of political polling at ComRes. “But in this election, who knows?”
Another Referendum on Scottish Independence

The Scottish National Party is predicted to win more than half Scotland’s U.K. parliamentary seats in May, becoming a key player in power negotiations after the election. A similar performance in next year’s elections to the Scottish Parliament — where the SNP already runs the show — and the pressure to ask the people of Scotland the independence question again may become irresistible. The most recent YouGov poll put the pro-independence camp ahead by 52 percent to 48 percent.
Say Hello to the New Bosses

As Conservative members of Parliament regularly observe in private, David Cameron didn’t win a majority in the 2010 election. It looks like he won’t this time, either. The pressure on him to go after a second failure to beat Labour outright would be immense, even if the Tories remain the largest party. And after 10 years leading the Conservatives, Cameron might be quite happy to leave Parliament and make some money. If Labour doesn’t win, it’s unlikely the party will keep Ed Miliband as leader very long; and if the Liberal Democrats lose half their seats, they may wonder if leader Nick Clegg has outlived his usefulness. That’s assuming he doesn’t lose his own seat in Sheffield, of course. So this time next year, all three parties could have new leaders. Which could mean:

Another Election in 2016

The Fixed-Term Parliaments Act makes it very difficult to call another election unless the big parties agree it’s a good idea. They might do if they both have new leaders who they think will appeal more to the public. So we could go through all this again rather sooner than expected. Another cup of tea, or maybe it’s time for something stronger?

Swiss Banks Try to Keep Italian Clients After Tax Deal Is Signed

UBS and Credit Suisse Headquarters in Zurich
Pedestrians and a tram pass UBS Group AG, left, and Credit Suisse Group AG's 
headquarters on Paradeplatz in Zurich, Switzerland. UBS Group AG and Credit 
Suisse Group AG, Switzerland’s biggest banks, reported losing about a third of 
Italian assets that were declared in the tax amnesty in 2009. 

Photographer: Philipp Schmidli/Bloomberg
by Jeffrey Voegeli Elena Logutenkova | 3:00 PM PST | February 25, 2015

(Bloomberg) -- Swiss asset managers, faced with the prospect of an exodus of Italian funds, have won a reprieve.

An agreement to share tax information among the two nations signed Monday means Italy will remove Switzerland from a black list, enabling Italians to come clean on undeclared Swiss funds on more favorable terms while keeping their money where it is.

Italy is counting on a voluntary disclosure program to flush out undeclared assets estimated at about 160 billion euros ($181 billion). While there are no official figures for how much of the hidden money may be in Switzerland, more than two-thirds of funds that surfaced in Italy’s most recent amnesty were from the Alpine nation, a sign of the potential hit to Swiss banks.

The deal gives the asset managers, already grappling with costly investigations from the U.S. to France, a chance to retain clients even as bank secrecy is abandoned.

“This agreement is very good for Swiss banks, we needed it desperately,” said Lars Schlichting, a partner and attorney-at-law at KPMG Holding AG in Lugano, Switzerland. “Without it we could have lost all Italian clients because we cannot have undeclared money anymore.”
Probable Outflows

Italian clients will have to pay between 7 percent and 12 percent of their secret assets in taxes and penalties if they voluntarily disclose accounts to the authorities, compared with as much as 40 percent if Switzerland hadn’t reached the agreement, Schlichting estimated.

This will lead to some outflows. UBS Group AG and Credit Suisse Group AG, Switzerland’s biggest banks, reported losing about a third of Italian assets that were declared in the tax amnesty in 2009.

“Italy was the biggest remaining market, for which a solution on undeclared assets had to be found,” after the U.K., France and Germany, said Andreas Venditti, a banking analyst at Vontobel in Zurich. “Banks may be facing billions of gross outflows, but the biggest clients will probably keep their accounts here after declaring them.”

