9th Mar: Credit Guest: Information cascade

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Credit - Information cascade

"Every market is in transition." - Kenneth Lay, former CEO of Enron

Watching with interest the impressive melt up in European equities during the month of February (with French index CAC40 up close 14% since the beginning of the year), in conjunction with continuous credit and rates compression, marking the return of leverage structured credit as the hunt of yield runs unabated, we reminded ourselves of the "information cascade" model when choosing our title analogy:

"An information (or informational) cascade occurs when a person observes the actions of others and then—despite possible contradictions in his/her own private information signals—engages in the same acts. A cascade develops, then, when people “abandon their own information in favor of inferences based on earlier people’s actions”." - source Wikipedia

In the specific case of the current equity melt-up helped recently in Europe supported as well by "better" economic data, no doubt that some investors have abandoned their own information in favor of inferences based on earlier central bankers actions when it comes to implementing QE, with Europe on the verge of launching a program of its own.

When it comes to assessing the on-going lift-off in European equities, it follows the lift-off we have seen in the US as well as in Japan, following the various rounds of QEs. 

In the "Information cascade model", there are four key conditions:

"1. Agents make decisions sequentially
2. Agents make decisions rationally based on the information they have
3. Agents do not have access to the private information of others
4. A limited action space exists (e.g. an adopt/reject decision).
One assumption of Information Cascades which has been challenged is the concept that agents always make rational decisions. More social perspectives of cascades, which suggest that agents may act irrationally (e.g., against what they think is optimal) when social pressures are great, exist as complements to the concept of Information Cascades." - source Wikipedia

Of course we agree with point number 2. When it comes to financial markets, agents often seems to act "irrationally", and display what former Fed Chairman Alan Greenspan called "Irrational exuberance" but then again, as we posited in our conversation "Pascal's Wager" investors are indeed making a "rational" decision based on the premises that central bankers are "deities":

"In the investment world, we think investors are betting with their "life savings" that central bankers are either gods or not."

Obviously investors that believed that the SNB's had a "godly' status met their makers when the SNB finally pulled the plug on the Euro peg but we ramble again...

When it comes to markets and the choice of our specific title, no doubt that the current "euphoric" environment is a clear display of "Information cascades being at work:

"Information cascades have become one of the topics of behavioral economics, as they are often seen in financial markets where they can feed speculation and create cumulative and excessive price moves, either for the whole market (market bubble...) or a specific asset, like a stock that becomes overly popular among investors." - source Wikipedia

What we also find of interest is that marketers also use the idea of cascades to attempt to get a buying cascade started for a new product:

"If they can induce an initial set of people to adopt the new product, then those who make purchasing decisions later on may also adopt the product even if it is no better than, or perhaps even worse than, competing products. This is most effective if these later consumers are able to observe the adoption decisions, but not how satisfied the early customers actually were with the choice. This is consistent with the idea that cascades arise naturally when people can see what others do but not what they know." - source Wikipedia

In similar fashion, central bankers around the world have done the same "marketing" exercise. They have induced other central bankers to adopt QE, although it is fairly clear that the real economic benefits of QE are dubious at best.

Therefore this week will review the current "risk-on" information cascade environment given, we think it is entirely flow driven with one of the main culprit being Japan's GPIF and we will also muse around the utility of a European QE in the current context.

Synopsis

• Under a dovish monetary global policy, both stock and bond markets will strengthen concurrently
• In the equity space, it's "party on" with a caveat
• We have moved from a low volatility regime to a higher volatility regime
• QE + Austerity = road to growth disillusion/social tensions but road for heaven for financial assets
• QE + fiscal boost/Investment push/reform mix = better odds of self-sustaining economic model / preservation of social cohesion. Less short-term fuel for financial assets, but a safer road longer-term
• Final note: Why European banks deleveraging has much further to go and why it means more pain for shareholders and bondholders

• Under a dovish monetary global policy, both stock and bond markets will strengthen concurrently. 

