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Knowledge is Power: Monopsony, Coal, Anti-Globalization Edition (TFS)
The impact of falling and rising interest rates on equity markets vary by country. Stocks do not always rise when interest rates fall and vice versa. In the case of Japan, an article by Franklin Templeton Investments noted that falling interest rates did not lead to positive long-term performance of the equity markets.
The benchmark index topped out at over 37,000 in Jan, 1990. This past Friday it closed at 18.381. So after more than 25 years the Nikkei is still lower than where it was back then. Anyone who bought stocks at that peak are still sitting on a loss.
The chart below shows the changes in interest rates and the equity market performance using the MSCI Japan Total Return Index:
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From the article:
The BOJ has become a top shareholder in the one of the world’s largest equity markets and already is one of the top five owners of 81 companies listed on Japan’s Nikkei 225 Index.2 The central bank is also on its way to becoming the number one shareholder of more than 50 of those firms, according to various estimates. Market bulls are happy with the BOJ purchases, but opponents say the central bank is artificially inflating valuations and ironically discouraging companies from becoming more efficient. Interestingly, Japan’s Nikkei 225 Stock Average is actually down more than 8% year-to-date, although one might argue its fate could have been worse without central-bank buying.3
2. Ibid.
3. Source: Bloomberg, as of November 1, 2016. Indexes are unmanaged and one cannot directly invest in an index. They do not reflect any fees, expenses or sales charges.
Source: Central Banks and Stock Markets: a BOJ Case Study, Franklin Templeton Investments, November 22, 2016
A few points to remember about the Japan equity market:
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cThe average tenure of a company in the S&P 500 Index has declined consistently for years now. The average tenure has fallen from 40 years to less than 20 years now.
Average Tenure of a company in the S&P 500:
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Source: Navigating Macro Choppiness, The Fiduciary Group
Companies get booted out of the benchmark for many reasons including going bankrupt, mergers & acquisitions, going private, technological advancements, etc. The only change in the index is constant. For example, companies tech firms like Apple(AAPL), Amazon(AMZN), Facebook(FB), are in the top 10 constituents of the S&P 500 today. However they may or may not exist in the index 20 or 30 years now as competitors can unseat them or they can be made irrelevant by newer technologies. Things like social media may be hot now but may be totally forgotten 20 years from now as consumers eventually move on to some other fad.
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The US Unemployment Rate has been on the decline for many months now. But the Labor Force Participation Rate has also been declining. The unemployment rate stood at just 4.9% in October and the number of unemployed persons was 7.8 million according to the official data from BLS.
The labor force participation rate at 67.3% in early 2000. Since then the rate has dropped and reached 62.7% in mid-2016. The chart below shows the slow and steady downward trend:
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Source: BLS
Higher labor participation rates implies more people able to work are employed. In general, the higher this rate the better for the economy.
So how does a chart look like when we plot the unemployment rate against labor force participation rate?
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Source: Schroder’s
The above chart shows that both the rates have decreased. The official unemployment is very low because of the methodology used to calculate that figure. For example, any unemployed person who has given up looking for a job are not counted. So these are the “missing” unemployed workers who fall off the radar. So the real unemployment rate is much higher.
The labor force participation rate an decrease for many reasons including lesser women wanting to be in the work force. But the chart showing the decline is stepper and repeats year after year. This should a cause for concern for policy makers.
The stocks of foreign companies trading as American Depository Receipts(ADRs) on the US Over-The-Counter (OTC) market can be of two types – Sponsored ADR and Unsponsored ADR. In this post, let us discuss about the Unsponsored ADR type.
All foreign firms that are listed on the organized exchanges are sponsored. This simply means the company or the issuer asked a depository to issue ADRs and listed them on an exchange like the NYSE or NASDAQ. Sponsored ADRs can also trade on the OTC market. For example, Swiss-based Nestle is a sponsored ADR and trades on the OTC under the ticker NSRGY.
So what is an Unsponsored ADR (UADR) ?
A recent report from Deutsche Bank on UADRs had the following defintion:
An Unsponsored ADR (“UADR”) is one in which no deposit agreement and no legal relationship is entered into between a depositary bank and the issuer. An unlimited number of depositary banks may issue the depositary receipts evidencing ownership of the underlying ordinary shares held in custody in the issuer’s home market. It is not uncommon for all four of the Depositary Banks to administer an Unsponsored ADR programme for a particular issuer company. The ADRs trade in the United States on the over-the-counter (OTC) market.
The establishment of a UADR is initiated by the depositary bank, mainly in response to investor demand and requires no action on the company’s part in the form of legal documentation or otherwise. There are no costs involved to the issuer, no incremental reporting obligations on the part of the issuer, no requirements to comply with Sarbanes-Oxley and no US GAAP reconciliation (local financial statements suffice). Though there are key differences between a UADR and a sponsored Level 1 ADR programme (“Level I”), from an investor perspective – both instruments provide an opportunity to access foreign securities more easily within the framework of the US securities infrastructure.
A few facts about UADRs:
Source: Unsponsored ADRs -Market Review, November 2016
Some of the big foreign firms that trade as Unsponsored ADR include Royal Mail (ROYMY) of UK, Singapore Airlines (SINGY) of Singapore, Munich Re Group (MURGY) of Germany, etc.
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