KPMG has already advised about 300 Italian clients this year on voluntary disclosure, starting with just three or four a week in January and increasing to about 70 last week, Schlichting said. Of the 300 clients, only one decided to withdraw all money from Switzerland for personal reasons, while some clients chose to add to funds here after declaring them, he said.
Fines, Probes

“Italian individuals have a lack of trust toward the administration in Italy,” said Louis Macchi, a Lugano-based tax adviser for PwC. “This is one of the reasons why I believe clients will continue to have their money in Switzerland.” He said he expects at least 50,000 cases of disclosure under the voluntary program.

Switzerland is the world’s largest center for offshore funds, managing about $2.3 trillion for clients who don’t reside here, according to estimates by the Boston Consulting Group. Secret accounts came under scrutiny after UBS in 2009 admitted to helping Americans evade taxes, paid $780 million to avoid prosecution and handed over information on about 4,700 accounts. Credit Suisse was fined $2.8 billion last year by the U.S. authorities on similar charges.

In France, authorities probing whether UBS helped clients evade taxes issued warrants for the arrest of three former officials from the bank, a person with knowledge of the investigation said last week.
‘Last Innings’

Italian “clients are systematically being urged to disclose their untaxed assets,” said Enzo Caputo with, a Zurich-based lawyer who specializes in advising bank clients. “The money is being watched very closely now. Swiss banks have established special desks for non tax-compliant clients.”

UBS’s “Italian clients will now document their tax status, like it already happened in the other European markets,” Serge Steiner, a spokesman for the Zurich-based bank said in an e-mailed statement.

Italy is part of “the last innings” of getting European clients to prove their tax compliance, Credit Suisse Chief Executive Officer Brady Dougan said on a conference call with analysts on Feb. 12. The voluntary disclosure program will probably lead to more funds flowing from Switzerland back to Italy, he said.

The bank “welcomes the Italian voluntary disclosure program, in combination with an agreement between the governments of Switzerland and Italy,” Credit Suisse said in a a statement.
Lower Commissions

Credit Suisse is being probed by prosecutors in Milan as part of an investigation into alleged tax evasion by clients, Il Sole 24 Ore reported Tuesday, without naming sources. An official for the bank declined to comment on the report. The bank had previously confirmed that its offices in Milan were searched in December.

“It is important to clean up the past,” said Sindy Schmiegel, a spokeswoman for the Swiss Bankers Association. “Banks are weighing the risks. ‘Which clients can I serve, where do I get in trouble?’ If a client doesn’t want to come clean, there are certain means to put pressure on them.”

BSI SA, a bank based in Lugano in southern Switzerland and about an hour’s drive from Milan, is restricting some Italian clients from making cash withdrawals and bank transfers. Some banks have frozen certain Italian clients’ assets altogether, according to Caputo, as they seek to avoid being considered accomplices should clients attempt to move their funds to other offshore financial centers.

“Banks are getting their clients to disclose as quickly as possible, also to limit their own risk,” said Macchi, the PwC consultant. “It will be a major effort for the banks to get all their clients to disclose by the end of September.”

Banks will also face “hundreds of millions” in costs to manage the disclosures, said Claudio Generali, president of the Ticino Bankers Association. Longer term, the increased competition that will result from the end of banking secrecy will probably also squeeze fees, he said.

“Of course we need to keep pace with competitors in Germany or in London, and that will squeeze the commission or returns of the bank,” Generali said.

To contact the reporters on this story: Jeffrey Vögeli in Zurich at; Elena Logutenkova in Zurich at

To contact the editors responsible for this story: Elisa Martinuzzi at

Tuesday, 24 February 2015

Topix Little Changed as Rail Companies Drop, SoftBank Rallies

Image result for topix japan

by Anna Kitanaka Toshiro Hasegawa  |  4:03 PM PST  |  February 24, 2015

(Bloomberg) -- Japan’s Topix index closed little changed, with rail companies weighing on the gauge and SoftBank Corp. providing the biggest boost, as investors assessed comments by Federal Reserve Chair Janet Yellen on U.S. interest rates.