The current European "melt-up" in European equities is driven by investors' flows and in particular by Japan's GPIF allocations. As reported by Nomura in their 2nd of March note entitled "GPIF Q3 FY14 investment results", there has been significant progress in portfolio rebalancing from the GPIF:

"The Government Pension Investment Fund (GPIF) released its investment results for Q3FY14 and reported that investment income totalled JPY6,623.3bn for a total return of
5.16%.
Beginning this quarter, the GPIF adopted a new method for announcing the amount of its investment assets – it no longer discloses investment assets by asset.
By making certain assumptions, we estimate the GPIF reduced its domestic bond holdings by JPY6.4trn, added JPY1.9trn in domestic stocks and shed JPY0.8trn short term investment. It increased its investments in international bonds and international stocks by JPY0.7trn and JPY1.9trn, respectively.
Compared with the JPY3.3trn reduction in Q2, the GPIF accelerated its domestic bond selling significantly in Q3 (JPY6.4trn reduction including matured investments). This is consistent with October-December JSDA data showing that trust banks were net sellers of yen bonds by a total of JPY3.1trn (vs. JPY0.5trn net buying in July-September).
By comparing the asset mix at end-December and the new Basic Portfolio, we have estimated how much GPIF assets need to increase or decrease to achieve the target median weightings. According to our calculations, GPIF should shed JPY13.3trn in domestic bonds, and increase domestic stocks by JPY5.7trn, international bonds by JPY1.7trn and international stocks by JPY5.9trn.
Assuming the GPIF reduces domestic bonds at a similar pace to Q3, it could achieve the target weighting in six months. Similarly, it would achieve the target weighting in 12 months if the reduction continues at a pace on par with Q2, and eight months if it proceeds at the Q2-Q3 average pace (Case [1] in Figure 2). The amount of portfolio shift necessary would be smaller if we reflect mark-to-market changes since end-December (i.e., higher stock prices, etc.; Case [2] in Figure 2). We will monitor how market movements affect the GPIF’s portfolio shift.
Looking at supply and demand factors alone, the GPIF’s portfolio shift should cause stock prices and yen bond rates to rise and JPY to weaken further. In our view, however, JGB investors may highlight the fact that the GPIF has made significant progress in its yen bond selling, and gradually shift their focus to when it is completed, as well as subsequent supply and demand dynamics.
We also note that public pensions other than the GPIF appear to have lagged in their portfolio shifts, and may begin to accelerate yen bond selling. In this case, the portfolio shift by public pension funds as a whole would be a longer process. However, we believe the market will begin to wonder if the BOJ can continue QQE2 purchases as it heads toward end-FY15, when the GPIF is likely to complete its rebalancing." - source Nomura

And as we posited in our post "The Vortex Ring", the re-allocation process from Japanese behemoth GPIF, has continued to put additional downward pressure on core government bonds:

"It is important to note as well that for the Japanese investors, adjusted for living expenses, US treasuries still yield more this year than Japanese government debt than at any time since 1998". - source Macronomics, 26th of May 2014

Go with the flow:
One should closely watch Japan's GPIF (Government Pension Investment Fund) and its $1.26 trillion firepower. Key investor types such as insurance companies, pension funds and toshin companies have been significant net buyers of foreign assets.

When it comes to Toshin funds, as reported as well by Nomura in their 4th of March note entitled "Toshin momentum remains strong", retail investors are also piling in international markets:

"Retail investors accelerated their investment in foreign assets via toshins last week, according to NRI (Figure 1). They bought JPY136bn ($1.1bn) of foreign securities, the highest pace in three weeks. This was the 14th week in a row of net purchases, and retail investors' cumulative foreign security buying via toshins this year has reached JPY1.2trn ($10bn), about JPY856bn ($7.2bn) bigger than for the same period in 2014
(Figure 2). 

Toshin momentum remains relatively strong, as risk sentiment among retail investors has improved gradually.
Retail investors continue to prefer foreign equities to other asset classes. They are estimated to have purchased JPY56bn ($0.5bn) of foreign equities via toshins, while purchasing JPY27bn ($0.2bn) of foreign bonds and JPY52bn ($0.4bn) of foreign hybrid securities. They continued to sell domestic assets via toshins for the third week in a row, while the pace of selling slowed to JPY60bn ($0.5bn) from JPY98bn the previous week. Japanese equity prices have been performing well since mid-January, and this likely encourages retail investors to book profits. Retail investors’ expectations for USDJPY appreciation have also led to stronger investment in foreign equities than in domestic assets via toshins (see "Retail investors still see USD/JPY upside", 12 February 2015). Lower yields globally may reduce the appeal of foreign bonds to retail investors. We expect toshin momentum to remain strong, because of better risk sentiment and expectations for JPY weakness, while their preference for foreign equities relative to bonds will remain strong for the time being." - source Nomura

Arguably, the GPIF has not been the only game in town with the pending European QE which, in terms of flows has driven them into overdrive when it comes to European markets as indicated by Bank of America Merrill Lynch Flow Show note from the 5th of March entitled "Carry On Risk":