Central Japan Railway Co. slid 3.7 percent after rallying for nine straight days through Monday to a record high. SoftBank gained 3 percent, its biggest advance in almost a month. Fast Retailing Co., Asia’s biggest clothing chain, was one of more than 100 Topix stocks to trade without the right to its next dividend, weighing on the gauge. Pachinko slot machine maker Sankyo Co. sank 6.2 percent after cutting its profit forecast.

The Topix closed little changed at 1,507.62 in Tokyo, swinging between gains of as much as 0.3 percent and a loss of 0.2 percent. The gauge had risen for the past seven days. The Nikkei 225 Stock Average slipped 0.1 percent to 18,585.20 after closing yesterday at a 15-year high. The yen rose 0.3 percent to 118.67 per dollar.

“The market looks overbought in the short-term and so we’ll be seeing some profit taking,” Hiroichi Nishi, an equities manager at SMBC Nikko Securities Inc. in Tokyo, said by phone. “We’re getting a sense of security from expectations of a delay in U.S. rate hikes.”

Futures on the Standard & Poor’s 500 Index fell less than 0.1 percent. The underlying gauge rose 0.3 percent to a record in New York on Tuesday after Yellen’s testimony to Congress.

Yellen told the Senate Banking Committee that wage growth remains too low even as the job market improves, and she signaled that a change in the Fed’s guidance on interest rates won’t lock it into a timetable for tightening.
Fed ‘Patient’

She repeated that the Fed’s pledge to be “patient” on beginning to raise the benchmark interest rate means an increase is unlikely for “at least the next couple” of meetings.

“The market was fearing a rate hike in June, but there’s more confidence now after the Chair’s reference to inflation that the hike will be delayed,” said SMBC’s Nishi.

SoftBank gained 3 percent to 7,315 yen, the biggest boost to the Topix and the Nikkei 225.

NTT Data Corp. added 2 percent to 4,870 yen after JPMorgan Chase & Co. raised its rating on the stock to overweight from underweight, while boosting its target share price by 58 percent to 5,700 yen.

About 105 companies on the Topix went ex-dividend Wednesday, according to data compiled by Bloomberg, meaning investors lose their right to the next payout. Fast Retailing slid 0.5 percent to 44,905 yen, after adjusting for the impact of its dividend.

Sankyo dropped 6.2 percent to 4,505 yen, its biggest decline in a year. The company cut its net-income forecast for the year by 42 percent on slowing sales.
Railways Drag

The Topix Land Transportation Index sank 1.5 percent, the biggest drag among the 33 industry groups on the broader gauge. Central Japan Railway lost 3.7 percent to 22,195 yen, leading declines on the sub-index.

Euro-zone finance ministers approved a four-month bailout extension for Greece on Tuesday after the government pledged to revamp tax collection, consolidate pension funds and maintain sales of state-owned assets. The accord paves the way for the European Central Bank to continue support of Greek lenders, while buying time for the euro area’s most indebted state to convince creditors it will deliver.

To contact the reporters on this story: Anna Kitanaka in Tokyo at; Toshiro Hasegawa in Tokyo at

To contact the editors responsible for this story: Sarah McDonald at John McCluskey

Asian Stocks Extend Five-Month High After Yellen Rate Comments

U.S. Fed Chair Janet Yellen
Janet Yellen, chair of the U.S. Federal Reserve, waits to begin a Senate Banking 
Committee hearing in Washington, D.C. 
Photographer: Andrew Harrer/Bloomberg

by Jonathan Burgos | 4:10 PM PST | February 24, 2015

(Bloomberg) -- Asian stocks gained, with the regional benchmark extending a five-month high, after Federal Reserve Chair Janet Yellen indicated an increase in interest rates is unlikely before mid-year.

The MSCI Asia Pacific Index climbed 0.3 percent to 145.82 as of 9:01 a.m. in Tokyo after closing at its highest since Sept. 12 on Tuesday. The Standard & Poor’s 500 Index advanced to a fresh record after Yellen told the Senate Banking Committee that wage growth remain too low even as the job market improves, and signaled that a change in the Fed’s guidance on interest rates won’t lock it into a timetable for tightening.

“Equities are slightly fully priced but aren’t unduly expensive,” Angus Gluskie, managing director at White Funds Management in Sydney, where he oversees about $550 million, said by phone. Yellen’s statement “doesn’t alter anything from our perspective as investors. We’re not yet in a fully synchronized global recovery but broadly most economies are developing in a right way. There are black spots. Chinese economic activity has been a concern.”

Japan’s Topix index added 0.3 percent. South Korea’s Kospi index advanced 0.7 percent. Australia’s S&P/ASX 200 Index slid 0.2 percent. New Zealand’s NZX 50 Index jumped 1.4 percent as it headed for a record close.

Markets in Hong Kong and China have yet to open, with mainland markets resuming trading following the Lunar New Year holidays. A preliminary gauge of China’s manufacturing due today from HSBC Holdings Plc and Markit Economics is expected to signal a third month of contraction.

Energy shares were the only group to decline on the MSCI Asia Pacific Index after West Texas Intermediate oil posted the longest losing streak since August. U.S. crude stockpiles are expected to have swelled by 4 million barrels last week from a record, according to a Bloomberg survey ahead of the official government report Wednesday.
U.S. Futures

Futures on the S&P 500 were little changed. The U.S. equity benchmark climbed 0.3 percent yesterday to a fresh record high. The Nasdaq Composite Index added 0.1 percent, climbing for a 10th straight day to bring it within 1.6 percent of its 2000 record.

Yellen repeated that the Fed’s pledge to be “patient” on beginning to raise the benchmark interest rate means an increase is unlikely for “at least the next couple” of meetings.

Euro-area finance ministers agreed to extend a bailout program for Greece after the government said it would undertake measures including a revamp of tax collection. International Monetary Fund Managing Director Christine Lagarde said Greece’s policy proposals fall short on key changes and may not meet the lender’s benchmarks for aid to continue.

To contact the reporter on this story: Jonathan Burgos in Singapore at

To contact the editors responsible for this story: Sarah McDonald at Jim Powell

Greek Plan to Tackle Economy Goes Before Finance Chiefs

A man holds a Greek flag in front of the Greek parliament in Athens 
as people gather in support to their government on Feb. 20.
Photographer: Louisa Gouliamaki/AFP via Getty Images
by Nikolaos Chrysoloras Fred Pals Rebecca Christie 2:24 PM PST | February 23, 2015

(Bloomberg) -- Greece’s month-old government is about to find out whether a package of new economic measures sketched in recent days is enough to win more funding from the rest of the euro region to keep the country solvent.

A draft list of commitments was under discussion with the International Monetary Fund, the European Commission and the European Central Bank after Finance Minister Yanis Varoufakis sent it to the institutions and Jeroen Dijsselbloem, president of the euro-area finance ministers group, before the midnight deadline on Monday. The group is scheduled to hold a conference call on Tuesday to assess the measures.

Based on a provisional agreement between Greece and its official creditors on Feb. 20, the approval of the list is a condition for extending the availability of bailout funds for another four months. The current program, which has been keeping Europe’s most indebted state afloat since 2010, is normally scheduled to expire on Feb. 28.

“I am very confident,” Dijsselbloem, who is also Dutch finance minister, said in an interview at an event in Tilburg, the Netherlands, on Monday. “The Greek government has been very serious, working very hard the last couple of days. We need it to be strong enough to work on the next couple of months. I am always optimistic.”
Short Reprieve

Approval of the Greek plans would offer a short reprieve for the country, which risks defaulting on some of its liabilities as early as next month without further financing from the creditor institutions. At the same time, Prime Minister Alexis Tsipras must try to avoid defections within his anti-austerity Syriza party after it won power on pledges to take back control of Greece’s finances.

IMF Managing Director Christine Lagarde said she hoped there would be a “meeting of the minds” between Greece and the rest of Europe on the changes needed.

“Greece has to go through very in-depth, sometimes difficult reforms,” she said in an interview on HuffPost Live on Monday. They “will have to tackle vested interests, protected professions, rigidity in various markets,” she said.