"Risk-On: cash down for 3rd straight week to fund $7bn into equity funds and $6bn into bond funds Europe the Consensus Darling: euphoric 99th percentile inflows over past 8 weeks ($31bn)…heaviest since Dec'08 (Chart 1)

Retail loves Income: chunky $2.8bn inflows to equity income funds this week; note BofAML private clients have significantly raised allocation to equity income ETF’s past 24 months (Chart 2)

Carry On Risk: incessant central bank rate cuts + rising macro optimism = risk taking on the rise...our Bull and Bear Index (flashed contrarian “buy” in Jan) up to 4.3 (Chart 3); 

big payroll/strong avg hourly earnings would cause risk to pause but Feb small biz hiring intentions today was not strong." - source Bank of America Merrill Lynch

The sentiment of bullishness in February has run unabated but, once again the "strong" NFP data in the US came back to spoil somewhat the party in the US equity space has "good" news once again meant "bad" news and increasing the possibility of a rate hike by the Fed in the near future (we still very much doubt about this).

• In the equity space, it's "party on" with a caveat, 

Not only have foreign flows and the ECB QE path pushed equities into overdrive, but the renewed appetite for buybacks in conjunction with a rise in M&A operations have also been supportive of the aforementioned rally. But there is indeed a caveat, because while the party is going strong, earnings have reverted in the US and remain flat in Europe. On that note we agree with Louis Capital Markets Cross Asset Strategy note from the 2nd of March, that fundamentals do not seem to matter in this market cycle when it comes to equities behavior to say the least:

"The reading of financial markets has been an understandable process when regarding the bond, the currency and the commodity markets. The equity market however has been a real enigma and its recent behaviour has not helped to better our comprehension of it. What is the driver of equity indices??? We thought that the expected stream of companies’ earnings was the main driver however this market cycle has demonstrated that this assumption is a false one. Subsequently, we are having significant difficulty in identifying the main drivers of the market.

Equity indices are reaching new highs in this cycle contrary to earnings that have reverted in the US and that remain flat in Europe. The P/E expansion has been very strong as a consequence and its limit is unknown. The current level of investor confidence is amazingly high and it contrasts strongly with the business climate in the real sphere that has not shown similar signs of overheating.
This kind of context is obviously very positive for equity investors. Some will say “it’s crazy, it’s going to crash”. However, history has repeatedly proven that high-levels of hubris often take a while before inevitably ending in tears. We did not expect to live through another mania in our life after the one experienced at the end of the 90’s, but we were wrong. This cycle is even more impressive that the one at the end of the 90’s, because it has come from nowhere and has so far lasted longer.

These days many commentators are explaining that, contrary to the TMT bubble, as profits are rising on this occasion current circumstances cannot be diagnosed as a “bubble”. We do not believe the current context constitutes a bubble. However, we were more comfortable in paying Cisco 100x expected earnings in 2000 than paying today 18x the earnings for Endesa or 20x for Belgacom. In the 2000’s the story was a strong one. A sort of revolution was taking place and it was consistent from a market perspective to dream of a new world emerging. Today, we are failing to find a similar story for Endesa and Belgacom, and our dreams are not stimulated when listening to the IR’s presentation of Belgacom.
The “low interest rates environment” are the words that can be found in every mouth during this cycle. The argument appears so obvious that everybody embraces the idea that the influence of central banks on the bond market also impacts the equity market through the discount factor mechanism. If profits of Belgacom remain flat for the next 20 years, paying the stock 20x current earnings roughly implies the recovery of its investment in 20 years. This is a long period of time, but the 20-year government bond yield of Belgium is close to 1%, thus implying a 100 year time horizon needed to recover its investment. 20 years vs. 100 years would represent the “equity risk premium”.
We fully disagree with this rationale, because it implies a “by default” investment. The pricing of equities is not driven by the pricing of bonds. Their underlying drivers are too different to think there are spill-over effects that inflate “naturally” equities. The Japanese experience has been crystal clear on this subject: long term bond yields have oscillated between 1% and 2% between 1998 and 2008, and despite this low remuneration of the bond asset class, the performance of the Nikkei was null during this period of time.We do not want harp-on regarding this subject as it one of weak importance for many PMs. The long only PMs are fighting against a benchmark regardless of the global mood of the equity market, whilst macro traders focus on relative value trades. The main beneficiaries of this equity mania are diversified PMs, because they have the choice between two asset classes that have been in a bullish mood for 6 years now. So even if they are wrong in their assets’ selection, they have not lost money in absolute terms." - source Louis Capital Markets

For us, and as per our title, the "Information cascade is at play and feeding speculation and create cumulative and excessive price moves on a grand scale for the whole market (market bubble...).

• We have moved from a low volatility regime to a higher volatility regime

As per our title analogy, the more central banks meddle with asset prices, the more disconnected and unstable markets are becoming.

On the subject of a higher volatility regime which was discussed in our previous conversation by our friends at Rcube Global Asset Management , European equities have started 2015 on very strong note as highlighted above by the amount of flows in the asset class, but implied volatility have risen across financial markets as depicted by Louis Capital Markets in their monthly report entitled "Europe In Sight":

"The European equity market has been very strong since the beginning of the year, outpacing most equity indices. It is difficult to find a tangible and credible reason behind this move because nothing has really changed in the real economy. It seems it is first of all “sentiment driven” and that the perspective of an aggressive central bank has helped to lift this sentiment.We are surprised by this reaction because the “central bank” argument remains by nature fragile and because we had previously signs of cautiousness with the rising implied volatility across financial markets (see chart below).

In the previous cycle, the 2002-2007 cycle, the rising volatility coincided with the end of the bull market. Although we do not call for the end of this bull market, we thought that the rising volatility since last summer would have prevented an “upward crash” like we got in January/February (15%+ for the Eurostoxx50 in less than 2 months). The chart below shows to what extent this move is unusual.

The sector hierarchy shows that this move corresponds to a pure re-rating as all sectors, with a small dispersion, benefited from this euphoria. The consumer segment has led a little thanks to the decline of oil prices but this is not the whole story. The median 12m Fwd PER of the Stoxx Europe 600 universe stands now at 16.8 and it is well above the top of 2007. That’s the most important story because it questions the valuation regime of European equities. Is this level exaggerated or will we see a median PER at 20 before the end of the year (implying an additional upside potential of 20%+)??? This context is perturbing for investors because it blurs the notion of “cheap” and “expensive” stocks, and lowers in the end, the relevance of the valuation factor." - source Louis Capital Markets

As far as the Information cascade is concerned and the on-going "melt-up" we would repeat what we indicated back in January 2012 in our conversation "Bayesian thoughts" when we quoted Dr. Constantin Gurdgiev, from his post entitled "Great Moderation or Great Delusion":

"when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."

Bayesian learning today is indeed leading towards an acceleration in the rise in asset prices, while the end of the low volatility regime in conjunction with the rise in the US dollar (meaning a global tightening from a pure "macro" perspective) indicate we are indeed in the final innings of the game we think.

• QE + Austerity = road to growth disillusion/social tensions but road for heaven for financial assets

In our November 12 2014 conversation "Chekhov's gun" we put forward our take on WE in Europe:

"Current European equation: QE + austerity = road to growth disillusion/social tensions, but ironically, still short-term road to heaven for financial assets (goldilocks period for credit)…before the inevitable longer-term violent social wake-up calls (populist parties access to power, rise of protectionism, the 30’s model…).
“Hopeful” equation: QE + fiscal boost/Investment push/reform mix = better odds of self-sustaining economic model / preservation of social cohesion. Less short-term fuel for financial assets, but a safer road longer-term?"  - source Macronomics 12th of November 2014

We also indicated at the time:

"Of course our "Hopeful" equation has a very low probability of success given the "whatever it takes" moment from our "Generous Gambler" aka Mario Draghi which has in some instance "postponed" for some, the urgent need for reforms, as indicated by the complete lack of structural reforms in France thanks to the budgetary benefits coming from lower interest charges in the French budget, once again based on phony growth outlook (+1% for 2015)"

Given France has now postponed any chance of meaningful structural reforms until 2017 with the complicity of the Europe Commission, (again a complete sign of lack of credibility while imposing harsh austerity measures on others), and that the government will face an electoral onslaught in the upcoming local elections which will see yet another significant progress of the French National Front, we are convinced the"Current European equation" will breed more instability and not the safer road longer team.

This brings us to a subject we have already tackled when it comes to differentiating QE in Europe versus QE in the US. It is all about Stocks versus Flows:

"We mentioned the problem of stocks and flows and the difference between the ECB and the Fed in our conversation "The European issue of circularity", given that while the Fed has been financing "stocks" (mortgages), while the ECB is financing "flows" (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities will have to depreciate."