The government said in a statement the same day that the list will include all of Syriza’s pledges for “alleviating the humanitarian crisis” and the cabinet will convene on Tuesday after the document goes to finance ministers.
Starting Point

The list will also include commitments to change the labor market and measures to protect homes from foreclosures and combat tax evasion, according to a Greek official.

The European Commission considers the list comprehensive enough to be a starting point to successfully conclude the review, according to an official at the commission who asked not to be named because the talks are continuing. It was encouraged by the commitment to combat tax evasion and corruption, the official said.

The package would then be put to national parliaments for formal consent, though lawmakers and officials in Germany, Finland and the Netherlands signaled they won’t stand in the way once their governments grant consent for the aid extension.

“This compromise deal, given that it will be finally approved and validated by the national parliaments in the next few days, is a positive development for Greece and the capital markets as it removes the imminent threat of ECB pulling the plug on the Greek banks,” Vangelis Karanikas, head of research at Athens-based Euroxx Securities wrote in a note to clients.
‘Red Lines’

Greek government spokesman Gabriel Sakellaridis said earlier that the list will include fighting corruption and changes to the tax system.

There are still plans to increase the minimum wage, introduce legislation on bad loans and back taxes and maintain pensions, he said. It will also restore collective bargaining for unions. They are “red lines,” said Sakellaridis.

Tsipras, 40, has said the agreement “cancels austerity” and annuls pledges by the previous government to cut wages, pensions and state employees and increase sales taxes.

The agreement permits Greece to lower previously agreed upon targets on a primary budget surplus, which doesn’t include interest payments on debt. That could give Tsipras some room to at least come good on some pre-election pledges.

In return, though, the Greek government will refrain from unilateral action that may risk budget goals and not annul most economic reforms included in the bailout agreements.
Tough Sell

Since its first international bailout in 2010, Greece’s economy has shrunk by about a quarter and it’s shouldering the highest unemployment in the euro region.

The Greek Parliament will approve the list of measures even if Syriza doesn’t fully meet pre-election promises, George Stathakis, minister for economy, shipping, tourism and infrastructure, said in an interview with Sunday’s Kathimerini.

Environment and Energy Minister Panagiotis Lafazanis, though, told Real News in an interview that Syriza’s “red lines won’t be violated, that’s why they’re called red.”

“The agreement includes several concessions by the Greek side, but it also enables the government to save face internally,” analysts at Athens-based Eurobank Equities, including Nikos Koskoletos, wrote in a note to clients dated Feb. 24. “Having said that, the agreement does not address the coverage of Greece’s financing needs, especially in the context of the present tight situation as regards available cash buffers in the coming weeks.”

To contact the reporters on this story: Nikos Chrysoloras in Athens at; Fred Pals in Amsterdam at; Rebecca Christie in Brussels at

To contact the editors responsible for this story: Alan Crawford at Rodney Jefferson

Best Stock Pickers Say Easy Money Has Made Their Job Harder

Portfolio Manager Robert D’AlelioPortfolio manager Robert D’Alelio said "If the next five years are the same, there won’t be any active managers left." Source: CL-Media Relations via Bloomberg

by Charles Stein | 9:00 PM PST | February 23, 2015

(Bloomberg) -- Robert D’Alelio has the kind of long-term record every mutual fund manager aspires to, beating 98 percent of his peers over the past 15 years with the $12.6 billion Neuberger Berman Genesis Fund and crushing his benchmark, the Russell 2000 Index.

D’Alelio’s performance over the past five years isn’t so enviable. He’s fallen behind his yardstick, and he’s got lots of company. Stock pickers including Donald Yacktman at the AMG Yacktman Fund and the team of O. Mason Hawkins and G. Staley Cates at the Longleaf Partners Fund trailed their barometers in the same period after dominating in the prior decade.

Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals. At the same time, the relentless climb of prices across equity markets has left them with few chances to sniff out bargains or show what they can do in more-volatile times.