"Credit growth is a stock variable and domestic demand is a flow variable" as indicated by Michael Biggs and Thomas Mayer in voxeu.org entitled - How central banks contributed to the financial crisis.

On that essential difference we came across a very interesting note from BNP Paribas from the 6th of March entitled "The ECB wants to buy but who wants to sell?"where they highlight 3 main differences between QE in Europe versus QE in the US which we summarized below:

1. Size matters: the corporate credit market/ABS market in Europe is not as deep as in the US. It is very difficult for institutional investors in Europe to switch from holding government bonds to corporate credit/ABS.
2. Timing: QE 1,2,3 in the US were done when the amount of US Treasuries issued was rising due to the US budget deficit! In Europe, QE is being launched when there is a very weak net issuance level due to austerity measures being implemented.
3. Liquidity constraints for Banks and Insurers are much more harsher than in 2010/20111, meaning that these institutions will hang onto their holdings, negative yields or not.

Stocks versus Flows, is for us a key element in terms of the macro understanding of the ECB's position versus the Fed as highlighted in BNP Paribas's note:

"The stock of bonds versus the flow
Over the past few weeks, much has been written about the risk that the ECB may not be able to find all the bonds it is intending to buy. This seems a strange predicament, since not so long ago many people were worried about the eurozone having too much debt. Before we go into more detail, it is worth remembering that someone’s debt is somebody else’s asset, so saying that there is too much debt would be equivalent to saying that there are too many assets, which we never hear (and for good reason). The main focus should rather be more on the quality of the debt (and how it would be repaid) instead of the size.
Why is there such a worry about the execution of QE? As we have pointed out several times, the size of the buying is relative to the size of bonds for sale. We show in Table 1, that the net issuance for 2015 is negative by EUR 200bn after taking into account the bonds bought under QE. This is the major difference with the US and the UK, as QE in those countries were done at a time of greater budget deficit, therefore limiting the concern about supply.

Other differences and specific points about European QE
When the FED was buying T-Notes, sellers had the opportunity to re-invest in the US fixed
income markets. They could also re-invest the proceeds into corporate bonds or in the mortgage markets, where the liquidity was enough to absorb part of the money that used to be in US government bonds. Investors could also choose lower quality bonds, investing some proceeds into municipal bonds for example. Obviously, it is unlikely that holders of AAA-rated US government bonds bought a lot of lower quality US paper (but some spillover must have taken place as we can see in Chart 1 and chart 2), and at the very least they were not penalised by negative deposit rates if the cash was not re-deployed immediately. So if they were not able to extend the duration or go lower into credit quality, they always had the choice to park (at least momentarily) some of the cash into very short-dated bonds at zero.

This is not the case in Europe today. When holders of a government bond from a eurozone country sell a bond, they do not have much of an alternative in the fixed income markets for reinvestment. The European corporate bond market is not liquid enough, the ABS market is too small and the ECB also has a programme to buy covered bonds. So unlike in the US, once a bond is sold to the ECB, the buyer is likely to look for another … government bond. So in the context where the offer of bonds is less (because deficits are lower) and there is a large marginal buyer, there is upward pressure on prices.
There are other differences. QE in the US and UK was done when the rules for liquidity constraints were easier. As regulation pushes banks to hold large amounts of collateral in order to comply with stricter liquidity rules, there is a natural extra bid for short-dated bonds. These bonds are also supported by the fact that the overnight rate is negative (unlike in the US) and as large investment funds do not have access to the deposit facility of the ECB, they have no choice but to buy short-dated bonds. This is why there are so many bonds with negative yields (up to 25% of the outstanding bond market size) – another significant difference with the US.

A word of caution
We should keep in mind that the ECB is officially trying hard to create inflation in line with its mandate. In that context the very long-dated bonds remain particularly vulnerable if CPI inflation numbers start to pick up. Nobody is expecting a bounce anytime soon, but when the base effect of oil fades (towards the end of 2015) and the weaker euro eventually lets some imported inflation in the eurozone, the picture could be very different. Also when QE started in the US, the economic situation was deteriorating following the 2008 crisis, which is not the case in Europe, where some early signs are that the situation is at the very least stabilising or getting slightly better. Forward inflation expectations in the eurozone have already corrected higher at 1.77% (5-year, 5 years forward implied inflation expectations) and are not far off from the ECB’s target, hinting that QE will be successful over the medium term, (Chart 6). 

Such high inflation anticipations combined with the suppression of nominal yields means that investors going into the long end are forced to accept very negative real returns (Chart 7). 