“In straight-up markets you don’t need active managers,” D’Alelio said in a telephone interview. “If the next five years are the same, there won’t be any active managers left.”

Twenty percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, and 21 percent topped the indexes in the five years ended Dec. 31, according to data from Chicago-based Morningstar Inc. Over 10 and 15 years, the winners rise to 34 percent and 58 percent, respectively.
Fund Redemptions

Investors have expressed their displeasure by moving money to low-cost funds that mimic indexes. In 2014, actively run U.S. stock funds suffered $98 billion in redemptions, while index funds took in $167 billion. Passive managers represent 38 percent of the $8.7 trillion stock fund business, more than twice their share 10 years earlier, Morningstar data show.

The shift may be ill-timed if the herd mentality comes to an end. Lagging behind the market will motivate managers to change their investment process and common sense will prevail as the economic cycle ages and fundamentals are rewarded, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in the firm’s 2015 outlook published in December.

“From our lens, this means a prolonged period of active investing is upon us, thereby overtaking the macro or index biased ways that have engulfed investing the past 15 years,” Belski wrote.

Royce Funds, the small-cap stock unit of Baltimore-based Legg Mason Inc., is undeterred after more than $17 billion in redemptions during the past four years. The $4.9 billion Royce Premier Fund beat 97 percent of rivals over 15 years, a number that drops to 7 percent over five years, Morningstar data show.
‘Same Process’

“We have been using the same process to pick stocks for 40 years and we have confidence in it,” Frank Gannon, co-chief investment officer for Royce, said in a telephone interview.

In his view, the Fed keeping interest rates near zero for the past six years has had the “unintended consequence” of boosting the stocks of companies with heavy debt and little or no earnings.

Typically after a recession, such companies lose out to firms that generate more cash and have better balance sheets. This time, no “Darwinian” shakeout happened and low-quality stocks ruled, Gannon said.

“There has certainly been little reward for owning high-return, superior business models that are conservatively financed,” Neuberger Berman’s small-cap stock team wrote in an October 2013 paper titled “Is There Hope for Active Managers?”
Lockstep Movement

Stocks have moved in lockstep to an unusual degree since the 2008 financial crisis, a handicap for managers seeking to exploit market inefficiencies.

Monthly dispersion among Standard & Poor’s 500 Index members, a measure of how far individual stocks are swinging relative to the market, narrowed for a fifth year in 2014 and in August reached the lowest level since 1979, data compiled by JPMorgan Chase & Co. and Bloomberg show.

As stocks started moving more on their own this year, 46 percent of active managers were beating their benchmarks as of Jan. 31, according to Morningstar.

Regardless of whether the trend is turning, Jeff Tjornehoj, an analyst with Denver-based fund tracker Lipper, doesn’t buy the idea that certain types of markets are tougher on stock pickers.

“It sounds like a team complaining about the rain when everyone has to play under the same weather,” Tjornehoj said in a phone interview.
‘Ample Opportunity’

Jim Rowley, a senior analyst at Vanguard Group Inc., is also dubious of high stock correlation as an explanation. In each of the last eight years, at least 70 percent of the stocks in the broad Russell 3000 Index either beat or underperformed that benchmark by 10 percentage points or more, according to Rowley, whose firm is known for championing index funds.

“That would suggest there has been ample opportunity to pick winners and losers,” Rowley said in a phone interview.

Stock pickers also complain that markets have essentially gone up for six consecutive years, excepting a flat 2011.

“People speak as if we have gone through a whole cycle,” said Neuberger’s D’Alelio. “Show me a cycle where stocks go straight up with no corrections.”

The lack of market corrections has hurt Yacktman, who in 2009 was a finalist for Morningstar’s manager of the decade award.

“A lot of our outperformance comes in difficult environments,” said Jason Subotky, a co-manager on the $13.9 billion AMG Yacktman Fund and the $10.9 billion AMG Yacktman Focused Fund.
‘Ideal Environment’

The Yacktman Fund, after beating competitors in the market selloffs of 2002 and 2008, has averaged annual returns of more than 13 percent in the past 15 calendar years, handily beating the S&P 500.