This is a highly unusual situation, which cannot be sustained over the medium term, hinting that at some stage the long end of bond prices will drop." - source BNP Paribas

Caveat creditor...as we posited in our September 2014 conversation "Sympathy for the Devil":

"The greatest trick European central bankers ever pulled was to convince the world that default risk didn't exist" - Macronomics.

"Investors have indeed Sympathy for the Devil we think, as they continue to pile up with much abandon and more and more getting "carried away" in their insatiable hunt for yield. In that sense Baudelaire's 1869 poem rings eerily familiar with the current investment situation in the sense that investors have been giving our "Generous Gambler" the benefit of the doubt (OMT - and now full blown QE) and shown their sympathy and their blind beliefs in "implicit" guarantees, rather than "explicit" (such as the German Constitution as we argued in various conversations)" - source Macronomics, September 2014

As we indicated in our conversation "Eastern promises" on the 9th of June 2012 we continue to think Germany could be the prime suspect in triggering a breakup (Greece being the perfect scapegoat):
"We think the breakup of the European Union could be triggered by Germany, in similar fashion to the demise of the 15 State-Ruble zone in 1994 which was triggered by Russia, its most powerful member which could lead to a smaller European zone. It has been our thoughts which we previously expressed."

Keep in mind that Angela Merkel while only appearing to be making material sacrifices has managed to keep Germany's liabilities unchanged so far.

• QE + fiscal boost/Investment push/reform mix = better odds of self-sustaining economic model / preservation of social cohesion. Less short-term fuel for financial assets, but a safer road longer-term"

We will never understand why the European QE is not made alongside some form of New Deal with massive infrastructures in Europe, which would put people back to work and improve the odds of a self-sustaining economic model with better preservation of social cohesion.

On a side note, if you are fans of the US TV series "House of Cards", you will have noted that in season 3, Frank Underwood (Kevin Spacey) now president of the United States is fighting against an hostile US Congress. In terms of his proposed economic policies, President Underwood wants a hostile Congress to cut Social Security and appropriate $500 billion on public spending to boost jobs in infrastructure, government and the private sector.

In the "real world", as reported by Bloomberg  on the 4th of March, "U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes":

"Obama earlier this year proposed applying a 14 percent mandatory tax on the stockpiled profits and a 19 percent minimum tax on foreign earnings going forward.
The one-time tax would generate $268 billion over six years, which Obama wants to use for infrastructure." - source Bloomberg

We find this interesting particularly around the discussions about "Biotechs" current valuations, which for us are clearly representative of their "tax advantage" compared to the "Utilities" sector for example. We touched on this subject in our October conversation "A Descent into the Maelström":

"We think that the "too much liquidity" popular trades of biotech, internet, gaming and small cap are up for more pain in the future. Technology and Health Care Companies in the S&P 500 index are both heavy users of adjusted earnings measures in their financial statements: Of 69 technology companies in the index, 56 use non-GAAP earnings, of 56 Health Care companies, 45 use them. (source "Earnings, but Without the Bad Stuff", Gretchen Morgenson, November 9 2013 - New-York Times). The vast majority of public biotech companies in the U.S. (87%) do not pay taxes because they lose money as they pursue breakthrough therapies and cures as well as using non-GAAP metrics to boast are more "positive" accounting picture. Young high tech companies often end up paying less than 10% of income in taxes whereas old railroads and utilities often pay more than 25% and cannot easily "jump" countries using M&A for tax inversion purposes"

Should the US administration decide to "close the tax gap", rest assured that your "Biotech Bubble" would burst in an instant, but, that's another subject...

• Final note: Why European banks deleveraging has much further to go and why it means more pain for shareholders and bondholders

While the Hypo Alpe Aldria drama is unfolding in Austria with additional losses of €5.1bn to €8.7bn meaning more pain to come for bondholders  (€9.8bn senior and sub, €1.2bn Pfandbriefe), we leave you with Louis Capital Market chart displaying the relative performance of the the STOXX Banks sector (SX7P) versus SXXP:

- source Louis Capital Market

As a reminder, US banks have increased their capital basis by 57% since 2007 until 2012 while Western European banks by only 37% on the same period as per our conversation "Sympathy for the Devil". So keep on playing the "Dead Cat Bounce" game in European banks stocks the on-going "Information Cascade", rest assured that when it comes to European banks, the trend is indeed your friend...

Sic transit gloria mundi -  "Thus passes the glory of the world." 

Stay tuned!