Over the past five years, the fund trails the benchmark. Investors withdrew $1.7 billion in 2014, according to Morningstar estimates.

The current market is reminiscent of the late 1990s, say Hawkins and Cates, who have overseen the $7.5 billion Longleaf Partners Fund for more than two decades and still have a top 15-year record.

Then, as now, stocks marched higher “while fundamentals mattered little,” the pair told shareholders in a January letter. Once the dot-com bubble burst in 2000, stock pickers eventually regained favor.

“At this moment of relative weak performance with active management in disrepute, our optimism about future relative performance is exceptionally high,” the two wrote.

Others who have cooled off say their approach will win the day again, whenever that day comes.

“History shows that sticking to your discipline is a good thing to do,” said Eric Schoenstein, who is part of the team running the $5.6 billion Jensen Quality Growth Fund.

“This is setting up as an ideal environment for stock pickers,” said Neuberger’s D’Alelio.

To contact the reporter on this story: Charles Stein in Boston at

To contact the editors responsible for this story: Christian Baumgaertel at Josh Friedman, Sree Vidya Bhaktavatsalam

Monday, 23 February 2015

Tsipras Tamed as Economists Declare Greece Loses Austerity Fight

by Simon Kennedy Jennifer Ryan | 3:24 AM PST | February 23, 2015

(Bloomberg) -- “Complete” surrender by the Greeks. “Major victory” for the eurocrats.

To those who have followed Greece’s financial crisis for five years, there wasn’t much doubt who won the latest round Friday when the region’s finance ministers struck a deal to keep the bailout on track.

Even German Finance Minister Wolfgang Schaeuble, who said he didn’t “want to make it more difficult for them,” concluded Greek Prime Minister Alexis Tsipras will have a “difficult” time selling the agreement at home. That’s because Tsipras’s populist rhetoric of ending austerity was overpowered by the united front he faced.

A “complete political surrender to the world of reality” was how Erik Nielsen, London-based global chief economist of UniCredit Bank AG, put it. Societe Generale SA and Berenberg Bank both labeled it a “u-turn” by Tsipras, who won election Jan. 25 promising an end to budget cutting.

“If the deal holds, it would be a major victory of common sense over populism,” said Holger Schmieding, chief economist at Berenberg in London, who cut his probability of Greece leaving the euro area to 25 percent from 35 percent. “The taming of Tsipras would show that Europe’s ‘tough love’ approach is working.”

While Tsipras says skirting national insolvency meant “we won a battle, but not the war,” economists say he may not have managed even that. That’s because the basics of the existing aid deal he fought against are still intact.
Greek Concessions

At last week’s meeting, Greece signed up to all the conditions of its current package and to continued international oversight, ditching plans to win back control of its purse strings so it could raise wages and pensions.

“The combination of pressure on the banking sector and on state cash flows has forced the bulk of the concessions to come on their side,” said Malcolm Barr, an economist at JPMorgan Chase & Co. in London.

There were some concessions. Tsipras now gets a chance to draw up a list of reform ideas rather than have them forced upon him. The fiscal target for this year was also made less specific, giving him potentially some extra cash to throw around at home.

Those tweaks left Commerzbank AG chief economist Joerg Kraemer suggesting while donor nations may have gotten their way, they are ultimately likely to back down on explicit requirements, allowing Tsipras some face-saving room to maneuver.

“Nominally, at least, the creditors have won, but reality is likely to be different,” said Kraemer.

Investors boosted European debt as the fear of contagion from Greece dissipated. Italian five-year bond yields and Portuguese 10-year rates both fell to record lows following the deal.

“Europe has drawn the line in the sand - and markets had absolutely no problem with that,” said Nielsen of UniCredit.

To contact the reporters on this story: Simon Kennedy in London at; Jennifer Ryan in London at

To contact the editors responsible for this story: Fergal O’Brien at James Hertling, Kevin Costelloe